Water Guard NZ Limited v Cynortic Water Systems Limited [2014] NZHC 3389 (19 December 2014)

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BETWEEN	WATER GUARD NZ LIMITED Plaintiff
AND	CYNORTIC WATER SYSTEMS LIMITED First Defendant MARK JAMES and SUSAN SULLIVAN Second Defendant CYNORTIC LIMITED Third Defendant REINER GEORGE BRAGULLA Fourth Defendant CYNORTIC INTERNATIONAL LIMITED _{Fifth Defendant}

Hearing:	18 December 2014
Counsel:	M Fisher and L Hui for Plaintiff A Marsh for First and Second Defendants
_Judgment:	_{19 December 2014}

This judgment was delivered by me on Friday, 19 December 2014 at 4.45pm pursuant to r 11.5 of the High Court Rules.

WATER GUARD NZ LTD v CYNORTIC WATER SYSTEMS LTD [2014] NZHC 3389 [19 December 2014]

[1] It is necessary to determine this interim injunction application as a matter of urgency. The application was filed on 12 December 2014. In that application the plaintiff Water Guard NZ Ltd (Water Guard) seeks an interim action restraining the first defendant Cynortic Water Systems Ltd (Cynortic) and the second defendants Mark and Susan Sullivan distributing or selling Water Guard filtration systems either themselves or through agents, and from exercising or purporting to exercise any right to cancel the exclusive distribution agreement, or taking actions in furtherance of a purported notice of cancellation of 10 December 2014. Other related orders are sought.

[2] The background is complex and I will not attempt to set it out in full. The product in question is a filtration system that works by applying ultra violet rays to water. The original developer and manufacturer of the system was the third defendant Cynortic Ltd (in liquidation). The original distributor was a company different from the present plaintiff, but which bore the same name, and has now become Midgen Enterprises Ltd (Midgen). The principal of the original Cynortic was Mr Reiner Bragulla, the fourth defendant, and the principal of Midgen was David Midgen. The original Cynortic and Midgen entered into an exclusive distribution agreement on 23 June 2010. The exclusive distribution agreement was

for a term of 10 years.¹The distributor had a right of renewal after that initial

[3] In the latter stages of 2013 both the original Cynortic and Midgen entered into unrelated transactions in which each transferred their interests in the distribution agreement to purchasers. The purchaser for Midgen was the plaintiff, Water Guard. The principal of Water Guard is Allan Stuart Morgan. The original Cynortic entered into an agreement to sell its business as manufacturer to the first defendant, Cynortic, a company owned or controlled by the second defendants, Mark Sullivan and Susan

[4] The relationship, if it can be called that, between Mr Morgan and the Sullivans has through this year broken down. Indeed, they have never met. Each blames the other for this breakdown. Some specific points can be made.

[5] First, Water Guard has not in fact purchased any filtration systems from Cynortic. It has, however, been actively trading and selling such systems. The reason it has not bought any from Cynortic is that when it purchased the business from Midgen, it purchased Midgen’s stock, and in addition as a term of the agreement for sale and purchase agreed to purchase stock from the vendor exclusively over any other sources.³

[6] The vendor, the original Cynortic controlled by Mr Midgen, had a very large stock of the product and through this year, pursuant to this contractual obligation, Water Guard has been meeting all its needs by purchases from Mr Midgen or his interests. There is enough supply through the Midgen interests to meet New Zealand demand for some time yet.

[7] Second, Water Guard has not been acquiring any parts from Cynortic. The Sullivans claim that there have been no requests for parts at all. Mr Morgan of Water Guard claims that Cynortic has been refusing to supply him with parts.

[8] Third, Water Guard claims that there are problems with the Cynortic product. Cynortic denies this.

[9] Fourth, in the middle of the year it came to Water Guard’s attention that the Sullivans and Cynortic were selling Water Guard system products directly themselves, rather than go through Water Guard as distributor. This appears to have been the immediate catalyst for the issuing of these proceedings by Water Guard against Cynortic claiming that was a breach of the exclusive distribution agreement.

[10] In addition to this litigation, there is litigation between Mr Morgan and Water

Guard and Mr Midgen and the original Cynortic. I will not go into the details of that litigation.

[11] Earlier this year these proceedings were filed and there have been a number of Court appearances. On 10 July 2014 the parties by agreement recorded various undertakings, given by Cynortic, that pending the determination of the proceedings or any earlier order of the Court or any agreement in writing, they (Cynortic and the Sullivans) would not distribute or sell directly or indirectly Water Guard filtration systems and related parts and products, or appoint any other person to do so.

[12] On 10 December 2014 Cynortic sent a letter (through lawyers) to Water Guard in which it purported to cancel the distribution agreement. It claimed that Water Guard had been advertising the sale of parts not sourced by Cynortic in breach of the distribution agreement, had modified systems in breach of the distribution agreement, changed its pricing in breach of that agreement, had fraudulently advertised units for sale and had been guilty of a number of other failings including repeatedly running down the product. It is that letter which has been the catalyst for this injunction proceeding.

[13] Water Guard wishes to stop Cynortic from selling direct to the market place and to have the position remain as it has been with Water Guard as exclusive distributor until trial.

[14] The present statement of claim contains other causes of action which deal with the issues that exist between Water Guard and the previous owner Mr Bragulla and other Cynotic entities connected to him.

[15] It is estimated by Mr Fisher that the proceeding will take five to eight days to hear. It is my assessment that with a sensible attitude being taken by counsel it could be heard within a week. Both Mr Fisher for the plaintiff and Mr Marsh for the Sullivan’s interests estimate that the issues between them can probably be heard within one to two days. It would seem to me that the other issues could probably be heard within three days.

[16] A fixture is available for the week of 13 April 2015 and I will be making directions in relation to that fixture at the end of this judgment. There will be the ability for the case to proceed over to the next week if it goes for longer.

[17] The principles that apply to interim injunctions are well known and set out in Harvest Bakeries Ltd v Klissers Farmhouse Bakeries Ltd.⁴I do not propose reiterating them, although I will be referring to them in the course of this judgment.

[18] The first issue is whether there is a serious issue that Water Guard is entitled to be selling product under the distribution agreement, that the cancellation is ineffective, and that the provisions of the distribution agreement apply preventing Cynortic and the Sullivans from distributing direct or dealing with other distributors.

[20] Water Guard has an exclusive distributorship agreement. That agreement has been breached by Cynortic in that Cynortic marketed and sold filtration units directly to retailers. Cynortic and the Sullivans gave the undertaking recorded in the minute of 10 July 2014 not to sell or market. Now it proposes to do so. The only real change in circumstances has been the notice of cancellation.

[21] It is arguable that notice of cancellation is not an effective cancellation of the distribution agreement. Mr Fisher says that the first ground put forward, of Water Guard advertising the sale of parts for sale not sourced from Cynortic, arises because Mr Morgan has been unable to access parts from Cynortic. Cynortic denies this, but on the face of it there is a serious question to be tried.

[22] Similarly, if there has been some modification of systems because of defects in the system supplied by Cynortic, as Mr Morgan claims, that may not be a breach.

⁴Harvest Bakeries Ltd v Klissers Farmhouse Bakers Ltd [1985] NZCA 70; [1985] 2 NZLR 129 (CA).

[23] I do not propose going through the other listed alleged breaches by Water Guard. They are all comparatively minor and on the face of it would not in themselves give rise to a right to cancel.

[24] Curiously the most serious possible breach by Water Guard is not listed in the notice of cancellation. That is the fact that Water Guard has not been buying units from Cynortic because pursuant to its obligation to buy Midgen stock it has been acquiring all its units from the Midgen interests. This has clearly placed the Sullivans under cashflow pressures. Presumably it will come to an end when there is no Midgen stock left.

[25] As I have said this is not a listed breach, and Mr Fisher maintains this may not be a breach because of the contractual obligation to Midgen and the way in which the clause setting out an obligation to purchase from Cynortic is worded in the distribution agreement.

[26] In the end I accept the Water Guard position that it may be that the cancellation notice was ineffective, and that therefore the distribution agreement remains in force and any sale or marketing of the units directly by Cynortic is a breach. There is a serious question to be tried.

[27] Mr Fisher also argued that the notice of cancellation was invalid because of the existence of an addendum following the agreement for sale and purchase between the original Cynortic interests controlled by Mr Bragulla and the new Cynortic controlled by the Sullivans. In that addendum the distribution agreements were specifically excluded under the sale and purchase agreement.

[28] On its face they were not assigned, and it is Mr Fisher’s argument that only the original Cynortic could cancel the contract.

[29] It is difficult to evaluate this argument at this point and with limited argument. However, it cannot be dismissed and must come under the category of seriously arguable.

[30] There are also other causes of action which relate to the other parties. There is a claim of inducing breach of contract by Cynortic, which is how Mr Fisher proposes Water Guard can seek an injunction against Cynortic if it is not an assignee.

[31] It is not necessary to spend time on these additional causes of action. It is arguable that if the distribution agreement has not been cancelled, then the Sullivans and Cynortic may have been involved in inducing a direct breach of the distribution agreement by the old Cynortic entities.

[32] Water Guard has now been selling Water Guard systems for over a year. It therefore has a track record. If an injunction was not granted and Cynortic and the Sullivans began marketing the systems directly, there would be the benchmark of the trading to date by Water Guard against which the Water Guard losses could be evaluated.

[33] Nevertheless I accept that the assessment of damages would be a difficult task, because it would be difficult to establish what losses Water Guard would have suffered, in particular in the area of damage to good will and the place of Water Guard in the market. The usual crisis that arises when a distribution agreement is cancelled, namely the cut-off of supply, would not arise because Water Guard has still got a supply of units to access which are held by Midgen interests. However, that position will not last forever, and could possibly come to an end before the case is heard.

[34] However, the primary immediate damage suffered may be difficult to quantify and in the long term there could be damage done in the marketplace with there being two competing suppliers of the product. Cynortic would effectively go into competition against Water Guard and start marketing its own products. There could be real damage to the reputation of the product as a consequence of it being marketed by warring parties.

[35] It is true that if the injunction is granted Cynortic will not receive any income from its business, and will continue to suffer the alleged ongoing damage of Water

Guard selling the units with modifications and unauthorised parts. However, I would be prepared to impose a term that all parts are acquired from Cynortic.

[36] I have given thought as to whether it should be a term that Water Guard will buy all its units from Cynortic. I have decided that I should not make such an order. It does appear that there is a contractual obligation on Water Guard to buy units from Midgen interests until the Water Guard stock has all been sold. The effect of my order then might be to force Water Guard to breach its contract with Midgen, and that in itself could give rise to a raft of complications. Thus, I have decided I will not make it a condition that Water Guard purchases from now on from Cynortic.

[37] Another factor which is relevant in the assessment of the balance of convenience is Mr Morgan’s apparent failure to meet with the Sullivans to find a compromise. I must say I find this most surprising. Despite Mr Fisher’s submissions to the contrary, I consider that the correspondence and history of this matter shows an unfortunate reluctance on Mr Morgan’s part to talk to the Sullivans. It seems to me that the parties should be talking, and matters now having reached this point, they should be involved in some form of settlement or mediation process in which all parties participate.

[38] The refusal on the part of Mr Morgan to have unconditional discussions is a point against the plaintiff’s case in terms of the balance of convenience and overall justice.

[39] However, in the end I am persuaded that providing there is an adequate undertaking as to damages and an adequate condition as to the purchase of parts, it is best to maintain the status quo until the hearing. I have arranged for a priority hearing for this case in the second half of April 2015. It would seem to me to be a mistake to change the existing situation when the parties can have a substantive hearing in four months time.

product to the Court, is surprising. I would have thought tt would have been better for Cynortic to have sought a priority fixture of the sort that I have now arranged, rather than to seek to change the status quo by taking its own unilateral and controversial action. The undertakings had set certain conditions in place pending trial, and Cynortic by its notice had sought to change those unilaterally.

[41] I conclude that overall justice favours the continuation of those undertakings and the status quo until the hearing in April 2015. Therefore, an interim injunction should issue.

[42] I record that Mr Morgan’s trust which has assets has provided an undertaking as to damages. I had expected an undertaking from Mr Morgan as well as his Trust, and the injunction will be conditional on that as well. If the defendants wish to apply to set aside the injunction because of difficulties with the undertaking, they have leave to apply. The plaintiff and Mr Morgan should co-operate in providing information on the financial and legal position of Mr Morgan and his Trust to the defendants’ counsel on a confidential basis.

[43] I make the following orders by way of interim injunction restraining the first and second defendants, pending further order of the Court, from:

(a) Distributing, or selling, directly or indirectly, Water Guard filtration systems and associated products to any person in New Zealand or the Pacific Islands;

(b) Marketing or advertising or promoting for sale, directly or indirectly, Water Guard filtration systems or associated products to persons in New Zealand or the Pacific Islands through any medium, including any website used by CWS Ltd in connection with its business;

(c) Appointing any other person to market or sell or distribute Water Guard filtration systems and associated products to any person in New Zealand or the Pacific Islands;

(d) Exercising or purporting to exercise any right to cancel the exclusive distribution agreement dated 24 June 2010 (the EDA);

(e) Taking any steps or actions in furtherance of the purported notice dated 10 December 2014 cancelling the EDA;

(f) Assigning or purporting to assign or sell to any other person, the rights, title or interests of the manufacturer under the EDA without first offering to the plaintiff the option to purchase the business of the manufacturer under the EDA.

[44] It is a condition that in addition to the Trust’s undertaking, Mr Morgan provide an undertaking as to damages. The injunction will not take effect until he provides such an undertaking. It is also a condition of the injunction that all parts for Water Guard systems are purchased by Water Guard from Cynortic and not from third parties. If this does not happen, Cynortic may apply for rescission on two working days notice.

High Court of New Zealand Decisions

Water Guard NZ Limited v Cynortic Water Systems Limited [2014] NZHC 3389 (19 December 2014)