Zespri Group Ltd v Southlink Supply Ltd
[2017] NZHC 1378
•26 June 2017
ORDER PROHIBITING ACCESS, DISCLOSURE OR PUBLICATION OF SCHEDULES 11 AND 13 OF THE SUPPLY AGREEMENT. ACCESS TO THE COURT FILE IS TO BE DECIDED BY A JUDGE (NOT A REGISTRAR) AS PER PARAGRAPHS [29] AND [32] HEREIN.
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2017-404-248 [2017] NZHC 1378
BETWEEN ZESPRI GROUP LIMITED
Plaintiff
AND
SOUTHLINK SUPPLY LIMITED Defendant
Hearing: 13 June 2017 Appearances:
M Russell and S Waalkens for the Plaintiff
S J Corlett for the DefendantJudgment:
26 June 2017
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 26 June 2017 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules
………………………………………………….
Registrar/Deputy Registrar
Solicitors:
Meredith Connell, Auckland, for the Plaintiff
Brookfields, Auckland, for the Defendant
ZESPRI GROUP LIMITED v SOUTHLINK SUPPLY LIMITED [2017] NZHC 1378 [26 June 2017]
[1] In this product contamination case, Zespri Group Ltd applies for summary judgment on liability only. Zespri’s case is that Southlink Supply Ltd supplied it with contaminated kiwifruit. Some potentially affected kiwifruit had been shipped overseas when the contamination was discovered. It dumped the off- shore kiwifruit. It sues for loss of revenue and disposal costs alleging breach of contract and breach of duty of care. It applies for summary judgment on liability only for breach of contract. While it says that it can prove breach of contract on a summary judgment basis, it accepts that all issues beyond that, including causation, damage and relief, are not suitable for summary judgment.
[2] Rule 12.3 of the High Court Rules provides that the court may give judgment on liability and direct a trial on the issue of the amount if the party applying for summary judgment satisfies the court that the only issue to be tried is one about the amount claimed. As to summary judgment, the principles are well settled In Krukziener v Hanover Finance Ltd the Court of Appeal re-stated
them:1
[26] … The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried. … The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated. … The Court will not normally resolve material conflicts of evidence or assess the credibility of the deponents. But it need not accept uncritically evidence that is inherently lacking in credibility as, for example, where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, which is inherently improbable.
… In the end, the Court’s assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it.
[27] …[T]he defendant need not file a statement of defence. The onus remains on the plaintiff, and summary judgment will be denied if on the hearing of the application it appears that there is an issue worthy of trial.
(citations omitted)
1 Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26] – [27].
Facts
[3] Zespri Group Ltd exports kiwifruit. China and Japan are two of its key markets. Both countries have strict food quality laws. Both markets are sensitive to contamination and quality issues. Zespri is concerned to maintain a reputation for supplying a high quality product free of contamination. Zespri does not grade and pack kiwifruit it exports but uses third party suppliers. Southlink Supply Ltd is one of them. Southlink sources kiwifruit, arranges for them to be processed and packed in packhouses, and supplies the packed product to Zespri under an annual supply contract. Southlink does not carry out the processing and packing itself. Eastpack does that. Southlink is a fully-owned subsidiary of Eastpack, a grower-owned co-operative with seven packhouses. The one in question in this case is at Quarry Road, Te Puke.
[4] There was maintenance work to grader 3 at the Te Puke packhouse in mid to late January 2015. Between 17 and 29 March 2015, kiwifruit in issue in this case were processed on grader 3. Kiwifruit can be identified and traced by Kiwifruit Property Identification Numbers – KPINs. The kiwifruit were delivered to Zespri. It shipped some of the kiwifruit, 8,498 tray equivalents2, on the HS Beethoven to Shanghai, People’s Republic of China.
[5] During a pre-export inspection, Zespri found a kiwifruit with metal fragments, shavings and dust on its surface. Eastpack identified this fruit as coming from KPIN 1065C which was packed in the Quarry Road packhouse on
17 March 2015 on grader 3 at approximately 4:30pm. Eastpack stopped packing on grader 3. Its site manager says that it carried out a thorough clean down of the grader using magnets and torches. Metal filings were found on one of grader 3’s packing belts. The grader was cleaned again and was passed on 30 March 2015. Eastpack suspects that the contractor who carried out the maintenance in January
2015 did not clean the machine adequately and metal fragments were left on the
grader.
2 Equivalent to 3.6kg of fruit.
[6] On discovery of the kiwifruit with the metal filings, Zespri issued a product issue notification report to Eastpack. Zespri applied a “no export” hold on potentially contaminated product that remained on shore. It required an investigation of all possible causes of contamination and required Eastpack to provide justification for the determination of the product identified as potentially contaminated and also to provide lists of potentially contaminated product loaded out. Eastpack arranged to re-call and re-pack all potentially affected fruit which were still on shore subject to a “no export” hold. While some kiwifruit with KPIN 1065C had been shipped on 22 March 2015, a further 12,587 tray equivalents of kiwifruit that had been processed on grader 3 during the relevant period were loaded on a ship to Tokyo, Japan. Eastpack says that it re-inspected the remaining kiwifruit still on shore – some 73,737 tray equivalents. It claims that this was approximately 2,204,928 pieces of fruit – with no faults found on any of them. The total quantity of suspect fruit that had been processed on grader
3 and was exported was 21,085 tray equivalents, 8,498 to Shanghai and 12,587 to Japan. Zespri arranged for the shipment to Shanghai to be diverted to Hong Kong. It arranged for all exported fruit which had been processed by grader 3 in the relevant period to be dumped on arrival in Hong Kong and Japan.
[7] Eastpack and Southlink accept that the metal filings and dust on the single kiwifruit amount to contamination and that that kiwifruit did not comply with the contract specifications. They do not, however, accept that they supplied any other defective fruit. They point out that the only fruit found to be contaminated was not exported. They deny any liability for losses arising from the decision to dump the exported kiwifruit.
Contract terms
[8] The supply agreement between Zespri and Southlink is an extensive document running for 206 pages. Zespri relies on these contract obligations:
A4.2 The contractor will exercise reasonable care, skill and diligence in the supply of Kiwifruit and Services up to and including FOBS in accordance with this Agreement. The Contractor warrants that all Kiwifruit supplied by the Contractor shall comply with the Supply Specifications.
“Supply specifications” are defined to include the ZIL quality manual, which is an extensive part of the contract. Amongst many other things, it provides that kiwifruit supplied must be free of contamination.
A4.5 If a third party service provider carries out any of the Contractor’s
obligations under this Agreement, then the Contractor:
(a) will remain responsible for performing those obligations under this Agreement and for all acts and omissions of that third party service provider: and
(b) warrants that those third party service providers will meet the obligations of the Contractor (including data transmission obligations) under this Agreement which are relevant to the services provided by those service providers, and agrees that any and all costs and charges incurred by ZGL as a result of those third party service providers’ failure to meet those obligations shall be met by the Contractor.
[9] For its part, Southlink relies on cl A3.3:
ZGL must supply to the Contractor any information that is necessary to:
(a) demonstrate adherence to contracted obligations under this
Agreement; or
(b) assist the Contractor in meeting its obligations to ZGL under this Agreement
except where ZGL reasonably believes that the information is confidential or commercially sensitive.
[10] Southlink also says that under the ZIL quality manual, once Zespri became aware of potential contamination to exported fruit, Zespri was under an obligation to notify it and to confer with it as to appropriate remedial action.
The pleadings
[11] The statement of claim has three causes of action, two for breach of contract and a third in negligence. For all causes of action, Zespri claims the costs of dumping the kiwifruit in Japan and China, plus loss of revenue.
[12] The first cause of action for breach of contract is for non-compliance with the contract specifications:
The defendant breached the warranties in that the kiwifruit on board the Japan and China shipments did not comply with the ZGL supply agreement as follows:
(a) The kiwifruit did not meet the supply specifications as some of the kiwifruit was contaminated with metal fragments, shavings or dust;
(b) the defendant supplied the contaminated kiwifruit to the plaintiff and/or
(c) the defendant did not isolate and eliminate the contamination of the kiwifruit to bring it within the supply specifications before the supply of the kiwifruit to the plaintiff.
[13] The second cause of action for breach of contract is called a failure to supply services, but it is better considered as a claim for defective performance. It is based on the requirement to exercise reasonable care, skill and diligence under cl A.4.2 as well as cl A.4.5 under which Southlink is responsible for any defective performance by its subcontractor. Particulars go to alleged failure to implement product contamination procedure, failure to clean grader 3, allowing the build-up of debris or waste on grader 3, failure to classify or record defects, failing to ensure that kiwifruit was free of contamination and the like.
[14] The third cause of action, in tort for negligence, not the subject of the summary judgment application, alleges failure to exercise reasonable care, skill and diligence in terms similar but not identical to the second cause of action for breach of contract.
[15] Southlink’s statement of defence denies liability and includes three affirmative defences: voluntary assumption of risk, contributory negligence and failure to mitigate.
The breaches of contract
[16] Zespri has not proved to the summary judgment standard that any of the kiwifruit shipped to China or Japan were contaminated. It has proved that Southlink supplied only one contaminated kiwifruit, but that kiwifruit remained in New Zealand and was not exported. Some of Zespri’s evidence suggests that some of the shipped kiwifruit must have been contaminated but, on the present
state of the evidence, that is speculative. At the hearing, Zespri accepted that the evidence did not prove export of any contaminated fruit. Southlink accepted that the supply of the one contaminated kiwifruit was a breach of the specifications under the contract.
[17] Southlink accepts that the metal fragments, shavings and dust ended up on the kiwifruit because of defective performance in grading the kiwifruit, that is, the apparent failure to clean grader 3 properly. It concedes a breach of contract under this head.
Summary judgment on liability
[18] With Southlink admitting breach of contract for both causes of action, Zespri submitted that it was entitled to summary judgment on liability. Southlink resisted saying that summary judgment could not be given only on proof of breach of contract. In its submission, judgment for liability for breach of contract could be entered only if the court could be satisfied on a summary judgment basis that Zespri had suffered a loss. It contests the steps taken by Zespri after it became aware of the delivery of the contaminated kiwifruit. Its case is that Zespri should not have dumped the kiwifruit once they were unloaded in Hong Kong and Japan. Instead, Zespri was under a duty to confer with it to agree on correct steps. Instead of dumping the kiwifruit, it should have inspected them, repacked them and sold them, except for any found to be contaminated.
[19] Zespri disputes that it was under any duty to confer with Southlink once it unloaded the kiwifruit offshore. The differences here go to provisions under the ZIL quality manual. Southlink relies on some provisions suggesting a duty to inform, whereas Zespri points to others showing that Zespri has a discretion whether to do so or not. I am unsure whether the entire manual has contractual effect. While some parts of the manual are obviously intended to have contractual effect (for example, product specifications) it is drafted as a management document rather than a legal contract, setting out guidelines and policies rather than rights, powers and duties. A decision on this aspect is not required because summary judgment can be given without an enquiry into loss.
[20] It is well established that a breach of contract is actionable without proof of damage.3 After all, a cause of action for breach of contract accrues upon the breach without requiring proof of damage. That is clear from the case law under s 4(1)(a) of the Limitation Act 1950 (now repealed) where time ran from different times in negligence and in contract because damage was an ingredient of one cause of action, but not the other. Nominal damages may be awarded if
there is no proof of loss. If a plaintiff has proved all the ingredients for a cause of action on a summary judgment basis, judgment may be entered on liability, even if the plaintiff has not proved any loss. In this, I take a different approach from Master Venning in Kelly v Edge Computer Ltd.4 He gave summary judgment for acknowledged breach of contract, but did so on the basis that the plaintiff was required to show some loss:5
The only issue is whether the plaintiff can actually show at this preliminary stage that there is some loss for which, whilst presently unquantified, the plaintiff must have sustained which would justify the entry of judgment.
In my respectful view, such an enquiry is unnecessary where a cause of action accrues without proof of loss.
[21] Even so, if proof of some loss is required, Zespri has done that. I accept that for the claim for non-compliance with the specification it is arguable that there was no further loss. One faulty fruit was detected before being shipped, but there were no additional costs to Zespri as a result of that single fruit being found. It is another matter with the failure to use due care. In the circumstances of this case, Eastpack’s failure to use due care in grading kiwifruit required Zespri to take some action in respect of potentially contaminated fruit that had been shipped offshore. What that action should have been is contestable, but it cannot be disputed that Zespri had to do something. Southlink has acknowledged as much. It differs from Zespri only on the steps that should have been taken. Whether the kiwifruit were dumped, or whether they were unloaded, unpackaged, inspected, repackaged and sold, Zespri would have incurred additional costs,
which arose out of the failure to use reasonable care, skill and ability. For the
3 Marzetti v Williams (1830) 1 B & Ad 415, 109 ER 842 (KB).
4 Kelly v Edge Computer Ltd HC Dunedin CP63/96, 5 March 1997.
5 At 8.
purpose of a liability determination where damage is an ingredient of the cause of action, it cannot matter what the particular loss is, so long as the court is satisfied that there must have been some damage. For example, in a building defects case there may be debate whether the particular loss is the costs of repair or the loss in value of the building, but a judgment on liability does not require the court to decide which applies, so long as there is proof of some loss.
[22] It remains to consider whether any of the affirmative defences provide reason for not entering judgment on liability. These are primarily defences to tort claims and do not figure in claims for breach of contract. In this case the contract allocates risk between the supplier and purchaser, with the supplier responsible for ensuring the kiwifruit match the contract specification. With that allocation Zespri cannot be considered to have voluntarily assumed the risk of receiving contaminated kiwifruit. Similarly, the allegation of contributory negligence is implausible. Zespri had a system of pre-export inspection as a safeguard against exporting contaminated product.
[23] The real issue in this case goes to the steps taken after Southlink’s breach was discovered. That raises mitigation questions but those do not bar the court from entering judgment on liability.
[24] The finding of breach of contract both for non-compliance with the contract’s specification and for failure to use reasonable care, skill and diligence, is not contestable. Summary judgment on liability can be entered accordingly. How Zespri dealt with these breaches after they were discovered, what steps it did take and should have taken are contentious and are not suitable for summary judgment. The questions of mitigation and extent of loss are proper matters for trial.
Confidentiality ruling
[25] Zespri sought an order for non-publication of any information relating to any terms of its supply contract with Southlink. The supply contract has a confidentiality clause under which the parties undertook to keep the terms of the
agreement, any service level agreement and any documents produced under the agreement and any information supplied by one party to the other identified as confidential. The clause does not prevent disclosure of information generally available to the public. The clause notes in particular that the following are confidential:
[a] The consolidated market and product development plans for
Zespri.
[b] Any sales, forecast or reports known as “Pool” reports.
[26] I take the same approach to publication as to an application for access to documents on the court file. A likely consequence of access to documents on the court file is potential publication. An application for summary judgment is heard in open court. The case has reached its substantive hearing stage under r 3.9 of the High Court Rules. Under that rule, anyone may access documents filed in court, including affidavits and exhibits to affidavits. That is subject to the court’s power to direct that any document or part of a document not be accessed without
the permission of a judge.6
[27] That power is considered with regard to matters to be taken into account under r 3.16. That requires the judge to take into account a number of factors including, in particular:
[a] the orderly and fair administration of justice; [b] the protection of confidentiality … ;
[c] the principle of open justice, encouraging fair and accurate reporting of and comment on court hearings and decisions; and
[d] the freedom to seek, receive and impart information.
6 High Court Rules 2016, r 3.9(3).
[28] Here, it is a matter of weighing the competing considerations of the parties’ desire to preserve confidentiality against the principle of open justice and orderly and fair administration of justice. A party’s assertion of confidentiality is not by itself conclusive. In Port Nelson Ltd v Commerce Commission,7 the Court of Appeal gave as examples of confidential information:
[D]ocuments showing the detailed costings of products or services which are provided in a competitive market, the marketing plans for a proposed new product, or a patent specification during the period before the application has been accepted and made available for inspection.
That was in the context of pre-trial discovery of documents, but it provides a useful guide.
[29] I accept that there are parts of the supply agreement which, if disclosed, may give advantages to Zespri’s competitors. While Zespri has an effective monopoly of kiwifruit export from New Zealand, it operates internationally in a competitive market. Not all of the agreement needs to be protected from disclosure. The parts I have identified as requiring protection are Schedules 11 and 13. They are not to be accessed, disclosed or published. I also direct that any application for access to the court file is to be decided by a Judge, not by a Registrar, and is to be made only on notice to the parties. Any such application is to be considered as if the case had not yet reached its substantive hearing stage.
Outcome
[30] I give summary judgment on liability for Zespri against Southlink Supply
Ltd for breach of the 2015 supply agreement as follows:
[a] breach of the specification obligation for supplying one contaminated kiwifruit to Zespri between 17 March 2015 and 28
March 2015; and
7 Port Nelson Ltd v Commerce Commission (1994) 7 PRNZ 344 at 347.
[b] breach of the reasonable care, skill and diligence obligation in grading kiwifruit with a machine which was liable to contaminate fruit.
[31] Zespri will have costs on the summary judgment application (but not costs for the entire proceeding). If the parties cannot agree costs, memoranda may be filed and I shall decide costs on the papers.
[32] Schedules 11 and 13 of the supply agreement are not to be accessed, disclosed or published. Any application for access to the court file is to be decided by a Judge, not by a Registrar, and is to be made only on notice to the parties. Any such application is to be considered as if the case had not yet reached its substantive hearing stage.
[33] The Registrar is to allocate a case management conference for directions to be given for the rest of the proceeding. Ahead of the conference, the parties should confer as to discovery and other case management directions.
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….
Associate Judge R M Bell
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