The Edge Buying Group (Queenstown 2000) Limited v Coco-Cola Amatil (NZ) Limited Ca145/02

[2002] NZCA 346

IN THE COURT OF APPEAL OF NEW ZEALAND   CA 145/02

BETWEEN     THE EDGE BUYING GROUP (QUEENSTOWN 2000) LIMITED

Appellant

AND               COCA-COLA AMATIL (NZ) LIMITED

Respondent

Hearing:                   18 November 2002

Coram:   Blanchard J Tipping J Hammond J

Appearances:            S P Rennie for Appellant

D G Hurd and B M M McKinlay for Respondent

Judgment:                 25 November 2002

JUDGMENT OF THE COURT DELIVERED BY HAMMOND J

Introduction

[1]       The central issues on this appeal from a judgment of Fraser J delivered on 25

June 2002, are whether an agreement between the appellant and the respondent was lawfully  cancelled  and,  if it was  not,  whether  certain  damages,  in the  nature  of damages for a chance, were properly awarded against the appellant.

Background

[2]       The appellant (“The Edge”) carries on business in Queenstown and Wanaka. It has a wholesale and retail business known as “Liquor Legends” and three other outlets: a tavern, a bar and a night-club.

[3]      The respondent (“Coca-Cola”) carries on business as a franchise bottler and distributor of non-alcoholic beverages in New Zealand.

[4]      On 21 September 2000 The Edge and Coca-Cola entered into an agreement, pursuant to which Coca-Cola would supply its products to The Edge on certain terms and conditions.

[5]      One of the products supplied by Coca-Cola to The Edge was post-mix syrup. This is a concentrate which is used in bars and other establishments to mix drinks. The concentrate is added to carbonated water through a post-mix dispensing unit.

[6]      With some limited exceptions, Coca-Cola’s policy is to sell post-mix syrup only to retailers purchasing pursuant to a term contract who will then dispense it through equipment supplied by Coca-Cola.

[7]       In this case, Coca-Cola’s understanding was that the post-mix syrup was to be sold to The Edge at an agreed discount price, for retail sale through its own outlets; and that with two agreed exceptions, on-sale of post-mix syrup to other retailers was not permissible.

[8]      In early  2001,  The Edge  began selling  alcoholic  and non-alcoholic  liquor supplies, including Coca-Cola post-mix syrup, to four retail liquor outlets which were not owned or operated by The Edge.  The Edge was of the view that such sales were not in breach of the agreement.

[9]      In July 2001 Coca-Cola became aware of the sales to two of these outlets which were not owned or operated by The Edge.   Various discussions then ensued between the parties.   The factual basis of those discussions, and the legal effect of them, were very much in issue at trial. Broadly, The Edge claimed that Coca-Cola had said that it would no longer supply The Edge with post-mix syrup it ordered for non Edge outlets.  Coca-Cola’s position was that it bona fide pressed on The Edge what it regarded as being the proper construction of the agreement with respect to on-sales to non  Edge  outlines.    But  Coca-Cola  maintained  that  it  did  not  make  threats  to

discontinue supply; and that it in fact continued, at all relevant times, to make supplies to The Edge.

[10]     On 17 October 2001 The Edge entered into an exclusive supply agreement with Frucor Beverages Limited (“Frucor”).  Frucor, as the New Zealand franchisee of Pepsi and associated products, is Coca-Cola’s main trade competitor.

[11]     On 19 November 2001 The Edge cancelled the agreement with Coca-Cola.  It did so on the basis that, as it maintained, Coca-Cola had repudiated the agreement by refusing to supply post-mix syrup for non Edge outlets.

[12]     Coca-Cola thereupon sought an interim injunction restraining The Edge from dealing with Frucor.  On 6 December 2001, William Young J refused the application. The Judge held that as both The Edge and Coca-Cola had arguable cases, it was preferable to deal with the question of remedies at trial.  Furthermore, in the Judge’s view, should Coca-Cola be successful at trial (as ultimately it was), an award of damages could be made to compensate it for any loss it incurred in the intervening period.

[13]     The substantive proceeding came on for trial in June 2002, before Fraser J in the High Court at Invercargill.

The Agreement

[14]     It is convenient at this point to set out the relevant provisions of the supply agreement.

[15]     The introduction to the agreement provided:

[Coca-Cola] is seeking to establish an ongoing relationship with The Edge Buying Group by providing a financial contribution to The Edge Buying Group in return for promotional involvement with The Edge Buying Group.  This agreement shall encompass and extend to the outlets known at the date of this agreement as The Edge Night Club, Liquor Legends, Shooters Bar and the Wakatipu Tavern and any new outlet or other outlet that comes under the ownership, control or management of The Edge Buying Group during the term of this agreement (the “Outlets”).

[16]     The term of agreement was from 1 September 2000 until 1 September 2003.

[17]     Clause 2 of the agreement – a renewal provision - is central to the damages issues this court has to consider.  It provided:

On expiry of this agreement (other than due to default by [Coca-Cola]), if requested by [Coca-Cola], The Edge Buying Group will negotiate with [Coca-Cola] to conclude a new agreement similar to this one and will not enter into any agreement with any other supplier, distributor or manufacturer of non-alcoholic beverages without giving [Coca-Cola] the opportunity to match the terms of the proposed agreement.  The parties acknowledge that this clause survives termination of this agreement.

[18]      Clause 3 of the agreement dealt with the pricing of the products to be supplied to The Edge. It is unnecessary, given the issues before us, to recite the clause in detail. It suffices to observe that it was common ground that the prices specified in that clause were discounted prices.

[19]     Clause 4 and 5 of the agreement provided for the method of payment; rebates;

[20]	Clau 6.1	e 6 provided that Coca-Cola would receive the following benefits: Product Exclusivity
The Edge Buying Group undertakes that it will not during the term of this agreement, without the prior written approval of [Coca-Cola] (which [Coca-Cola] may withhold in its absolute discretion), distribute, sell, promote, display or dispose of any non-alcoholic   beverages,   which  compete  with  any  of  the Products which can be supplied by [Coca-Cola] pursuant to this agreement.
6.2	Sponsorship Exclusivity
The Edge Buying Group grants to [Coca-Cola] the first right of sponsorship for all activities associated with The Edge Buying Group and The Edge Buying Group undertakes that it will not grant  any  other  sponsorship   rights  to  any  competitor   of [Coca-Cola].

 

and for the supply of the necessary equipment for dispensing mixes.

s

s

6.3	Signage Exclusivity/Rights [Coca-Cola]   may  erect  signage  as  mutually   agreed  upon
between the parties.  The Edge Buying Group shall not permit other signage for products or companies in competition with the Products or [Coca-Cola] to be erected.
[21]	Clau	e 7 was the termination provision.  Clause 7(a) is directly relevant to the

 

issues we have to consider.

Either party may terminate this agreement after giving notice to the other party if the other party fails to observe or perform any of its material obligations contained in this agreement and does not remedy that failure within 4 weeks after being called upon to do so by written notice.

[22]     By clause 10 The Edge warranted:

The Edge Buying Group warrants that it shall not, and is not, a party to any  agreement,  arrangement,  or  understanding,  which  is  or  could conflict with the nature and provisions of this agreement.

[23]Clause 12 of the agreement was an “entire agreement” clause, in these terms: Except for those matters specifically referred to in this agreement, this

agreement contains all terms of the agreement between the parties and

replaces all prior agreements, discussions and arrangements between the parties with respect to the matters covered by this agreement.

The Pleadings and Argument in the High Court

(1) Coca-Cola

[24]     Coca-Cola’s case was that The Edge’s entry into the contract with Frucor on

17 October 2001 was in breach, or a repudiation of its agreement with Coca-Cola; and that, in further breach of the agreement with Coca-Cola, The Edge had cancelled the agreement on 19 November 2001.

[25]      Coca-Cola sought specific performance of the agreement, an injunction, and damages against The Edge.

(2) The Edge

[26]     The  Edge’s  case  was  that  it  was  entitled  to  cancel  the  agreement  with Coca-Cola because Coca-Cola had repudiated the agreement by refusing to supply post-mix syrup for supply to non Edge outlets.  In the alternative it claimed that it was an implied term of the agreement with Coca-Cola, that Coca-Cola “would not interfere with/or sabotage the relationship” between The Edge and the outlets to whom it was, or intended to, supply post-mix products.  The Edge’s case was that Coca-Cola had breached this implied term, and that breach was sufficiently serious to entitle The Edge to cancel the agreement.

The Judgment of Fraser J

[27]     The Judge found that The Edge was not entitled to cancel the agreement; and that it was itself in breach of the agreement by entering into the fresh arrangement with Frucor, and cancelling the agreement with Coca-Cola on 19 December 2001.

[28]     In coming to this conclusion, Fraser J made the following findings:

(a)On the question of the underlying dispute between the parties (whether the agreement prohibited The Edge from onselling post-mix syrup to other retailers) the Judge held that the agreement did not impose any such restriction.  There was no express term in the agreement to such effect; and further, the context of the agreement did not support such a restriction.

(b)The  Judge  upheld  the  argument  that  the  agreement  contained  an implied term that Coca-Cola would not interfere with supply to the retail outlets in fact serviced by The Edge.  The Judge then held that whether any act or conduct amounted to “interfering with and/or sabotaging”  the  customer  relationship  was  a  question  of  fact  and degree, to be determined on the evidence; and further, that such a term went beyond “the mere cut and thrust of commercial competition”.

(c)       The Judge found as a fact that the agreement between Coca-Cola and

The Edge was cancelled on 19 November 2001.

(d)Fraser J held that Coca-Cola’s conduct did not amount to a repudiation of the agreement. This because (a) Coca-Cola continued to meet The Edge’s orders; and (b) there were no threats to discontinue supply. There were discussions during the course of which Coca-Cola continued to press its view that The Edge was not entitled to on-sell, but in the Judge’s view they fell far short of threats to discontinue supply. Fraser J adopted certain observations of Tipping J in delivering the judgment of this court in Oxborough v North Harbour Builders Limited [2002] 1 NZLR 145 that in order to ground a repudiation of a contract, the conduct in question would need to amount to an unequivocal assertion that the intention was not to perform the contract according to its true terms.

(e)The Judge found that representatives of Coca-Cola had spoken to the non-excepted outlets to which The Edge was supplying post-mix product, and had conveyed Coca-Cola’s view that The Edge was in breach of its agreement with Coca-Cola in supplying them.  But the Judge held that this conveying of Coca-Cola’s view to those outlets “was not conduct amounting to interference and/or sabotage”.   And even if such conduct was sufficient to amount to “interference”, in the court’s view, in the context of the agreement and the nature and extent of the business, such advice “could not possibly be serious enough to justify cancellation”.

(f)As to the appropriate  remedies,  Fraser J held that, in principle,  an award of damages was adequate in this instance.  This was not a case in which specific performance and/or an injunction should be granted.  In reaching this conclusion the Judge appears to have been influenced principally by the fact that there would be “on-going difficulties” if The Edge was forced to continue to purchase produce from Coca-Cola. If there was liability on the part of The Edge to Coca-Cola, damages

had been agreed in favour of Coca-Cola in the sum of $206,919.00.  Of that sum, $130,000 represented damages beyond the term of the agreement.  It is this last sum which is the subject of the appeal to us. We will deal with it in greater detail later in this judgment.  For present purposes, it is sufficient to note that the Judge entered judgment for the total agreed damages of $206,919.00.

(g)Coca-Cola was awarded costs on a 2B basis, together with the usual formula for disbursements.

The Issues on the Appeal

[29]     By the close of argument in this court, the issues had been narrowed to two central issues.  First, whether The Edge was entitled to cancel the agreement as it had. Secondly, whether the sum of $130,000 for damages beyond the term of the contract was properly awarded to Coca-Cola.

[30]     In his written submissions, Mr Rennie had continued to place some reliance upon the alleged breach of the implied term as found by the Judge, but in the view we take of the case, that issue can be dealt with quite shortly.  We will address that issue later in this judgment.

[31]     For Coca-Cola, Mr Hurd had (properly) given notice of intention to support the judgment (if necessary) on the basis that Fraser J’s construction of the underlying obligations under the agreement was incorrect.  That is, if necessary, Coca-Cola still maintains that what it sees as a proscription against on-sale by The Edge to non Edge outlets is the proper construction of that aspect of the agreement.  We do not find it necessary to traverse that issue because we consider that on any view of the matter, the agreement was unlawfully cancelled by The Edge.

A Valid Cancellation?

[32]     It is not necessary to revisit the law of repudiation or cancellation of contracts for the purpose of the disposition of this appeal.  The relevant principles, at least so far as they relate to this appeal, are very well established.

[33]     As to the general principle, the law was stated succinctly by McMullin J in this court in Starlight Enterprises  Limited v Lapco Enterprises  Limited [1979] 2 NZLR

744 at page 748 line 38:

The test, to be applied in any case where it is said that one party has repudiated by words or conduct his obligation under a contract so as to entitled the other to rescind [the then equivalent of cancellation], is whether the party said to be repudiating has acted in such a way as to lead a reasonable person to the conclusion that he does not intend to fulfil his part of the contract.   If it is of that kind it may amount to a repudiation of the contract entitling the other party to rescind.

[34]      See also Oxborough v North Harbour  Builders Ltd (supra) and the authorities therein referred to; and Coote, “Repudiation, Affirmation, and Substantial Breach Under the Contractual Remedies Act 1979” (2002) 8 NZBLQ 8.

[35]     Mr Rennie accepted, as he had to on the Judge’s findings, that at no point before the time that The Edge entered into the contract with Frucor (or for that matter before it subsequently purported to cancel the contract), did Coca-Cola fail to supply product to The Edge as required by the agreement.

[36]     It followed that for The Edge to succeed it had to rely (if it could) on something which Coca-Cola had said that it would do (but had not yet done).

[37]     An argument  that Coca-Cola  had threatened  that it would not supply was disposed of by the Judge on the facts.  No challenge was mounted before us as to that finding, nor do we see how any could have been.  There was evidence on which the Judge could have come to the view he did.

[38]     What The Edge was left with, at the end of the day, was an argument that as Mr Rennie put it before us, what Coca-Cola did was “capable  of being understood as a refusal to supply …”.  (Italics added).  To put this another way, that The Edge could reasonably have understood from Coca-Cola’s protestations as to what the agreement “really” meant, and the way it conveyed its view of the proper interpretation of the contract to non Edge suppliers, that The Edge was justified in taking the course it did.

[39]     The  argument  founders  at  all  points.    It  founders  on  the  facts,  because Coca-Cola did not, as the Judge found, threaten not to supply; and in fact it did not ever terminate supply prior to actual cancellation of the agreement in November 2001.

[40]     It founders on the law, because the bona fide assertion (without more) by one party as to their interpretation of a contract, cannot be a proper reason to be seized upon by the other party as a justification for terminating a contract.  As a matter of legal principle, parties should not be exposed to a danger “that any forthright assertion of [their] view of their relative rights and duties could, if it turned out to be wrong, justify recession by the other party.  This would be particularly unfortunate if one of the parties had acted on legal advice which was later held by the court to be mistaken”.

(Treitel, Law of Contract, 9th Edition at page 722, in the context of commentary on

Woodar Investment Development Ltd v Wimpey Construction (UK) Ltd [1980] 1 WLR

277 (H.L.).)

[41]     Here, Coca-Cola had expressed a particular view of the contract.   But at no point did it stop performing the contract, nor, on the Judge’s findings, did it threaten to do so.  This then is a straightforward example of an occurrence (common enough in commercial practice) of parties disagreeing as to what a contract meant, but one party feeling constrained to observe the contract until the legal position is clarified.

[42]     With all respect, it is not sufficient, as Mr Rennie endeavoured to run it, for Frucor to say, in effect: “well we read what Coca-Cola was saying differently, and took  it  that  supply  might  well  be  interfered  with,  and  we  took  necessary  and appropriate steps to secure our supply with Frucor”.  To put the matter that way is to fail to appreciate the force of the observation of this court (per McMullin J, supra) that the appropriate test is an objective one.

[43]     It is necessary to add only this.  At one point Mr Rennie endeavoured to press on  this  court  that  Coca-Cola  was  not  bona  fide  in  its  view  as  to  the  proper interpretation of the on-sale issue under the contract.  That claim confronted the very high hurdle of the factual finding by the Judge that:

In my opinion [Coca-Cola] were mistaken, but it was a view which they held bona fide on not unreasonable grounds.

No notice to challenge that finding had been given; in any event we do not see how it could have been sustained, given that this was a factual finding based on the Judge’s assessment of the witnesses.  Bona fides is particularly a matter for the trial Judge.

[44]     There is nothing in this appeal point.   Coca-Cola formed a view, albeit one which was not ultimately upheld, as to the proper interpretation of the contract.   It expressed that view to third parties.  But it continued to perform in full and it did not threaten to cancel or refuse supply.  A reasonable person would not have been led to the conclusion that Coca-Cola did not intend to fulfil its part of the contract.  The case demonstrates yet again the care which has to be taken in cancelling a commercial contract.

The Implied Term

[45]     Given the way the argument fell before us, and the conclusion we have just reached, it is not necessary for this court to revisit the issue of the term which was implied by the Judge.  Without expressing a concluded view, the implication of that term in this instance was somewhat problematic.  But it is sufficient to dispose of the point entirely for the purposes of this appeal that, assuming solely for the purposes of argument that there was such a term and there was a substantial breach of it (which does not appear to have been so), no notice was given by The Edge in terms of clause

7(a) of the agreement (para 21, supra).  To cancel without observing the process prescribed by the agreement itself was unlawful.

Damages

[46]     The only item in issue before us (as was the case before the trial Judge) is whether any damages at all should have been awarded beyond the term of the agreement.

[47]     The Judge said:

If there are to be damages, quantum is agreed at $130,000.

[48]     It may be as well to dispose of the quantum point first.  It was not altogether easy to follow Mr Rennie on this point.   He appeared (somewhat faintly) to be suggesting at one point that there might not have been any such an agreement.

[49]      The record is plain. Evidence was to have been given for Coca-Cola under this head.  In the course of the trial, and just before Mr Gate (the relevant witness) was to give evidence,  counsel  agreed what the amount would be if damages  were to be awarded at all under this head.  That agreement is recorded in a minute of the trial Judge dated 13 June 2002 (which was delivered and recorded in open court). Clause (f) of that minute provides as follows:

There is an unresolved issue between the parties as to whether any such amount  is  appropriate.     What  is  agreed  is  that  if  an  amount  is appropriate, then the amount should be $130,000 … Mr Rennie confirmed the position as … above”.

[50]     That agreement was presumably arrived at for good and sufficient reason on The Edge’s part (Mr Hurd suggested that the figure settled on was in fact at a real discount on the claimed figure).  Why and however it was reached, it was plainly reached in face of the court, and the agreement of the parties was carefully recorded by the trial Judge.  The figure must therefore stand.

[51]     As to whether any sum could properly have been awarded, Mr Rennie made what amounted to a single submission:  that “it could not be said that it was probable that this agreement would be rolled over”.  By that he meant that there would likely not have been a renewed (or matched) agreement.

[52]     Mr Rennie accepted the law as set out in the judgment of this court in Martelli

McKegg Wells & Cormack v Commbank International  (NV) (CA 75/96, 7 November

1996).  That is, for the Judge to award damages under this head he had to be able to find that there was a chance (which was more than speculative) of renewal of the agreement.  Once that point was reached, the contingencies could properly be taken into account in assessing the sum payable.  Here, on the facts, the necessary threshold was found by the Judge.   As the Judge put it “[Coca-Cola]  had a substantial, not merely a speculative, prospect of obtaining a renewal of the agreement”.  There was evidence on which he could reach that view.  It would be inappropriate to disturb that

finding.    Indeed  because  clause  2  gave  Coca-Cola  an  opportunity  to  match  any proposed agreement with a third party, there was a very real possibility of a renewal being achieved.

[53]     That being so, the essential pre-conditions  for relief had been met, and the

Judge was bound to award the agreed damages.

Conclusion

[54]     The appeal is dismissed.

[55]      In this court, Coca-Cola will have costs of $5,000 together with its reasonable disbursements, including the travel and accommodation expenses of both counsel for Coca-Cola.  If necessary, the disbursements are to be fixed by the Registrar.

Solicitors:

Rhodes & Co, Christchurch for Appellant

Minter Ellison Rudd Watts, Auckland for Respondent