Ward Equipment Limited v Preston
[2017] NZHC 240
•23 February 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-1966 [2017] NZHC 240
BETWEEN WARD EQUIPMENT LIMITED
First Plaintiff TPL LIMITED Second Plaintiff
AND
MARKUS JOHANNES PRESTON Defendant
PRESTON HIRE (NZ) LIMITED Second Defendant
PRESTON HIRE GROUP NZ LIMITED Third Defendant
MEVON PTY LIMITED (CAN 022 601
363)Fourth Defendant
Hearing: 13 February 2017 Appearances:
DJG Cox for Plaintiffs
J D McBride and P Hall for DefendantsJudgment:
23 February 2017
JUDGMENT OF FOGARTY J
This judgment was delivered by Justice Fogarty on
23 February 2017 at 10.00 a.m., pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date:
Solicitors:
Rennie Cox, Auckland
Simpson Western, Auckland
WARD EQUIPMENT LIMITED v PRESTON [2017] NZHC 240 [23 February 2017]
Introduction
[1] The first and second plaintiffs commenced these proceedings in August 2016 seeking an injunction to restrain the defendants from carrying on business in New Zealand, selling and hiring Prestons’1 construction equipment products in breach of an exclusive licence agreement by Mevon in favour of Ward Equipment to hire and sell those products. Preston, the parent of Mevon, has entered the market, in competition with Ward its licensee.
[2] Because of the commercial urgency of the matter, Ward obtained from the High Court an Order that the Court first try and adjudge the counterclaim brought by Mevon, that the licence agreement has been brought to an end on reasonable notice. That it was brought to an end when Mevon, on 9 September gave three months’ notice which expired on 8 December 2016. Mevon seek a declaration:
That the licence agreement expires on 8 December 2016, subject to its clauses 10.4, 10.5 and 10.6 and costs.
[3] The issue for determination in this judgment is whether the licence is subject to an implied term that it could be terminated by either party on giving reasonable notice, and second, whether the notice of three months was adequate.
[4] The resolution of this issue in part depends upon an examination of the formation of the licence agreement and the subsequent assignments and amendments thereof. This examination is made also against the common law policy that such a commercial contract has no presumption of permanence. On the contrary, the Courts across the common law world are inclined to infer that such contracts are terminable
on reasonable notice, in the absence of express provisions.2
1 That is, the equipment of all the Preston companies: the first, second and third defendants.
2 Martin-Baker Aircraft Co Ltd v Canadian Flight Equipment Ltd [1955] 2 QB 556, Bernard- Norman Specialities Co Ltd v SC Time Inc (1989) 71 OR (2d) 278, Treen Gloves & Safety Products Ltd v Degil Safety Products (1989) Inc (1990) 33 CPR (3d) 74 (BCSC), Anchor Butter Co Ltd v Tui Foods Ltd [1997] 3 NZLR 107 (HC), Australian Blue Metal Limited v Robert Frank Hughes [1963] AC 74 at 98-99 applied in Paper Reclaim Ltd v Aotearoa International Ltd
[2006] 3 NZLR 188 (CA), Staffordshire Area Health Authority v south Staffordshire Waterworks
Co [1978] 1 WLR 1387 (CA) at 1395-1397 per Lord Denning MR, Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438 (CA) at 444, Minister of Education v De Luxe Motor Services (1972) Ltd [1990] 1 NZLR 27 (CA), Bobux Marketing Ltd v Raynor Marketing Ltd [2002] 1 NZLR 506 (CA) at [68], The Software Link (Australia) Pty Ltd (CAN
003 386 212) v Texada Software Inc [2005] FCA 1072 at [25], Eden Construction Pty Ltd v State
The history of the relationship
Mr Preston and Mr McMaster
[5] The business relationship started in 1998 between an Australian businessman, Mr John Preston, and an Auckland businessman, Mr Timothy McMaster. Both men were involved in the construction industry. Mr Preston’s companies specialise in hiring large cranes and scaffolding equipment, particularly a product called “Superdeck” and in respect of at least the latter, Mr Preston’s companies had intellectual property rights (IP).
[6] They decided to do business. A written agreement was entered into on 29
June 1998. There were two parties to the agreement. The licensor was Mr Preston’s company, Patent Marketing Corporation Pty Ltd (PMC) and the licensee was the Trestle Plank and Ladder Hire Company Ltd (TPLHCL). The licensor granted to the licensee an exclusive licence to its intellectual property in New Zealand (the territory), including to modify, adapt and manufacture the products. It also granted an exclusive licence to use, sell, hire or otherwise deal in such products anywhere in New Zealand.
[7] The agreement does not have any defined term. Rather, clause 10 provides:
10.1This Agreement commences on the Effective Date and shall continue hereafter without limit of time, and may be terminated in the following manner:-
(a) in accordance with Clause 10.2 below; or
(b) upon the expiration or lapse of all of the Patents, at the Licensee’s sole discretion, and upon three (3) month’s written notice to the Licensor.
10.2 The Licensee is in breach of any obligation hereunder:
…
[8] Clause 10.2 of the agreement gives the licensor power to terminate the licence if the licensee was in breach of a variety of obligations and similarly, the
of New South Wales (No 2) [2007] FCA 689 at [26] to [27]. These cases repeatedly confirm that the usual common law expectation for a commercial contract importing continuing obligations between the parties, which depend on an ongoing good relationship between the parties, are terminable on reasonable notice, where the contract has no fixed duration.
licensee had the power to terminate the agreement in respect of any prior breach by the licensor.
[9] But in the absence of breach there is no power reserved to either the licensee or the licensor to bring the licence to an end. To the apparent contrary, clause 12.1 reads under the heading “GENERAL”:
12.1This Agreement shall be binding and enure to the benefit of the Licensee and their respective legal successors but shall not otherwise be assignable or transferable or pledged or mortgaged or charged or offered for security by the Licensee without the prior written consent of the Licensor.
[10] Clause 12.2 also provides an entire agreement and understanding clause, discussed in paragraph [30] following.
New relationship between Mr Preston and Mr Ward
[11] The original licensee, TPLHC went into liquidation in August 2012. By this date Mevon was the licensor having taken assignment of that agreement from the original licensor, PMC. Rather than terminate the agreement, Mr Preston reached an agreement with Mr Ward who controlled Ward Equipment Ltd. Ward Equipment had purchased TPLHC’s business upon the liquidation of the latter. Ward Equipment leased the tangible assets of TPLHC, to a new company TPL Limited with the effect that Ward Equipment became the licensee in place of TPLHC, Ward Equipment using the tangible assets of TPL also owned by a Ward company.
[12] As part of this exercise, Mr Preston negotiated one variation of the original licence with Mr Ward. The variation was to delete clause 6.2(b). This was an onerous clause, as it turned out. It had provided for minimum royalties of not less than AU$10,000 for the first year and AU$15,000 for the second year and thereafter, adjusted at the end of every year at the CPI rate of the territory for the preceding year. TPLHC had never met the minimum target. The deletion of that minimum royalty was an incentive for Ward Equipment to take over the obligations of the licence. This assignment was documented in a signed variation of the agreement, dated 20 May 2013.
Mr McMaster continues to be involved, to little effect, and Mr Preston decides to enter
[13] Although Mr Preston had negotiated with Mr Ward, he found out that Mr McMaster, the previous proprietor of TPLHC, was effectively still running the business of the licensee, using TPL’s assets and not generating much revenue. In the period February 2014 to March 2015, the total revenue was $52,826 and in the period July 2015 to March 2016, only $54,458. It will be recalled that the royalty was seven per cent; on these figures it was $3,697.82 and $3,812.06 per annum. This compares with the original minimums of A$10,000, year one, and thereafter
A$15,000.3
[14] Mr Preston formed the opinion that Mr Ward himself had little interest in TPL, given the very modest revenue it generated for him (compared to the $20 million turnover enjoyed by Ward Equipment) and that he left matters to Mr McMaster.
[15] Mr Preston decided to enter the New Zealand market. On 22 October 2014 he emailed Mr Ward saying he was planning to visit and would like to meet him to discuss the Superdeck business and how he could assist in promoting the product and/or taking it in another direction. That meeting did not take place until March
2015 and Mr Preston advised Mr Ward at the time that Preston Hire Group would be entering the New Zealand market. He advised they were entering the market to promote their crane and other products but would respect Ward’s rights as licence holder of the Superdeck.
[16] The Superdeck is the core product licensed in these agreements. It is a facility whereby goods can be transferred by crane off-site into a high rise building by being deposited into a bin which slides out from a vacant floor window and then slides back in once filled.
[17] Mr Preston acknowledged that his company, Mevon, should have terminated the licence agreement before the Preston Hire Group entered the New Zealand
market. He does not defend entering, but explains it on the basis that he thought the
Ward company were not particularly interested in the Superdeck product.
[18] On 9 September 2016 Mevon gave notice to the solicitors of Ward as follows:
Mevon has determined it now wishes to terminate the licence agreement with Ward, on the basis of Ward’s continuing breaches and on the basis of the parties entitlement to terminate on reasonable notice. In this case, we consider that three months is an appropriate notice period, which means that the licence agreement will formally end on 8 December 2016. This letters serves as Mevon’s notice that it now terminates the licence agreement, on three month’s notice. Ward will, of course, be entitled to the benefit of the “run off”, “buy back” provisions in the licence agreement at clauses 10.4 and
10.5.
[19] Clauses 10.4 and 10.5 are applicable upon termination of the agreement. These are “wash-up” provisions. For example, the licensee agrees to sell and the licensor agrees to purchase all products held under the control of the licensee at a percentage of the original manufacturing cost on a table. These clauses are applicable to termination under the agreement “for any reason”.
The core issues
[20] The first issue is whether or not Mevon can give notice to terminate the
agreement. The second issue is whether or not three months’ notice is adequate.
The response of Ward Equipment
[21] Mr Cox, for Ward, argued that the provisions of cl 10 of the agreement precluded termination unless it fell within the circumstances in respect of which termination is expressly addressed in that clause. Clause 10 is headed “Term and Termination”. It is predicated either on breach of obligation by the licensee or upon expiry or lapse of patents tied to the products of the licensor. Mr Cox relied particularly on the opening two lines of this clause:
10.1This Agreement commences on the effective date and shall continue thereafter without limit of time, and may be terminated in the following manner:-
(a) in accordance with Clause 10.2 below; or
(b) upon the expiration or lapse of all of the Patents, at the Licensee’s sole discretion, and upon three (3) month’s written notice to the Licensor.
10.2The Licensee is in breach of any obligation hereunder: (a) – (i) set out a number of breaches.
THEN the Licensor may by written notice to the Licensee terminate this Agreement with immediate effect but without prejudice to any right of action of the Licensor in respect of any prior breach by the Licensee.
[22] So Mr Cox, for Ward, argued that it is not possible to apply the normal test enabling an implied term that the contract could be brought to end by reasonable notice. By the normal test I mean the traditional common law “obvious” test: so obvious that it goes without saying that X and Y is a provision of the contract. The obvious test is usefully set out by the Court of Appeal in Devonport Borough Council v Robbins.4 The case law developing the test described in that case does not come from the case law recognising that commercial agreements are capable of being terminated on reasonable notice. There are different policy considerations
driving the two lines of authority.
[23] Where the issue is whether or not a term can be implied in an ongoing contractual relationship, then the agreed terms are given greatest weight and the implied term must be necessary to give business efficacy to the terms already agreed. So, the core concept is that no term will be implied if the contract is workable without it. It must be so obvious that it goes without saying.
[24] On the other hand where the continuance of a commercial contract depends upon an ongoing relationship of mutual confidence between the parties, and difficulties have emerged in the relationship, then the common law leans to the relationship being brought to an end upon reasonable notice, and upon fair terms, whether or not that is expressly provided for in the agreement. That policy is recognised across the common law world, as evidence by the cases gathered in footnote 2 of this judgment.
[25] In an effort to head off the application of this second line of authority, part of the case for Ward is that when the agreement was originally negotiated between Mr Preston and Mr McMaster these gentlemen discussed whether or not there would be a finite term of the contract and decided against it. Evidence to this effect was given by Mr McMaster in an affidavit. The admissibility of this evidence was said to be justified as “objective” by reliance upon a dictum in Supreme Court decision of
Vector Gas Limited v Bay of Plenty Energy Limited:5
There is no problem with objective evidence directed to the context, either factual or linguistic, in which the negotiations were taking place. That kind of evidence can properly inform an objective approach to meaning. Whereas evidence of the subjective content of negotiations is inadmissible on account of its irrelevance, evidence of facts, circumstances and conduct attending the negotiations is admissible if it is capable of shedding objective light on meaning. It is often said in contract interpretation cases that evidence of surrounding circumstances is admissible. Circumstances which surround the making of the contract can operate both before and after its formation. In either case irrelevance should be the touchstone for the exclusion of evidence. I do not consider there are any sufficiently persuasive pragmatic grounds on which to exclude evidence that is relevant. Indeed to do so would require reconciliation with s 7 of the Evidence Act 2006.
[26] In my view evidence of the content of the negotiations between Mr Preston and Mr McMaster did not meet the first criterion that it be the objective. Vector does not apply. The evidence cannot be relied upon. In any event I think it is irrelevant.
[27] I would also observe that even if it were admissible that the parties decided not to set a finite term on the licence, it does not follow that the parties agreed that it would last forever. If it is not going to last forever it has to be able to be brought to an end upon reasonable notice.
[28] It is significant that the alternative argument by Mr Cox was that the relationship between the parties set up an estoppel. Mr Cox did not have a precedent for such an estoppel.
[29] To appreciate the context of these propositions it is worth recalling that in the case of The Power Co Ltd v Gore District Council,6 where there was an express
5 Vector Gas Limited v Bay of Plenty Energy Limited [2010] NZSC 5, [2010] 2 NZLR 444 at [29] (emphasis added).
6 The Power Co Ltd v Gore District Council [1997] 1 NZLR 537 (CA).
“forever” clause, it was taken to the High Court and to the Court of Appeal in support of the proposition that even if the parties agreed expressly that a relationship would last forever, such an agreement was so contrary to public policy that that agreement was unenforceable.
[30] I prefer the argument of Mr McBride, who drew attention to cl 12.2 of the
Agreement, which provides:
This Agreement constitutes the entire agreement and understanding of the parties and supersedes all prior written or oral representations agreements or understandings between them relating to the subject matter of this Agreement.
[31] He relied on a line of cases headed by Exxonmobil Sales and Supply Corp v Texaco Ltd,7 Vodafone New Zealand Ltd v M5 Investments Ltd,8 AXA Sun Life Services Plc v Campbell Martin Ltd9 and Stanley v Fuji Xerox New Zealand Ltd.10
[32] Mr McBride relied particularly on the decision of Penlington J in Anchor Butter Co Ltd v Tui Foods Ltd.11 That case concerned three licences to use registered trademarks for butter. The trademark owner sought to terminate the licences on 12 months’ notice notwithstanding that the licenses were expressed to be “without limited period” and contained specific clauses detailing circumstances in which the licensor was entitled to terminate the clause. The Judge held that the
phrase “without limited period” meant no more than the term of the contract was not specified. It was not synonymous with “indefinitely” or “forever”. The existence of a termination clause did not preclude an implied term that the contract was terminable on reasonable notice, relying on the cases already cited of Martin-Baker
Aircraft Co Ltd v Canadian Flight Equipment Ltd,12 Bernard-Norman Specialities
7 Exxonmobil Sales and Supply Corp v Texaco Ltd [2003] EWHC 1964 (Comm), [2004] 1 All ER (Comm) 435.
8 Vodafone New Zealand Ltd v M5 Investments Ltd HC Auckland, CIV-2008-404-2860, 3
December 2010.
9 AXA Sun Life Services Plc v Campbell Martin Ltd [2011] EWCA Civ 133, [2011] 2 Lloyd’s Rep
1.
10 JL Stanley v Fuji Xerox New Zealand Ltd HC Auckland, CP 479/96, 5 November 1997 at [24].
11 Anchor Butter Co Ltd v Tui Foods Ltd [1997] 3 NZLR 107 (HC).
12 Martin-Baker, above n 2.
Co Ltd v SC Time Inc13 and Treen Gloves & Safety Products Ltd v Degil Safety
Products (1989) Inc.14 In Treen Gloves the Canadian trial Judge noted:15
But in my view a commercial contract such as this almost requires a termination clause. The concept for perpetual distributorship agreement is difficult to entertain. The plaintiff company’s business organisation must be presumed to be aware of the facts of business life.
[33] The modern authorities recognise that it is simply improbable, and commercial nonsense, to suggest that commercial parties to contracts for services, or licences, intend such contracts to last forever. It is not possible for a responsible business person to responsibly enter into such a relationship.
[34] Cooke P in the Minister of Education v De Luxe Motor Services (1972) Ltd
said:16
Whether it can be put as high as a presumption is doubtful, but we think that most Judges and practitioners today would expect to find cogent reasons in the nature or terms of the particular contract before placing on it the interpretation that there is no right to determine on reasonable notice.
[35] More recently there is the decision of the Court of Appeal in Bobux
Marketing Ltd v Raynor Marketing Ltd, where the Court confirmed:17
In the end although in a mercantile or commercial contract the Court will favour an interpretation which enables the relationship to be terminated on reasonable notice, the question remains whether the language actually used by the parties admits of an implication or interpretation to that effect.
[36] That proposition is consistent with the Federal Court decision in Australia of Eden Construction Pty Ltd v State of New South Wales (No 2).18 The Federal Court confirmed that commercial contracts of indeterminate duration will normally be determined on reasonable notice, and went on to say:19
It lies upon a person who says that a contract is revocable or determinable to show either some expression in the contract itself, or something in the nature of the contract, from which it is reasonable to be implied that it was not
13 Bernard-Norman, above n 2.
14 Treen Gloves, above, n 2.
15 At [27].
16 Minister of Education v De Luxe Motor Services (1972) Ltd [1990] 1 NZLR 27 (CA) at 31.
17 Bobux Marketing Ltd v Raynor Marketing Ltd [2002] 1 NZLR 506 (CA) at [68].
18 Eden Construction Ptd Ltd v State of New South Wales (No 2) [2007] FCA 689 at [26] to [27].
19 At [27] (emphasis added).
intended to be permanent and perpetual, but was to be in some way or other subject to determination. Contracts which involve more or less of trust and confidence, more or less of delegation of authority, more or less of the necessity of being mutually satisfied with each other’s conduct, more or less of personal relations between the parties will fall into the last mentioned category (per Sir W M James LJ in Llanelly Railway and Dock Co v London and North-Western Railway Co (1873) VIII LR Ch App 942 at 950).
[37] A licensing contract of intellectual property classically falls within a contract involving a degree of trust and confidence between the parties. The present circumstances is that Ward Equipment has the opportunity but also the responsibility to actively market Prestons’ products in New Zealand. It is in truth a form of partnership. And it is a fact that the root cause of the breakdown in the relationship is that Ward’s business is dominated by other ventures, particularly demolition, and Ward is not achieving a significant number of hire contracts for Superdeck. Prestons’ entered the market in New Zealand in order to get more sales of its product in New Zealand than being achieved by its licensee.
[38] It was not argued, nor could it have been, that Ward was successfully, through its subsidiary, growing the market for Prestons’ products in New Zealand.
[39] If the facts of the case were the other way and Ward was achieving admirable results growing the New Zealand Superdeck market, there might have been a case on the facts for arguing contractually unreasonable conduct on the part of Preston to enter the market in competition with its licensee.
[40] Another way of looking at this is as was done in the English High Court in Exxonmobil Sales and Supply Corp v Texaco Ltd.20 Implied terms based on business efficacy or “intrinsic” to normal business arrangements of this sort21 are not caught by an entire agreement clause.
[41] I am quite satisfied that this particular contract was such that it could not have been in expectation of the parties at the time that it was made that it would last forever. That it could never be brought to an end by either party on reasonable
terms.
20 Exxonmobil, above n 2.
21 See AXA Sun Life Services Plc v Campbell Martin Ltd, above n 9.
[42] The next question, and really the key question, is whether or not three
months’ notice is adequate.
[43] Mr McBride acknowledged that normally the authorities suggest a notice period between six months and a year for contracts of no fixed term. Penlington J in Anchor Butter Co Ltd v Tui Foods Ltd analysed the relevant factors that need to be taken into account.22 He included:
(a) Carrying out existing commitments;
(b) Giving notice of termination of supply to existing customers; (c) Bringing current negotiations to fruition;
(d)Where appropriate, obtaining the fruits of any extraordinary expenditure or effort to carry out within the scope of the agreement; and
(e) Possibly adverse trading consequences for the recipients replacement trading situation.
[44] When, pursuant to cl 10 the licensor has given written notice to the licensee to terminate the agreement on expiration or lapse of the patents or breach, cl 10 goes on to address the question of notice. Clause 10.3 enables notice with immediate effect in a case of breach. That does not apply.
[45] Where the agreement terminates due to the expiration of lapse of the patents, the licensee can terminate the agreement upon three months’ written notice to the licensor.
[46] As explained in the first paragraph, it is the position of Preston that three months’ notice is a reasonable time and in any event, the parties have now had six months.
submission is that the contract has been in place for almost 20 years and in operation for approximately 15 years, when it was varied in 2013. At that variation the parties agreed to delete a minimum term of 20 years and replace it with a long stop provision following the lapse of all patents. The submission is that Mevon is the author of its own misfortune having set up business in New Zealand in competition without notice to the licensee. It is contended that Ward was not in breach of contract and was not given any notice by the Preston Group that they or Mevon considered its performance to be substandard before Mevon attempted to bring the contract to an end. They were not actions of a party acting in good faith. Additionally, Ward Superdecks, while old, were completely refurbished over the period 2014 to 2015 at a close to $100,000 and therefore it is incorrect for them to be portrayed as having little value. While the trading consequences for Ward may not be substantial, it would be devastating completely to the second plaintiff, TPL. TPL is entitled under s 4 of the Contracts (Privity) Act 1982 to be benefit of the licence agreement as the party entitled to the Preston Superdecks from Ward and hire them out. If the licence agreement is terminated its business would be crippled. Ward also submits that contracts for Superdecks are formed a long time before they are actually needed, normally before construction even commences. There is therefore often a substantial lag of time between the date and orders placed by a construction company requiring Superdecks and the date the Superdecks are to be delivered. For these reasons the term should be at least 12 months.
[48] The argument for Ward Equipment and TPL is a formal argument, undermined by poor performance of the licensee.23 There was no challenge to the argument by the Preston Group that the sales and hire of the Superdecks by IPL/Ward were very low.
[49] Moreover, it seems to me that once the Court recognises that the licensor has the power to bring the licence to an end on reasonable notice, when judging that notice the Court should take into account the immediate commercial effect of the notice being given. The licensee knows that the business is at an end. In this context
is there any real commercial difference between three months’ notice and six months’
23 See [13] above.
product by the licensee at the terminating end of the licence, there might be some merit in a longer period. The evidence, such as it was, as to the scale of operations of IPL is against that inference. For this reason I think it is appropriate to default to the term of three months which is provided for already in clause 10.1(b), where the licence would be terminating on the expiration or lapse of all of the patents.
[50] Had this been the case where there was a significant turnover of new contracts and grants of licences, it would be another matter. But what has been recognised by both parties is that there is usually a significant lead-in time of three months itself before contracts are let.
[51] In short, I cannot see any commercial case justifying a longer period than the three months already agreed.
[52] Accordingly, the declaration of this Court is two-fold. First, Mevon did have the power to give notice terminating the agreement. Secondly, Mevon should have given three months’ notice.
[53] I have considered whether or not the obligations between the licensee and the licensor upon termination should be any different than those set out in paragraph [10], particularly as to the licensor’s obligation to purchase all products held by or under the control of the licensee as provided for in cl 10.5(d). Ward/TPL argue that by those terms they will be underpaid for the sale back of the stock, particularly the Superdecks and say that these Superdecks were completely refurbished over the period 2014 and 2015 with costs close to $100,000.
[54] However, cl 10.5(d) as well as setting the price depending on age as a percentage of original manufacturing costs has a proviso “all products sold to the licensor must be of good commercial quality and in good working order”.
[55] Accordingly, Mevon is entitled to the declaration.24
subject to its cls 10.4, 10.5 and 10.6, and costs.
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