Pharma Pac Limited v Leonard [2014] NZHC 2023 (26 August 2014)

Last Updated: 12 September 2014

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2014-404-1075 [2014] NZHC 2023

BETWEEN	PHARMA PAC LIMITED Plaintiff
AND	SIAN ELIZABETH LEONARD First Defendant MATTHEW CLIFFORD Second Defendant

Hearing:	15 August 2014
Appearances:	Mr J K Goodall for Plaintiff Mr J W Johnson for Defendants
Judgment:	26 August 2014

_{JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE}

This judgment was delivered by me on

26.08.14 at 4 p.m., pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

_{Date...............}

PHARMA PAC LIMITED v LEONARD & ANOR [2014] NZHC 2023 [26 August 2014]

Background

[1] This is an application for summary judgment.

[2] The plaintiff is engaged in the business of designing, manufacturing and selling plastic packaging including bottles. In April 2012 the defendants who are the directors of a company called MMC Trade Link Limited (“MMC”) approached the plaintiff to purchase bottles for their business. MMC was in the business of selling water in drink bottles. When it became clear that the parties on both sides were willing to proceed, two key documents were executed by them as the basis for their trading relationship. Closer consideration of the contents of those documents and the legal effect will be set out further on in this judgment. The first document the parties referred to as the “Trading Agreement” was executed on 27 April 2012. That agreement contained a personal guarantee which the defendants gave of the indebtedness of MMC.

[3] The Trading Agreement incorporated by way of attachment the then current version of the plaintiff’s terms and conditions of sale. It was agreed that the plaintiff would change its terms and conditions of sale from time to time to keep them up to date. Critically the Trading Agreement provided:

3. In the event that the Customer exceeds the agreed credit limit, the

Company may refuse to supply further goods to the Customer.

4. The Company may vary the terms of the Customer’s Trading

Account at any time.

5. The Customer agrees to grant the Company a personal guarantee as set out below.

[4] At another place in the Trading Agreement the following words appeared:

Credit limited offered $5,000.00

Payment Date: Goods purchased on credit are due for payment within 20 days after the month of purchase.

Personal Guarantee:

I/we guarantee jointly and severally to pay all monies owed to the Company by [MMC] and acknowledge that we shall be treated as principal debtors.

[5] The conditions of trade which were attached ran to some 19 separate paragraphs which do not require further discussion.

[6] On 4 May 2012, that is a week after the Trading Agreement was signed, the parties signed a document which for convenience the parties described as the “Supply Agreement”. That agreement provided, by clause 1, that the intent of the agreement was that the plaintiff would be the sole supplier of MMC’s requirements for water bottles. The Supply Agreement also had attached to it a “pricing schedule” which was stated to “contain estimated volumes per annum”.

[7] The schedule attached to the Supply Agreement indicated an estimated annual volume of bottles that would be supplied of 6,500,000 at a unit rate of

$0.2961 per unit. The estimated annual purchases that MMC was projected to make under that estimate would have been of a value in excess of $1,900,000.

[8] The Supply Agreement also contained the following provision:

7. Review period

The first review of prices for specified resin material movements shall be 6 months from the signing of this agreement and thereafter every 6 months. All other cost components will be reviewed every

12 months.

The Raw Material price review will be based on ICIS LOR South East Asia Mid Point Average in the previous full 6 month period converted to NZD at the prevailing exchange rate.

Labour and electricity and other overhead costs will be relative to the annual change in CPI. This will be reviewed annually on the anniversary of the agreement.

[9] The evidence was that the plaintiff would, as a result of embarking upon the manufacture of water bottles for MMC, be obliged to create new tooling, moulds and plant modification at its own expense. For that reason, it would need a more or less guaranteed period of continuous trade with MMC in order to pay back the development costs relating to the new tooling. I accept that that was the reason why

the Supply Agreement gave the plaintiff the status of sole provider of water bottles for a period of four years.

[10] Production of the bottles seems to have commenced from mid-2012. The first invoice date, being 24 July 2012, was for a price of $6,438.08. Thereafter, invoices were issued until November 2013 when I understand the last invoice was rendered for an amount of over $200,000 worth of bottles. During the trading period, the lowest amount invoiced was $6,438.08 and the highest was the November 2013 invoice to which I have just made reference.

[11] The November 2013 invoice was never paid. As at 26 February 2014 when there was $136,308.44 owing, the plaintiff served a statutory demand on MMC in that sum.

[12] On 20 February 2014, the second named defendant emailed one of the directors of the plaintiff following a meeting that the parties had. In that email the second defendant confirmed that it was “our 100% commitment that we make good and get our account up to date as fast as we can”. Further, suggestions were made as to the basis upon which the plaintiff might be agreeable to continuing the trading relationship which included paying for bottles upfront. The email further referred to the proposal that:

4. We agree to settle your outstanding account immediately upon the arrival of new investment funds which are positive and favourably in current negotiation as discussed with you.

[13] On 5 March 2014, solicitors acting for MMC wrote to the plaintiff seeking to dissuade the plaintiff from taking steps to liquidate the company. The letter from Simpson Western Lawyers dated 5 March 2014 included the following paragraph:

6. Our client has advised that it does not dispute the amount of the debt owing. Rather it needs more time to make payment.

[14] Further, the letter stated:

13. We also advise that the guarantors have very little tangible assets and only afford themselves a very modest salary. Accordingly there is little value in pursuing them.

[15] By April 2014, consultants retained by MMC had put in train a proposal for a compromise with creditors pursuant to Part 14 of the Companies Act 1993. The creditors meeting took place on 28 April 2014. The plaintiff voted against the proposed compromise. However the resolution was adopted. The compromise proposal which was voted on at the meeting included the following provision:

_{3. Compromise binding}

The Compromise shall be, and remain binding on all Compromise

Creditors to the extent of their Debt.

By entering into this Compromise, the Compromise Creditors agree to cancel all debts owed by the Company.

[16] Various part-payments per dollar were set out in the compromise which the creditors would receive in place of their full debts.

[17] As the plaintiff voted against the compromise proposal, the plaintiff then sent written demands to the defendants as guarantors and subsequently commenced this proceeding against the defendants on 6 May 2014. In the statement of claim, it stated that as at 1 April 2014, the sum of $204,462.67 was due by MMC. After making allowance for payments, the net amount owing as at 6 May 2014 was

$203,462.67. It was for that sum that the plaintiff issued these proceedings against the defendants.

[18] In the defendants’ notice of opposition, the grounds of opposition were stated to be the following:

a. the First Defendant and the Second Defendant have a defence to the

Plaintiff’s claims;

b. the credit limit to which the First Defendant and Second Defendant agreed under MMC Trade Link Ltd’s trading account, as distinct from the Supply Agreement, is limited to $5,000.00;

c. the First Defendant and the Second Defendant have rights of set-off or a counterclaim in respect of the Plaintiff’s failure to perform clauses 6 and 7 of the Supply Agreement in relation to price review;

d. the dispute between the parties should be subject to alternative dispute resolution methods than these proceedings pursuant to clause

12 of the Supply Agreement;

e. on or about 28 April 2014 the principal debtor, whose liability the First Defendant and Second Defendant guaranteed, entered a compromise with its creditors under part 14 of the Companies Act

1993 pursuant to which the liability of the principal debtor to its creditors was cancelled; and

f. as the principal debtor’s liability to the Plaintiff has been cancelled, the First Defendant and Second Defendant are not liable to the Plaintiff.

Summary judgment principles

[19] Under r 12.2 of the High Court Rules, the plaintiff is required to satisfy the Court that a defendant has no defence to a cause of action in the statement of claim or to a particular part of a cause of action. The applicable principles are well settled and are set out by the Court of Appeal in Krukziener v Hanover Finance Ltd:¹

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 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, or 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.

[20] I intend to be guided by this statement.

First issue – limit to guarantee

[21] The contentions that the defendants put forward through their counsel, Mr Johnson, in his able submissions were to the following effect. It was said that in effect what occurred in this case was that the parties entered into two separate arrangements or contracts. The first was that embodied in the Trading Agreement which contained the guarantee to which reference was made in the background section of this judgment. Further, the evidence of the first defendant was that she

_{entered into the Trading Agreement with the understanding that the liability to which}

1. Krukziener v Hanover Finance Ltd [2008] NZCA 187, (2008) 19 PRNZ 162 at [26] per Miller J (citations omitted).

she would be exposed to under that Agreement would not be in excess of the credit limit. She said that she understood and “I thought it was agreed” that MMC’s indebtedness under the Trading Agreement would not exceed $5,000 and further said:

I have never agreed to personally guarantee [MMC] for any amounts beyond

$5,000.

[22] She then went on to say that:

7. Later [MMC] needed to make large orders for bottles which would exceed the $5,000.00 credit limit under the Trade Account Agreement. Accordingly, [MMC] later entered into a supply agreement with [the plaintiff] ...

8. I understood the Supply Agreement would constitute a new agreement through which [MMC] would make its larger purchases. [The plaintiff] must have been of the same view as it never addressed the issue that the purchases [MMC] were making exceeded the $5,000.00 credit limit. Also, the subsequent Supply Agreement does not refer to the Trading Account Agreement or contain a requirement for a personal guarantee that would have changed by [sic] understanding.

9. As it was not intended that the Supply Agreement was a new agreement, neither I nor Matthew Clifford agreed that the personal guarantees we gave under the Trading Account Agreement would apply to the Supply Agreement.

[23] The following are the sub-issues which arise in relation to the defence disclosed in the first part of the notice of opposition.

[24] The first is whether the Trading Agreement and the Supply Agreement were two separate agreements which were unrelated to each other with the result that from the point when the Supply Agreement was entered into, the parties traded under the terms of that Agreement alone so that the Trading Agreement together with its guarantee had no application to the debts that MMC accrued from that point forward.

[25] The second is whether the Trading Agreement is to be construed in such a way that the liability of the defendants under the guarantee is not to exceed the

$5000 which is the expressed credit limit that applies to MMC?

[26] Thirdly, if the guarantee applies, is it limited to smaller debts as the first defendant deposes that it was her belief it would?

[27] The first sub-issue is to be answered in the negative in my judgement. There is no reason why the two agreements should not have cumulative effect. When the parties entered into the Supply Agreement they did not provide, as they could have, that any obligations under the Trading Agreement were from that point forward abrogated. Secondly, there is no evidential basis why the Court should conclude that because there had been a change in the trading circumstances of the parties, they entered into a separate agreement governing their trading arrangements (that is the Supply Agreement) which thenceforth was to have exclusivity.

[28] That conclusion is reached on the basis that the two agreements were entered into within a week of each other and before any substantial trading commenced between the two parties. The first agreement was directed to establishing the standard generic terms of agreement between the parties which apply to all customers of the plaintiff and also for the purpose of regulating credit arrangements between the parties. The second agreement, the Supply Agreement, was directed to matters such as projected volumes of purchase and the price per unit. There was no watertight division between the subjects covered in the two agreements and to some extent they overlapped. However, the chronology makes it clear that this was not a case where over the long term, the parties’ needs evolved so that the agreement that they had entered into in the first place became unsuitable to their needs and was required to be supplanted by a second agreement.

[29] The answer to the second sub-issue that arises turns upon what the effect if

any, the expression “credit limit offered $5000” had on the scope of the guarantee.

[30] In my view this expression did not have the effect of limiting the exposure of the defendants under the guarantee as they contend. The first reason for that conclusion is that the guarantee and the credit limit was concerned with different matters. The credit limit was inserted into the contract so that the plaintiff acquired the right to decline to further perform the contract if unmet accounts exceeded the amount stated. That is why clause 3 which I have already set out stated that the

plaintiff “may refuse to supply further goods to the customer” if the credit limit was exceeded. The provision did not say that the plaintiff must decline to supply further goods, and therefore the plaintiff could potentially increase the level of MMC’s indebtedness. Nor did it say and nor could it be implied that any debt in excess of the credit limit could not be recovered against MMC. Further, it was plainly the intention of the provision that the plaintiff could choose to allow the debt level to increase beyond the $5000.

[31] The wording of the guarantee would, if considered in isolation, be objectively and reasonably understood as giving rise to a guarantee of the indebtedness of MMC which was unlimited as to amount. It is not subject to any proviso or limitation which restricts the amount which the guarantee secured. It does not make the entitlement of the plaintiff to call on the guarantee subject to compliance with the credit limit. Because there was no limit to the level to which the indebtedness of MMC could be allowed to rise, there was logically no limit on the amount which could be called up under the guarantee, that guarantee securing “all monies owed to the [plaintiff]”.

[32] In order to properly interpret the words which the parties used, it is necessary to bear in mind the judgment of the Supreme Court in Vector Gas Ltd v Bay of Plenty Energy Ltd.² The following relevant passage from the judgment of Tipping J explains the position:³

[19] The ultimate objective in a contract interpretation dispute is to establish the meaning the parties intended their words to bear. In order to be admissible, extrinsic evidence must be relevant to that question. The language used by the parties, appropriately interpreted, is the only source of their intended meaning. As a matter of policy, our law has always required interpretation issues to be addressed on an objective basis. The necessary inquiry therefore concerns what a reasonable and properly informed third party would consider the parties intended the words of their contract to mean. The court embodies that person. To be properly informed the court must be aware of the commercial or other context in which the contract was made and of all the facts and circumstances known to and likely to be operating on the parties' minds. Evidence is not relevant if it does no more than tend to prove what individual parties subjectively intended or understood their words to mean, or what their negotiating stance was at any particular time.

² _{Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444.}

³ At [19]-[20] (footnotes omitted).

[20] Although subjective evidence would be relevant if a subjective approach were taken to interpretation issues, the common law has consistently eschewed that approach. The common law focuses strongly on the agreement in its final form as representing the ultimate consensus of the parties. Hence it is regarded as irrelevant how the parties reached that consensus. To inquire into that process would not be consistent with an objective inquiry into the meaning of a document which is generally designed to be the sole record of the final agreement. A party cannot be heard to say — never mind what I signed, this is what I really meant.

[33] The interpretation of the Trading Agreement which I prefer is consonant with the background circumstances to the entry into that Agreement between the parties. The relevant commercial context in which the Trading Agreement was made and the following matters are relevant. First, the guarantors were also directors of MMC. They must therefore be taken to have appreciated MMC’s intentions as to its trading relationship with the plaintiff. The evidence of Mr Hopwood, director of the plaintiff, is that MMC was estimating sales of up to 6.5 million units for the first 12 months. His evidence is that that would have translated into average monthly purchases from the plaintiff of $160,000. He further gave evidence that the order that was placed in October 2013, which was invoiced in November 2013, was a substantial volume, for an amount in excess of $200,000 worth of the plaintiff’s products. While I agree that this information was not provided to Mr Hopwood prior to the date when the Trading Agreement was signed, it seems reasonable to assume that even back at the point where the Trading Agreement was signed, the defendants as directors of MMC understood that trading volumes of that level were likely to be achieved.

[34] Further, the purchases from the plaintiff were to be financed by credit that the plaintiff extended to MMC. There was no suggestion that another party would be funding the purchases or that they would be prepaid. Whenever MMC placed an order there would be corresponding debt incurred which was owed to the plaintiff. Without some outside source of finance, therefore, it was plain that MMC would owe to the plaintiff amounts that fluctuated from time to time and were likely to be very well in excess of $5000.

[35] Against this background, a guarantee which was limited to $5000 would be of trifling significance, limited as it was to be a relatively minor percentage of the total indebtedness that MMC would be assuming to the plaintiff.

[36] Further, the expressions of subjective expectation that the first defendant put forward in her affidavit are not relevant, as the above extract from the judgment of Tipping J demonstrates.

[37] My conclusion is that the defendants are bound by their guarantee.

Second issue - do the defendants have an equitable set-off?

[38] In summary, the defendants in this part of the case contended that there was an obligation on the part of the plaintiff to review the level of charges from time to time to reflect changes in manufacturing costs attributable to pricing levels at which materials could be obtained. It was the submission of the defendants that the plaintiff had failed to review the per unit price charged for the bottles in light of changes to the manufacturing costs.

[39] The defendants produced evidence that they had obtained a quotation from another supplier which was at substantially lower per cost price per unit. This was then compared with the charges which the plaintiff was imposing at the same time and pointed to as evidence that the plaintiff had arguably, in contravention of its contractual obligations, failed to carry out the necessary review as a result of which it had been in breach of its contractual obligations which caused loss to MMC and to the defendants.

[40] Clause 7 of the Supply Agreement on the subject of review has been set out earlier in this judgment.

[41] The schedule to the Supply Agreement also provided as follows:

(a) Pharmapac shall furnish to Customer Limited documentary evidence of cost movements which are relevant to each review.

(b) The movement for raw material costs will be measured against the ISIS LOR resin schedules in $USD and converted to $NZD on the same day.

Nominated date:

- Specified resin, i.e., PET Bottle moulding grade = USD$ XX.00

NZD/USD FX Rate = 0.XX

Labour and overhead and electricity costs will be reviewed annually to

New Zealand CPI Index (electricity segment re electricity costs).

(c) Pharmapac must exercise all prudent means to minimize cost increases.

Any price movements resulting from the annual reviews shall be recorded in writing signed by both parties.

(d) The percentage of cost of each component will be altered annually after agreement between both parties if there is a substantial change in the cost of any component.

[42] I accept that the interpretation of the Supply Agreement which the defendants put forward is correct in that there was a contractual undertaking given by the plaintiff to review the unit charges for the bottles from time to time.

[43] However I do not accept the inference which the defendants would have this Court draw from the competitor’s price quotation that there is an arguable defence. All that is apparent from that quote is that the other company was prepared to undertake the task at a lower per unit price. That says nothing about the key question of whether there had been a downward movement in the cost of materials which the plaintiff ought to have factored into its prices when charging MMC. It is equally consistent with the possibilities that the competing company provided the price offer on the basis of increased material costs or no movement in material costs over the period of comparison for which the plaintiff was obliged to carry out a review of materials costs.

[44] The review which was intended to be in respect of the price at which the plaintiff would supply the manufactured articles was no doubt made up of the usual components of raw materials, energy and labour costs and perhaps other items. It would not have followed from the fact that there was a downward movement in one particular component that the overall costs of manufacture would have diminished.

[45] Nor has there been any serious attempt to demonstrate how any proposed loss

(which would be the source of the cross-claim for damages) is made up.

[46] In the end, the evidence that Mr Hopwood has provided shows that there were fluctuations in the price which the plaintiff was charging MMC. A contemporaneous document annexed to his affidavit showed a price movement downwards from the opening price of 27.72 cents per unit to a figure of 22.5 cents per unit for orders invoiced after 13 January 2014. Mr Hopwood deposed that price was something the parties discussed on a regular basis.

[47] The essence of the complaint that the defendants make is that the plaintiff did not review its charges downward in the light of reduced cost inputs. The assertion appears to be erroneous in that the plaintiff did just that. Whether there ought to have been further adjustments to the price is entirely speculative.

[48] I do not therefore accept that it is reasonably arguable that MMC, and therefore the defendants standing in its shoes, has a defence arising from this ground under discussion.

Third issue – the effect of the Part 14 compromise

[49] Mr Johnson further submitted that the defendants had a defence arising out of the entry into the compromise with creditors under Part 14 of the Companies Act. It was argued that the nature of the compromise which was binding on all creditors, had the effect of discharging the debt which MMC owed to the plaintiff and therefore the contract of guarantee which was ancillary to those debts would no longer be of any effect.

[50] I do not accept that there is such an arguable defence. I accept the submissions that Mr Goodall for the plaintiff made to the effect that where the right to sue on the debt was lost by operation of law, the effect on a guarantee which the debtor had provided to the creditor is that the guarantee continues to remain in

effect: see Re Southern World Airlines Ltd⁴ and Buttle v Allan as Official Liquidator of Buttle & Co Sharebrokers Ltd (in liq).⁵

[51] There is a further reason why the supposed defence cannot succeed and that is that the terms in which the relationship of creditor-guarantor was established specifically state that the nature of the obligation of the guarantors is that of a principal debtor. The effect of such a provision must be that the guarantors undertake a separate obligation to the creditor which is unaffected by any discharge that might provide a defence to the guarantors (if indeed that had been the effect of a Part 14 compromise, a proposition which I consider must be rejected).

[52] The notice of opposition also raises a ground that the dispute between the parties should have been subject to alternative dispute resolution pursuant to cl 12 of the Supply Agreement.

[53] The defendant did not make any submissions on this point. The ground of opposition, the plaintiff submits is not a defence. I agree with that submission and no further comment is required about this ground.

Result

[54] For the foregoing reasons I consider that the defendants do not have an

arguable defence to the plaintiff’s claim. There will be judgment in the sum of

$203,462.67.

[55] The parties should confer on the question of costs and if there is any disagreement concerning liability for costs or the basis upon which they are to be calculated, counsel are to provide memoranda not exceeding four pages on each side

_{within 10 working days of the date of this judgment.}

⁴ _{Re Southern World Airlines Ltd [1993] 1 NZLR 597 (HC) at 604 – 605.}

⁵ Buttle v Allan as Official Liquidator of Buttle & Co Sharebrokers Ltd (in liq) [1994] 1 NZLR

396 (CA).

J.P. Doogue

Associate Judge