SPX Flow Technology New Zealand Limited v Gas 1 Limited
[2017] NZHC 2049
•25 August 2017
IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY
CIV-2014-412-000024 [2017] NZHC 2049
BETWEEN SPX FLOW TECHNOLOGY NEW
ZEALAND LIMITED Plaintiff
AND
GAS 1 LIMITED Defendant
Hearing: 4-24 August 2016 Appearances:
I Thain and I Scorgie for the Plaintiff
H McIntosh and H MacFarlane for the DefendantJudgment:
25 August 2017
JUDGMENT OF NATION J
SPX FLOW TECHNOLOGY NZ LTD v GAS 1 LTD [2017] NZHC 2049 [25 August 2017]
Contents
Background …………………………………………………………………… 2 The term sheet variation settlement …………………………………………
16
The claims and counterclaims ………………………………………………..
26
Gardians’ claims ……………………………………………………………….
30
Gardians’ claim for $2,147,200 for misrepresentation inducing Gardians’ entry
into the term sheet agreement …………………………………………………..
30
Gardians’ claim for SPX’s failure to remedy building defects …………………. 65 Claim for extra cleaning costs …………………………………………………. 68 Gardians’ claim for additional employment costs in bringing performance of
plant up to required standard …………………………………………………..
75
Undisputed counterclaim amount ……………………………………………… 96 SPX’s claim for unpaid contractual sums ……………………………………
98
Summary of the parties positions ………………………………………………. 98 Gardians’ complaints as to SPX’s failure to remedy building defects after term sheet variation …………………………………………………………............. 111
Gardians’ complaints as to SPX’s failure to deal with processing issues as
required by the term sheet variation ……………………………………………
118
S P X’s perform ance fro m term sheet variation to end of 2012/2013 season …. 118 SPX’s perform ance ov e r the winter shut down pe riod ……………………….. 145 The evidence of Mr White, dairy project engineer for SPX ………………… 154 The move towards changing the term sheet variation ………………………
168
Changes to the term sheet variation …………………………………………
184
Post 1 August 2013 progress ………………………………………………….
204
Performance of the plant ………………………………………………………. 204 Plant and processing issues …………………………………………………..,. 252 Conclusion as to what SPX personnel had achieved with the processing plant when they left the site in September 2013 …………………………….
285
Contractual recognition of the need for a mid-run CIP ……………………
288
Contractual developments ……………………………………………………
314
Submissions and determination ………………………………………………
350
Summary of closing submissions ………………………………………………. 350 Phase 1 ………………………………………………………………………….
353
Waiver ………………………………………………………………………… 353 The agreement to make reasonable adjustments to the payment schedule …… 362
Implied terms as to reasonable adjustments …………………………………... 373 Phase 1 – deemed performance of Phase 1 test ……………………………..... 376 Phase 2 …………………………………………………………………………. 425 Phase 3 …………………………………………………………………………. 444 Mackay v Dick ……………………………………………………………….. 444 Waiver ………………………………………………………………………… 456 FIDIC – clause 12.2 and deemed performance ……………………………….. 471 Agreement to make reasonable adjustments to the payment schedule ……….. 476 Phase 4 …………………………………………………………………………. 478 Conclusion as to Phases 1 to 4 payments ……………………………………. 483 Performance security ………………………………………………………….
484
Summary ……………………………………………………………………….
491
Background …………………………………………………………………….. 492 SPX claims ……………………………………………………………………... 500 Phase 1 ………………………………………………………………………... 501 Phase 2 ………………………………………………………………………... 506 Phase 3 ………………………………………………………………………... 508 Phase 4 ………………………………………………………………………... 510 Reasonable adjustments ………………………………………………………... 512 Conclusion on SPX’s claim …………………………………………………...... 515 Performance bond ……………………………………………………………… 516 Gas 1’s claims ………………………………………………………………….. 518 Gas 1’s claim for mi sre presentation ………………………………………….. 518 Gas 1’s claim for w a ge and salar y costs incurred in having plant perform at
the required level ………………………………………………………………
520
Gas 1’s claim for addit i onal cleanin g costs …………………………………… 522 Gas 1’s claim for cost o f fix ing const ructi on def e cts …………………………. 524 Costs and interest ………………………………………………………………. 525 Conclusion ……………………………………………………………………..
526
[1] Over recent years, some New Zealand-based companies have generated significant profits exporting dairy products. This has encouraged heavy investment in similar businesses. As these proceedings show, such investment, often associated with significant borrowings, is not for the faint-hearted. That is particularly so where the investment has been associated with the production of infant milk formula. The technology and expertise required in milk processing factories is expensive and sophisticated. Supply of the required milk to the factory at the appropriate time is crucial. The markets are demanding and can be impacted by events over which the processor has no control. These were all factors that affected the economic fortunes of the defendant and its investment in an infant formula milk plant built for them by the plaintiff. As it turned out, they also had consequences for the plaintiff.
Background
[2] The plaintiff is SPX Flow Technology New Zealand Limited (SPX). The defendant is now Gas 1 Limited but was formerly known as Gardians Limited. In this judgment I refer to it as Gardians.
[3] SPX is effectively owned by SPX Corporation, whose headquarters are in Charlotte, North Carolina in the USA. It is a global supplier of specialised engineering solutions for the food, beverage, power and energy, and industrial markets.
[4] The SPX/Anhydro team was a team of specialists, particularly in powder processing, spray drying and evaporation. The Anhydro business is based in Copenhagen, Denmark.
[5] Gardians was a joint venture company between the Sutton Group of Auckland and Grant Paterson interests of Southland. Peter Sutton and Grant Paterson were directors of Gardians. The Patersons were substantial dairy farmers in Southland while the Suttons had food processing businesses based in Auckland. Their combined investment in the Clydevale factory near Balclutha was $60 million.
[6] SPX and Gardians entered into the contract for the milk processing plant on
29 September 2011. The contract comprised a number of documents, including the
International Federation of Consulting Engineers’ (FIDIC) general conditions. It was for construction of the plant building as well as for the supply and installation of a specialised infant formula processing plant. The civil building work was subcontracted to Hawkins Construction Limited. There were separate contractual arrangements between Gardians and third parties for the supply of utilities (water, electricity, steam) and the powder packing plant. The contract price was
$42,944,000.
[7] The contract specifications required that:
The plant will in full operation, produce 3.415 tonnes per hour of 21.5 hours per day of infant formula powder (IF1), based on 56% total solids in the concentrate feed. This is based on the guaranteed capacity but the plant is capable of more than 3.8T/hr of Infant Formula if dehumidified air is added in future.
[8] There was provision for delay damages at 0.25 per cent of the contract price per week of delay, capped at five per cent of the contract price, ie $2,147,200. The specified time for completion of construction of the plant was 27 October 2012 when a Taking Over Certificate (TOC) was to be issued (allowing for certain minor omissions and defects). The plant began processing milk commercially on 29
October 2012.
[9] Part of the contract price was for the Anhydrous Milk Fat (AMF) plant. The
AMF plant was an integrated but non-essential part of the factory.
[10] The AMF payment due under the contract was $3,000,000, to be paid in instalments as follows:
· January 2013 $500,000
· August 2013 $1,000,000
· February 2014 $1,500,000
[11] The remainder of the contract price was to be paid with an initial advance payment of 10 per cent, monthly progress payments through the course of the works
totalling 80 per cent, a five per cent payment on successful completion of production tests and the remaining five per cent payment on issue of the TOC.
[12] By late 2012, significant issues had developed between the parties. There were delays with the building work carried out by Hawkins which led to delays in the trialling and completion of the plant for the 2012/2013 season.1 There were issues over the quality of the infant milk powder produced over that season. There were complaints over the appearance of the finished factory.
[13] Mr Sutton said the combination of the delayed start to the first production season and the ensuing quality problems led to a major loss in revenue for that season. Gardians was unable to take the raw milk that it had contracted to buy and instead incurred significant costs in arranging for that milk to go to another factory. Mr Sutton said that, because the whole project had been debt-funded, the lack of the expected revenue stream in that first season put the company under serious debt pressure. He believed Gardians had never really recovered financially from its poor start.
[14] Mr Ryan was the group general counsel for SPX and largely responsible for this contract. He said that, despite the language in the contract linking delay damages to the TOC, by early 2013 Gardians believed it was entitled to damages based on interim milestones in the construction programme.
[15] SPX was aware of the complaints being made by Gardians. SPX considered approximately $6.7 million of the contract price was outstanding. It considered its testing of the plant, in order to optimise the quality of the product, had been prejudiced by changes which Gardians had made in the recipe for the infant milk formula. It also claimed there had been problems in the quality of the milk supply which had impacted on its ability to ensure the plant produced product to the
required standard.
1 The period from about August until May when milk is being produced and available for processing.
The term sheet variation settlement
[16] The matters then in dispute were resolved through an agreement dated 8
March 2013 (the term sheet agreement). One of the terms of the term sheet agreement was that it was in full and final settlement of all matters between the parties as to additional costs incurred and payments to be made between Gardians and SPX in respect of the contract. It thus settled Gardians’ claim to delay damages or damages for defects, and SPX’s claim for immediate payment of the outstanding amounts of the contract price. The settlement recorded in the term sheet agreement was acknowledged in a formal deed of variation of the contract completed on 27
March 2013 (the variation deed). I refer to the terms of the settlement, as recorded in both documents, as “the term sheet variation”. Mr Sutton said both parties saw the variation deed at the time as drawing a line under what had gone before.
[17] The term sheet variation set out the parties’ obligations to the extent they had agreed to vary the original contract.
[18] Clause 6 of the variation deed obligated the parties to:
… work collaboratively and in good faith to deliver a world class nutritional plant that can be used as a globally recognised reference site achieving the best practice and higher sustainable outputs achievable from the plant.
[19] Gardians had to make an immediate payment of $2,100,000. The balance due under the contract was to be paid in accordance with four subsequent phases.
[20] Phase 1 required SPX to do all things necessary to achieve output and run times provided for in the contract. Those outputs and run times were to be based on current recipes and product specifications for growing up milk powder (GUMP), follow-on and infant formula. They were 3.41 metric tonnes per hour (mt/hr) / 21.5 hours per day / 3 consecutive days / 1 clean in progress (CIP) run.2 This referred to the output from the plant over 21.5 hours of operation per day for three consecutive
days.
2 Clean in progress, also referred to as a mid-run flush.
[21] Terms were set for the parties to work together so SPX could carry out the tests necessary to show the outputs and run times had been achieved. Upon achievement of those rates, the Phase 1 criteria, Gardians had to immediately pay
$700,000 plus GST. If rates of 3.00 mt/hr had been achieved for infant formula and SPX reasonably determined that capital improvements were required to achieve an infant formula output of 3.41 mt/hr for the required run time, those improvements were to be SPX’s cost.
[22] Under Phase 2, SPX and Gardians agreed there would be a complete shutdown of the plant following the end of the 2012/2013 season for up to seven weeks during June and July 2013. During that time, a number of improvements would be implemented, including the installation of a dehumidification plant at Gardians’ cost. The improvements were to be variations to the contract, the scope and cost of which were to be mutually agreed. Upon completion of these improvements and all items of rectification of construction defects, Gardians was immediately to pay to SPX the sum of $700,000 plus GST.
[23] Phase 3 was reflected in the particulars of contract, as amended, as follows:
The following shall be defined as Phase 3 and the definition of Contract
Works shall be amended accordingly:
“From the earlier of:
(a) the completion of the Contractor’s Phase 2 Obligations; and
(b) 1 August 2013,
for a period of 6 months (the end of which is defined herein as the Completion of the Phase 3), the Contractor will provide a full time site presence for a period of 6 months with an incentivised team and will use its best endeavours to optimise Plant to achieve the following Performance Targets for the following products (Phase 3 Performance Targets). For the avoidance of doubt, the Phase 3 Payment is not conditional upon the Plant achieving the Phase 3 Performance Targets.
Product
Performance Target
Gump
4 metric tonne per hour / 21.5 hours per day / 3 consecutive days/1 CIP run
Follow On
4 metric tonne per hour / 21.5 hours per day / 3 consecutive days/1 CIP run
Infant
Formula
4 metric tonne per hour / 21.5 hours per day / 3 consecutive days/1 CIP run
These outputs and run times will be based on the Current Recipes and the product specifications set out in the SPX Quotation NZ0111018.6.
The tests to demonstrate the outputs and run times will be conducted on dates agreed by Contractor and Employer and the Plant will be under the Contractor’s control for the purpose of such tests (Phase 3 Tests).
The Employer will work collaboratively with the Contractor for successful completion of the tests, but testing dates are to be designed as to not adversely impact on commercial production commitments of the Employer for the 2013 dairy season.
The tests are to be designed to minimise the risk of product downgrades as a result of or following the tests.
The initial term sheet agreement had also referred to SPX using its “best endeavours to achieve targeted outputs”.
[24] On completion of Phase 3, Gardians was to pay SPX $678,000 plus GST.
[25] In the variation deed, the parties acknowledged Gardians had paid the first
$500,000 plus GST of the contract price for the AMF plant. Phase 4 effectively required Gardians to pay $2,500,000 plus GST for the AMF plant at the end of the earliest six month period “following the expiry of the optimisation phase during which the plant is capable of operating at the optimised levels as configured during the optimisation phase using the current recipes”.
The claims and counterclaims
[26] SPX claims $4,578,000 as the amount due for the balance of Phases 1 to 4 payments.
[27] SPX obtained and provided to Gardians a performance security issued by the ANZ Bank for 10 per cent of the contract price, ie $4,294,400. SPX seeks a declaration that it is entitled to have the performance security returned to it in conjunction with any judgment it obtains against Gardians or, in the alternative, when it pays any amount that Gardians is entitled to on its counterclaim.
[28] Gardians counterclaims damages of $2,147,200 for an alleged breach of s 9
Fair Trading Act 1986. Gardians says it was induced to enter into the term sheet variation and to give up an entitlement to delay damages of $2,147,200 by a misrepresentation as to the operational capacity of the plant.
[29] Gardians claims SPX breached its obligations to provide a plant that could consistently achieve the output and run times required by the contract and the term sheet variation. Gardians also says the contract and term sheet variation required SPX to remedy construction defects, and it failed to do so. Gardians claims
$185,610.37 for the loss suffered from such breaches and a corresponding declaration that SPX was in breach of contract in such ways.
Gardians’ claims
Gardians’ claim for $2,147,200 for misrepresentation inducing Gardians’ entry into the term sheet agreement
[30] Gardians pleaded:
When negotiating the term sheet and variation deed SPX represented to
[Gardians] that:
(a) the operational capacity of the Plant could exceed the original requirements of the Contract, such that it could reliably produce approximately 4.0 metric tonnes per hour, for 21.5 hours per day, in respect of various desired nutritional products; and
(b) in consideration for the Terms Sheet and Variation Deed, and in particular for [Gardians’] forbearance to sue under clause 8.7 of the Contract and the Particulars of Contract for delays in completion, SPX would complete, test and hand over the Plant on that basis.
[31] By way of particulars, Gardians alleged these representations were made orally in meetings or by telephone between Mr Sutton and Mr Horan of SPX.
[32] I must first determine whether a reasonable person in Gardians’ situation, that is with the characteristics known to SPX or of which SPX ought to have been aware,
would have likely been misled or deceived by SPX’s statements.3
3 Red Eagle Corp Ltd v Ellis [2010] NZSC 20, [2010] 2 NZLR 492 at [28].
[33] Mr Sutton’s evidence was that, during the negotiations leading to the term sheet agreement, SPX said it had the expertise and resources to get the plant to the Phase 3 targets, namely, an output of 4 mt/hr. Mr Sutton said Gardians would not have completed the variation deed without that representation.
[34] Mr Brett Murdoch was the general manager of SPX and had a management supervisory role as the Clydevale project proceeded through 2011 to 2013. He was involved in negotiating and agreeing the term sheet agreement signed on 8 March
2013. He said the objective of 4 mt/hr was discussed with Brent Sutton as a “sensible objective for an optimised plant with some tags … perhaps some plant improvements and such like”. He considered it a sensible objective “with the other optimisations and plant improvements”, given SPX had nearly achieved that capacity. He thought there were one or two perceived plant bottlenecks that could be addressed but said optimisation of big factories continues for years and can require software changes, small process changes, changing the plant with changed recipes and changes in pumps. He said, in short, everything may have to change to get optimum performance.
[35] Both Gardians and SPX compromised claims that both might have pursued through the settlement recorded in the term sheet variation. Whatever may have been said to Mr Sutton before he signed the variation deed, the obligations which SPX accepted and which were the basis on which Gardians entered into the settlement were as set out in the term sheet agreement and the subsequent variation deed. It was clear from those documents that the target of 4 mt/hr was an aspirational target for both parties to work towards and there was no assurance that the plant would be capable of output at that level. This was expressly stated in the variation deed.
[36] Consistent with that, the output required under Phase 4 was not 4 mt/hr but whatever rates had been achieved during Phase 3. In the variation deed, as to Phase
4, SPX and Gardians agreed:
The parties acknowledge that the intent is that the Plant will continue to perform at the rates achieved in the Phase 3 tests for the products listed above using the Current Recipes and the product specifications set out in the SPX Quotation NZ0111018.6 (regardless of whether these rates are lower or
higher than the Phase 3 Performance Targets) (Phase 3 Optimised Rates) for a continuous period of at least 6 months using the Plant as configured for the Phase 3 Tests.
[37] It was also clear from the term sheet agreement and the variation deed that both parties would have to work collaboratively towards achieving output at that targeted level. Phase 3 followed on from Phase 2 which contemplated further investment in the plant, particularly by Gardians who would have been responsible for the major cost of a dehumidifier, around $3 million. Gardians thus accepted that SPX was not legally committed or bound to ensure the plant was capable of an output at the targeted level.
[38] In his brief of evidence, Mr Sutton said that, at the time of the term sheet variation, he did not understand that capital upgrades were required for the plant and at Gardians’ cost. Mr Ryan said, and I accept, this was specifically discussed in the negotiations and then recorded as part of Phase 2 in the term sheet agreement and the variation deed.
[39] Having regard to all the evidence, I find that, with the term sheet variation, SPX agreed that, with the further allocation of its resources to the project, the plant would be able to produce the particular products, according to the existing recipes for those products, to the extent referred to for Phase 1 in the term sheet variation. This had to be achieved with the plant as designed and built under the original contract. The parties were, however, to use their best endeavours to have the plant produce more than the Phase 1 requirements, ie 4 mt/hr, but it was agreed, to do that, it might be necessary to make some capital upgrades to the plant. If that was necessary and did happen, such upgrades would be at Gardians’ cost or as mutually agreed.
[40] A reasonable person in the shoes of Mr Sutton would have known that, with the term sheet variation, there was uncertainty as to what might be achieved in implementing Phase 3. They would also have understood SPX was not guaranteeing that at the end of Phase 3 the plant would be capable of producing at 4 mt/hr.
[41] I thus do not accept that SPX made a misrepresentation as to the plant having a 4 mt/hr capacity in the way Gardians alleges in its counterclaim or in the way of which Mr Sutton spoke.
[42] Gardians has also failed to prove that, to the extent there was a representation as to the plant being potentially capable of producing at 4 mt/hr, such representation was false. The representation was as to what the plant could be capable of achieving with further optimisation and potential investment.
[43] Gardians led evidence from Mr Stuart Berry, an expert in the operations of plants such as that at Clydevale. From October 2011 to December 2012, Mr Berry was contracted to the BNZ to act as a financial auditor in respect of the SPX/Gardians construction contract because it was debt-funded. He was responsible for reviewing and approving for payment the monthly contract invoices submitted by SPX to Gardians.
[44] From January 2013 to April 2014, Mr Berry was project engineer for Gardians. In conjunction with SPX’s Mr Gary White, he prepared the processing action list, “the snag list”, that the parties were to work on over the winter shutdown period and when the plant was recommissioned at the beginning of season 2.
[45] Mr Berry considered that, to achieve production at 4 mt/hr, there would have to be capital upgrades to the mixed pasteuriser and evaporator. There would also need to be significant changes to the process operations, such as, amongst others, shortening the time for batch preparations, increasing the batch total solids to the evaporator and improving the inlet air humidity control by installing a dehumidifier. Mr Berry acknowledged that 4 mt/hr “might be theoretically possible” with a dehumidification plant in place, coupled with the changes to processing procedures.
[46] Gardians decided not to invest in the dehumidification plant during 2013 and in 2014 when it still owned the plant. On 2 September 2013, Mr Berry advised Gardians that Phase 3 changes should only be considered in season 3, the season that would start in August 2014.
[47] Mr Peter Brady is a management and operations consultant specialising in the dairy food industry. He was engaged by Gardians as an interim CEO at the plant from mid-2013 and continued working for them, either at the plant or remotely, until the end of March 2014. He said in his evidence that, when he was engaged by Mr Sutton, he was told of all the problems with construction in the plant during the first season. However, when he arrived at the plant, he understood that Gardians’ directors and employees were coming to the 2013/2014 season confident that numerous construction defects had been remedied by SPX over the winter shutdown and that recommissioning of the plant with the SPX experts on site would be a success.
[48] On 30 September 2013, Mr Brady reported to Mr Sutton and Mr James Shortall, Gardians’ commercial manager, as to what would be required to produce “4 tonne per hour whole milk capacity”. He said the dryer currently had capacity to increase to 4 mt/hr. He referred to some bottlenecks in other parts of the plant and made suggestions as to how the system could be operated to increase capacity. It appeared from his report that the only plant change required to achieve that capacity would be the installation of a system to take a blend of certain products continuously. Mr Brady did not speak of it as requiring a major investment but said it would require “some validation work from SPX/Anhydro”.
[49] Mr Brady prepared a detailed report for Mr Johns of 8 February 2014 setting out the scope of works that would be required to increase capacity to 4 mt/hr. Mr Johns was then the plant manager. In his report, Mr Brady did not suggest the plant would be incapable of achieving that output.
[50] On 20 February 2014, Mr Sanderson, Gardians’ process manager who was assisting the Sutton Group when they were looking to bring in an equity partner, advised senior managers that, with no modifications to the current plant, he believed the dryer powder output for all specifications could be increased to 3.6 mt/hr. He said this future target rate was contingent on favourable drying conditions. Installation of dehumidification for the incoming dryer plant air would enable consistent dryer throughput all year round. He said initial investigative scoping work for the installation of the dehumidification was conducted by SPX in early
2013, but that a full analysis of equipment, civil and services requirements was required to obtain a full picture of total project costs. He considered that an increase of dryer output to the 4 mt/hr target would require capital investment to achieve throughput increases to plant equipment upstream of the dryer.
[51] On 16 December 2013, Mr Shortall prepared a report for a consultant. The report was considered by Mr Brady who added his comments. The report said that the plant currently had a maximum capacity of 3.4 mt/hr. It said that, with additional capital expenditure and some further optimisation of the plant, the capacity of the plant could be increased to around 4.0 mt/hr.
[52] In 2014, the plant was sold to Danone Asia Pacific Holdings Pte Limited (Danone), part of an international business with considerable expertise and experience in the establishment and management of milk processing plants, including those producing infant formula. Danone took over ownership of the plant on 31 July 2014, and between July 2014 and July 2016 has carried out significant work at the plant, including the capital upgrade of the evaporation plant and installation of a dehumidification plant in January 2016. The evidence of Mr Andrew Johns, manager of the plant for Danone, was that certain individual components of the plant were designed to handle an output rate of 4 mt/hr but there were bottlenecks in the overall production process which Danone had to address. Some of those bottlenecks were still outstanding but, with significant capital expenditure and installation of a new specialised plant, Danone had come close to achieving 4 mt/hr output.
[53] Gardians has also not established that it suffered any loss as a result of or
“by” SPX’s conduct.4
[54] Mr Sutton was a sophisticated and experienced businessman. His notes on the documented communications he received show that he read and understood the detail of those documents. I do not accept that either he or anyone else in Gardians was or could have been misled by a misrepresentation from SPX in the way that
Gardians alleges.
4 Red Eagle Corp Ltd v Ellis, above n 3 at [29].
[55] Gardians’ counterclaim for $2,147,200 was based on an entitlement to delayed damages which it claims it had under the original contract (0.25 per cent of the contract price of $42,944,000) up to the contractual limit of five per cent of the contract price of $2,147,200, ie 20 weeks. It claimed the delay was from the first milestone for performance of the contract, the plant receiving first product on 1 or 5
August 2012. Gardians says it had an entitlement to those delay damages from 1 or
5 August 2012 to the date the term sheet agreement was executed, 8 March 2013 (31 weeks). Alternatively, it argued entitlement was from the time for completion set out in the particulars of contract, 27 October 2012, to execution of the term sheet agreement (19 weeks), on which basis the claim would have been for $2,039,840.
[56] In submissions, Mr McIntosh said that, but for the alleged misrepresentation over the 4 mt/hr capacity, an increase in production to that level (or even close to it) would have allowed Gardians to recoup its first season losses. He said it was because of this and based on that representation that Gardians entered into the term sheet agreement and forewent delay damages payable by SPX. For the reasons discussed, I have held there was no misrepresentation over this. Had that been the basis on which they entered into the term sheet variation, Gardians would have made the investments required to have the plant producing at 4 mt/hr in the 2013/2014 season. They did not do so.
[57] Under s 43 of the Fair Trading Act, if there had been a misrepresentation on a claim for damages, it would have been for the Court “to do justice to the parties in the circumstances of the particular case and in terms of the policy of the Act”.5
[58] Gardians had not established that it had a claim for delayed damages to the extent of $2,147,200 at the time the term sheet agreement was entered into. Under the FIDIC contract, any entitlement to delay damages only began from the contractual time for completion, 27 October 2012. Gardians began commercial production of nutritional formula powder at the plant on 29 October 2012. There were issues as to whether the problems in producing out of specification product were then contributed to, in part, through Gardians’ decision to manufacture product
with recipes different from those on which the contract had been based.
5 Red Eagle Corp Ltd v Ellis, above n 3.
[59] SPX claimed that liability for indirect or consequential losses was excluded by a term of the contract.6 SPX was also claiming that substantial sums were due to it under the contract. It wanted to be confident as to the basis on which it would be paid the balance which it claimed was due to it under the contract and the terms on which such payment would be made. The term sheet agreement acknowledged that the parties had been in dispute over these matters when the term sheet agreement
was completed.
[60] With that agreement, Gardians obtained SPX’s commitment to the allocation of significant resources in terms of personnel, expertise and materials to fulfil its term sheet obligations, immediately so in respect of Phases 1 and 2. Gardians obtained the benefit of that continued commitment and realised the value of it with its sale of the plant to Danone.
[61] In all these circumstances, had I found there had been a misrepresentation in the way claimed by Gardians, to do justice between parties, I would have assessed their entitlement to damages on the basis the misrepresentation would have been incorporated into the term sheet agreement and would have required SPX to meet the obligations it had in respect of that term. I would have held that Gardians had not established that it suffered any loss by reason of SPX’s failure to meet such a term in the agreement because:
(a) Gardians had not made the investment in the dehumidifier or the other improvements which the parties anticipated would be necessary to achieve the increased capacity;
(b) Gardians had agreed that, during the 2013/2014 season, SPX should concentrate its efforts on achieving the required quality of products rather than increasing productive capacity to even the Phase 1 requirements;
(c) the plant had processed all milk that was available to it; and
6 See [94] below.
(d) Gardians sold the plant to Danone without any evidence that the price obtained was less because of any alleged failure to have the plant capable of producing product at the rate of 4 mt/hr.
[62] Mr Thain, for SPX, also submitted that Gardians may not have been entitled to claim damages on this basis because the contractual provisions as to such a payment were for payment of a penalty rather than a genuine pre-estimate of the loss that would be caused to Gardians if there was delay. Were it the latter, Gardians would have had to prove its actual loss and the Court would allow damages only for the loss which had been established.7
[63] Under cross-examination, Mr Sutton accepted that the formula for delay damages was not a genuine pre-estimate of loss. Mr Sutton and Gardians have said they considered that, because during the first season the plant was not producing infant formula product of the required standard, they did suffer losses in excess of the amount claimed by delay damages. However, in the term sheet agreement, they acknowledge that their claim for such a loss was disputed. As it needed to be, the focus of evidence at the trial was on what happened after the term sheet agreement was entered into. Not surprisingly, Gardians has not proved what actual losses it suffered during the first season, nor to what extent any such losses were caused by SPX’s breaches of contract.
[64] There is now some suggestion that the former distinction between provision for liquidated damages and penalties may not be as determinative as it was formerly held to be.8 However, I do not need to reach any conclusion on this defence to Gardians’ counterclaim. For the other reasons discussed, Gardians fails on its claim for $2,147,200 for misrepresentation.
Gardians’ claim for SPX’s failure to remedy building defects
[65] Gardians’ claim is for $185,610.37 for SPX’s failure to complete construction of the plant, as required by the contract, the term sheet agreement and the variation
7 John Burrows, Jeremy Finn and Stephen Todd Law of Contract in New Zealand, (5th ed, Lexis
Nexis, Wellington 2016) at [21.2.6].
8 Cavendish Square Holidngs BV v Talal El Makdessi; ParkingEye Ltd v Beavis [2015] UKSC 67, [2015] 3 WLR 1373.
deed. During the hearing, it accepted the challenges SPX had made to a claim for
$40,000 for lagging on steam and condensation pipes and $15,000 paid to a consultant, Dr Chris Bloor.
[66] Through counsels’ submissions, SPX accepts liability for $65,339. This was largely for the cost of remedying yellow wall paint and floor coatings. With Gardians’ agreement, the work was not carried out during the 2013 winter shutdown period and remained outstanding when the plant was sold.
[67] Of the adjusted claim for $185,610.37, various amounts remain in dispute. I
now deal with those.
Claim for extra cleaning costs
[68] Gardians claims $12,000 for costs incurred through additional time spent by Gardians’ staff removing equipment in order to clean, which it says was made necessary by inadequate design.
[69] On 13 February 2014, Gardians’ outgoing operations manager, Mr Charlie Williams, provided Mr Johns with a report on the plant, identifying defects in the civil build of the plant which he considered needed to be addressed, together with what he considered were some areas of concern as to process design. The only mention of additional cleaning work resulting from design was in relation to the micro-addition area having a wet scrubber attached to remove fine particles from the air. Mr Williams said the extraction duct above the tip-funnel became encrusted with this dust and the build-up became a risk. He suggested it could be possible to install a spray-ball into the extraction duct to clean the surface. He noted this would have to be done by SPX and Gardians.
[70] I accept the submission made for SPX that, while it might be possible to improve a design to make it easier to operate a plant, that does not mean the actual design of the plant was not as contracted for. Mr Johns accepted that, if the plant had been designed differently, some of the cleaning time would have been shorter.
[71] With the settlement recorded in the term sheet variation, Gardians accepted that the TOC should be deemed to have issued as at 27 October 2012. With the issue of the TOC, Gardians accepted the factory and plant had been provided as per the original contract but with SPX obliged to rectify “minor defects” of which it had been given notice as required by the contract.
[72] At times, after the term sheet variation was concluded, complaints were made by Gardians’ personnel that in various ways the plant could have been designed better. Some of the evidence from Mr Brady and Mr Berry was to the same effect. I do not consider there is any basis on which SPX can be liable for damages or be denied what is due to it as a matter of contract on such a basis.
[73] Gardians accepted that SPX had built and made available to it for operation the plant and factory that it was contractually required to supply in return for payment. There was potential for the processing operations at the plant to be improved with improvements or changes to what had been built. The parties however recognised that such improvements would require a variation to the original contract, except for those improvements that might be required to achieve the output criteria in Phase 1.
[74] Gardians has not established that it incurred cleaning costs of $12,000 as a result of SPX breaching any contractual obligation it had to Gardians.
Gardians’ claim for additional employment costs in bringing performance of plant up to required standard
[75] Gardians claims $105,600 for the cost of bringing the performance of the plant up to the contracted standard. The claim was for the cost of employing three staff for 40 hours per week for 16 weeks, at a cost of $55 per hour.
[76] For reasons which I later discuss in detail, I find that by 27 September 2013 the plant was capable of performing to the standard required by the term sheet variation and to the standard required by Gardians.
[77] With a new plant, producing nutritional milk powder products from raw milk, and achieving and maintaining optimum performance of the plant and processing procedures, was always going to be demanding and would take time. With the term sheet variation, SPX committed significant resources and personnel to assist in this process of optimisation through until 27 September 2013. At that point, the performance of the plant in the production of nutritional powder products was to the required standard. Gardians agreed there was no point having SPX continue to assist, with the plant producing only whole milk powder (WMP). At that time, both SPX and Gardians anticipated the plant would be producing nutritional products later in that second season and SPX would again assist with this. For its own commercial reasons, Gardians had the plant continue to produce WMP for nearly all of the balance of the second season.
[78] On 29 April 2014, Gardians agreed to sell the plant to Danone. After 27
September 2013, Gardians never asked SPX to further assist with the optimisation of plant performance.
[79] From then on, as was to be expected, it was for Gardians, as the owner and operator of the plant, to analyse the precise nature of the milk coming to the plant, monitor precisely the way the plant was performing, analyse the precise nature and quality of the powder produced, and to make the detailed adjustments and setting changes that were required to further optimise plant performance and to maintain performance at an optimum level.
[80] The term sheet variation required Gardians and SPX personnel to work collaboratively on all of this, which they did through until 27 September 2013 when it was agreed SPX personnel should leave the site. Gardians has not proved that it incurred any salary or wage costs after that date as a result of any breach of contract by SPX.
[81] Mr Johns was operations manager of the plant from February 2013 to 31 July
2014 when he took up that position under Danone ownership. Mr Johns said this claim was for the commitment and hours put in by his management team to ensure the plant could meet the requirements of expected performance. His calculation was
for 16 x 40 hour weeks but that was only an estimate. Mr Johns had included consultancy fees for Dr Bloor of $15,000, paid in the winter of 2013, as costs relating to claimed plant performance defects but, as ultimately reflected in the reduction of Gardians’ claim, $10,000 of that was for training and nothing to do with the plant.
[82] Mr Aaron Sanderson said he was the plant process manager for Gardians from April 2012 to 1 August 2014 when he became production manager of the plant for Danone. He said that, as process manager for Gardians, he had 28 staff reporting to him and together they were responsible for the production operations at the plant. Mr Michael Byrne was the assistant process manager and Mr Sanderson’s second-in- charge at the time the plant was a Gardians business.
[83] Mr Sanderson said that, for much of the first half of the 2013/2014 season, the plant primarily produced WMP which enabled Gardians to focus on further process troubleshooting and optimisation.
[84] Although the plant was designed so it could operate on product for 21.5 hours a day, in the early part of the 2014 season when nutritional products were being produced, it was taking all milk available and on product for significantly less than
21.5 hours. I thus infer that staff would have had additional time to work on optimisation of the plant at no extra cost to Gardians.
[85] Mr Sanderson said that, from late 2013 and early 2014, he was aware the owners of the plant were considering selling part of the Gardians business. In February 2014, he was asked by Mr Johns to prepare a current and future plant capacity summary statement for senior management. He said that, once the deal with Danone was signed, Danone personnel began to work alongside Gardians’ people at the plant to give them a better understanding of the asset they were acquiring, and to identify improvements and additions that Danone would need to make over the next winter shutdown for the plant to be able to produce Danone’s own infant formulas from the start of the next season. He said he was asked to contribute to a list of proposed capital projects.
[86] Mr Sanderson did not give any specific evidence as to additional hours he had to work or as to additional remuneration he received because of the alleged contractual defaults by SPX over and above whatever his normal remuneration would otherwise have been.
[87] Mr Johns only began working at the plant in February 2014, taking over from the interim CEO and the outgoing operations manager, Mr Williams. At that time, as far as production was concerned, the demands on Gardians’ personnel must have been less as a result of the decision to concentrate on processing WMP rather than nutritionals. Senior managers must also have been significantly involved in preparing for the sale.
[88] The project engineer, Mr Berry, said he ended his contract in early 2014 because by then he could see there was not much more he could usefully do in the circumstances. The plant was by then running much better than before, although he considered it needed some major capital improvements in order to reach its potential. However, he understood that Gardians was no longer in a financial position to fund such improvements and that the owners were looking to sell the business.
[89] A report to the Board of December 2013 noted that Mr Williams (the operations manager) and Ms Tania Williams (the quality and laboratory manager) had both resigned, with Mr Williams to leave in February 2014 and Ms Williams in March 2014.
[90] All this would suggest that, after Mr Johns took up his position in February
2013 through until 31 July when the sale to Danone was settled, Gardians committed fewer resources to improving the operation of the plant rather than more.
[91] Mr Johns has not identified how the work, supposedly covered by this claim, related to SPX’s obligations under the term sheet agreement and variation deed. Witnesses did have criticisms to make as to defects in the original design but, as part of the term sheet settlement, Gardians had accepted it had taken over the plant as designed on 27 October 2012. The settlement, as recorded in the term sheet agreement and variation deed, was in full and final settlement of “additional costs
incurred and payments required to be made between Gardians and SPX in respect of
the contract”.
[92] The evidence of Mr Johns and Mr Sanderson does not prove, on the balance of probabilities, that Gardians incurred salary or wage costs of $105,000 in excess of what it would have otherwise had to pay for people at management level working for Gardians at the plant as a result of what it claimed were SPX’s breaches of contract.
[93] It was a term of the variation deed that the instrument was additional to, and did not supersede, the term sheet agreement. It said, if there was any ambiguity or conflict between the variation deed and the term sheet agreement, the term sheet agreement would prevail to resolve such ambiguity or conflict. The variation deed also stated that, except as expressly varied by the deed, the provisions contained in the contract were confirmed and were to remain in full force and effect.
[94] SPX also denied liability for this part of the counterclaim relying on a condition of the contract as follows:
Consequential Damages
Under no circumstances whatsoever shall [SPX] be liable to [Gardians] … for any indirect or consequential damages, including but not limited to lost goodwill, lost resale profits, work stoppage, impairment of other goods, loss of product or raw materials or otherwise and whether arising out of breach of any express or implied warranty, breach of contract, tort, negligence or otherwise, except only in the case of personal injury where applicable law requires such liability.
[95] I do not consider Gardians’ claim for any of the $185,610.37 would have been covered by that exclusion clause. Gardians’ claim, which I have held it has not been able to prove, was a claim for direct damages, not indirect or consequential damages. I therefore reject this part of SPX’s argument.
Undisputed counterclaim amount
[96] Through Mr Thain’s submissions, SPX accepted that Gardians has a valid counterclaim for $65,339. I have assumed that includes the allowance of $2,671.12 as part of the claim for steam plate trap replacement at $5,342.25. Gardians’
counterclaim was for $185,610.37. From that amount has to be deducted disallowed
claims for:
One-half of the cost of the steam trap replacement $ 2,671.12 Claim for cleaning costs $ 12,000.00 Additional wage costs $105,600.00 Total $120,271.12
[97] Adjusting for the disallowed claims on the figure for Gardians, the counterclaim that has been established is for $65,339.
SPX’s claim for unpaid contractual sums
Summary of the parties positions
[98] SPX’s claim is for the total of $4,578,000 which Gardians agreed to pay by way of the Phases 1 to 4 payments provided for in the term sheet variation.
[99] The term sheet variation required the parties to work “collaboratively and in good faith”. The plant had to be capable of producing the specified product of the quality required by the contract and at the quantities referred to in the term sheet variation. To achieve that production, there had to be a supply of milk to the plant at the required levels and at appropriate times. Gardians’ staff had to do the work required of them at the plant but SPX had to provide its particular expertise and resources to assist Gardians’ staff as they trialled and tweaked the plant to achieve maximum efficiency. With the term sheet variation, SPX assured Gardians of a continuing major commitment to the relationship and to the plant using staff not just from New Zealand but also some of their most experienced and highly qualified SPX/Anhydro personnel from Denmark.
[100] Under Phase 1, it was anticipated that, with both parties doing what was required of them, the plant would process milk and produce the specified product to the extent required, without further major capital investment. With the parties working collaboratively, SPX would be able to carry out the necessary completion tests to demonstrate the plant was performing as required. On that happening, SPX would be paid $700,000.
[101] In essence, SPX says it did all that was required of it but the production targets were changed for the 2013/2014 season. Payment of the $700,000 for Phase
1 was no longer conditional on satisfactory completion testing as originally provided for in the term sheet variation. Satisfactory performance of Gardians’ new production schedule was to be the new test. In any event, the new production schedule, continuing production of WMP and the sale of the plant to Danone made it impossible for SPX to carry out Phase 1 completion tests. Therefore, SPX contends that any requirement for SPX to complete the Phase 1 test was waived.
[102] Under Phase 2, payment of a further $700,000 was due on satisfactory completion of reconstitution trials, completion of mutually-agreed improvements to the contract works as variations to the contract and rectification of specific construction defects as listed in the second schedule to the variation deed.
[103] There is no issue that SPX carried out the required reconstitution trials. SPX says that, to the extent it was required to make any improvements to the contract works, it did so. SPX says it completed all the construction rectification work required of it except for what was required to deal with yellowing of the original wall/ceiling paint finishes and wet process floor defects. SPX says the parties agreed to defer that work. Because Gardians sold the plant, SPX never had the opportunity to do this work and its obligations in this regard should be brought into account through Gardians’ counterclaim to the extent of $65,339. SPX says it did all that was required of it as to Phase 2 so that it was entitled to payment of the further
$700,000.
[104] As to Phase 3, SPX says Gardians did not give SPX the opportunity to do the work that would otherwise have been required of it in the optimisation phase. Through selling the plant, Gardians prevented SPX from being able to do so. SPX says Gardians cannot rely on its default in this regard to avoid payment of the Phase
3 sum of $678,000.
[105] SPX says that, under the term sheet variation, $2,500,000 was payable six months following the expiry of the optimisation phase. SPX says that, with the sale of the plant to Danone on 31 July 2014, it was clear Gardians did not require SPX to
do anything further with regard to Phase 4, so that the further $2,500,000 would have been due no later than 31 January 2015, being six months after 31 July 2014.
[106] Gardians says there were numerous defects with the plant and buildings which have never been fixed, as was contractually required of SPX. Gardians says SPX did not provide a plant having the capacity to consistently produce output and run times of 3.41 mt/hr, 21.5 hours per day, in respect of various products. In that regard, it particularly emphasised the allegation that the plant was unable to run for
21.5 hours per day without having to stop for cleaning (referring to a mid-run flush or CIP).
[107] Gardians says it did not have to make any further payments to SPX until SPX had carried out the completion tests originally required under Phase 1, proving that the plant was able to consistently produce specified product of the required quality and in the required quantity. It had not done so.
[108] Gardians admitted that its use of the plant after 27 September 2013 prevented SPX taking further steps to achieve quality targets for nutritional products and to carry out quality testing in respect of such products. However, it asserts that this was temporary and did not relieve SPX of its contractual obligations, such that SPX is not entitled to the Phase 1 payment of $700,000.
[109] As to Phase 2, Gardians admitted SPX had carried out the required reconstitution trials and ultimately acknowledged SPX had no outstanding obligations to make improvements to the plant. However, Gardians denied SPX had remedied all building defects, so Gardians did not have to pay the Phase 2 $700,000.
[110] Gardians admits that its decision to begin production of WMP in September
2013, its then continuing production of WMP and its sale of the plant to Danone at the end of April 2014, prevented SPX’s team from taking steps to further optimise the output and run times in pursuit of Phase 3 output targets. Gardians accepts that it agreed all SPX staff should leave the plant on or around 27 September 2013 but says this did not constitute any contractual variation or settlement of outstanding issues.
Gardians thus claims that SPX has not met its obligations under either Phase 3 or
Phase 4 and is therefore not entitled to the payments due under such phases.
Gardians’ complaints as to SPX’s failure to remedy building defects after term sheet
variation
[111] Phase 2 of the term sheet variation required SPX to rectify a number of defects arising out of the building contract, the “hit list”. It was incorporated into the variation deed as the second schedule. The work was to be done during the winter shutdown period between 1 June and 31 July 2013.
[112] Mr Berry prepared a report dated 12 February 2014 as to how the contract with SPX had progressed generally. He said it was based on his role as project auditor for the BNZ from November 2011 to November 2012, his presence on the production site from January 2013 as Gardians’ project engineer and information provided by operations management during the initial production start-up. He was also dealing with SPX as to day-to-day coordination, and doing the final inspections and sign-off for the Hawkins activities.
[113] Mr Berry noted that a building completion hit list, referring to 300 items, had been generated in October/November 2012. A Hawkins’ site supervisor was on site organising the completion of minor items at the end of the 2012/2013 season and he was organising teams to be on site for the winter shutdown. He noted that, during the winter shutdown, Hawkins had 30 staff on site completing these items.
[114] Mr Berry said that all items on the “hit list” were signed off by Gardians on
12 August 2013 except for yellowing of paint on walls and poor floor finishes in the wet-process areas. In closing submissions for Gardians, Mr McIntosh accepted Gardians and SPX agreed to defer work to deal with these problems so it would not interfere with production in the second season. That sign-off occurred because Hawkins was going off-site and Gardians was about to start production again. Mr Berry said the list had no further life after that point.
[115] It was Mr Brady’s understanding that, when he was engaged as interim CEO by Gardians from mid-2013, the construction defects from the 2013/2014 season had been remedied over the winter shutdown period.
[116] Mr White from SPX was responsible for ensuring that items on the various lists were addressed. He confirmed with Mr Berry that all items on the list of general building and civil work defects had been attended to with the exceptions of issues with yellowing paint and wet-process floor defects which they agreed would be addressed at a later date.
[117] Consistent with all of that, there were no issues over building defects work discussed at the meeting of Gardians and SPX representatives which took place on
24 September 2013 in anticipation of SPX shortly moving away from the site.
Gardians’ complaints as to SPX’s failure to deal with processing issues as required by the term sheet variation
SPX’s performance from term sheet variation to end of 2012/2013 season
[118] Mr Sutton said he oversaw the plant from origination through to the sale of the business to Danone in July 2014. He said that for months after the variation deed was signed, Gardians continued to experience the same lack of commitment from SPX/Anhydro as he said it had experienced before the term sheet variation. He said that this lack of commitment resulted in SPX/Anhydro personnel not being back at the plant in time to resolve continuing production problems. Their presence was all too late to avoid problems that had arisen through Gardians having to redirect milk supply to another factory, with the result that the 2012/2013 season finished and the milk supply ran out before Phase 1 targets had been achieved.
[119] Mr Sutton said that while, by the end of 2013, the plant was running much better, it still had major construction, plant and design defects that would cost Gardians millions of dollars to resolve. He said Gardians had never released SPX from its obligation to run the plant for three consecutive days on each nutritional formula. He suggested that SPX had never required Gardians to make the plant available for such tests because it knew the plant could not achieve the 21.5 hour-
three day run time targets, irrespective of the metric tonnage being produced per hour.
[120] It is apparent from Mr Sutton’s communications with SPX in March, April and May that he did not consider SPX was providing on-site personnel and resources to assist in improving the operation of the plant in a way which was consistent with the “good faith” of the agreement.
[121] On 19 April 2013, Mr Sutton emailed SPX senior managers expressing concern at work outstanding at the plant and complaining that Gardians could not see any additional resources being applied to the plant prior to the end of the dairy season. Included in the complaint was advice that Gardians had approached another company to see “what resources they are able to offer”.
[122] In an email of 20 April 2013, Mr Sutton acknowledged SPX’s prompt response to this email. He said he also appreciated “Denmark’s attention”. That would have been a reference to the involvement of the Anhydro team from Copenhagen.
[123] Although Mr Sutton acknowledged the positive and prompt response from SPX to his complaining email of 19 April 2013, in his email of 20 April 2013 he referred to the way one-third of their milk had to be diverted to another dairy company due to lateness of the start-up and breakdowns, failure to reach daily production targets and 30 per cent of product being out of spec. These complaints related to pre-term sheet agreement settlement issues.
[124] In an email of 28 April 2013, while Mr Sutton thanked SPX for the support Gardians had received over the last few weeks and acknowledged the improvements that had been made, he referred to problems he said it was continuing to have as a result of the late completion of the building and commissioning. At the same time, he reiterated Gardians’ need for SPX’s continuing support and commitment for the start-up next season in approximately August 2013.
[125] On 6 May 2013, Mr Sutton emailed a detailed letter to senior people within SPX complaining of the way Gardians was being treated and saying “we have been treated appallingly”. The email included a detailed account of issues that had arisen during 2012. Mr Sutton was concerned that Anhydro personnel, who had been on site at the end of April and who were to be there until the end of May, were going to be leaving before then. SPX did attempt to respond to these complaints proactively, not least through Mr Michael Demchy, a senior general manager with SPX, becoming directly involved.
[126] In an email of 23 May 2013, Mr Sutton said the departure of Anhydro personnel and poor plant performance was going to be costly. He suggested it was going to have ramifications that would have to be discussed between the lawyers. He complained of issues they were having with the plant, referring back to his email of 16 April 2013 which had referred to problems Gardians had encountered during
2012.
[127] The variation deed was signed off and dated 27 March 2013. On the same day, SPX issued an invoice for $2,100,000. One of Mr Sutton’s complaints was that the term sheet agreement was signed and SPX paid in March but that the Anhydro engineers did not arrive until about five weeks afterwards, when the milk supply was nearly finished. I find Anhydro staff were on site almost immediately after the variation deed was signed and Gardians paid the $2,100,000.
[128] On 19 March 2013, Mr Williams, the operations manager for Gardians, was communicating with senior people at Gardians as to information which Gardians was to provide to Anhydro prior to them arriving. On Tuesday 26 March 2013, Mr Murdoch advised Mr Sutton and others at Gardians that the Anhydro people would be arriving “on Thursday morning” (ie 28 March 2013). One of the engineers, Mr Mortensen, was on site around the end of March 2013 and reported on progress that was being made in improving sidewall appearances of infant formula production. Two of the Anhydro people had to return to Denmark for personal reasons but they continued assisting with the plant from Denmark.
[129] Under cross-examination, Mr Sutton confirmed that, in April and May, the plant was processing all the milk that was available to it. Gardians also admitted in the pleadings that during April and May 2013 Gardians and SPX were doing the reconstitution trials required as part of Phase 2. The reconstitution trials involved making nutritional powders without raw milk, using powder and adding water instead of taking milk. Mr Sutton also accepted there were people from SPX on site in April and May 2012 and they made helpful discoveries, changes and adjustments to the plant which led to better results for the last few runs before the winter shutdown.
[130] Mr Berry accepted he had been correct in saying in his report of 12 February
2014 that SPX engineers had been on site from 22 March 2013. Two Anhydro engineers were on site from 25 March for three weeks. Three Anhydro engineers were on site from 17 May until 31 May. Mr Berry referred to production runs being carried out with raw milk and reconstituted milk over this latter period to determine the operational conditions for the dryer and evaporator, and the engineers creating an extensive list of issues with the dryer operation which had to be changed over the winter period. Mr Berry worked on that list in conjunction with SPX people.
[131] Mr Sutton was critical of the fact Mr Murdoch, SPX’s New Zealand manager, was not on site at that time. It is apparent from the documented communications that, although based in Auckland, Mr Murdoch was in regular contact with SPX personnel at the plant, he responded promptly to issues raised with him by Gardians, referred those concerns to others within SPX for advice or action, and otherwise responded in a timely way to Gardians.
[132] Mr Sanderson was the production manager at the plant responsible for the plant’s daily operations when it was owned by Gardians. It was his evidence that, by the end of the first season, with the Anhydro specialists on site, major improvements had been made to both the plant and the processes so that it could, by then, run much more efficiently and reliably.
[133] Mr Demchy was General Manager-South East Asia and Oceania and Food and Beverage Systems Engineering Director-Asia Pacific for the SPX flow business
during 2012 and 2013. His involvement began, in the main, after the term sheet variation had been negotiated. He said that in mid-March 2013 SPX arranged for specialist engineers from SPX’s Anhydro-brand team in Denmark to travel to the plant to assist with optimising the process on the evaporator and spray dryer in the plant. Mr Demchy said that equipment was key to the plant’s operation. It was Anhydro-branded equipment that had been supplied and installed during the construction period in 2012 by members of the Anhydro team.
[134] Mr Demchy said the work required of SPX as part of Phase 1 was part-way completed at the end of the 2012/2013 season with the plant getting close to producing a number of the products to the extent required by the term sheet variation.
[135] One of the witnesses for Gardians was Mr Shortall, who is Mr Sutton’s son- in-law. He was the commercial manager for Gardians from January 2012 through to the sale of the plant in July 2014. On 19 July 2013, he provided a report to Mr Sutton and Mr Paterson. That document summarised the key issues Gardians faced over the first season and how those issues had been resolved. Mr Shortall’s report covered the differing products the plant had to produce and referred to progress that had been made with the assistance of SPX/Anhydro as the 2012/2013 season came to an end.
[136] That report was provided to Deloitte for submission to the BNZ in support of a request for further working capital. Mr Sutton said the report was prepared by Mr Shortall in conjunction with Gardians’ Chief Financial Officer, Wayne Caskie. He accepted the information in the document was accurate and not misleading in any way.
[137] For standard infant formula, Mr Shortall reported the major issue for season 1 was solution appearance.9 As to that, Mr Shortall noted that a major issue with a dryer blockage had been resolved with a software sequencing change by Anhydro
during the last week of April 2013.
9 The appearance of a solution once the infant formula had been mixed in the bottle, a quality obviously of considerable importance to purchasers of the product and thus to importers and to Gardians as the manufacturer and exporter of the product.
[138] As to side wall appearance,10 Mr Shortall’s report said “after arrival of Anhydro support on 15 May saw successful runs. Product was produced in spec for SA (sidewall appearance) over last four production runs of season”.
[139] The report noted that further plant changes were underway during the off- season to further improve solution appearance and bulk density.11
[140] Mr Shortall’s report on premium infant formula indicated there had been problems with dryer blockages as with standard infant formula. There had been a deterioration in solution appearance as a result of changes which the Anhydro team made to profiles in attempts to reduce dryer and cyclone blockages. This required a reversion back to earlier settings. Mr Shortall’s report noted “last four production runs in May all in spec after Anhydro made successful changes across both IF specs”.
[141] As to standard follow-on, his report said there had been early production issues but these were resolved by February 2013. As to premium follow on, Mr Shortall noted “production runs have generally been good with virtually all product in spec at end of season”.
[142] For standard GUMP, Mr Shortall noted the major issues had been thermophile (plant issue) and sensory (formulation issue). As to sensory issues, he noted there were major improvements in taste resulting from changes to the formulation on 6 March 2013, and there would be changes to the formulation for season 2 to provide better taste and reduce the risk of off-flavours. He said there were no major issues with dryer blockages and solution appearance with this product but said that contamination problems with thermophiles had occurred with the lifting of production runs in December 2012 leading to the downgrading of product. For premium GUMP, similar issues arose as for standard GUMP. Mr Shortall said that changes were made to the formulation at the end of the 2012/2013 season (around
April/May 2013) and other changes had since been made and implemented.
10 The appearance of residue on a container after the mixed infant formula had been used or poured out of the container.
11 The latter refers to the extent to which the powder settles within the tin after packaging. This is of importance to consumers who do not want to have purchased less in quantity than appeared to be appropriate from the size of the tin.
[143] Mr Shortall’s report of 19 July 2013 explained how losses had arisen in the first season and, in each case, said the issue had been resolved. His summary stated how all quality and plant issues had been resolved and how all of this had been with Anhydro support.
[144] The evidence satisfies me that SPX did all that was required of it under the term sheet variation agreement between the time that agreement was finalised and the beginning of the winter shutdown period on 1 June 2013.
SPX’s performance over the winter shutdown period
[145] On 10 May 2013, Mr Berry prepared his list of suggested plant changes for consideration. He noted they were items that could be improved or changed to improve the operation of the plant and make the operators’ jobs easier in relation to safety and quality issues. He said some of the items would be relatively easy to implement while others would require some engineering. He categorised the changes as either “need to have” or “nice to have”. He introduced these latter items with the note “these would be outside the SPX scope of supply”.
[146] The items were considered by SPX who indicated whether or not the items were ones that Gardians would have to pay for or were SPX’s responsibility. Mr Berry accepted that SPX provided prices for a number of items which were Gardians’ responsibility, such as providing mobile working platforms. Those were never taken up by Gardians. Mr Berry accepted that Mr White was correct in saying there were a number of items which SPX considered Gardians should pay for but which SPX in fact carried out at their own cost.
[147] Mr Berry also accepted Mr White’s evidence that SPX generated its own list of improvements but the list included items which Gardians had suggested. He had no reason to doubt Mr White’s evidence that they had completed all required items on that list.
[148] Mr Berry also said that he had prepared a master list including items that both
parties had agreed should be attended to, “the snag list”.
[149] Mr Berry recorded that, from the end of June until the end of July 2013, SPX engineers were on site to action items on the snag list. He referred to the regular weekly review meetings of Gardians personnel with the SPX engineer and senior SPX management, and the agreements reached as to the way production was to proceed in the new season.
[150] On 28 August 2013, Mr Berry said in emails that SPX had completed its actions list and Hawkins had completed its building defects list. On 28 August, he said Gardians had been pleased with both the presence of the SPX engineers on site and the progress made at improving product quality.
[151] One improvement which the parties recognised might assist in achieving increased capacity at the plant was the installation of a new dehumidifier. That was recognised in the term sheet variation. It was also recognised that, if this investment was to be made, it would be at Gardians’ cost.
[152] On 9 May 2013, Mr Berry advised Mr Sutton that he had discussed the economics and wisdom of making this investment with someone from SPX. The advice had been to delay a decision about the installation of such a device until dryer output had been optimised. Mr Berry agreed that by May 2013 a decision had been made not to proceed with a dehumidifier. On 27 June 2013, Mr Sutton and Mr Berry agreed the issue of a dehumidifier should be parked. Mr Berry agreed that, at that time, the economics of the whole situation were such that this further investment on Gardians’ part was not justified.
[153] On 20 June 2013, Mr Sutton complained to SPX that SPX had failed to give Gardians the advice and assistance they needed in deciding whether or not to make that investment. This disconnect, between the way in which the operators of the plant and engineers from SPX and Anhydro appeared to be working collaboratively at the plant, and the attitude which Mr Sutton was displaying towards SPX at an owner/director level, had been evident in April/May 2013. It was to resurface again in September 2013, as evidenced by Mr Sutton’s email of 17 September 2013.
The evidence of Mr White, dairy project engineer for SPX
[154] The main evidence I received from SPX, as to the engineering and technical support they provided to the plant at the end of the 2012/2013 season and then through 2013, was from Mr White. He is a dairy project engineer, with a Bachelor of Science with Honours in Chemical Engineering from Swansea University, Wales. He has worked as a project manager and process engineer for over 35 years in New Zealand, the USA and the United Kingdom. Before 2011, he had been employed as a project manager and process engineer for BW Murdoch Limited. This was the company which was sold to SPX in 2011. That business had done a considerable amount of work designing processing solutions for dairy companies such as Fonterra. One of the first projects Mr White worked on for SPX was the Gardians plant near Balclutha.
[155] Between July and November 2011, Mr White was involved in formulating the design concept and preparing process specifications for the plant. At the end of the construction period in October 2012, he worked on site at the plant to oversee processes during the initial commissioning. He was on site until December 2012 but had to leave because his wife was seriously ill. He returned to work at the plant in May 2013. He worked on the plant daily from then until SPX’s work for Gardians at the plant finished at the end of September 2013. He was involved with product trials and optimisation works in May, rectification of defects and the making of improvements to the plant when it was shut down in June and July, and then the re- commissioning of the plant with product testing and optimisation through to the end of September 2013.
[156] Mr White spoke of the particular challenges they faced with this project during the 2012/2013 season. These related to the way the operation of the plant had to cope with changes to product recipes, and the difficulties faced in having the opportunity to optimise the performance of the plant for one particular product because of the pressure Gardians was under to process all milk that it was committed to taking, which it could more easily do in producing GUMP rather than infant formula.
[157] Gardians also had very few of their own experienced plant operators on site during the commissioning stages. SPX engineers therefore found they had to assist with the actual running of the plant more than with other projects with which they had been involved. This was probably something they should have expected given Gardians was a start-up company and it was a greenfields project.
[158] When Mr White returned to the plant in May 2013, he knew that an agreement had been reached in March but he was not concerned with the commercial arrangements. He knew that SPX was to optimise the plant for production of agreed recipes and also to rectify defects and make improvements to the plant during the planned shutdown period of June and July at the end of the dairy season.
[159] Mr White said Anhydro engineers came on site to work on optimising plant performance before the planned shutdown on 1 June 2013. He said May 2013 was not the best time to optimise the plant because of the nature of the milk supply however SPX did carry out trials during that time.
[160] Mr White said he worked with Gardians’ project engineer, Mr Berry, to prepare the “Gardians action list, a list of mainly process related matters which SPX, including the Anhydro team and Gardians, were to address”. This was the “snag list”.
[161] Mr White sent his list of suggested improvements to Mr Berry on 31 May
2013. The way Mr Berry and Mr White were working was consistent with their taking a collaborative approach to improving the performance of the plant, as required by the term sheet variation.
[162] The impression I had from Mr White’s evidence was that he was not concerned with the commercial arrangements between Gardians and SPX. His whole focus was on getting the plant to perform at the optimal level. He said he had a good relationship with Gardians’ people. He also spoke of his relationship with Gardians’ factory manager, Charlie Williams, in ways that suggested they worked cooperatively in coping with the commercial demands which the plant faced. Mr
Sanderson of Gardians said he had enjoyed working with Mr White. He considered him to be trustworthy and a very knowledgeable process engineer.
[163] Mr White said that, before the winter shutdown, they had worked out what improvements they would make to the plant. Agreement was reached over these items. He provided Mr Williams with his list of what they were going to work on and what he hoped would be achieved. These improvements were not capital intensive and primarily involved tweaking of the systems.
[455] I find Gardians did make it impossible for SPX to fulfil what was required of it to obtain the Phase 3 payment, so that conditions for the Phase 3 payment must be taken as having been fulfilled.
29 Mackay v Dick, above n 27, at 270.
Waiver
[456] SPX claimed that Gardians, by its conduct (as particularised above), waived the requirement for SPX to provide the on-site optimisation and for the Phase 3 tests to be conducted.
[457] I find that Gardians did, by its conduct, waive the requirement for SPX to provide the on-site optimisation and for the Phase 3 tests to be conducted. It waived those requirements through:
(a) adopting the new production schedule for August and September 2013 with its new recipes, the emphasis to be on quality rather than achieving even the Phase 1 outputs;
(b) having the plant make just WMP at the end of September 2013;
(c) agreeing with SPX that there was no point in it remaining at the plant after 24 September 2013;
(d) not making any proposals, even as to the Phases 1 or 2 payments, after receiving SPX’s requests for payment and for arrangements over this to be concluded so that SPX could return to the plant in November when it had been anticipated it would be able to assist with further optimisation connected with renewed production of nutritionals;
(e) continuing with just WMP production in and after November 2013; and
(f) agreeing on 29 April 2014 to sell the plant to Danone and through settling that sale on 31 July 2014 without, in the interim, paying or offering to pay any of the outstanding portion of the contract price for the plant, as represented in the Phases 1 to 4 payments.
[458] I find that, as a result of that conduct, SPX reasonably believed it was not required to complete Phase 3 optimisation or Phase 3 tests. In doing so, it relied on the representations that had been made by Gardians through its conduct. SPX then acted to its detriment in not insisting the plant be made available to it and Gardians do everything else necessary for SPX to assist with optimisation work. For the
reasons already discussed, I am satisfied it would be unconscionable for Gardians to now deny SPX the Phase 3 payment on the basis SPX had not done what was required of it under Phase 3.
[459] Mr McIntosh also argued that, if there was a waiver with regard to Phase 3, SPX’s claim was for damages, not a debt. He argued that SPX had not established what loss it had suffered through being unable to complete Phase 3. He argued that, had SPX returned to the site to do the Phase 3 work, it would have incurred significant costs in doing so. It has avoided incurring those costs.
[460] I reject that argument. On satisfaction of Phase 3 requirements, SPX was entitled to payment of $678,000 outstanding on the contract price for the plant. That entitlement was a debt due to it. It was entitled to payment of that sum as soon as Phase 3 requirements had been met, not as payment for the work that would have been involved in Phase 3. That is the loss it has suffered through being unable to satisfy the requirements of Phase 3, requirements which were waived by Gardians.
[461] I do not consider there was any communication or conduct on the part of SPX
which would have released Gardians from its obligations to make any of the Phases
1 to 4 payments. SPX’s performance after the term sheet variation, in the context of the difficult relationship it had with Gardians at director/owner level, indicated it always accepted it had to meet its contractual obligations. I am satisfied that, right through until 31 July 2014, SPX would have remained willing to do so had there been any real indication from Gardians that Gardians was willing and able to make the payments required of it.
[462] I consider that remained the situation even after it had filed these proceedings claiming the balance of what was due to it under the contract.
[463] Mr Berry, Gardians’ project engineer, prepared a report of 12 February 2014 with his review as to how the whole contract between the parties had proceeded and what had eventuated with regard to the term sheet variation. In his report he said Phase 3 started 1 August 2013 and was a continuation of the production improvement trials. He noted that the last two SPX engineers left on 25 September
2013 and three Anhydro engineers were on rotation from 25 July to 23 September
2013. In that report, he confirmed SPX/Anhydro engineers and senior SPX management agreed that SPX needed to come back for the next infant formula runs to complete the optimisation. He said the phase of increasing production to 4 mt/hr had not been started.
[464] Mr Berry had advised Gardians on 2 September 2013 that Gardians should only consider making the changes necessary to achieve 4 mt/hr in season 3, that is the season that would start in August 2014. He had also said that the changes SPX/Anhydro had made in early 2013 were a good basis for the operators to increase capacity in the next season.
[465] It was apparent from the 30 July 2013 agreement, the minutes of the 24
September 2013 meeting and correspondence to Gardians from Mr Ryan that, if Gardians had made the Phases 1 and 2 payments, as SPX reasonably required of it, and if Gardians returned to producing nutritionals in November, SPX would have returned to the plant to assist with further optimisation.
[466] I have already found that Phase 1 was effectively completed with satisfactory performance of the plant in connection with the new production schedule at the beginning of season 2 and Gardians keeping the plant on WMP in November 2013. Even if there had been no communication over the decision to stay on WMP in November 2013, the reality was that Gardians had made it impossible for SPX to continue with further optimisation of the plant through its decision to stop producing nutritionals and to stay on WMP during the 2013/2014 season. Although at one point Gardians suggested SPX might have to do further work to be entitled to any of the Phases 1 to 4 payments, I find that was simply to further stall payments Gardians was obliged to make. Gardians did not do or say anything to indicate that it in fact required SPX to carry out such work. It had been agreed between Gardians and SPX that there was no point in SPX personnel remaining at the plant after it went off nutritionals during September 2013.
[467] Gardians submitted that not only did SPX not offer to return to carry out an optimisation phase but, in correspondence, Mr Ryan had contended the purpose of
Phase 3 had already been achieved. That was the reality as far as these parties were concerned.
[468] With the adoption of the new production schedule for season 2, Gardians chose not to then do anything required of it in relation to ensuring the plant could achieve an output of 4 mt/hr. As far as production of nutritionals was concerned, the emphasis was to be on quality rather than achieving the Phase 1 output requirements. Gardians had thus communicated to SPX that it did not require SPX to do any work on increasing the capacity of the plant to produce nutritionals at 4 mt/hr. Consistent with that, it agreed there was no point in SPX remaining at the plant once it moved into producing WMP. With that decision, and with Gardians continuing to have the plant stay on WMP and not asking SPX to return on further optimisation of the plant in connection with the production of nutritionals, the reality was that SPX had assisted with the optimisation of the plant to the extent Gardians required of it.
[469] With the way Gardians responded to SPX’s proposals as to payment of amounts which SPX claimed were due under the term sheet variation and with Gardians keeping the plant on WMP, SPX would reasonably have inferred that Gardians was not wanting it to return and work with it on further optimisation of the plant.
[470] With Gardians agreeing to sell the plant to Danone on 29 April 2014, with milk production then tailing off at the end of the season and with Gardians focusing on working with Danone to have the plant ready for settlement of the sale, there was then neither need nor realistic opportunity for SPX to be working on further optimisation of the plant to meet Gardians’ Phase 3 aspirations. There was certainly no opportunity for SPX to do anything under Phase 3 after the sale to Danone settled on 31 July 2014.
FIDIC - clause 12.2 and deemed performance
[471] In closing submissions, Mr Thain did not submit that SPX could rely on FIDIC to obtain the Phase 3 payment. He did, however, submit for SPX that, in terms of FIDIC, the Phase 3 tests would have been tests after completion. If that was so, cl 12.2 would have applied if that was necessary for SPX to recover payment.
[472] Gardians submitted the Phase 3 tests would not have been FIDIC “tests after completion” for the reasons already advanced in respect of Phase 1 but also because Phase 3 was not part of the original contract.
[473] I accept that the Phase 3 tests were FIDIC tests after completion.
[474] SPX and Gardians were in a continuing contractual relationship where there were variations to the original contract. They agreed in the variation deed that the terms of the original contract, including FIDIC, would continue to apply to the extent they were not inconsistent with the term sheet variation.
[475] For the same reasons that applied as to Phase 1 tests, applying FIDIC cl 12.2, the Phase 3 tests would be deemed to have been completed and satisfied.
Agreement to make reasonable adjustments to the payment schedule
[476] Payment of the Phase 3 $678,000 also had to be made, certainly no later than
31 July 2014, in accordance with Gardians’ agreement that it would make reasonable adjustments to the payment schedule as set out above.
[477] I accept the submission for SPX that Gardians was liable to make the Phase 3 payment no later than when ownership of the plant was transferred to Danone on 31
July 2014. At that point, Gardians had put itself in a position where it could no longer have performed what was required of it as to the Phase 3 payment.
Phase 4
[478] The Phase 4 instalment of the outstanding contract price of $2,500,000 was simply the passing of six months during which the plant was capable of performing at whatever optimised level was achieved in Phase 3. Gardians argued that, for the Phase 4 payment to be due, the plant had to be capable of operating at the optimised levels as conferred during Phase 3 so that payment was dependent on completion of Phase 3.
[479] There was no contractual guarantee in the variation deed that, with Phase 3, the plant would be producing 4 mt/hr. Gardians never did what was required of it to have the plant capable of an output at that level and, as at September 2013, was satisfied with the output achieved then of, or close to, 3.4 mt/hr. In these circumstances, I consider that the requirement for Phase 4 would have been satisfied if the plant had been retained by Gardians and had been capable of producing at the levels which Gardians had accepted for the six months from 1 August 2013. Gardians could not operate the plant at that level because it settled the sale of the plant on 31 July 2014. The Phase 4 payment was for the AMF plant which was part of what Gardians had taken over on 29 October 2012.
[480] I find that SPX had done what was required of it to be entitled to the Phase 4 payment. If Gardians’ obligation to pay was conditional on completion of Phase 3, that condition was waived with the waiver of Phase 3 obligations.
[481] I accept the submission for SPX that the Phase 4 payment fell due no later than six months after the latest possible date on which Gardians’ waived the Phase 3 requirement, ie 31 January 2015 being six months after 31 July 2014.
[482] Gardians was also required to pay this $2,500,000 no later than 31 January
2015 in accordance with its obligation to agree on reasonable adjustments to the payment schedule.
Conclusion as to Phases 1 to 4 payments
[483] On each of the above pleaded and accepted grounds, SPX is entitled to judgment for the Phases 1 to 4 payments in the total sum of $4,512,661 plus GST.
Performance security
[484] In accordance with conditions of the original contract, SPX obtained and provided Gardians with a performance security for Gardians’ benefit. The performance security was issued by the ANZ Bank in the amount of $4,294,400, being 10 per cent of the contract price.
[485] Under FIDIC clause 4.2, the performance security was to remain in place until 21 working days after the last day of the defects notification period. It was to be returned to SPX for cancellation at the ANZ bank after issue of the performance certificate. On 20 December 2013, SPX made demand on Gardians to issue the performance certificate and return the performance security. Gardians refused to do so.
[486] Gardians submitted that SPX would not be entitled to release of the performance security until SPX had satisfied any liability it might have on Gardians’ counterclaims but acknowledged the merits of this head of claim would follow the main claims.
[487] As at 20 December 2013, the amount due on Gardians’ counterclaim was significantly less than the amount due to SPX, even for just the Phase 2 payment. Gardians had taken over the plant with the TOC deemed to have issued as at 27
October 2013.
[488] By 20 December 2013, SPX had done all that Gardians required of it in relation to Phases 1 and 2. By then, Gardians had made the decision to continue with WMP production and no further work was required of SPX in relation to Phases
3 and 4. The performance certificate should have been issued to SPX at that time and the performance security returned.
[489] In its amended statement of claim, SPX sought an order requiring the issuing of a performance certificate as at 24 November 2013 and an order requiring Gardians to return the performance security to SPX. SPX is entitled to such orders but, in the circumstances, the performance certificate should be issued as at 20 December 2013.
[490] SPX also sought judgment in the sum of the bond charges incurred by SPX. SPX did not call any evidence as to what those bond charges were but there is proof in the documents that such charges were incurred. Mr Ryan confirmed that such charges had been incurred. Mr McIntosh submitted that issues of interest and costs should be dealt with post-judgment and I will deal with those issues in that way. The
bond charges are in the nature of interest and it is appropriate that the claim in relation to them be dealt with as part of the claim for interest.
Summary
[491] In the following summary, I reiterate the various findings made in this judgment in terms of the defendant “Gas 1 Limited” (Gas 1), as Gardians is now known.
Background
[492] In 2011, SPX contracted with Gas 1 to build a milk processing plant at
Clydevale near Balclutha at a cost of some $43 million, due for completion on 27
October 2012. The first season production at the plant started in October 2012.
[493] During the first season, there was a dispute between SPX and Gas 1. SPX said it was entitled to payment of some $6.7 million of the contract price. Gas 1 was saying it had suffered significant losses as a result of delays in the construction of the plant and the quality of the powder produced from the plant. It said it had a claim under the contract for delay damages.
[494] This dispute was settled in full through a term sheet agreement and associated variation deed in March 2013. In accordance with that settlement, Gas 1 made an immediate payment to SPX of $2,100,000. A further $4,578,000 of the original contract price was to be paid to SPX under four phases.
[495] Under phase 1, SPX experts were to work with Gas 1 at the plant at the end of season 1 and over the winter shutdown to ensure that the plant could process milk and produce specified infant formula milk powders, according to specified recipes, at a rate of 3.41 mt/hr with the plant to be producing for 21.5 hours a day, including time for a mid-run clean.
[496] Gas 1 had to cooperate with SPX to enable SPX to carry out tests for each of the specified products over three days to prove that the plant could perform at the
required level. On satisfactory completion of those tests, Gas 1 was to pay SPX
$700,000 plus GST.
[497] With Phase 2, SPX had to remedy construction defects with the plant, carry out reconstitution trials and make agreed capital improvements to the plant at Gas 1’s cost. On completion of those matters, SPX was entitled to a payment of a further
$700,000 plus GST.
[498] Under Phase 3, SPX was to provide a further six months’ assistance, beginning 1 August 2013, with the aim of increasing the output from the plant to 4 mt/hr. At the end of that period, Gas 1 was to pay SPX a further $678,000 plus GST.
[499] Under Phase 4 Gas 1 was to pay SPX the balance of $2,500,000 plus GST for a particular part of the Clydevale plant, such payment to be made six months after the end of Phase 3 optimisation.
SPX claims
[500] SPX sued for each of the Phases 1 to 4 amounts which Gas 1 had refused to pay.
Phase 1
[501] As to the Phase 1 payment, Gas 1 argued that SPX was not entitled to this payment until it had satisfactorily completed the required Phase 1 tests. It had never done so and the plant was never capable of performing at the required level.
[502] Held: Gas 1 waived the requirement for those tests by:
(a) at the beginning of season 2, requiring SPX to assist with a new production schedule where there was only a short run on nutritionals and where SPX had neither the opportunity to carry out further optimisation of the plant on a sustained basis nor opportunity to carry out the Phase 1 tests;
(b)having the plant produce just WMP after 22 September 2013 and then keeping the plant on WMP through most of season 2; and
(c) agreeing to sell the plant to Danone in April 2014 and settling that sale on 31 July 2014.
[503] At the start of season 2, when the plant was on nutritionals, SPX had shown that the plant was capable of producing powder of the required quality and to the quantity then required by Gas 1.
[504] If, contrary to that conclusion, Gas 1 had not waived the requirement for completion of the original Phase 1 tests, then the terms of the original contract between the parties were to be applied. Through the new production schedule, having the plant on WMP and the sale of the plant to Danone, Gas 1 had made it impossible for SPX to carry out the Phase 1 tests. In those circumstances, applying the terms of the contract, those tests were deemed to have been satisfied.
[505] On either basis, Gas 1 had to make the Phase 1 payment.
Phase 2
[506] As to Phase 2, Gas 1 argued that it did not have to pay all or any part of the Phase 2 $700,000 until all building defects had been remedied. There were two defects outstanding with regard to the paint and floor coatings so this threshold for payment had not been met.
[507] Held: Having regard to all the contractual arrangements, including the agreement to defer work in relation to these items, this was not a situation where SPX was required to fix all building defects before receiving the Phase 2 payment. SPX was entitled to payment of the $700,000 but with an adjustment for the $65,339 which it accepted should be brought into account against this claim because of work required of SPX which was still outstanding when SPX left the plant in September
2013.
Phase 3
[508] As to Phase 3, Gas 1 argued SPX was entitled to payment of the $678,000 only when it had met Phase 1 requirements. It argued that those Phase 1 obligations had not been met and SPX had never assisted with the further six months optimisation with the aim of increasing the capacity of the plant to 4 mt/hr.
[509] Held: SPX had met the Phase 1 requirements. In the circumstances, under Phase 3 it was required only to assist with optimising performance of the plant at such levels as had been achieved with Phase 1. For SPX to do that, Gas 1 had to make the plant available to it to do so, and had to have the plant producing nutritionals rather than WMP. Gas 1 had not done what was required of it to enable SPX to meet any obligations it had in this regard. Gas 1 had also waived the need for SPX to provide this assistance through its commitment to the new production schedule, its decision to stay on WMP and the sale of the plant to Danone. To the extent satisfactory completion of Phase 3 tests might have been required as a condition for the Phase 3 payment, the terms of the contract could be applied so that any such tests were deemed to be satisfied.
Phase 4
[510] The Phase 4 payment of $2,500,000 was to be made six months after SPX’s performance of its Phase 3 obligations. Gas 1 argued that SPX had never done what was required under Phase 3 so SPX was not entitled to the Phase 4 payment.
[511] Held: Gas 1 had waived the need for SPX to carry out further Phase 3 optimisation. With settlement of the sale to Danone on 31 July 2014, nothing further could be required of SPX with regard to such optimisation. Accordingly, the Phase 4 payment had to be made to SPX by 31 January 2015 at the latest.
Reasonable adjustments
[512] With regard to all the Phases 1 to 4 payments, SPX claimed that Gas 1 required SPX to work with it on a new production schedule at the beginning of season 2. This prevented SPX from carrying out the Phase 1 tests as originally
envisaged. Recognising this and in return for SPX’s cooperation, Gas 1 agreed it would make reasonable adjustments to the payment schedule.
[513] Gas 1 said that any such agreement was not intended to be legally binding and its only commitment had been to negotiate over such terms.
[514] Held: In all the circumstances, there was an agreement to agree on reasonable adjustments. There was an intention to be bound by such an agreement. In the particular circumstances, with the Court being able to have regard to all the contractual arrangements that had been made between the parties and the full matrix of facts, it was appropriate for the Court to give effect to the agreement reached by implying the revised terms for payment which were reasonable. The Court implied terms that required Gas 1 to make each of the Phases 1 to 4 payments as set out above, which it had failed to do.
Conclusion on SPX’s claim
[515] SPX was accordingly entitled to judgment against Gas 1 in the sum of
$4,512,661 plus GST.
Performance Bond
[516] It was a term of the original contract that SPX provide a performance bond securing any obligations it might have had to Gas 1 for any non-performance on its part of the contract between the parties. It had been entitled to the release of that bond as at 24 November 2013. Gas 1 had refused to make this possible when asked to do so on 20 December 2013.
[517] Held: Gardians was ordered to deliver up the required documents to SPX to enable it to obtain the release of this bond. SPX was also entitled to judgment for the interest it had paid for that bond in the period after 20 December 2013.
Gas 1’s claims
Gas 1’s claim for mi srepr esentation
[518] Gas 1 claimed $2,147,200 under the Fair Trading Act on the basis that, with the March 2013 settlement, it had been induced to give up an entitlement to delay damages of $2,147,200 through a representation from SPX that the plant would have the capacity to produce powder at the rate of 4 mt/hr.
[519] Held: There was no misrepresentation as alleged. SPX had said it would work with Gas 1 to enable the plant to process 4 mt/hr but this was on a best endeavours basis only and that increase was likely to be achieved only with significant further capital investment in the plant by Gas 1. Gas 1 has not proved that such representations, as were made, were untrue. Gas 1 could not have relied on the misrepresentation it alleged in entering into the March 2013 settlement. Even if it had, it had not proved that it had suffered any loss as a result. It would not necessarily have been entitled to delay damages. In season 2, the plant had processed all the milk that was available to it. Gas 1 had not attempted or done anything to increase the capacity of the plant beyond 3.41 mt/hr. It had sold the plant in 2014 without there being any evidence that the price obtained for the plant was less because of its then output capacity.
Gas 1’s claim for wa ge and salar y costs incur r ed in having plant perform at the required level
[520] Gas 1 claimed $105,600 for additional wage and salary costs it had incurred during season 2 in working on the plant to have it perform at a level that SPX was contractually required to achieve.
[521] Held: At the beginning of season 2, SPX had shown the plant was capable of performing at the level required of it, both in terms of quantity and the quality of powder produced. For nearly all of season 2, after SPX had left the plant, Gas 1 had it producing WMP rather than nutritionals so there was little opportunity to work on further optimisation. Gas 1 agreed to sell the plant to Danone at the end of April and, from then on, was primarily working with Danone to ensure the plant was
capable of producing the powder required by Danone. Gas 1 had not proved that it
had incurred the claimed costs in remedying shortcomings in SPX’s performance.
Gas 1’s claim for addit io nal cleanin g costs
[522] Gas 1 claimed $12,000 for additional cleaning costs incurred as a result of defects in the plant.
[523] Held: Gas 1 had not proved there were such defects. Rather, it complained there was an aspect of the plant which could have been designed better but the plant was as it had contracted for and as it had taken over at the end of October 2012. Any costs incurred by Gas 1 in this regard were not the result of any breach of contract on the part of SPX.
Gas 1’s claim for cost of fix ing const ructi on defe c ts
[524] Of the amount Gas 1 claimed for the cost of remedying defects that were SPX’s responsibility, SPX accepted that, when SPX left the plant in September 2013, further work was still required to deal with paint and floor coating problems that had emerged. SPX and Gas 1 had agreed to defer that work so that it would not interfere with production in season 2. SPX accepted that the work was nevertheless still outstanding and agreed that it should be brought into account against SPX’s claims to the extent of $65,339.
Costs and interest
[525] The Court reserved issues as to interest and costs for further consideration.
Conclusion
[526] Gardians is now named Gas 1 Limited. There is judgment for SPX Flow Technology New Zealand Limited against Gas 1 Limited on both the claims and counterclaims in the sum of $4,512,661 plus GST.
[527] I make an order requiring Gas 1 Limited to issue the performance certificate referred to in FIDIC as at 20 December 2013 and a further order requiring Gas 1
Limited to forthwith return the performance security referred to in FIDIC to SPX Flow Technology New Zealand Limited.
[528] Leave is reserved to SPX to seek any further orders that may be required to give effect to this judgment.
[529] Issues as to interest and costs are reserved. If the parties are able to resolve these by agreement, a memorandum is to be filed within four weeks as to the amounts for which judgment is to be given. If no such agreement is reached, SPX is to file a memorandum within six weeks as to what it seeks. Gas 1 is to file a memorandum in response within eight weeks. Unless either party indicates they seek to be heard further in relation to this matter, I will deal with interest and costs on the basis of such memoranda.
Solicitors:
DLA Piper, Auckland
H McIntosh, Barrister, Wellington
Van Aart Sycamore, Dunedin.
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