Cerebos Gregg's Limited v PaulMac Limited [2015] NZHC 507 (17 March 2015)

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BETWEEN	CEREBOS GREGG'S LIMITED Plaintiff
AND	PAULMAC LIMITED First Defendant GRAEME PHILIP MCCULLOUGH AND FIONA CHRISTINE MCCULLOUGH Second Defendants

[1] After over two years of inactivity, the plaintiff ’s proceeding was struck out

11 December 2014. This judgment deals with the defendants’ application for costs.

[2] The plaintiff commenced this proceeding in August 2012. It alleged that the defendants acted in breach of a distribution agreement entered into on or about

16 September 2005, under which the first defendant (Paulmac) would distribute the plaintiff’s Robert Harris-branded food and beverage products in part of the North Island of New Zealand which included both Wanganui and Palmerston North (the territory). Paulmac’s appointment as the plaintiff’s distributor in the territory was for a term of five years commencing 1 January 2005. If Paulmac wished to terminate the agreement, it had to give three months’ notice in writing to the

[4] The distribution agreement contained a restraint of trade provision, under which Paulmac and the second defendants undertook for a period of two years after the date of termination of the agreement not to conduct, establish or be involved with a business in the territory selling products similar to the plaintiffs “A list” products (Robert Harris roast and ground coffee catering packs and sachets) or any other food and beverage products manufactured or distributed by the plaintiff.

[5] The five year term expired on 31 December 2009. However, the plaintiff contended that some form of contractual relationship persisted between the parties after that date, or recommenced later. That was disputed by the defendants.

2010, and in June of that year the plaintiff sent the defendants a proposed new form of agreement setting out what it thought were agreed terms. The new form of distribution agreement was never completed and returned by the defendants, although Mr McCullough advised by email of 23 August 2010 that the defendants’ solicitors had told Mr McCullough that they had posted the documents to the plaintiff from Palmerston North on 30 June 2010. Mr McCullough said that he did not know what had happened with the documents, and asked the plaintiff to send another set.

[7] The plaintiff sent a further set of documents to the defendants, but they did not sign the replacement set of documents. On 25 February 2011 Mr McCullough advised that the defendants would not execute the new distribution agreement. Mr McCullough advised that Paulmac would still be trading as a distributor in the hospitality industry, but it was the McCulloughs’ intention to step away from the A list products, as well as equipment, and focus on a range of biodegradable packaging and hotel/motel supplies. He advised that the defendants would not be dealing in coffee per se, but would still be servicing hotels etc. and would require teas, coffee sachets, and instant coffee etc (B list products).

[8] The plaintiff then purported to cancel the distribution agreement, with effect from 5 May 2011. When it did so, it expressed its view that the restraint provision in the 2005 agreement would apply for the two year period commencing from

[9] In its statement of claim filed on 8 August 2012, the plaintiff alleged that the defendants acted in breach of the restraint of trade provision in that they sold a number of A list products within the territory in the period between

27 February 2012 and 23 May 2012. It applied for an interlocutory injunction restraining the defendants until 25 May 2013 from supplying roast ground coffee within the territory. It also asked for damages, to be particularised after discovery, and solicitor/client costs.

[10] The plaintiff ’s application for an interlocutory injunction was heard by Collins J on 17 October 2012. The principal issue before the Judge was when the two year restraint began to operate. The plaintiff contended that it was when Paulmac ceased to be the franchisee for the territory in May 2011; the defendants contended that it was when the term of the initial five year distribution agreement expired on 31 December 2009.

[11] In a reserved judgment delivered on 24 October 2012, his Honour dismissed the application and reserved costs. His Honour was satisfied “by the narrowest of margins” that the plaintiff had established the existence of a serious question to be tried (on the basis of breach of an operative two year restraint of trade clause which did not expire until 5 May 2013), but his Honour was not satisfied that the balance of convenience justified the making of an interlocutory injunction.

[12] Collins J noted that there was no evidence that the defendants had acted in breach of the restraint of trade clause prior to 31 December 2011 (the date from which Paulmac had proceeded with its business on the basis that no restraint would apply).

[13] His Honour noted that, on the basis of the plaintiff’s understanding of the

legal position, there was only approximately seven months left out of the two year

restraint period. Whatever harm the plaintiff may have suffered by virtue of the defendants’ alleged breaches, the damage would not be greatly exacerbated by allowing the dispute to be determined in the normal way, without the plaintiff effectively being given the relief it really sought prior to the hearing of its case.

[14] The defendants filed a statement of defence on 21 December 2012, in which the substantial allegations in the plaintiff’s statement of claim were denied. They admitted that there had been negotiations which resulted in an understanding in 2010 that new terms were agreed, but said that when the new form of agreement was sent through by the plaintiff, they found that it failed to embody the terms which had been agreed. They pleaded that an amended version was sent back to the plaintiffs.

[15] The plaintiff did not take any further step in the proceeding after the statement of defence was filed.

[16] The defendants seek an order for costs in the sum of $19,900, plus disbursements (filing fee on statement of defence) of $108.80. They point to the fact that the plaintiff’s application for an interlocutory injunction was dismissed by Collins J, and that the plaintiff subsequently abandoned its claim. They accept that only one set of costs should be awarded, as the defendants were represented by the same counsel.

[17] Generally, their claim for costs is calculated on a “2B” basis, with uplifts to band C for the commencement of the defence (up to six days), and for the filing of the opposition to the interlocutory application (up to two days). They say that the two affidavits filed in support of the opposition by Mr McCullough covered numerous factual matters, and that an affidavit was also filed by Mrs McCullough. They submit that band C better reflects the time spent on the notice of opposition, and is appropriate for the statement of defence given the plaintiff’s failure to take further steps following the filing of the statement of defence and the fact that its claims have now been struck out.

[18] Mr Gustafson accepts that the prima facie position is that a discontinuing plaintiff is liable to pay the defendant’s costs. He refers to North Shore City Council v Local Government Commission, in which Tompkins J stated the position as follows:¹

(1) There is a presumption in favour of awarding costs against the party which has discontinued a proceeding

(2) As a general rule the Court, in considering costs on a discontinuance, will not consider the merits of the competing contentions in the proceeding. A situation where the merits are so obvious that they should influence the costs issue represents an exception to this rule.

[19] He accepts that the onus is on the plaintiff to satisfy the Court that, because of the particular circumstances of this case, the normal presumption of costs in favour of the defendant should not apply.

[20] Mr Gustafson makes two principal submissions in support of his argument that this case is among the exceptions to the overall rule, and that there should be no award of costs.

[21] First, he submits that the plaintiff’s proceeding was rendered nugatory by a supervening event. Having lost its application for an interlocutory injunction, it would have been too hard for the plaintiff to have calculated damages for the defendants’ breaches, and the two year restraint period (on the plaintiff’s interpretation) came to an end only approximately seven months after Collins J gave his judgment dismissing the application for an interlocutory injunction. Mr Gustafson referred to the decision of Priestley J in BDM Grange v Parker, in support of the proposition that it would have been very difficult for the plaintiff to quantify

[22] Mr Gustafson submits that any victory at trial would have been largely symbolic and therefore uneconomic.

[23] Mr Gustafson referred to the decisions of Tompkins J in North Shore City Council, and of Simon France J in Olive Francis Retirement Home v Director- General of Health,³both cases in which the plaintiff claimed that supervening events had rendered its claim nugatory, and that it should therefore not have to pay the defendant’s costs on discontinuance.

[24] In Olive Francis Retirement Home, Simon France J noted that the discontinuance was something that had to happen because the subject matter of the proceeding had been overtaken by other events. The learned Judge said:

[18] In my view the reasons why discontinuance has arisen are sufficient to displace the presumption in rule 476C. It would be unjust to require the plaintiff to pay the defendant’s costs when the proceedings have never been tested because of the exercise of different powers by the defendant. On the other hand, I see nothing in the actions of the defendant that would support an award of costs against the defendant. Just as the plaintiff has not had its day in Court, nor has the defendant had the opportunity to defend the process.

[25] Mr Gustafson’s second submission is that the defendants’ behaviour in this litigation should disentitle them to any award of costs. He submits that the overriding principle is that costs are to reflect how the parties acted in the litigation: Paper Reclaim Ltd v Aotearoa International Ltd.⁴

[26] Mr Gustafson submits that the defendants only produced a copy of the agreement that they say they executed on 30 June 2010, on 5 October 2012, seven days before the injunction hearing. This form of agreement turned out to contain handwritten alterations to the standard form of franchise agreement, which the plaintiff had sent to them. One of the alterations was a reduction of the restraint period to six months. The alterations in this form appeared to the plaintiff to be inconsistent with the unqualified nature of Mr McCullough’s 23 August 2010 advice

that he had completed the documents and given them to the defendants’ solicitors for

[27] When they received the altered form of agreement on 5 October 2012, the plaintiff’s solicitors issued a formal notice under r 8.32 of the High Court Rules, calling on the defendants to produce certain documents, including correspondence between themselves and their solicitors enclosing the altered form of agreement executed by the defendants.

[28] The defendants’ solicitors replied on 9 October 2012, advising that they had no record of the agreement or the correspondence the plaintiff had requested in the notice to produce documents. Mr Gustafson submits that the appropriate interpretation to put on that response is that the defendants’ solicitors probably did not receive and send on to the plaintiff the amended version of the form of agreement as claimed by the defendants.

[29] Mr Gustafson submits that this conduct contributed to the plaintiff ’s conduct of the case: if the unamended 2010 agreement had been executed, the plaintiff’s case was much stronger. Relying on Olive Francis Retirement Home and Paper Reclaim, he submits that the appropriate course is to let costs lie where they fall.

[30] If his two principal submissions are not accepted, Mr Gustafson submits that an award of costs on a 2B basis would be appropriate, but with a percentage reduction to reflect the defendants’ conduct and the factors making it uneconomic for the plaintiff to continue with its claim following the refusal of its interlocutory injunction application. In his submission, the defendants would be entitled on a 2B basis to only 2.6 days at $1,990 per day, making a total of $5,174. He rejects the suggestion that any part of the costs should be assessed on a band C basis.

Unless the defendant otherwise agrees or the court otherwise orders, a plaintiff who discontinues a proceeding against a defendant must pay costs to the defendant of and incidental to the proceeding up to and including the discontinuance.

[32] In Fong v Wong⁵Asher J held that the rule creates a presumption that costs are payable by a discontinuing plaintiff, and I think that should be the starting point in this case. Although the plaintiff did not actually discontinue its proceeding, it invited the Court to strike the proceeding out, and the striking out of the proceeding achieved the same end as a discontinuance.

[33] As Tompkins J observed in North Shore City Council, the general rule in considering costs on a discontinuance is that the Court will not consider the merits of the parties’ competing contentions. The rule is a general one, because there may be some circumstances where the merits, one way or the other, are so obvious that they should influence the costs issue.⁶

[34] In my view, the merits in this case are not so obviously in the plaintiff’s favour that the presumption in favour of a costs award to the defendant should not apply. The plaintiff was only able to persuade Collins J that it had a serious case to be tried by the narrowest of margins, and one can readily appreciate how the Judge reached that view in the absence of any written contract, signed by the defendants, covering the period in question.

[35] Nor am I satisfied that this is a case where the plaintiff’s abandonment of the proceeding has been brought about by some supervening event which has rendered the proceeding nugatory. There has been no supervening legislation of the kind with which the Court was concerned in North Shore City Council, and nothing akin to the defendant’s notice of intention to issue cessation and closing orders in Olive Francis

_{Retirement Home. The plaintiff filed its proceeding in August
2012 fully aware of}

the difficulties it might face in proving damages, and in the knowledge that any interlocutory injunction it obtained could only remain in place until 5 May 2013.

[36] The difficulty the plaintiff may have faced in proving damages is neither a relevant supervening event nor a factor sufficient to disentitle the defendants to a costs order. The courts regularly assess damages in circumstances where that is not an easy exercise, and I do not regard the fact that the plaintiff may have seen the proceeding as uneconomic after its application for an interlocutory injunction failed as a sufficient factor to justify a “no costs” result.

[37] A contributing factor in the failure of the injunction application was that the plaintiff, although becoming aware of Paulmac’s alleged breaches of its obligations in February/March 2012, did not commence its proceeding until August 2012, and the Judge accepted that Paulmac was likely to face major financial difficulties if it was restrained from trading in roast coffee products for the relatively short period until May 2013.

[38] On Mr Gustafson’s second principal submission, I do not accept that the defendants’ conduct was sufficient to disentitle them to any award of costs. However, I accept that there should be some discount from the costs to which the defendants would otherwise be entitled to reflect their apparent reluctance to produce relevant documents until a few days before the injunction hearing.

[39] I see nothing in this case to justify costs being awarded to the defendants on a band C basis for the filing of the notice of opposition and statement of defence. In my view, the appropriate order is an order for costs on a “2B” basis to the defendants, but with a deduction to take account of the conduct factors referred to in para [38] of this decision.

[40] Costs on a “2B” basis, without any such deduction, would be $9,154, made up as follows:

Filing notice of opposition to
interlocutory application	0.6 days at $1,990 per day	$1,194
Preparation of written submissions	1.5 days at $1,990 per day	$2,985
Appearance at the hearing	0.5 days at $1,990 per day	$995
		$9,154

[41] The next question is what deduction should be made to reflect the defendants’ conduct in failing to provide the amended version of the franchise agreement until only a few days before the injunction hearing. It seems to me that it was not unreasonable for the plaintiff to have served the notice to produce documents when it received the amended version of the agreement – given what Mr McCullough had told the plaintiff in August 2010, the plaintiff had understandable concerns over the authenticity of the document. A more forthcoming attitude from the defendants might have saved unnecessary expense.

[42] Weighing the considerations, I believe the justice of the case will be met by an order for costs (including disbursements) to the defendants in the total sum of

On the Papers
_Judgment:	_{17 March 2015}

High Court of New Zealand Decisions

Cerebos Gregg's Limited v PaulMac Limited [2015] NZHC 507 (17 March 2015)

High Court of New Zealand

Cerebos Gregg's Limited v PaulMac Limited [2015] NZHC 507 (17 March 2015)