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High Court of New Zealand Decisions |
Last Updated: 7 December 2018
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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
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CIV-2015-004-000368
[2018] NZHC 3149 |
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BETWEEN
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AFFCO NEW ZEALAND LIMITED
Plaintiff
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AND
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NZ PREMIUM TRADING COMPANY LIMITED
Defendant
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Hearing:
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16, 17, 18 and 19 July 2018
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Counsel
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R J Hollyman and G P Malone for Plaintiff
A Parkinson and D Evans (McKenzie Friend) for Defendant
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Judgment:
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3 December 2018
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JUDGMENT OF KATZ J
This judgment was delivered by me on 3 December 2018 at 11.00am Pursuant to Rule 11.5 High Court Rules
Registrar/Deputy Registrar
Solicitors: Solutions Law Office, Nelson
Counsel: J Hollyman, Shortland Chambers, Auckland Copy to: A Parkinson (on behalf of the Defendant)
AFFCO NEW ZEALAND LIMITED v NZ PREMIUM TRADING COMPANY LIMITED [2018] NZHC 3149
[3 December 2018]
Table of Contents
Para No.
Witness credibility and reliability [10]
The First Container — factual background [13]
The Shandong Containers — factual background [39]
The Shandong loss of profits claim [51]
The Shandong loss of profits claim — factual background [55]
Discussion [74]
The Shanghai Container — factual background [79]
Summary and conclusion [100]
Introduction
[1] AFFCO New Zealand Limited (“AFFCO”) operates meat processing plants at various locations throughout the North Island and, through a subsidiary, in the South Island. Most of its meat products are exported overseas, including to China.
[2] NZ Premium Trading Company Limited (“NZ Premium”) is a private company that was operated principally by Andrew Parkinson, one of its owners and directors.1 It was a registered exporter of meat products under the supervision of the Ministry of Primary Industries (“MPI”) in New Zealand, and a registered exporter to China under
1 Mr Parkinson represented NZ Premium in this proceeding, with leave of the Court.
the control of AQSIS China (the Chinese authority regulating such imports). NZ Premium is no longer trading.
[3] In 2013 and 2014, AFFCO sold various meat products to NZ Premium for export to China. Difficulties arose with some of the shipments. First, the format of New Zealand health certificates required for importing meat products into China changed. Chinese authorities ceased accepting New Zealand meat exports for a time while their concerns with the health certificates were addressed. Second, one of AFFCO’s meat processing plants was “delisted” by Chinese authorities for a period, which meant that meat from that plant could not exported to China. Certain exports of AFFCO’s meat products by NZ Premium were affected by these events.
[4] The difficulties arising from these events were further compounded by the manner in which NZ Premium operated its business. In particular, NZ Premium made various payments to AFFCO that did not match AFFCO’s invoices, and did not give references for those payments. Further, although AFFCO’s terms and conditions of international trade (“terms and conditions”) prohibited set-offs, NZ Premium would regularly set off amounts it claimed were owing to it, without requesting or waiting for AFFCO to approve the claimed sum and issue a credit note. This made it difficult to reconcile the true state of NZ Premium’s account. AFFCO was at times willing to provide product to NZ Premium without prior payment in full, as staff accepted Mr Parkinson’s assurances that NZ Premium had a credit. The situation became increasingly problematic, however, in the second quarter of 2014. Both parties claimed that the other owed them money. By the end of 2014 their relationship had broken down completely.
[5] In March 2015, AFFCO issued proceedings against NZ Premium in the District Court, seeking payment of $152,729.64. AFFCO prepared a helpful spreadsheet for trial that set out all the sums claimed by both AFFCO and NZ Premium, and included credits for all sums paid by either party. Mr Parkinson accepted that the spreadsheet is comprehensive. Taking into account the various NZ Premium claims in respect of which it has given credit, AFFCO now claims that the balance owing to it is
$118,064.71.
[6] In May 2015, NZ Premium filed a statement of defence denying any liability to AFFCO, and counterclaiming for more than $8 million. Most of NZ Premium’s counterclaim comprises “lost profits” said to arise from various contractual breaches by AFFCO. NZ Premium’s counterclaims necessitated the removal of the proceeding into this Court, on 4 June 2015.
[7] The issues between the parties became more focussed during the course of the hearing, as is often the case. The key issues still requiring determination relate to three different shipments:
(a) The First Container (11602738) — this was a container that had to be returned from China as it contained product that had been produced at AFFCO’s Moerewa plant during the period when that plant was delisted by Chinese authorities.
(b) The Shandong Containers (11669665 and 11672759) — these containers were also denied entry to China due to the Moerewa delisting issue, although they contained product that had been produced prior to the delisting period.
(c) The Shanghai Container (11705415) — this was a container that AFFCO re-routed to Shanghai (from its original destination of Ningbo) and attempted to sell to another customer, as a result of NZ Premium’s failure to pay AFFCO’s invoice for the container.
[8] NZ Premium alleges, in relation to each of these containers (or their replacements) that AFFCO has acted in breach of contract. Its loss of profits claims relate to the Shandong Containers and the Shanghai Container.
The First Container`
[9] The first issue requiring determination is whether AFFCO owes money to NZ Premium in respect of the First Container. In particular, NZ Premium claims that AFFCO is required to reimburse it for certain shipping and storage costs incurred in relation to this container.
Witness credibility and reliability
[10] It is necessary to make some observations at the outset as to witness credibility and reliability. I set out below (and in subsequent sections) the facts as I have found them to be reliably proved. Many of my factual findings are based largely on the contemporaneous documents. Other facts were not in dispute. To the extent, however, that factual matters were in dispute, I generally preferred the evidence of the AFFCO witnesses, including in particular Mr Bailey, AFFCO’s China Sales Manager, to that of Mr Parkinson.
[11] Mr Parkinson is in the unfortunate position of having lost his business. NZ Premium is no longer trading. Not surprisingly, this has caused Mr Parkinson considerable distress. He lays the blame for the loss of his business squarely at the door of AFFCO. This belief has strongly coloured how he now views the relevant events. Key aspects of his evidence were not supported by the contemporaneous record, and were often contradicted by it. Mr Parkinson was frequently unwilling to make concessions in cross-examination, even when such concessions were clearly called for. At other times his evidence was discursive or evasive. He is clearly a man of firm views. Due to his deep emotional involvement in the subject matter of this proceeding, it is my view that he struggled to bring the required degree of objectivity to aspects of his evidence.
[12] The evidence of Mr Bailey (who was AFFCO’s primary witness), on the other hand, was measured and generally objective. His account of the key events was largely consistent with (and supported by) the contemporaneous documents. He was willing to make concessions when appropriate. I found him to be a credible and generally reliable witness.
The First Container — factual background
[13] AFFCO made two sales to NZ Premium in May 2013, for a total sum of
$206,544.50. One of those orders, order 11602738 (the First Container), is the subject of the present dispute. NZ Premium paid $102,068.11 to AFFCO for the First Container, which comprised beef quarters that had been produced at AFFCO’s
Moerewa plant between 19 and 22 April 2013. It was shipped from New Zealand on or about 16 May 2013 and arrived in China on 20 June 2013.
[14] On 11 May 2013, shortly before the product was shipped, China gave notice that it was placing a halt on New Zealand meat imports, as a result of MPI changes to the accompanying health certificates. MPI advised exporters, however, that the issue would likely only affect product certified after 11 May (which would exclude the First Container). Further, officials appeared confident that the issue would be resolved quickly. Ultimately, however, that assessment proved to be somewhat optimistic. A total of 1,323 containers, including the First Container, were held up in Chinese ports until the problem was resolved in early July 2013.
[15] Once that issue was resolved, a second issue arose that prevented the First Container from being cleared for entry into China. MPI advised AFFCO on 4 June 2013 that it had been notified by AQSIQ that AFFCO’s Moerewa processing plant had been delisted from being authorised to produce product for export to China, with effect from 20 April 2013. As a result, product produced at the Moerewa plant from 20 April 2013 onwards could not be imported into China. Neither AFFCO nor NZ Premium were aware of this issue at the time the First Container was shipped. Although the Moerewa plant was subsequently re-listed for export to China, this did not assist, as product produced during the delisting period was still prohibited.
[16] On about 5 August 2013, NZ Premium notified AFFCO that the First Container had been refused entry into China on 23 July 2013. The reason given by Chinese authorities was that the product had been produced during the period in which the Moerewa plant had been delisted. To resolve the situation, Mr Bailey informed Mr Parkinson, also on 5 August 2013, that AFFCO would pay the costs of returning the First Container to New Zealand and would ship replacement product. Mr Bailey’s email stated that:
As you booked Vessel for ME47 Quarter Beef we will need you to arrange to Bring Home. Of course we will reimburse you but as FOB sale2 unfortunately we need you to arrange the return.
[17] Unfortunately, by this stage NZ Premium no longer had possession or control of the original MPI health certificate for the shipment. Mr Parkinson’s evidence as to how NZ Premium lost possession and control of the certificate was somewhat vague. When cross-examined on the issue he denied that NZP or its agents were responsible for the loss, stating that:
No, I’m sorry, no one, no one can prove who lost the health certificate. It could be the agent, could be AQSIQ, could be Customs, could be the New Zealand Embassy, ‘cos they all had them. One of five or six people may have lost it, all out of the control of NZP or their agent.
[18] It appears that the administrative delays and difficulties associated with 1,323 New Zealand containers being held up in Chinese ports may well have been a contributing factor. Whatever the reasons for the health certificate being mis-placed, however, it is clear that it was lost on NZ Premium’s watch. AFFCO had no involvement in clearing the shipment through Chinese customs and bore no responsibility for the certificate going missing.
[19] The loss of the certificate made it substantially more difficult for NZ Premium to arrange to return the First Container to New Zealand, and this resulted in significant delays. Additional costs that arose as a result of the delay included storage costs of the First Container in China from June 2013 to October 2013, and storage of the container in Auckland from November 2013 to May 2014, and ancillary costs such as power charges incurred while the container was in storage in New Zealand. The First Container was not ultimately returned to AFFCO until June 2014.
[20] On 17 January 2014, Mr Parkinson sent AFFCO an invoice for costs of
$66,856.04 associated with the return of the First Container (NZ Premium #002). He proposed, in his covering email, that NZ Premium and AFFCO share the costs, which he anticipated at that stage would be about $76,000 in total. Mr Parkinson proposed that NZ Premium bear $50,000 of that sum, leaving AFFCO to contribute the balance
“Free on Board” means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. Risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onwards.
of $26,000. There was no further dialogue between the parties regarding this proposal, and no agreement was reached regarding it.
[21] The breakdown of the costs claimed in NZ Premium #002 is as follows:
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Shipping costs to China
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$7,646.18
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Paid
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Storage in China from 20 June 2013 to 21 October 2013
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$40,921.24
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Not paid
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Cargo handling fees on reshipment
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$17,422.12
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Paid
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NZ port logistics
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$866.50
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Paid
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TOTAL
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$66,856.04
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$25,934.80
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[22] As set out in the above table, AFFCO paid for those portions of the invoice that related to shipping costs to China, cargo handling fees on reshipment and NZ port logistics. It disputes liability, however, for the storage costs that were incurred in China for the period from 20 June to 21 October 2013. It submitted that the delays in China (resulting in significant storage costs being incurred) were attributable to NZ Premium’s loss of the health certificate, and should therefore be borne by NZ Premium.
[23] NZ Premium issued a second invoice to AFFCO, dated 28 May 2014, (NZ Premium #003) for $77,257. This comprises storage costs in New Zealand between 10 November 2013 and 5 May 2014 (the First Container was returned to AFFCO in early June 2014). A third invoice (NZ Premium #005), dated 3 June 2014, was for $11,155. This was for power charges while the container was stored in New Zealand, prior to its return to AFFCO. AFFCO disputes its liability to pay either NZ Premium #003 or NZ Premium #005.
[24] NZ Premium claims that it is entitled to reimbursement of a total sum of
$155,277.04 (said to be the sum of invoices NZ Premium #02, NZ Premium #03 and
NZ Premium #05),3 plus interest and costs, in relation to the First Container. It accepts that AFFCO has already credited it with $25,934.80 of that sum.
[25] NZ Premium relied in particular on Mr Bailey’s email of 5 August 2013 [set out at [17] above) in which he stated:
As you booked Vessel for ME47 Quarter Beef we will need you to arrange to Bring Home. Of course we will reimburse you but as FOB sale unfortunately we need you to arrange the return.
[26] Mr Parkinson submitted that the phrase “of course we will reimburse you”, in context, refers to all costs (not just shipping costs) incurred by NZ Premium in relation to the First Container from that date (5 August 2013) until it was returned to AFFCO in June 2014.
[27] AFFCO submitted that the additional costs, over and above the $25,934.80 it has agreed to pay in relation to the First Container, were not incurred in shipping the First Container back to New Zealand. Rather, they were additional costs incurred by NZ Premium, initially because of the dispute between the Chinese and New Zealand authorities, and then because NZ Premium delayed returning the First Container and, when it did, it sent the container back without the correct documentation so that it could not be released into New Zealand for many months.
[28] Clause 11 of AFFCO’s terms and conditions provide that:
11 Regulatory compliance
Goods shall as at the date of shipment have been manufactured, processed and packed to the standard required by the health and agriculture authorities in the country at which the Goods are to be discharged from the vessel shipping the same.
[29] AFFCO breached clause 11, because the product contained in the First Container had not been manufactured, processed and packed to the standard required by the health and agriculture authorities of China.
3 The actual sum of the three invoices is $155,268.04.
[30] Clause 14 is also relevant. It provides:
14 Limits of Seller’s liability
The Seller shall not be liable for any act or omissions whether by reason of negligence of otherwise in breach of the Terms and Conditions of Contract unless such breach is notified by the Buyer to the Seller in accordance with the Seller’s claims procedure and the Seller’s liability including but not limited to consequential, special or aggravated loss shall not in any event whatsoever exceed the invoiced price for the Goods in respect of which the breach is notified.
[31] The invoiced price for the First Container was $102,068.11.
[32] The delisting of the Moerewa plant first came to AFFCO’s attention on 4 June 2013, after the First Container had already been shipped. It is not entirely clear when AFFCO learned that the delisting had occurred with effect from 20 April 2013, and that the First Container was therefore affected. There is no evidence, however, that it informed NZ Premium of the issue prior to the First Container being rejected by Chinese customs on 5 August 2013.
[33] AFFCO was contractually required to provide NZ Premium with product that had been processed to the standards required by AQSIQ. It failed to do so. In the event that NZ Premium has suffered loss as a result, it is entitled to damages that will put it in the same situation, so far as money can do it, as if the contract had been performed.4 NZ Premium is only entitled to recover, however, that part of its loss as was at the time of the contract reasonably foreseeable to result from the breach.5 Further, the quantum of damages is limited by the cap in clause 14 of AFFCO’s terms and conditions.
[34] In my view, it was reasonably foreseeable at the time the contract for the sale of the First Container was entered into that there could be delays in clearing the container through Chinese customs. Both parties were aware that China had given notice that it was placing a halt on New Zealand meat imports, as a result of MPI changes to the accompanying health certificates. The parties were hopeful that that
4 Robinson v Harman [1848] EngR 135; (1848) 1 Ex 850, 154 ER 363 (Exch) at 855.
5 Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 (CA) at 539.
issue would be resolved promptly, but there was no guarantee of that. AFFCO should therefore bear the costs of any delays arising out of this issue.
[35] It was not reasonably foreseeable, however, that NZ Premium or its agents would lose (or lose control of) the health certificate. As this was an FOB sale, NZ Premium was responsible for the import and export process and had control of the key documents, including the bill of lading and the MPI health certificate. NZ Premium must bear responsibility for the loss of the health certificate on its watch, and the additional costs that flowed from that.
[36] Applying this approach to the present facts, it is my view that AFFCO should bear responsibility for half of the storage costs incurred in China. The claimed costs relate to the four-month period from 20 June 2013 to 21 October 2013. The First Container was rejected by Chinese customs authorities on 5 August 2013, due to the delisting of the Moerewa plant. AFFCO advised, on the same date, that the container should be returned to it in New Zealand. It is reasonable to allow a period of up to two weeks for NZ Premium to arrange for that. The delays from that point on, however, were due to the loss of the health certificate by NZ Premium or its agents. NZ Premium must bear those losses. As the total costs of storing the First Container in China are $40,921.24, AFFCO is liable to reimburse NZ Premium for $20,460.62 for those costs.
[37] The balance of NZ Premium’s claim under this head relates to storage costs for the First Container in New Zealand for the period from 10 November 2013 to 5 May 2014, and power charges incurred during that period. I have found, however, that the very lengthy delay in returning the First Container to AFFCO is attributable to the lost health certificate. NZ Premium rather than AFFCO must bear responsibility for the losses associated with that. The New Zealand storage costs (and associated power charges) are accordingly not recoverable by NZ Premium. There is nothing in Mr Bailey’s email of 5 August 2013 that requires a different outcome, or suggests that AFFCO had agreed to meet costs that it was not otherwise contractually obliged to.
The Shandong Containers
[38] The second key issue in dispute between the parties relates to two containers that NZ Premium purchased for its client Shandong Taihua Food Co Ltd (“Shandong”).
The Shandong Containers — factual background
[39] NZ Premium ordered the Shandong Containers (orders 11669665 and 11672759) on 28 January 2014 and 3 February 2014 respectively. They were shipped as part of 11 sales made by AFFCO to NZ Premium between September 2013 and April 2014. The orders were placed pursuant to AFFCO’s terms and conditions.
[40] The Shandong Containers each included 260 bags of frozen beef quarters manufactured at the Moerewa plant between 5 April 2013 and 11 April 2013. Mr Bailey informed Mr Parkinson that there was a risk that the containers might not be accepted into China due to the issues that had arisen relating to the Moerewa plant, even though the product was produced outside the period of delisting. Mr Parkinson was willing to proceed nevertheless. The orders were shipped on 24 January 2014 and 14 February 2014.
[41] When the Shandong Containers arrived in China, difficulties arose in clearing customs. AFFCO was keen to rally support from MPI to get the containers through AQSIQ, given that they were not processed during the delisting period. Based on the advice of his contacts in China, however, Mr Parkinson persuaded AFFCO to let the issue go, and instead simply send replacement product. Indeed, Mr Parkinson informed AFFCO by email that he had already confirmed that the product would be returned and replaced “as consequences too great to push the issue”. He said that “I hope this is ok with AFFCO, I’m sure it will be”.
[42] AFFCO agreed to proceed in accordance with NZ Premium’s wishes. In early March 2014, it agreed to cancel the Shandong order and send two replacement containers (orders 11689013 and 11689015). The value of the two cancelled orders was $210,581.29. AFFCO agreed to bear the cost of that order. The parties also agreed that AFFCO would credit NZ Premium $14,616.61 in respect of the shipping costs
incurred by NZ Premium in shipping the Shandong Containers to China. Those costs had been incurred by NZ Premium, because those were FOB sales. NZ Premium invoiced AFFCO (NZ Premium #004) for the shipping costs on or about 28 May 2014, and AFFCO has credited that sum to NZ Premium in its calculation of claim.
[43] In an email exchange on 12 March 2014, Mr Bailey advised Mr Parkinson that the prices for the replacement shipment would be USD 4.85 per kilogram for beef, and USD 4.95 per kilogram for mutton. This pricing was quoted on a CIF (Cost, Insurance and Freight) basis,6 rather than FOB. As a result, the price was calculated in USD rather than NZD (FOB shipments are priced in NZD).
[44] NZ Premium requested, and AFFCO agreed, to ship the replacement orders direct to NZ Premium’s client, Shandong. AFFCO also agreed to pay NZ Premium a commission on the sale of the two replacement containers, which amounted to
$18,788.27 (45 cents per kilogram). That sum has been credited in AFFCO’s calculation of claim. The replacement orders were shipped on 21 March 2014 and arrived in April 2014.
[45] NZ Premium has invoiced AFFCO a further $26,517.31 (NZ Premium #012) in respect of foreign exchange losses and price differentials between the Shandong Containers and the replacement containers. In essence, NZ Premium says that the two replacement containers ended up costing it more than the two original containers, and AFFCO should meet the difference. AFFCO denies liability for this sum.
6 The Incoterms Rules (which apply to AFFCO’s terms and conditions) define CIF as follows:
“Cost, Insurance and Freight” means that the seller delivers the good on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.
The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIF the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.
[46] Mr Parkinson submitted that AFFCO is required to meet the cost differential between the Shandong Containers and the two replacement containers because it has breached clause 11 of AFFCO’s terms and conditions. As I have noted above, that clause provides, inter alia, that goods shall at the date of shipment have met the standard required by the health and agriculture authorities in the country at which the goods are to be discharged from the vessel shipping the same.
[47] It appears from the evidence before the Court, however, that the Shandong containers did comply with Chinese import requirements, as they were processed outside the period of delisting. For that reason AFFCO was keen to get MPI involved in resolving the issue with its Chinese counterpart, and had already taken steps in that direction. AFFCO was requested by NZ Premium, however, not to press the issue. NZ Premium’s preference was to return the Shandong containers and obtain replacement product. AFFCO agreed to this course.
[48] It is clear from the evidence (including the contemporaneous correspondence) that the original contracts were effectively rescinded by agreement. AFFCO agreed to take back the Shandong containers at NZ Premium’s request, and the price of those containers was fully refunded, as were the associated shipping costs.
[49] A new contract was then entered into for the two replacement containers. The price of the new containers was expressly agreed in an email exchange between Mr Parkinson and Mr Bailey on 12 March 2014. The new containers were more expensive than the original containers. This was in part because they were shipped CIF rather than FOB and, as a result, AFFCO was covering the shipping costs. Because shipping CIF includes more cost and risk for the seller, it is inevitably more expensive. It was also agreed that the price of the new containers would be in USD rather than in NZD, and there was no agreed protection from exchange rate risk. Further, the new price included a commission to NZ Premium of over $18,000, which AFFCO has given credit for in its claim.
[50] AFFCO has met its contractual obligations to NZ Premium in respect of the Shandong containers and the two replacement containers. NZ Premium’s claim that it is owed $26,517.31 in relation to this issue fails.
The Shandong loss of profits claim
[51] NZ Premium advanced several counterclaims. Some of these were more in the nature of defences than true counterclaims, in that they explained why NZ Premium says the balance claimed by AFFCO is not payable.
[52] One of the counterclaims which is, however, a true counterclaim is NZ Premium’s loss of profits claim relating to its business relationship with Shandong. NZ Premium alleges that AFFCO failed to supply NZ Premium with 40 containers of product that it had ordered on behalf of Shandong, from which NZ Premium would have made net profits of $505,344.32.
[53] NZ Premium further claims that as a result of AFFCO’s failure to supply it with the required 40 containers, Shandong cancelled 75 other orders for 2014 (with a value of $14,723,551.28), thereby causing NZ Premium to lose profits of $1,148,437. Shandong is said to have also cancelled “orders” for the next two years, 2015 and 2016 (with a value of $78,822,091.66), thereby causing NZ Premium to lose further profits of $7,374,964.05.
[54] There was no evidence at trial of any orders being placed on behalf of Shandong for 2015 or 2016. Although this aspect of the loss of profits claim lacked clarity, I understood Mr Parkinson to be alleging, in essence, that if AFFCO had supplied Shandong with 40 containers in 2014 it is likely that firm orders would have been forthcoming for increasing volumes of product in subsequent years. The losses associated with these potential sales are therefore claimed as consequential losses.
The Shandong loss of profits claim — factual background
[55] NZ Premium was keen to develop its business relationship with Shandong, and envisaged that the initial two Shandong Containers discussed in the preceding section would be followed by many more sales.
[56] On 13 February 2014, NZ Premium placed 40 orders with AFFCO. They were placed pursuant to AFFCO’s terms and conditions and were recorded under sales order confirmations issued by AFFCO. The 40 orders were to be shipped to Shandong progressively from March to May 2014.
[57] In February 2014, Shandong representatives visited New Zealand. They met with AFFCO and NZ Premium representatives, at AFFCO’s head office, on 25 February 2014. There was a dispute at trial as to precisely what happened at that meeting, and at a further meeting the following day. Mr Bailey and Henry Fu (AFFCO’s sales co-ordinator) gave evidence on behalf of AFFCO. Mr Parkinson gave evidence on behalf of NZ Premium. Overall, I preferred the evidence of the AFFCO witnesses on this issue, in large part because their account is significantly more consistent with the contemporaneous documentation than the account given by Mr Parkinson.
[58] The first contemporaneous document of note is a document prepared by Shandong headed “New Zealand Beef and Lamb business outline of negotiations – February 2014”. Mr Parkinson produced this document at trial. He said that the Shandong representatives gave it to him at the conclusion of the 25 February 2014 meeting. On its face, the document appears to be an outline of the speaking notes or negotiation points that the Shandong representatives wished to make at the meeting. The document outlines Shandong’s market strategy and lists “the main issues currently”. The first point on Shandong’s list of issues is:
1. Price. The cost is always the most important part of any business. China is the market with lots of competitor. We all know we get what we paid, we wish your company may supply the value products to us. The price will decide the volume of our import.
Another issue identified was that as the arrival of the first two containers had been delayed, Shandong now had permit issues.
[59] The 25 February meeting was attended by Mr Parkinson, Mr Bailey, Mr Fu, Mark Smith (AFFCO’s then manager) and the Shandong representatives. I accept the evidence of the AFFCO witnesses that during the course of the meeting, the Shandong representatives expressed an unwillingness to proceed with any orders, purportedly
because they did not believe that the quality of AFFCO’s beef was good enough for them. AFFCO’s view was that Shandong’s real issue was price and had nothing to do with quality. The Shandong representatives denied this when it was put to them, at the meeting, albeit I note that “price” was the first issue listed in their “negotiation outline” document. The meeting became quite heated, as Mr Smith appears to have taken umbrage at what he saw as false criticisms of the quality of AFFCO’s product. The Shandong representatives said they were not going to proceed and Mr Smith called the meeting to an end.
[60] Mr Parkinson spoke to Mr Bailey after the meeting and told him that he would try and sort something out overnight and let Mr Bailey know the outcome in the morning.
[61] At 7.43 am the next morning, Mr Parkinson emailed Mr Bailey, confirming that after Shandong’s visit the previous day he had a “major problem” with the quarter beef order “partly due to what they saw and price”. Mr Parkinson informed Mr Bailey that he had delayed his trip home so he could meet with Mr Bailey to “work out a solution and keep our good relationship with you/AFFCO.”
[62] Mr Parkinson met with Mr Bailey later that morning and informed him that he had not been able to persuade the Shandong representatives to change their minds, and so would not be able to proceed with the order for 40 containers. He said that he would keep trying to sort out a deal and would keep AFFCO informed.
[63] That day, AFFCO cancelled the remaining 30 Shandong orders in its system. Ten of the 40 orders had previously been cancelled in the system, on 24 February, the day prior to AFFCO’s meeting with Shandong representatives. Mr Bailey explained at trial that AFFCO was, in essence, simply trying to keep product moving through its shipping system during its peak production period. There was ample product available at that time, so that if Shandong had confirmed on 25 February 2014 that it did indeed want the full 40 containers within the next couple of months, and arranged payment for those containers, there would be no difficulty in fulfilling such orders.
[64] On 28 February, Mr Parkinson emailed Mr Bailey to advise that he had a new agreement with Shandong “to keep the 20 quarter beef and 20 mutton deal”. He said that Shandong’s chairman would be signing the deal that day, but that he (Mr Parkinson) had made the contract subject to approval by AFFCO. Mr Parkinson said that he would advise once the deal was completed, and would come and see AFFCO the following Monday (3 March 2014). Mr Parkinson claimed at trial that the “new agreement” he was referring to did not relate to the original 40-container order, but was an entirely new order, in addition to the previous 40-container order. His evidence on this issue lacked credibility and I reject it.
[65] The proposed meeting between Mr Bailey and Mr Parkinson on 3 March 2014 was superseded by events, as on that date Chinese customs officials rejected the two initial Shandong containers (as discussed in the preceding section) due to the Moerewa delisting issue. As a result, Mr Parkinson sent Mr Bailey an email advising him of the problem with the Shandong containers and that “in the meantime Shandong has put on hold the beef quarters order until they get the two containers paid for and problem with AQSIQ sorted”.
[66] Also on 3 March 2014, after receiving advice from Mr Parkinson that the two Shandong containers had been rejected by Chinese customs, Mr Bailey emailed Rowan Ogg, AFFCO’s operations manager, and requested that he put pressure on MPI to talk to AQSIQ to get the product into China. His email concluded that this was “critical as we will have another 20 [containers] to ship to this client which are now being produced”. In cross-examination, Mr Bailey said that this was a “white lie” to put pressure on Mr Ogg “to get going with MPI.” Mr Parkinson’s role was in sales, whereas Mr Ogg was in operations. Mr Ogg therefore had the relationship with MPI. Mr Bailey wanted him to prioritise getting MPI to sort this issue out. Although AFFCO did not have a confirmed order from Shandong at that stage for a further 20 (or 40) containers, Mr Bailey appears to have remained hopeful that such an order would be forthcoming, if the issues with the initial two Shandong containers could be resolved.
[67] On 6 March 2014, Mr Parkinson, in a further email to Mr Fu at AFFCO, stated that “my client has put on hold all other shipments until this [receipt of the two orders
replacing the Shandong Containers] is sorted and he gets the two containers he has already paid for”.
[68] On 10 March 2014, Mr Parkinson advised Mr Bailey by email that Shandong could not get their full import permit for the 40-container order until their first permit, relating to the initial Shandong Containers’ importation, was complete. Shandong apparently needed to import the quantity allowed in the first permit before it could apply for the larger permit, and therefore shipping dates could only be determined when the initial orders were released or replacements sent and received. (I note that this issue was also noted in Shandong’s “outline of negotiations” paper that was provided to Mr Parkinson by the Shandong representatives immediately following the 25 February meeting.)
[69] On 29 April 2014, Mr Bailey emailed Mr Parkinson asking whether stock that AFFCO was holding was required by NZ Premium. If not, Mr Bailey said he was heading to China on 11 May and would sell it. Mr Parkinson said in reply that:
The product [the two replacement containers sent to Shandong] was cleared from wharf last Friday. We can follow that up now. Meeting with Ken and others this weekend, so will get full update now.
Can you give me update of product that ready for sale, I’m working 6 containers qrter beef, I assume all mutton gone by now.
[70] Mr Bailey replied later that day, and said that AFFCO had been sitting on mutton until NZ Premium advised it did not want it—”[a]nyhow just as long as you aware we will have to take sales when I’m in China as we can’t sit on such a volume of product as has cost a fortune in slow stock turn.”
[71] On 7 May 2014, Mr Parkinson emailed Mr Bailey advising that the two replacement containers sent to Shandong (to replace the two Shandong Containers rejected in March) had not yet cleared Chinese customs. He confirmed that Shandong “are fully aware of your deadline to confirm orders and shipping dates as being this Friday”. However, an extension was requested to the middle of the following week “so they can see the product in there (sic) factory after it is released”. Mr Parkinson concluded that he hoped that AFFCO would agree to extend the deadline “as I’m sure it will all be positive”.
[72] Mr Bailey responded by email on the same date, advising that AFFCO had sold all quarter beef, and any new product would be at 4.70USD/kg CIF—”[a]s you could appreciate if we held product this long we would be broke”. In terms of a possible mutton sale, he advised that AFFCO “could try to come up with Mutton 6 way but Market Levels now $5.00USD/kg CIF and we would need quick shipment”.
[73] Mr Parkinson responded that he would advise Shandong accordingly and observed that “the rejection of [the] first two containers as not eligible for entry to China has cost us both a lot in lost sales and revenues”. He added that:
Unfortunately the delays were way out of our control and I believe that these people will become good customers for both of us in the future. They unfortunately have had to wait almost 6 months to get there (sic) first order.
I totally understand not being able to hold stock, especially quick moving products and appreciate what you have and are doing for us to develop our market for full range of cuts.
[74] NZ Premium claims for lost profits of $505,344.32 in respect of the 40 containers ordered on behalf of Shandong for delivery in 2014, which it says AFFCO failed to supply, in breach of contract. In addition, it claims just over
$8.5 million in lost profits for orders that it claims Shandong would have placed in subsequent years, but for AFFCO’s breach of contract.
[75] NZ Premium has failed to prove, however, that at any time after 25 February 2014 it had an unconditional contract with AFFCO for the provision of 40 containers of product to Shandong. The contemporaneous documents tell an entirely different story. Although 40 orders were initially placed, those orders were cancelled on 25 February 2014. Mr Parkinson clearly worked hard, for several months, to try and get the Shandong deal back on the table, or to secure an alternative deal. AFFCO was fairly patient throughout this process. By early May 2014, however, time had run out. The season was nearing an end and AFFCO could no longer hold back product for a possible sale to Shandong that might never eventuate. Mr Parkinson confirmed that Shandong “are fully aware of your deadline to confirm orders and shipping dates as being this Friday”. Mr Parkinson was unable to obtain an extension to that deadline, and did not confirm an order prior to it (or indeed subsequent to it).
[76] Shandong wanted to wait and assess the first two containers it received from AFFCO before confirming any further orders. Indeed, Shandong’s position was that it could not obtain an import permit for a further 40 containers until it had received the two initial containers. Unfortunately, for reasons beyond the control of either NZ Premium or AFFCO, delivery of the two initial orders was delayed by several months (as discussed in more detail at [40]–[41] above).
[77] As the original 40 orders had been cancelled, there was no contractual obligation for AFFCO to supply the product. Even if the orders had only been suspended or put “on hold”, as Mr Parkinson suggested at trial, at no time did NZ Premium lift the suspension and request that the orders now be shipped. No dates for shipment were ever agreed and no payments were tendered by NZ Premium.
[78] AFFCO has not breached any contractual obligation that it owed to NZ Premium in relation to the Shandong orders. AFFCO is accordingly not liable to NZ Premium for its alleged loss of profits on the 40-container order that was cancelled in February 2014. Nor is AFFCO liable for any loss of profits that may have resulted from sales to Shandong by NZ Premium in subsequent years.
The Shanghai Container
The Shanghai Container — factual background
[79] On 29 April 2014, NZ Premium purchased a shipment of beef (order 11705415) from AFFCO for delivery to Ningbo, China (“the Shanghai Container”). The sale was pursuant to AFFCO’s terms and conditions. NZ Premium purchased the Shanghai Container for on-sale to Zheijiang Cereals, Oils and Foodstuffs Import & Export Co Ltd (“Zheijiang”).
[80] The container was shipped on 4 July 2014, prior to AFFCO receiving payment for it. The reason for this, in large part, was that AFFCO found NZ Premium’s account difficult to reconcile, for the reasons I have set out at [4] above. Mr Parkinson repeatedly asserted that AFFCO owed him money (rather than the reverse) and this appears to have caused some confusion.
[81] AFFCO’s terms of conditions (clause 9.2) required that AFFCO’s invoices to be paid without setoff. Credit notes therefore needed to be issued by AFFCO before deductions could be made from any amounts owing. Mr Parkinson, however, unilaterally applied significant setoffs without first receiving approval from AFFCO, and did not hold AFFCO credit notes in relation to those deductions.
[82] AFFCO’s then Marketing Manager, Dale Kwok, met with Mr Parkinson to discuss the issues with the NZ Premium’s account on or about 9 July 2014. Mr Kwok followed up with an email later that day, emphasising the importance of following proper processes. He stated that making deductions:
...without prior approval or advice is completely unacceptable and contrary to AFFCO protocol...AFFCO requires all invoices to be paid in full with any possible claim situations arising, settled afterwards as a separate situation. We stand irrevocably by this principle and as advised are prepared to test this legally.
[83] AFFCO required NZ Premium to forthwith pay various amounts it had purported to set off (totalling $148,472.65) and to provide a full explanation of any sums claimed, which AFFCO would then consider.
[84] On 24 July 2014, Mr Kwok sent a further email to Mr Parkinson, expressing concern that there was still no commitment to pay the deductions that NZ Premium had made. AFFCO’s concerns increased further when Mr Kwok learned that NZ Premium had not yet paid for the Shanghai Container, which by then had almost arrived in China. NZ Premium had requested that AFFCO hand over the bill of lading, but Mr Kwok advised him that AFFCO was not willing to do that without first receiving payment. Mr Kwok told Mr Parkinson that AFFCO had lost confidence in NZ Premium. He said that unless the previous deductions/set offs were paid, along with the invoice for the Shanghai container, AFFCO would instruct the shipping company to return the Shanghai Container to New Zealand.
[85] NZ Premium did not make the required payments. Accordingly, on 26 July 2014, when the Shanghai Container arrived in Ningbo, it was not unloaded. Instead, AFFCO arranged for the container to be sent on to Shanghai, where it arrived on 28 July 2014. AFFCO cancelled its contract with NZ Premium in relation to the
Shanghai Container, pursuant to its terms and conditions. AFFCO then made arrangements to sell the container to another buyer. An impasse arose, however, as NZ Premium had possession of the MPI health certificate required to import the container into China and refused to provide this to AFFCO. AFFCO, on the other hand, had the bill of lading, and would not provide this to NZ Premium. Neither party could import the container into China without the co-operation of the other. The container was therefore sent to a holding area in Shanghai for containers that did not have correct documentation.
[86] Lawyers became involved. A resolution was reached on 18 August 2014, as recorded in an email to NZ Premium from AFFCO’s in-house counsel on that date:
[87] In their email in reply, NZ Premium’s lawyers recorded their understanding that upon AFFCO receiving confirmation of payment from NZ Premium, it would (amongst other things) immediately provide NZ Premium with a copy of the bill of lading to allow NZ Premium to initiate the customs clearance process. Further, once payment for the container had cleared, AFFCO was to release the original bill of lading to NZ Premium in order for NZ Premium to collect the product in Ningbo.
[88] On 20 August 2014, NZ Premium paid for the Shanghai Container. A problem arose, however, as it was discovered that delivery to Ningbo would not be straightforward. NZ Premium therefore decided to clear customs in Shanghai, rather
than Ningbo. NZ Premium subsequently informed AFFCO, on 24 September 2014, that:
The cost to get the container removed from the official system at Ningbo and make it a container “awaiting documents for clearance in Shanghai” is NZD 24,150.00 (gst incl).
We will invoice AFFCO showing “consultation and negotiation fee” for the above amount.
For obvious reasons a detail invoice from China will not be sent to cover the account. All other clearance costs will be as per normal commercial transactions and covered by invoices.
[89] On the same date, NZ Premium invoiced AFFCO for that amount (invoice NZ Premium #011). AFFCO paid that invoice.
[90] The Shanghai Container was eventually released by Chinese customs on 16 November 2014. On 28 November 2014, NZ Premium issued two further invoices for further costs incurred in clearing customs—NZ Premium #0117 ($1,484.04) and NZ Premium #015 ($28,537.38).8 Invoice #015 was for “customs sluggish”, “container detention”, “demurrage” and “agency handling charge”. Invoice #011 was for documentation fees.
[91] NZ Premium submitted that AFFCO was required to reimburse it for all of its costs in arranging the clearance of the Shanghai Container through Chinese customs. It relied on the 18 August 2014 agreement (set out at [86] above) and further noted that in Mr Parkinson’s subsequent email of 24 September 2014 (seeking reimbursement of
$24,150), he had stated that “all other clearance costs will be as per normal commercial transactions and covered by invoices”.
[92] NZ Premium also claims that the diversion of the goods to Shanghai and delays encountered in Chinese customs’ clearance of the order “by 112 days” caused its buyer, Zheijiang, to cancel other orders valued at $746,940. NZ Premium alleges that it
would have derived profits of $56,020.50 from such orders, and seeks judgment for that sum.
[93] The sale of the Shanghai container was made on a CIF basis. AFFCO was therefore responsible for paying the costs and freight charges necessary to transport the goods to the port of destination specified by the purchaser, together with insurance for the goods. Under the CIF model, AFFCO’s responsibility ended once the goods reached NZ Premium’s port of choice. NZ Premium was then responsible for all other charges (including port storage fees and customs clearance fees) incurred to enable the goods to be cleared from the port. The key issue is whether that position changed as a result of the 18 August 2014 settlement agreement. That agreement must be interpreted in its factual context, which I have set out above.
[94] Pursuant to clause 9 of AFFCO’s terms and conditions, NZ Premium was required to pay for the Shanghai Container prior to its dispatch from New Zealand. Clause 9.2 specified that “the Buyer shall not, for any reason, withhold payment nor make any deduction or set off”. NZ Premium did not pay for the goods as required. When pressed for payment (after the goods were already en route to Ningbo), NZ Premium asserted a set-off. NZ Premium had no contractual entitlement to do so. Further, its belief that it had a set-off available that was sufficient to cover the costs of the Shanghai Container was erroneous.
[95] Clause 13 of the terms and conditions provided that “no property in the Goods shall pass to the Buyer until payment is made in full to the Seller.” Accordingly, at all times prior to NZ Premium paying for the goods on 24 September 2014, the Shanghai container was owned by AFFCO. As I have noted above, however, NZ Premium had the health certificate required to clear the container through customs and refused to return this to AFFCO. This put AFFCO in an untenable position. Although it owned the goods, and had another customer willing to purchase them, it could not clear them through customs. Nor could the goods leave China. One option was for AFFCO to abandon the goods, leaving them to be destroyed by Chinese authorities, and then sue
NZ Premium for its losses. Alternatively, AFFCO could try and work with NZ Premium to try and resolve the situation. It elected to follow the latter course.
[96] NZ Premium’s position, on the other hand, was that it did not feel it should have to pay for the container, due to set-offs that Mr Parkinson (wrongly) believed were available to it. But it could not clear the container through customs as it did not have the bill of lading. NZ Premium was keen to resolve the situation, as it had a customer awaiting the shipment. Further, the customer was an important one to NZ Premium, as evidenced by NZ Premium’s significant claim for consequential loss of profits in respect of potential future orders from Zheijiang.
[97] Absent the 18 August agreement, it is clear that NZ Premium (rather than AFFCO) would have been contractually required to pay the costs included in invoices NZ Premium #011 ($1,484.04) and NZ Premium #015 ($28,537.38) as they related to the costs of clearing the Shanghai Container through Chinese customs, which was a buyer cost. The issue is whether there is anything in the 18 August agreement that alters that position. In my view, there is not. In relation to the Shanghai Container, that agreement provided that:
3. The contract for the current product sitting in Shanghai (ordered by NZP on 29 April 2014) will be performed as originally intended. NZP will pay the invoiced amount of USD$78,465.07 to AFFCO immediately. Once that sum is received by AFFCO, it will release the bill of lading to NZP. NZP will not be liable for any extra costs incurred by AFFCO due solely to the delay in performance of the contract. AFFCO will not be liable for any loss or costs incurred by NZP due to the delay in performance of the contract.
(Emphasis added)
[98] The parties expressly agreed that the contract would be “performed as originally intended”. As a result, the costs associated with clearing Chinese customs were required to be met by NZ Premium. The agreement further makes it clear that AFFCO “will not be liable for any loss or costs incurred by NZ Premium due to the delay in performance of the contract.” Hence, even though some or all of the increased costs associated with clearing customs were likely attributable to the delay in performance of the original contract, NZ Premium was contractually required to bear these.
[99] It necessarily follows that NZ Premium’s loss of profits claim in relation to the claimed 2015 orders from Zheijang is also untenable. Even if Zheijang had placed “confirmed 2015” orders as NZ Premium claimed, any subsequent cancellation of those orders was not caused by any breach of a contractual obligation by AFFCO. Accordingly, there is no basis for NZ Premium’s claim for consequential losses.
Summary and conclusion
[100] AFFCO (unintentionally) breached clause 11 of its terms and conditions in relation to the First Container, because the meat products in that container were not processed and packed to the standard required by China’s health and agriculture authorities. AFFCO was accordingly required to meet NZ Premium’s losses in relation to the First Container (including costs associated with returning it to New Zealand), to the extent that such losses were a reasonably foreseeable consequence of its breach. This is subject to the contractual cap (the price of the goods) in clause 14.
[101] The delay in clearing the First Container through Chinese customs, due to changes made by MPI to the New Zealand health certificates, was reasonably foreseeable. The parties were aware of this issue prior to shipment. The delay associated with NZ Premium or its agents losing possession and control of the MPI health certificate for the container was not, however, reasonably foreseeable.
[102] NZ Premium is accordingly entitled to an additional credit of $20,460.62 in respect of the First Container, covering storage costs in China up until 20 August 2013. The further delays after that time were due to the loss of the health certificate. This additional credit reduces the balance of NZ Premium’s account from $118,064.71 to $97,919.09.
[103] NZ Premium’s claim for price differences and exchange rate losses in respect of the Shandong Containers and their replacements is misconceived. The goods contained in the Shandong containers did not breach clause 11 of AFFCO’s terms and conditions. Nevertheless, at NZ Premium’s request, AFFCO agreed to take them back and ship replacement product. The price of the Shandong Containers, and the associated shipping costs, was fully refunded to NZ Premium. A new contract was
entered into for the two replacement containers, at a different price. AFFCO has not breached its contractual obligations to NZ Premium in relation to either the Shandong containers or their replacements.
[104] NZ Premium did not have an unconditional agreement with AFFCO for the supply of 40 containers of product to Shandong at any time after 25 February 2014. It is apparent from the contemporaneous documents that the Shandong order was cancelled on that date and never reinstated. No dates for shipment were ever agreed or provided and no payments were tendered. AFFCO has not breached any contractual obligations it owes to NZ Premium in relation to the Shandong orders. It follows that AFFCO is not liable to NZ Premium for NZ Premium’s alleged loss of profits on prospective sales to Shandong.
[105] AFFCO has met all of its contractual obligations in relation to the Shanghai Container. The parties agreed on 18 August 2014 that the contract in relation to that shipment would be performed as originally intended, and that AFFCO would not be liable for any loss or costs incurred by NZ Premium due to the delay in performance the contract. The costs of clearing customs in China (and associated costs) were costs for the buyer (NZ Premium) to bear.
Result
[106] AFFCO is entitled to judgment in the sum of $97,919.09, together with interest from and including 22 April 2014 until the date of judgment, at the rate of 5 per cent per annum.9 I order accordingly.
[107] NZ Premium’s counterclaims are dismissed.
[108] It is my preliminary view that AFFCO, as the successful party, is entitled to an award of costs on a 2B scale basis. I encourage the parties to endeavour to agree costs between themselves, based on this indication. As I have not heard submissions on costs, however, leave is reserved to file memoranda if costs cannot be agreed. Any
memorandum on behalf of AFFCO is to be filed and served by 18 December 2018. Any memorandum in response from NZ Premium is to be filed and served by 25 January 2019.
Katz J
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URL: http://www.nzlii.org/nz/cases/NZHC/2018/3149.html