About Health Supplements Ltd v Charnley aka Lopez [2013] NZHC 1168 (21 May 2013)

Last Updated: 3 July 2013

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2011-404-4585 [2013] NZHC 1168

BETWEEN ABOUT HEALTH SUPPLEMENTS LTD First Plaintiff

AND DANIEL FRANKLING KING Second Plaintiff

AND ELENA TIRI CHARNLEY ALSO KNOWN AS LANI LOPEZ

First Defendant

AND HEALTHY INSIGHTS LTD Second Defendant

AND LANILOPEZ.COM LTD Third Defendant

Hearing: 22 April 2013

Counsel: M Lloyd and M Phillips for Plaintiff

K Quinn and K Baxter for Defendants

Judgment: 21 May 2013

RESERVED JUDGMENT OF ASSOCIATE JUDGE SARGISSON (Strike out application)

This judgment was delivered by me on 21 May 2013 at 4 pm pursuant to

Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date ..........................

Solicitors:

Schmidt and Peart, 152 Anzac Ave, Auckland

S A Armstrong, PO Box 8, Auckland

ABOUT HEALTH SUPPLEMENTS LTD V CHARNLEY ALSO KNOWN AS LANI LOPEZ HC AK CIV-

2011-404-4585 [21 May 2013]

[1] In this proceeding, commenced in July 2011, the plaintiffs sue three defendants. The first defendant, Ms Charnley otherwise known as Ms Lopez, applies for an order striking out six of ten causes of action as pleaded against her in the plaintiffs’ second amended statement of claim. The application is made on the grounds that six causes of action as pleaded are clearly untenable and otherwise an abuse of process.

[2] The application is opposed.

[3] It is for Ms Charnley to show that grounds exist for the strike out order.

Background

[4] In 2006 Mr King and Ms Lopez agreed orally to go into business together to develop and market a health supplement containing resveratrol. Mr King is a science graduate and claims he developed the product. Ms Lopez is a naturopath who had experience advertising naturopathic and health remedies on the radio and she claims she had been researching resveratrol at the time of the agreement.

[5] The business was operated through the corporate vehicle About Health Supplements Ltd for some years and was very successful. However, the working relationship of Mr King and Ms Charnley became strained and on 14 October 2010 they entered into a settlement agreement in respect of disagreements they had over the business. The agreement recites that they wished to bring their business relationship to an end and it “sets out the terms on which they intend to so”.

[6] The relevant terms of the settlement agreement state:

a) Mr King to pay Ms Lopez, on the designated settlement date of 29

October 2010 (“settlement date”), the sum of $1,000,000 (one million dollars), for her shares in About Health. About Health to pay to Ms Lopez half the retained earnings held by it for the period 31

March to 29 October 2010. These two payments to comprise the

settlement sum (“the settlement sum”).

b) In return Ms Lopez, and/or her agents or assigns, to be restrained from selling any product containing resveratrol, in all media, for a period of 4 months from settlement date and, on the radio, for six months from settlement date.

c) Mr King and About Health to have exclusive use of all About Health’s intellectual property (“IP”) including, but not limited to, the trade marks res-v health about, about, and about health, the company name About Health Supplements Ltd and any good will associated with About Health’s name and brand and the res-v plus name, brand and formula.

d) Ms Lopex, and/or her agents or assigns, are not to use any of About

Health’s IP.

e) This agreement is the full and final settlement of all claims arising out of or in connection with... [About Health’s affairs, its future business strategy, ownership and control, the intellectual property owned by the First Plaintiff and the use by the Ms Lopez of her name, image and brand] (“the Dispute”)... except any claim arising out of or in connection with this agreement.

f) Subject to the terms of this agreement, the parties agree not to bring proceedings or claims against each other ...in relation to the Dispute or in respect of any matters howsoever arising relating to their former business relationship through About Health or in relation to the development, sale and/or promotion of any health supplement product by Ms Lopez...

[Emphasis added].

[7] The plaintiffs say before the ink was dry on the agreement Ms Charnley breached its terms. Essentially, they say the value of the settlement was wholly undermined.

[8] The plaintiffs filed their first amended statement of claim on 16 December

2011 seeking losses of $3,005,000 being the alleged loss of the capital value of the business plus accrued loss of profits and additionally loss of profits accruing at the rate of $86,000 per month. The amended claim relied on four causes of action that allege misconduct amounting to:

(a) Breaches of the terms of the settlement agreement as set out in paragraph 15(a) – (d) of the claim.

(b) Misleading and deceptive conduct under the Fair Trading Act 1986. (c) Passing off.

(d) Breach of ss 89 and 90 of the Trademarks Act 2002 .

[9] The plaintiffs filed a second amended statement of claim on 21 August 2012. This amended claim expanded the causes of action to ten. It retained the earlier four causes of action (renaming them as the fifth to eighth causes of action) and added six new causes. These new causes of action allege the plaintiffs are entitled to damages in the amount originally pleaded for losses alleged to flow mainly out of pre- settlement conduct that gave them the right to cancel the settlement agreement and that they duly did so.

[10] It is these new causes of action (listed as the first to fourth causes of action and the ninth to tenth causes of action) that Ms Charnley seeks to have struck out:

(a) First cause of action- Breach of the oral agreement (the first agreement).

(b) Second cause of action- Misleading and deceptive conduct by Ms

Lopez in relation to the first agreement.

(c) Third cause of action- Breach of fiduciary duties owed by Ms Lopez to the first plaintiff, About Health Ltd, and Mr King.

(d) Fourth cause of action- Breach of the statutory duty under s 131 of the Companies Act to act in good faith and in the best interests of About Health.

(e) Ninth cause of action- Unlawful interference by Ms Lopez with contractual relations between the radio network and About Health.

(f) Tenth cause of action- Breach of confidence/misuse of confidential information by Ms Lopez.

[11] Ms Charnley claims that whether or not there has been cancellation (which is not conceded) the added causes of action as against her plainly constitute claims that were settled or barred by the settlement agreement of 14 October 2010 between the plaintiffs and the first defendant.

[12] The plaintiffs say that from cancellation arises a serious question as to whether the added claims are no longer barred and therefore that the claim as now pleaded in all ten causes of action is not demonstrably untenable and should go to trial.

[13] The grounds on which the plaintiffs rely on are as follows:

(a) That plaintiffs were induced, by fraud and/or misrepresentations made by the first defendant, to entering into the agreement which purported to fully and finally settle the dispute between them and the first defendant.

(b) Further first defendant subsequently breached clause 15 of the

agreement by using the plaintiff’s intellectual property.

(c) The use of the plaintiff’s intellectual property in breach of agreement also amounted to a repudiation of the agreement by the first defendant.

(d) By notice dated 9 November 2012 the plaintiffs cancelled the agreement on the grounds of misrepresentation, repudiation and breach.

(e) As the agreement is now cancelled and of no further force or effect, the plaintiffs are entitled to resume/reopen the dispute that the agreement purported to fully and finally settle.

(f) Most of the conduct on which the ninth cause of action (unlawful interference with contractual relations) is based occurred after the agreement was entered into and is not therefore part of the dispute that the agreement purported to fully and finally settle.

(g) All of the conduct on which the tenth causes of action (breach of confidence/misuse of confidential information) is based, occurred after the agreement was entered into and is not therefore part of the dispute that the agreement purported to fully and finally settle.

[16] As is evident from their grounds of opposition the plaintiffs accept that the added causes of action accrued before the settlement agreement. The exceptions are the ninth and tenth causes of action which are based on acts that allegedly occurred after the settlement agreement was made or largely after it was made.

[17] Putting aside the ninth and tenth causes of action momentarily, the plaintiffs’ grounds also show they accept the settlement agreement would bar the added causes of action but for two reasons:

a) That they were entitled to cancellation under the Contractual Remedies Act 1979 as a result of repudiation, misrepresentation and breach of cl 15 of the settlement agreement; and

b) Secondly, the effect of such cancellation is that the settlement agreement is of no effect and the settled causes of action are revived.

[18] In respect of the ninth and tenth causes of action, the plaintiffs’ contention is

in essence that these causes cannot be barred by the settlement agreement:

a) For the same reasons as the other four causes (ie because if barred by the settlement agreement, the settlement agreement is of no effect); or

b) Alternatively, because they do not relate to the subject matter of the parties’ agreement: ie “the Dispute” or any “matters relating to their former business relationship...”

Issues

[19] Bearing in mind that the onus is on the defendant, the primary issue for determination is whether the plaintiffs’ contention that the settlement agreement is of no effect (and hence that the settled causes of actions are revived) is plainly untenable.

[20] There is a threshold question as to whether there has been valid cancellation. For the purposes of this application that question need not be answered.

[21] The alternative issue is whether the ninth and tenth causes of action relate to acts that are not caught by the “no litigation” provisions of the agreement. This issue need not be addressed unless the plaintiffs’ primary contention is untenable.

Legal Principles

[22] The application is made under r 15.1 of the High Court Rules. Relevantly it states that:

15.1 Dismissing or staying all or part of proceeding

(1) The court may strike out all or part of a pleading if it—

(a) discloses no reasonably arguable cause of action, defence, or case appropriate to the nature of the pleading; or

...

(d) is otherwise an abuse of the process of the court.

[23] The general principles applying to strike out applications are well settled:1

(a) Pleaded facts are assumed to be true.

(b) The cause of action must be clearly untenable. The court must be certain that it cannot succeed.

(c) The jurisdiction is to be exercised sparingly and only in clear cases,

reflecting the court’s reluctant to terminate a claim short of trial.

(d) The jurisdiction is not excluded by the need to decide difficult questions of law, requiring extensive argument.

(e) The court should be particularly slow to strike out a claim in any developing area of the law.

Is the plaintiffs’ contention that the settlement agreement is of no effect (and

hence that the settled causes of actions are revived) plainly untenable?

[24] As aforementioned, it is accepted by the plaintiffs that the settlement agreement will act as a bar to at least the first to the fourth causes of action, if it remains in effect. However, they submit that as the settlement has been cancelled, the settlement agreement can be of no effect and the strike out application cannot succeed.

[25] I prefer the submission of counsel for the first defendant. He submits the effect of the settlement agreement is to extinguish rights to sue for breach of the first

agreement or rights that may have existed but for the settlement agreement. If there has been valid cancellation, the rights and remedies that the plaintiffs have are governed by the Contractual Remedies Act 1979 and are for breach of the promises made in the settlement agreement, misrepresentation inducing the plaintiffs to enter into the settlement agreement or repudiation of the settlement agreement. The Act does not provide for a reinstatement of settled rights.

[26] My reasons can be stated briefly.

[27] The settlement agreement is a contract. If the alleged representation, repudiation, or breach of clause 15 meets the statutory threshold for the purposes of s

7 there would be a tenable case for cancellation under the Act.2 It is possible, though

I make no finding on the point, that there has been a breach of cl 15 which substantially reduces the benefit of the contract. The same may apply to the alleged misrepresentation and repudiation.

[28] Both parties acknowledge that cancellation, whether for breach, repudiation or misrepresentation, is not rescission ab initio, and does not avoid the contract as though it never existed. Cancellation is prospective only: s 8(3)(a) makes clear such effect. No party is obliged to perform the contract further “so far as the contract

remains unperformed.”3 However it is another matter to say cancellation means the

settlement agreement is of no effect and has not extinguished past claims.

[29] Counsel for both parties have referred in this regard to the case of Humphries v Carr in which it was held that the issues that the settlement agreement purported to settle were reopened on cancellation.4 In coming to the conclusion that the settlement

_{agreement had no effect the Court said:} 5

2 Contractual Remedies Act 1979, s 7 allows for cancellation where there has been repudiation, inducement by misrepresentation (innocent or fraudulent) or a breach of a term in the contract if the effect of one of the above acts substantially reduces/changes the benefit, or increases/changes the burden of the contract to the cancelling party.

3 Contractual Remedies Act, s 8(3)(a).

4Humphries v Carr [2012] 1 NZLR 742.

The [agreement] was an accord and conditional satisfaction in the sense that it did not operate to discharge any existing cause of action unless and until there had been performance of the settlement agreement.

[30] Thus the Court found that:6

There is nothing to suggest that the parties intended the [agreement] to be an immediate and enforceable agreement which each accepted in satisfaction of the existing claims they had against each other and in substitution for pre- existing obligations. Had that outcome been intended, the parties could simply have provided for the immediate withdrawal or abandonment of all proceedings in the litigation between them and for the unconditional and mutual release of all claims each had against the other. Instead, the parties chose to enter an agreement in terms of which the abandonment of the claims each had against the other was conditional upon the due performance of the agreement.

[Emphasis added].

[31] In the current situation the wording of the settlement contract is not conditional. Materially the settlement contract lacks the conditional wording of the kind used in Humphries. The contract does not say it is conditional upon due performance of any or certain terms.

[32] The plaintiffs’ argument that the agreement was conditional upon Ms Lopez not using the IP and that there has been no satisfaction as the satisfaction was the actual exclusive use of About Health’s IP, holds little merit. The contract was unconditional and breaches of the contract or misrepresentations made will be remedied under the Contractual Remedies Act.

[33] The plaintiffs and the defendants’ settlement contract consists of both accord and satisfaction by which the plaintiffs have substituted their existing rights for a set of promises and obligations in the settlement agreement. The law will step in when such contractual promises are broken to provide damages, but it does not erase the settlement contract in its entirety. The law also steps in when a person is induced by false misrepresentations to enter into a contract, or repudiates a contract, but such remedy is in the form of damages not vitiation of the agreement.

[34] Thus, I find that the contractual bar to the first through to the fourth causes of action remains. I am satisfied that they cannot stand.

[35] Although cancellation of the settlement agreement does not allow the plaintiffs to revive settled claims, it does not leave them without remedy if they can prove breach and misrepresentation or repudiation in relation to the settlement agreement. These can be remedied with claims under the Contractual Remedies Act. The first of these issues already forms part of the statement of claim.

Are the ninth and tenth causes of action caught by the “no litigation” provisions

of the agreement?

[36] I turn then to the remaining ninth and tenth causes of actions. Counsel for the plaintiffs argue that the clauses of the settlement agreement barring litigation are ambiguous and are not sufficiently clear to support a strike out application of these causes. They stress that these causes relate primarily to conduct that is alleged to have occurred after the settlement agreement was entered into. The full and final settlement was only in respect of the ‘The Dispute’ and does not cover future issues which may arise.

[37] Counsel for Ms Charnley argues that both causes of action were ‘on the radar’ at the time of the agreement.

[38] As this dispute is partly factual it is not appropriately resolved in an application of the present kind. As such it is more appropriately determined at trial.7

Result

[39] The application to strike out is partially successful. I order the strike out of the first to the fourth cause of action but decline to strike out the ninth and tenth cause of action.

Costs

[40] As costs follow the event under the statutory costs regime and Ms Charnley is the substantially successful party she is entitled to an order for costs. There will be an award in her favour on a 2B basis plus disbursements as fixed by the Registrar.

Other Matters

[41] The proceeding is to be listed in the chambers list for mention on 7 June

2013 at 2.15 pm. Leave is reserved to seek a telephone conference at an earlier date if required.

Associate Judge Sargisson