Water Guard NZ Limited v Cynortic Water Systems Limited
[2016] NZCA 291
•27 June 2016 at 3.00 pm
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA592/2015 [2016] NZCA 291 |
| BETWEEN | WATER GUARD NZ LIMITED |
| AND | CYNORTIC WATER SYSTEMS LIMITED MARK JAMES SULLIVAN AND SUSAN MARY SULLIVAN |
| Hearing: | 24 May 2016 (further submissions received 9 and 21 June 2016) |
Court: | Harrison, Miller and Kós JJ |
Counsel: | M J Fisher and H L Hui for Appellant |
Judgment: | 27 June 2016 at 3.00 pm |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe cross-appeal is allowed.
CWe set aside the injunction granted against Cynortic Ltd.
DThe appellant must pay the respondents one set of costs for a standard appeal on a band A basis and usual disbursements. We certify for two counsel.
____________________________________________________________________
REASONS OF THE COURT
(Given by Miller J)
Introduction
A Water Guard unit is a filtration device which filters water for particles and treats it using ultraviolet light to kill bacteria. The parties to this litigation are or were involved in making the units and distributing them in New Zealand and the Pacific. The manufacturer and distributor sold their respective businesses to third parties at about the same time. Those transactions led to this litigation.
It is first necessary to name the protagonists. A confusion of company names led the trial Judge, Asher J, to identify them according to their human principals and the parties have adopted the same nomenclature on appeal:[1]
(a)Cynortic Ltd (in liquidation) is called Bragulla Ltd. The company and its principal, George Bragulla, are known as the Bragulla interests. Bragulla Ltd is the original manufacturer of the units.
(b)Midgen Enterprises Limited (Midgen Ltd) and its principal, David Midgen, are known as the Midgen interests. Midgen Ltd is the original distributor for Bragulla Ltd pursuant to an exclusive distribution agreement, which we will call the EDA.
(c)Water Guard NZ Ltd (Morgan Ltd) and its principal, Stewart Morgan, are known as the Morgan interests. Morgan Ltd bought the distribution business from the Midgen interests under an agreement known as the MMA (for Midgen-Morgan Agreement).
(d)Cynortic Water Systems Ltd (Sullivan Ltd), whose principals are Mark and Susan Sullivan, are known as the Sullivan interests. Sullivan Ltd bought the manufacturing business from the Bragulla interests under an agreement known as the BSA (for Bragulla-Sullivan Agreement) and a subsequent addendum to the BSA.
[1]Water Guard NZ Ltd v Midgen Enterprises Ltd [2015] NZHC 2227 [High Court judgment].
Asher J tried two proceedings. They were not amalgamated but rather were heard consecutively on the footing that all of the evidence was admissible in both. The first proceeding focused on the MMA.[2] The Morgan interests alleged that misrepresentations were made about the distributorship business, and further that the units Midgen Ltd supplied were defective. This claim succeeded in small part, Asher J finding that no misrepresentations were made but there were certain defects in some units. Damages remain to be fixed.
[2]File number CIV-2014-404-445.
The second proceeding was brought by Morgan Ltd against the Bragulla and Sullivan interests.[3] As Asher J put it, the pleading was not easy to follow but could be broadly summarised as a series of allegations that the defendants had acted in a manner inconsistent with Morgan Ltd’s rights under the EDA. For present purposes, the claim may be said to focus on an option to purchase the manufacturing business (or right of first refusal) in the EDA, and the impact of the addendum to the BSA on Morgan Ltd’s rights under the EDA. Asher J granted certain relief against Bragulla Ltd, which was by then in liquidation. So far as the Sullivan interests were concerned, he recorded that there was to be an accounting for a very small profit made on certain sales in New Zealand. He otherwise dismissed the claims against them and refused a declaration that Sullivan Ltd had no interest in the EDA.[4]
[3]File number CIV-2012-404-915.
[4]High Court judgment, above n 1, at [240]–[246].
This appeal and cross-appeal are confined to the second proceeding. The protagonists are the Morgan and Sullivan interests, respectively the purchasers of the distribution and manufacturing businesses.
Narrative
The EDA was executed on 23 June 2010. Bragulla Ltd granted Midgen Ltd the exclusive right to market, distribute and sell Water Guard units in New Zealand and the Pacific Islands for a term of ten years. It included the right to use all registered trademarks, patents and copyright for marketing, advertising and promotion. Ownership of the intellectual property remained with Bragulla Ltd, which undertook to maintain it. If either party chose to sell its business the other party would have first option to purchase:
In case of either party wishing to sell his business, the other party shall have first option to purchase same at the agreed formula above [the greater of one and a half times gross profit or annual turnover].
Apart from the option to purchase, the EDA said nothing about assignment. Notably for present purposes, it did not insist that any transfer to a third party include a novation, such that the distributor might enforce its rights directly against an assignee of the manufacturer’s business.
Morgan Ltd purchased the distributorship business from Midgen Ltd under the MMA, which was signed on 16 September 2013, became unconditional on 15 October and settled on 1 November 2013.
At about the same time, the Bragulla interests negotiated the sale of the manufacturing business to Sullivan Ltd. The BSA was signed on 26 September 2013, declared unconditional on 8 November and settled on 24 February 2014. It contained no express assignment of the manufacturer’s rights under the EDA but it extended to the entire business and it is not in dispute that the business included these rights, along with ownership of the Water Guard intellectual property.
In an email exchange of 7 October Messrs Midgen and Bragulla granted reciprocal waivers of their options to purchase, in these terms:
I herewith declare that I do not want to exercise my option to purchase your business.
These waivers were recognised as prerequisites to both transactions, and they were given in each case before either agreement became unconditional. The Midgen waiver was supplied to the Sullivans’ solicitor on 10 October.
Mr Morgan was not told of the sale to Sullivan Ltd at first. After he learned of it on about 17 October he claimed that the Midgen waiver was “not legally valid” and “the Distributor” ought to have been offered the right to purchase. On 27 October, following a meeting with Mrs Sullivan, he nonetheless consented to the sale:
As Sole Director of [Morgan Ltd] I consent to the sale by [Bragulla Ltd] of its rights under the Agreement to your company even though the Distributor was not offered the first option to purchase [Bragulla Ltd’s] business as required by the Agreement. It is noted that at the time of George [Bragulla]’s request to Dave Midgen to acknowledge his intent with regard to this option the [Midgen Ltd] business sale to the writer had already been declared unconditional. Therefore the email from Dave Midgen was not legally valid.
I confirm your advice at our meeting that as the purchaser of [Bragulla Ltd’s] business, you acknowledge the Agreement in place between [Bragulla Ltd] and [Morgan Ltd] and will be bound by its terms and conditions including the Distributor’s option of distribution rights for part or all of Australia.
Following settlement Mr Morgan soon encountered problems with the units and the distributorship business. These issues were dealt with in the first proceeding, which is not the subject of the appeal. We do not understand it to be in dispute that, as Asher J found, he became “belligerent and disparaging” with Mr Bragulla and the Sullivans, who had not yet taken possession of the manufacturing business but became involved after they were committed unconditionally to the purchase on 8 November.[5] This was unnecessary and unfortunate; the Sullivans were not the cause of Mr Morgan’s problems and they understood that their business would prosper only if his did. Mrs Sullivan tried to establish a good working relationship but she found Mr Morgan impossible to deal with. Mr Bragulla accordingly took it on himself to deal with Mr Morgan. Unfortunately, he responded in kind to Mr Morgan and evidenced an imperfect understanding of his obligations,[6] none of which improved matters.
[5]High Court judgment, above n 1, at [216].
[6]Exemplified by a later agreement in which he purported to sell what was left of the business to yet another party. The Sullivans had no role in this, and it has no bearing on the appeal.
In an attempt to separate the Sullivans from Mr Morgan, Mr Bragulla sent the Sullivans, on 8 January 2014, an addendum to the BSA, which provided that the EDA did not “form part of the assets and intangibles being sold” under the BSA, acknowledged that Bragulla Ltd retained its rights and obligations under the EDA, and set up back to back obligations on the part of the Sullivan interests so that Bragulla Ltd could honour its obligations:
2.2The purchaser will supply the vendor with Water Guard Systems and spare parts, as required, so that the vendor can fulfil its obligations under the EDAs.
The addendum contemplated that Sullivan Ltd might negotiate distribution arrangements direct with Morgan Ltd:
2.3The purchaser retains the right to negotiate and enter into distribution agreements with the distributors who are party to the EDAs while the relevant EDA remains on foot, provided that the purchaser advises the vendor of their intention to do so.
It also provided that the parties would enter into an agency agreement for the sale of Water Guard systems and spare parts to the distributor.
Finally, the addendum provided that any liability for products sold into markets covered by the EDA would remain with Bragulla Ltd:
2.5The purchaser will not be responsible for any past, present or future liabilities or guarantee claims for any products sold into those markets, covered under the EDAs. Any such responsibility, liability or guarantee claim will remain with the vendor.
So difficult was Mr Morgan, the Judge found, that the addendum was “irresistible” to the Sullivans; it separated them from Mr Morgan with, in their minds, no change in their role as manufacturer and Mr Morgan’s as distributor.[7] On 17 February they signed the addendum with some changes from the document as forwarded by Mr Bragulla: notably it deleted from cl 2.2 a sentence stating that the purchaser would not sell any filters stocked and sold by the distributor into markets covered by the EDA. The BSA, as varied by the addendum, settled on 24 February 2014.
[7]High Court judgment, above n 1, at [224].
In the result, the manufacturer’s business, including its intellectual property rights, vested in Sullivan Ltd under the BSA but its liabilities under the EDA, including any liabilities for defective products, remained with Bragulla Ltd. However, Sullivan Ltd was obliged to sell units and parts to Bragulla Ltd so that firm might meet its EDA obligations.
On 29 April 2014 Mr Bragulla put Bragulla Ltd into liquidation, where it remains. It is not clear who is funding the liquidator, or to what end. The Bragulla interests ultimately played no part in the trial.
Throughout March and April 2014, the Judge found, the Sullivans “despaired of a working relationship with Mr Morgan, and thought they would try some sales themselves, to keep things going”.[8] The Sullivans also formed the belief that Mr Morgan planned to set up his own business manufacturing the units and was breaching the EDA by sourcing parts from overseas vendors. They emailed Mr Morgan stating that they had not purchased the distribution contracts entered into by the previous owner, that Sullivan Ltd did not recognise Mr Morgan’s right to sell, service or maintain the units, and that the trademark “Water Guard” was registered to Sullivan Ltd, which had not permitted Morgan Ltd to use it. This stance was contrary to the EDA, which gave Morgan Ltd the right to use the Water Guard name and exclusively distribute the units in New Zealand. The Sullivans also breached the EDA by selling some refurbished stock; Asher J accepted that they mistakenly thought they were entitled to do so.[9]
[8]High Court judgment, above n 1, at [230].
[9]At [232].
Matters came to a head when Mr Morgan took proceedings in April 2014. The Sullivans swiftly acknowledged they had been acting contrary to the EDA, and orders were made by consent requiring them not to distribute or sell the units or parts and products in New Zealand or the Pacific Islands.[10]
[10]Water Guard NZ Ltd v Cynortic Water Systems Ltd HC Auckland CIV-2014-404-915, 12 May 2014 (Minute of Woolford J).
Relations did not improve. On 10 December 2014 Sullivan Ltd sent a letter purporting to terminate the EDA for breach, alleging that Morgan Ltd was sourcing parts from elsewhere and seeking to damage the Sullivans’ business. Morgan Ltd was not buying any units either, but this was not said to be a breach, apparently because it was entitled to continue buying them from Midgen Ltd for a time.
Mr Morgan responded to the termination letter by seeking an interim injunction. Asher J granted it on 19 December 2014 in the same terms as the existing injunction, with the added order that Sullivan Ltd could not in the interim terminate the EDA or assign the manufacturer’s interest in it without first offering Morgan Ltd the option to purchase the manufacturer’s business.[11] He noted that Mr Morgan had demonstrated a most unfortunate reluctance to talk to the Sullivans, which weighed in the balance of convenience, and made it a condition that parts were to be purchased from Sullivan Ltd and not from third parties.[12]
High Court judgment
[11]Water Guard NZ Ltd v Cynortic Water Systems [2014] NZHC 3389 [interim injunction judgment].
[12]At [37]–[38] and [44].
The trial began on 6 July 2015 and took more than two weeks. The Judge heard oral evidence from the principals. It is relevant to note that he found the Sullivans reliable witnesses but did not form a favourable view of Mr Morgan.
Sullivan Ltd admitted breaching the EDA by marketing some units in New Zealand, but it had not done so since April 2014 and it had agreed to account to Morgan Ltd for the very modest profits resulting.[13] Asher J recognised this frank acknowledgement, accepted the Sullivans’ good faith explanation, and noted that Sullivan Ltd had nominated a sum it should pay.
[13]High Court judgment, above n 1, at [229].
Without opposition, the Bragulla interests being unrepresented, he also granted declarations that Morgan Ltd is the distributor of filters under the EDA and Bragulla Ltd remains liable to Morgan Ltd as manufacturer under the EDA. Asher J also granted an injunction against Bragulla Ltd. It is necessary to quote the orders:[14]
(a) An injunction restraining the third defendant, Bragulla Ltd from:
(i) appointing or purporting to appoint any other person to market or sell or distribute Water Guard filtration systems and associated products or UV water filtration systems or parts associated with the brand name Water Guard to any person in New Zealand or the Pacific Islands or Australia;
(ii) assigning or purporting to assign to any other party, the rights, title or interests of the manufacturer under the EDA;
unless authorised expressly by the EDA to engage in such conduct in terms of the EDA, but subject always to the plaintiff being given the option to purchase the rights, title and interests of the manufacturer under the EDA and/or the first option to be the distributor of Water Guard products for part or all of Australia.
It will be seen that this injunction included a proviso the effect of which was to give Morgan Ltd a first option to buy the manufacturer’s rights under the EDA.
[14]At [286].
The Judge refused to grant a third declaration, that Sullivan Ltd does not enjoy any legal or beneficial interest in the rights, title or interests of the manufacturer under the EDA. He accepted that Sullivan Ltd had no direct interest under the EDA as a party or assignee; for the purposes of the EDA the manufacturer’s rights and obligations remained with Bragulla Ltd. However, the intellectual property and manufacturing rights had been sold to Sullivan Ltd, the price paid reflected the manufacturer’s rights under the EDA, and Sullivan Ltd was obliged to supply units and parts so Bragulla Ltd could meet its obligations under the EDA. The Sullivans had at least a contractual interest and perhaps also a fiduciary interest in Bragulla Ltd’s performance of the EDA.[15]
[15]High Court judgment, above n 1, at [240]–[241].
The Judge observed that Morgan Ltd had in its original statement of claim claimed the exact opposite of the third declaration; namely, a declaration that Sullivan Ltd was the assignee of Bragulla Ltd under the EDA.[16] He found that the change of position was tactical, in that Mr Morgan wanted to secure the manufacturing rights via the liquidator and was using the litigation to limit the Sullivans’ capacity to resist. He foresaw that this would likely lead to Mr Morgan defeating the Sullivans’ rights under the BSA. He also observed that Morgan Ltd was plainly in breach of the EDA by failing to place orders for units and making it plain that no such orders would be placed.[17]
[16]At [242].
[17]At [245].
The Judge dismissed other claims. We need not survey all of his findings. Relevantly for our purposes, he dismissed a claim that the Sullivans had committed the tort of inducing a breach of contract. When dealing with that cause of action, he accepted that Bragulla Ltd had breached the EDA by transferring the intellectual property to Sullivan Ltd and by failing to offer Morgan Ltd as assignee the option to purchase the business.[18] He also found that the consent Mr Morgan gave to the transfer of the EDA was for the sale of all the manufacturer’s rights to Sullivan Ltd, which did not happen, and that consent could not be construed as extending to the BSA as varied by the addendum, under which Bragulla Ltd retained the EDA.[19]
[18]High Court judgment, above n 1, at [256].
[19]At [256].
However, Asher J did not accept that the breaches were intentionally induced by the Sullivans. He accepted the Sullivans’ evidence that neither of them thought that in signing the addendum they were so altering the assignment as to breach the EDA.[20] On the contrary, the terms of the addendum clearly showed that it was intended to leave the EDA in place and enforceable as between Bragulla Ltd and Morgan Ltd. In a practical sense nothing changed for the Morgan interests after the addendum; they remained exclusive distributors.
[20]At [261].
His overall finding was that the Sullivans had not intended to spite Mr Morgan or defeat his interests by entering into the addendum, but rather wanted to create a buffer between them without affecting Morgan Ltd’s rights under the EDA.[21] They merely overlooked what he found to be the legal consequences of that decision. These findings were supported by their early attempts to form a working relationship with Mr Morgan and the fact Mr Sullivan quickly backed down from his “desperate and naïve” and mistaken attempts to unlock the impasse by blocking Mr Morgan’s rights.[22] Asher J found that apart from that “reactive” aberration, and the attempt in December in 2014 to terminate the EDA,[23] the Sullivans were prepared to honour Morgan Ltd’s position as exclusive distributor in New Zealand. It was in their interests that Mr Morgan should succeed.
The appeal and cross-appeal
[21]At [271].
[21]At [265].
[22]At [267].
[23]Which he found was a result of frustration at Mr Morgan’s hostility and his refusal to place any orders.
Morgan Ltd appeals on the grounds that the Judge erred in fact and law by:
(a)finding that the Sullivan interests did not commit the tort of inducing a breach of contract; and
(b)refusing to make a declaration that Sullivan Ltd does not enjoy any legal or beneficial interest in the rights, title or interests of the manufacturer under the EDA.
The Sullivan interests cross-appeal against:
(a)the finding that Bragulla Ltd breached its obligation to give Morgan Ltd the first option to purchase the business when it sold the intellectual property and all the business except the New Zealand and East African operations;
(b)the finding that the consent Mr Morgan gave to the transfer of the EDA was for a sale to Sullivan Ltd of all the manufacturer’s rights, which did not happen, and the consent could not be construed as extending to the final sale agreement between Bragulla Ltd and Sullivan Ltd as varied by the addendum; and
(c)the decision to grant the injunctions.
We will address each of these grounds in turn. Before doing so, however, we will examine the legal effect of the contracts, so far as relevant, and the waivers. As will be seen, we agree with the Judge that the addendum had no effect on Morgan Ltd’s rights. We go further, however, and conclude that there was no breach of the EDA in the first place and the waivers given, first by Mr Midgen and then by Mr Morgan, were effective to exclude the option to purchase. These conclusions mean that the appeal must be dismissed and the cross-appeal allowed.
The effect of the addendum in law
It is helpful to begin by examining just what contractual rights Morgan Ltd claims to have lost. When tested on this Mr Fisher identified three matters.
Lost ownership of intellectual property
Counsel initially submitted that Morgan Ltd had lost the intellectual property, which it owned under the EDA. That cannot be right, as he eventually conceded; all that Morgan Ltd owned under the EDA was a licence to use the intellectual property, ownership of which unequivocally remained with the manufacturer. It could not be suggested that under the BSA, as amended, Morgan Ltd has lost the right to use the intellectual property; although the addendum does not say so in as many words, it is necessarily implicit that the EDA is to carry on as before.
Lost rights of enforcement against the manufacturer
Counsel next submitted that Morgan Ltd has lost the right to enforce the EDA against the manufacturer, which is the only person of substance. He argued that the BSA ought to have involved a legal assignment, the effect of which would be to give Morgan Ltd direct rights against Sullivan Ltd. For the proposition that such is the effect of an assignment, he cited the judgment of the Supreme Court in Savvy Vineyards 3552 Ltd v Kakara Estate Ltd, and in particular the following paragraph from the majority judgment:[24]
[85] In Tolhurst v Associated Portland Cement Manufacturers (1900) Ltd, Lord Collins MR said:[25]
It is, I think, quite clear that neither at law nor in equity could the burden of a contract be shifted off the shoulders of a contractor on to those of another without the consent of the contractee. A debtor cannot relieve himself of his liability to his creditor by assigning the burden of the obligation to some one else; this can only be brought about by the consent of all three, and involves the release of the original debtor ...
The provisions of the Property Law Act 2007 as to the assignment of things in action proceed on the same basis, addressing the assignment of debts (including the right to the performance of obligations) but not the assignment of the burden of obligations.[26] On this basis, where there has been a contract between A and B and an assignment by B to C, and nothing else, the traditional view is that:
(a) the rights but not the obligations of B are transferred to C;
(b) C may enforce the rights of B against A;
(c) B remains liable on the contract to A; and
(d) A and C are not otherwise in contract.
[24]Savvy Vineyards 3552 Ltd v Kakara Estate Ltd [2014] NZSC 121, [2015] 1 NZLR 281.
[25]Tolhurst v Associated Portland Cement Manufacturers (1900) Ltd [1902] 2 KB 660 (CA) at 668.
[26]Property Law Act 2007, pt 2, subpt 5.
We are quite unable to see that this passage supports counsel’s proposition. On the contrary, it establishes the orthodox propositions that:
(a)Bragulla Ltd might assign the benefit of the EDA to Sullivan Ltd, which might then enforce it against Morgan Ltd;
(b)Bragulla Ltd could not assign the burden of the EDA to Sullivan Ltd, but would itself remain liable to Morgan Ltd;
(c)Morgan Ltd and Sullivan Ltd would not otherwise be in contract.
The Supreme Court held that s 11 of the Contractual Remedies Act 1979 did not change the law so as to provide that an assignment includes the burden of a contract.[27] It is for this reason, and to take the assignee out of the chain entirely, that the parties to such a transaction often opt for novation. Indeed, they may provide for a right to novate.[28]
[27]Savvy Vineyards 3552 Ltd v Kakara Estate Ltd, above n 24, at [92].
[28]At [93].
In this case the EDA protected the parties’ interests through the option to purchase, but in the event that option was not exercised it did not prohibit or regulate assignment at all. We accept Mr Hurd’s submission that the BSA involved an assignment; that must be so, since the manufacturer’s rights under the EDA would have been among the property transferred, had the addendum not been entered into. Contrary to Mr Fisher’s assumption, no further or separate agreement was required.
In summary, Bragulla Ltd was entitled under the EDA to assign its rights but not its obligations, and absent further agreement among the parties an assignment would not allow the distributor to enforce the EDA directly against the assignee. The BSA effected such assignment. The subsequent addendum actually secured Morgan Ltd’s rights indirectly, by obliging the manufacturer to supply so Bragulla Ltd could meet its continuing obligations under the EDA. It is true, as Mr Fisher submitted, that the back to back arrangement was not entirely symmetrical, in that the addendum declared Sullivan Ltd would not be liable for claims, but that argument takes counsel no further, for it assumes incorrectly that an assignment must have given Morgan Ltd the right to enforce these claims directly against Sullivan Ltd.
It is true that Bragulla Ltd now lacks substance. However, insolvency was not a consequence of assignment, and in any event the EDA contained no guarantees of solvency. As noted above, the Judge did not accept that the Sullivans entered the addendum with intent to defeat Morgan Ltd’s rights; rather, they were driven to it by Mr Morgan’s behaviour.
Lost right of option to purchase
Counsel next argued that Morgan Ltd lost the right to purchase the manufacturing business itself. That is undoubtedly correct. (We add that it lost the right to enforce the manufacturer’s obligation to maintain the intellectual property too.) Sullivan Ltd has assumed no obligation to offer the business to the distributor in the event of sale. But that has nothing to do with the addendum. It results from the waiver and the EDA in combination. The addendum has nothing to say about the option to purchase, for the good reason that the parties knew it had already been waived and Bragulla Ltd accordingly had no need to protect itself by committing Sullivan Ltd to an option to purchase enforceable at the suit of the distributor.[29]
[29]This might have been done under s 4 of the Contracts (Privity) Act 1982 without making the distributor a party to the BSA.
This brings us to the waivers given by Messrs Midgen and Morgan. As noted above at [27], Asher J accepted that “Bragulla Ltd breached its obligation to give Morgan Ltd as assignee the first option to purchase the business”, reasoning that Mr Morgan’s consent was given to the sale of all the manufacturer’s rights but what resulted was something less than that.[30] Curiously, it seems that Asher J was not invited to consider the effect of Mr Midgen’s waiver; the judgment makes no reference to it.
[30]High Court judgment, above n 1, at [256].
In the passage just quoted Asher J assumed that Bragulla Ltd had to give Morgan Ltd the option, notwithstanding that the business was still owned by Midgen Ltd. Mr Fisher argued that the Judge was correct, for the parties were on notice the business had been sold and Morgan Ltd was the owner in equity. But counsel was unable to cite authority for the proposition that a legal owner’s right to waive an option to purchase vests immediately — that is, before settlement — in the purchaser. He referred to Bevin v Smith and West City Construction Ltd v Levin.[31] Bevin v Smith establishes relevantly that the grantee of an option to purchase acquires a caveatable interest in land, but that is not the question.[32] It may be assumed that Morgan Ltd acquired an equitable interest in the distributorship business on the MMA being executed. In such circumstances it may be assumed too that the legal owner owes obligations to its purchaser and cannot waive its rights without authority. But that is not the question either. The question is whether rights could be waived as between parties who remained owners in law. It falls to be answered in circumstances where neither the BSA nor the MMA could proceed without the reciprocal waivers and there is no evidence of fraud or other disentitling conduct on the part of anyone involved.
[31]Bevin v Smith [1994] 3 NZLR 648 (CA) and West City Construction Ltd v Levin [2014] NZSC 183, [2015] 1 NZLR 362.
[32]Bevin v Smith at 665.
In these circumstances, we take the view that Mr Midgen’s waiver was effective and complete. It extended to all the manufacturer’s rights, and it was unconditional. It left Bragulla Ltd free to assign its rights as it saw fit. And the Sullivans plainly relied on it.
It follows that we need not consider the effect of the waiver given by Mr Morgan on 27 October 2013, but we record our agreement with Asher J that it permitted Bragulla Ltd to sell all of the manufacturer’s rights.[33] We reject Mr Fisher’s submission that it was limited in some way, or conditional on Mrs Sullivan’s agreement to be bound by the EDA. Her promise was undoubtedly genuine, but it adds nothing to the obligations assumed in the BSA and addendum.
[33]High Court judgment, above n 1, at [256].
We respectfully disagree with the Judge’s conclusion that Mr Morgan’s waiver could not be taken to extend to the addendum. As Mr Hurd pointed out, the addendum resulted in Bragulla Ltd selling less than Morgan Ltd (and Mr Midgen) had authorised, and there is no reason why it should revive a right that had been waived, somehow reinstating the distributor’s option to acquire the entire business.
Conclusion on lost rights
We conclude that the waiver given by Mr Midgen, like that given subsequently by Mr Morgan, extended to all the manufacturer’s rights under the EDA, and further, that the waiver having been given, the addendum entailed no further loss of rights for Morgan Ltd. Rather, the addendum repatriated to Bragulla Ltd some rights that it had lawfully agreed to alienate to Sullivan Ltd.
Inducing breach of contract: did the Sullivans act intentionally?
Morgan Ltd contends that Asher J was wrong to find that the Sullivans lacked the intention for the tort of inducing breach of contract. Mr Fisher acknowledged that the Judge identified the correct legal test but submitted that he did not apply it correctly:
(a)he implicitly required Morgan Ltd to show that the Sullivans intended to cause harm, when Morgan Ltd need only show that they knew they were inducing a breach of contract;
(b)he conflated knowledge with motive, and wrongly considered motive relevant to the question of knowledge; and
(c)he did not appreciate that breach of the EDA was a necessary means to achieve the Sullivans’ end goal of purchasing the Water Guard intellectual property and getting the benefit of the distribution channel free of obligations to Morgan Ltd or any product liability for Water Guard systems sold under the EDA.
In any event, he submitted it was not open to the Judge to accept Mrs Sullivan’s claim that she did not understand Bragulla Ltd was breaching the EDA by transferring Water Guard’s intellectual property to Sullivan Ltd, having regard to compelling evidence to the contrary. It is also said the Judge made a number of factual findings for which there was no evidence. And it is said that the only conclusion reasonably open on the evidence was that Mrs Sullivan knew Bragulla Ltd was breaching the EDA by transferring title in the Water Guard intellectual property to Sullivan Ltd.
Our conclusions above remove the foundation for this claim, for the BSA and addendum caused no breach of the EDA. On the assumption that we may be wrong, we will summarise briefly our conclusions on this ground of appeal.
Mr Fisher conceded in oral argument that, contrary to his written submissions, the tort requires subjective intention; that is, it is not enough to show that the Sullivans knew their conduct resulted in a breach of contract.[34] He submitted that intent may be inferred from known effect.[35] But the Judge found very clearly that the Sullivans did not know their conduct resulted in a breach of the EDA:[36]
I entirely believe their evidence that neither of them thought that in signing the addendum they were so altering the assignment as to create a breach of the EDA.
The clearest demonstration of this is the addendum itself. I agree with Mr Marsh’s submission the terms of the addendum clearly show that it was intended by the parties that Bragulla Ltd would continue to meet its obligations to Morgan Ltd under the terms of the EDA. It was a specific requirement under the terms of that addendum that Bragulla Ltd would retain its rights “and obligations” under the EDA and that parts would be supplied so that Bragulla Ltd “can fulfil its obligations under the EDA”. Thus, on its plain words the addendum contemplates the EDA remaining in place and enforceable as between Bragulla Ltd and Morgan Ltd.
[34]Diver v Loktronic Industries Ltd [2012] NZCA 131, [2012] 2 NZLR 388 at [33].
[35]OBG Ltd v Allan [2007] UKHL 21, [2008] 1 AC 1 at [42].
[36]High Court judgment, above n 1, at [261]–[262].
We characterise as perfectly hopeless Mr Fisher’s submission that these findings were not open to the Judge. Counsel based his submission on a highly selective approach to the evidence, and he assumed erroneously that the Judge was not entitled to form an impression of the witnesses founded on the quality of their evidence, including its consistency with contemporaneous documents and common sense as well as their readiness to concede points against them. The Judge did not rest his findings on demeanour. The evidence, beginning with the addendum itself, points compellingly to the Judge’s conclusion that the Sullivans had no such hostile intention. Counsel relied on evidence that in March and April 2014 the Sullivans set about selling directly into the marketplace, but the obvious explanation, which the Judge accepted, is not that they always intended to do so but that Mr Morgan’s behaviour eventually drove them to it. Finally, it was also an important part of counsel’s argument that the Sullivans were motivated by an end goal of defeating Mr Morgan’s interests, but this submission rests on an assumption that the addendum was so patent a breach of Bragulla Ltd’s obligations to Morgan Ltd that such must have been the Sullivans’ objective all along. As we have explained, we take a very different view of the addendum.
This ground of appeal fails.
Was the Judge wrong to deny Morgan Ltd a declaration that Sullivan Ltd enjoys no rights of the manufacturer under the EDA?
We have summarised the Judge’s findings at [25] above. Mr Fisher began by pointing out that there exists no contractual relationship between Sullivan Ltd and Morgan Ltd. That is not in dispute. He submitted that Sullivan Ltd’s contractual relationship with Bragulla Ltd cannot affect the contractual relationship between parties to the EDA. Turning to discretionary considerations, Mr Fisher submitted that the Judge was wrong to take into account that Morgan Ltd had failed to order parts, wrong to find that Morgan Ltd had changed its pleadings for tactical reasons, and wrong to criticise Mr Morgan for his legitimate business objective of acquiring the Water Guard intellectual property via a purchase from the liquidator of Bragulla Ltd. He submitted that such acquisition will require the agreement of Sullivan Ltd or a court order requiring it to transfer title.
We accept Mr Hurd’s submission that while there is no contractual relationship between Morgan Ltd and Sullivan Ltd, Sullivan Ltd does have an interest in Bragulla Ltd’s rights and interests under the EDA, for the reasons given by Asher J.[37]
[37]High Court judgment, above n 1, at [241].
Further, even if Sullivan Ltd had no relevant interest in the EDA, the Judge was correct to refuse a declaration in the exercise of discretion. He found that Mr Morgan has no intention of ordering units or parts and there was no evidence that Morgan Ltd had complied with the condition of the December 2014 injunction that all parts should be bought from Sullivan Ltd.[38] Mr Fisher sought to excuse this latter failing by pointing out that a request for a price list was not met for several months, which is no excuse, and that Bragulla Ltd is in liquidation, which is no excuse either; the liquidator has not disclaimed the EDA and need only place an order with Sullivan Ltd for the parts required. The Judge may have overlooked that Morgan Ltd was still entitled to buy units (but not parts) from Midgen Ltd, but that does not detract from his decision.
[38]At [245].
Finally, it is admittedly correct that Morgan Ltd is motivated by the desire to acquire Sullivan Ltd’s intellectual property, which the parties appear to agree is the only remaining asset of real value. That ambition is unobjectionable in itself, but there is every reason to be wary about the means — as yet undisclosed — by which Mr Morgan intends to attain it. If he wants to negotiate a purchase with the Sullivans he does not need the declaration. It is clear from counsel’s submissions that Mr Morgan contemplates further litigation, and it is a reasonable inference that he expects such litigation to involve a challenge by Bragulla Ltd’s liquidator to the EDA. If there is another logical explanation for the declaration, it has not been advanced. We endorse Asher J’s conclusion that the Court should not facilitate behaviour that may defeat Sullivan Ltd’s rights under the BSA:[39]
It seems to me likely that if Mr Morgan did indeed negotiate such an arrangement with the liquidator of Bragulla Ltd, it could involve him breaching the EDA (although the liquidator may consent to that), and it would also involve him defeating Sullivan Ltd’s rights under the BSA. As Mr Fisher put it for Mr Morgan, the Sullivans would have no return for its purchase of the manufacturing business save for its rights against Mr Bragulla (whereabouts unknown) and Bragulla Ltd (in liquidation). Bragulla Ltd’s liquidation was the unilateral act of Mr Bragulla, and was no fault of the Sullivans. I do not think a Court declaration should issue to assist Mr Morgan on such a course. It is inappropriate to use the Court’s powers to grant tactical declarations for business purposes such as the one sought here.
[39]At [244].
This ground of appeal fails. We turn to the first ground of the cross-appeal.
Did Bragulla Ltd breach Morgan Ltd’s option to purchase?
This ground is directed at Asher J’s conclusions that Bragulla Ltd breached the EDA by selling its business without offering Morgan Ltd the option to purchase, and that Mr Morgan’s consent to the BSA did not extend to the addendum.
We have already addressed these issues at [40]–[45] above. For the reasons given there, we accept that the waiver given by Mr Midgen — and if it were necessary, that given later by Mr Morgan too — was effective to authorise the sale of Bragulla Ltd’s business without reservation. In particular, it allowed Bragulla Ltd to sell the business without insisting that the purchaser grant Morgan Ltd an option to purchase. We further find that there was no breach of the EDA.
This ground of cross-appeal succeeds.
Was the Judge wrong to grant Morgan Ltd an injunction against Bragulla Ltd?
We have quoted the injunction at [24] above. As noted, it was granted without opposition, Bragulla Ltd being unrepresented and Sullivan Ltd apparently failing to appreciate its potential significance. Mr Fisher submitted that we ought not entertain an appeal in the circumstances. We are persuaded, however, that it is right to revisit the decision in the interests of justice. We observe that the Judge did not receive the assistance he might have expected from trial counsel, who was not Mr Hurd.
To begin with, the Judge’s underlying rationale for the injunction must have been that Bragulla Ltd had breached the rights of Morgan Ltd by failing to offer an option to purchase, but we have taken a different view of the contracts. That being so, the proviso to the injunction secures for Morgan Ltd rights to which it is not entitled, namely a right to restrain further assignment and an option to purchase the rights of the manufacturer under the EDA.
Next, there was no apparent need for the injunction; there is no suggestion that Bragulla Ltd intends to assign its rights under the EDA to any third party, or that such assignment is commercially feasible. We acknowledge that the injunction would preclude Bragulla Ltd from assigning its rights to the Sullivan interests, but we do not think that the Judge intended to affect the Sullivans in that way, nor is such restriction justified on the view we take of the case.
Finally, it is not in the interests of justice that Bragulla Ltd be inhibited by Court order in the exercise of any right it may have to cancel the EDA. That is so if only because the Judge found that Morgan Ltd has breached the EDA in a manner that must have substantially reduced its benefits to the manufacturer.
This ground of cross-appeal succeeds.
The way forward
We do not understand it to be in dispute that there no longer exists any possibility of a sensible working relationship between the Morgan and Sullivan interests. The EDA must be brought to an end, one way or another. Regrettably, it is not within our power on this appeal to achieve that outcome, to which the liquidator must be party.[40] The opportunity may arise in connection with issues still to be resolved by the High Court. Chief among them would appear to be a claim, apparently not yet formulated, that the Morgan interests have infringed intellectual property. In this proceeding damages have not been fixed, as noted earlier, although indications are that they will be modest.
Decision
[40]Companies Act 1993, s 284. See generally ANZ National Bank Ltd v Sheahan [2012] NZHC 3037, [2013] 1 NZLR 674 at [137]; and Levin v Lawrence [2012] NZHC 1452 at [54].
The appeal is dismissed.
The cross-appeal is allowed. We find that Bragulla Ltd did not breach its obligations to Morgan Ltd by failing to offer an option to purchase. We set aside the injunction granted against Bragulla Ltd.
The appellant must pay the respondents one set of costs for a standard appeal on a band A basis and usual disbursements. We certify for two counsel.
Solicitors:
Castle Brown, Auckland for Appellant
Bill Dwyer, Christchurch for Respondents
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