Sheppard Industries Limited v 39 Degrees South Limited [2014] NZHC 759 (14 April 2014)

Last Updated: 18 July 2014

IN THE HIGH COURT OF NEW ZEALAND ROTORUA REGISTRY

CIV 2013-463-000483 [2014] NZHC 759

BETWEEN	SHEPPARD INDUSTRIES LIMITED Plaintiff
AND	39 DEGREES SOUTH LIMITED First Defendant
AND	CRAIG CORBETT Second Defendant

Hearing:	8 April 2014
Appearances:	G D Stringer for the Plaintiff F Wood for the First and Second Defendants
Judgment:	14 April 2014

_{JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN}

This judgment was delivered by me on

14.04.14 at 4:30pm, pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

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

SHEPPARD INDUSTRIES LIMITED v 39 DEGREES SOUTH LIMITED & C CORBETT [2014] NZHC 759 [14 April 2014]

[1] The plaintiff (SIL) is a manufacturer and supplier of bicycles, parts and accessories. It operates under the trading name of Avanti.

[2] The first defendant (39 Degrees) operated as an Avanti dealer in Rotorua. On

22 November 2010 SIL and 39 Degrees entered into a written Dealer Agreement

(Agreement) for supply.

[3] On 24 November 2010 39 Degrees completed a Credit Application form, and

Mr Corbett executed a Personal Guarantee, guaranteeing the obligations of 39

Degrees to SIL.

[4] On 13 November 2013 SIL filed its summary judgment application. SIL claims the sum of $292,023.93 against 39 Degrees and Mr Corbett. Since then some payments have been made. The Court is advised the debt is about $166,000 plus interest and costs.

[5] On 10 December 2013 SIL cancelled the Agreement.

The claim

[6] SIL’s claim is for invoices which it says are unpaid. Clause 11 of the

Agreement required payments from 39 Degrees that:

Ensure that their accounts... are paid on time and in full.

The bike account is due for payment within five days of the end of the month. Payment due is the lower amount required to either:

1. Reduce the month end total account balance below the Stock- Funding threshold amount;

2. Clear all amounts due including current and overdue amounts.

[7] Clause 4 of the Agreement states:

4. Breach of Agreement

In the event one party materially breaches this agreement the other party may terminate this agreement upon 30 days written notice... [including for] non-payment of due account...

[8] The Agreement provided that there was a Stock Funding Threshold (SFT) of

$140,000 by which stock to the value of that amount is supplied by SIL. In terms of its payment obligations 39 Degrees was required to pay the balance over the SFT by the end of the month following. That is, payment of the SFT amount was not required except upon the termination of the Agreement.

[9] The service of the summary judgment application in November and the purported cancellation of the agreement one month later has occurred against a background of significant developments in the parties trading relationship.

The contractual variation

[10] On 9 October 2013 Ms Hewitt for SIL wrote to 39 Degrees requesting payment of $113,441.01 claimed to be due. That sum was calculated by deducting from the total debt due of $320,545.89, an amount of $207,104.88 being the amount of the “stock funding”. In short Ms Hewitt has deduced from the total debt due the SFL as it was at that time.

[11] The letter warned that if the payment was not received within 30 days SIL

would commence debt recovery action.

[12] SIL says the letter was a breach notice which triggered payment of all amounts due. But, apart from threatening commencement of debt recovery action it warned of no other consequences at all. What is clear from the letter is that its calculations were based on the fact that the SFL applied.

[13] Within the 30 days stipulated Mr Corbett for 39 Degrees wrote to Ms Hewitt and in length detailed 39 Degrees’ challenge to SIL’s calculation of the debt due. He referred to recent meetings with other identified SIL managers and stated an arrangement had been made for payment of the debt. He referred to payments having being made since. He challenged SIL’s calculations by reference to its claims of stock sold but unpaid for by 39 Degrees.

Our current arrangement was agreed in the Rotorua meeting September 2012 that SFT no longer applied. Bike supply was on a new basis, in effect a comprehensive range of bikes supplied as agreed by SIL and [39 Degrees]. Payments to be made on a monthly basis on sold stock. For confirmation please refer to NZ Sales Manager. We have the new Avanti Plus contract in front of us to sign and understand the changes, implications proposed in the new bike supply agreement. It would be helpful to discuss/understand how to transition from one bike sales model to the next new model.

[15] There was no response to Mr Corbett’s reply. Instead five days later SIL’s summary judgment application was filed. It is clear that SIL’s calculation of a debt due was based upon a claim that the SFT applied, for the amount of the SFT is included in the sum claimed.

[16] However, it is clear that at the time the summary judgment application was filed the parties’ agreement had not been concluded because that did not occur until delivery of Ms Hewitt’s letter dated 10 December which stated:

... due to continued breaches of your dealer agreement, your dealer agreement has been terminated pursuant to clause 4... due to the following instances:

Non payment of due accounts as outlined in s 11 of the dealer commitments;

Carrying of non-Sheppard product not agreed...

[17] In overview:

(a) A letter of demand was issued on 9 October 2013 which does not require payment of the SFT. Nor does it state that the agreement may be cancelled.

(b) Although by Mr Corbett’s reply advice is given of an agreement that the SFT no longer applied, there was no response to that claim.

(c) A summary judgment proceeding was filed before the agreement was cancelled which calculates a total debt due which includes the SFT but the Agreement has not been cancelled and it is only at the time of

cancellation that the debt crystallised to include the SFT as part of a sum due.

(d) Cancellation did not occur until 10 December but before then there had been no warning of that outcome. Grounds for cancellation related to claims of non payment of due accounts.

[18] The first two affidavits of Ms Hewitt filed in support of the summary judgment application made no reference to Mr Corbett’s assertion of a variation agreement with other managers, including Mr Dale and Mr McMurray, or that the SFT had not applied since September 2012 and that a consignment arrangement had prevailed since then by which only stock sold was required to be paid for the following month.

[19] Only in her third affidavit did Ms Hewitt acknowledge there had been a variation to the parties trading arrangement but she rejected Mr Corbett’s claims of a consignment arrangement. As to what that agreement was she places reliance upon an email from Mr Schnell (another SIL manager) dated 5 September 2012 which states:

Assuming that the stock value was correct we would write off half of the difference of $79K [being calculated as payable] say $40K if you paid the balance of $39K immediately. We would also then credit your P & A account with the quarterly dividends that have been held and credit your APF account which is currently overdrawn by around $4K so that it is at least square.

Going forward between now and Christmas we would expect you to at least pay the cost of what you sell (so that there is no gap between the stock value and the account balance at end of month) and then work towards keeping the account current from January 2013 based purely on 120 day payment terms for bikes.

We want to move forward positively together – can you give some thought to this Craig and I will call tomorrow.

[20] Notwithstanding Ms Hewitt’s views regarding the nature of the variation arrangement, it is clear that Mr Schnell’s letter does not provide the final word regarding the extent of that variation.

[21] In Mr Corbett’s response dated 10 December 2012 he said:

Good to tidy up the past but to ensure the go forward is fully successful we need to establish a lot more detail to have absolute clarity.

Removal of Stock fund to threshold model Jan 1. Move to a 120 days payment model?

...

Considerations

[22] Mr Corbett’s evidence is that the nature of the trading arrangement changed significantly. He contends it became a consignment arrangement and that payment obligations included paying SIL for bikes sold in the previous month.

[23] Apart from Ms Hewitt, SIL has provided no evidence from the other managers with whom Mr Corbett says the variation arrangement was concluded. Apparently the three persons identified are still employed by SIL.

[24] Mr Stringer for the plaintiff urges the Court should not concern itself with whether or not there was a variation arrangement for he said the plain fact is records disclose that 39 Degrees was consistently in arrears with its obligations to pay for bikes sold within that following month.

[25] A review of a spreadsheet of sales largely confirms what Mr Stringer has said although against that claim there are the figures to show that in the months of November and December 2013 about $30,000 worth of bikes was sold but a total of about $117,500 was paid.

[26] The evidence discloses a trading arrangement whereby 39 Degrees was frequently in arrears with monthly payments, but that it was part of the arrangement that had endured for more than a year. The parties were frequently in discussion. The variation arrangement had been concluded in the spirit of those discussions although Ms Hewitt’s evidence does not endorse Mr Corbett’s understanding of the variation outcome.

[27] What is clear is that there is a conflict of evidence regarding payment obligations and of the trading arrangements that had existed. Whilst Mr Corbett

believed he had appropriately addressed SIL’s calculation of a debt due of $113,000 that was referred to in Ms Corbett’s letter of 9 October 2013, there was no response from SIL except to issue a summary judgment proceeding almost immediately.

[28] The extent of 39 Degrees debt is far from clear. Mr Stringer argues that what is clear is that there was a history of poor payment and that the actions of issuing summary judgment proceedings and of cancellation of the agreement are clearly supported by unchallenged claims of a debt that was due. It is for this reason he urges the court to resist the temptation to draw any conclusions at all about claims of a variation arrangement.

[29] The Court does not agree with that approach to matters. The Court has concerns about the letter of demand with the only consequence forecast was that debt recovery action might commence. Although warned by Mr Corbett of a variation arrangement having been concluded with named managers this was ignored because of a firm belief that the SFT still applied for the amount of that was part of the calculation of the demand for payment of $113,000.

[30] Serious questions arise regarding the purported cancellation of the agreement. Only if that cancellation was valid could the SFT amount have been included in the claim of a debt due. Yet the summary judgment proceedings had already included the SFT in the amount claimed even though the agreement had not been cancelled.

[31] The fact is that calculation of the debt due was very much based upon claims that the SFT applied when arguably it did not. Also at the relevant time there is evidence of discussion and some negotiation regarding the signing of a new dealer contract. Mr Corbett is now a bit cynical regarding these events. At paragraph 68 of his affidavit he states:

This can be seen from the email chain between myself and Stella Hewitt on

26 December 2013... the primary consideration of SIL was to apply pressure to bare to force us to sign a new dealer contract and the summary judgment

proceedings appear to be part of that process. SIL were not prepared to reinstate supply until all its terms had been agreed to including signing the

new dealer contract. I was not prepared to sign this new contract at that stage without further significant discussions with SIL.

Conclusion

[32] Mr Stringer submits the case is all about a debt owed. To the contrary the Court considers, as Mr Wood submits, that the dispute is about the parties’ agreement and the effect of the variation that was concluded. Significant evidence exists concerning these matters. Some of that concerns the nature of the trading arrangement as it was conducted.

[33] The actual terms of the variation arrangement goes to the very heart of the matters in dispute. Arguably the payment demand was based on the wrong arrears being claimed. The actions of SIL then filing summary judgment proceedings before the purported cancellation of the contract require further scrutiny.

[34] Arguably SIL were alerted to complications affecting its calculations, which it chose to ignore. There may be a basis for challenging the validity of the purported cancellation.

[35] In overview of all of these mattes it is clear to the Court that the application for summary judgment should fail. Issues of credibility are involved which are not suitable for resolution except by hearing oral evidence.

Judgment

[36] The application for summary judgment is dismissed.

Costs

[37] These are fixed on a 2B basis but are reserved for determination in the

_{resolution of the parties’ dispute.}

Associate Judge Christiansen