BASF NEW ZEALAND LIMITED v BRIAN ROBERTS (1998) LIMITED [2020] NZCA 634

BASF NEW ZEALAND LIMITED v BRIAN ROBERTS (1998) LIMITED [2020] NZCA 634 [8 December2020]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA201/2020[2020] NZCA 634BETWEEN BASF NEW ZEALAND LIMITEDAppellantAND BRIAN ROBERTS (1998) LIMITEDRespondentHearing: 9 November 2020Court: Courtney, Woolford and Mander JJCounsel: T B Fitzgerald and B J Dominikovich for AppellantP J Napier and A M Ryder for RespondentJudgment: 8 December 2020 at 3.30 pmJUDGMENT OF THE COURTThe appeal is dismissed.____________________________________________________________________REASONS OF THE COURT(Given by Woolford J)[1] On 17 March 2020, Associate Judge Johnston set aside a statutory demandissued by BASF New Zealand Ltd (BASF) against Brian Roberts (1998) Ltd (BRL).1BASF now appeals against the Associate Judge's decision.21 Brian Roberts (1998) Ltd v BASF New Zealand Ltd [2020] NZHC 537 [High Court judgment].2 BASF applied for leave to amend its notice of appeal to include a fresh ground of appeal relatingto an exclusion clause in its general terms and conditions, but did not seek to advance that at thehearing of the appeal.[2] BASF is a specialist supplier of automotive paint and associated products.BRL is a panel beating business. The statutory demand relates to an alleged debt thatBRL owes BASF in respect of the termination of a fixed-term exclusive supplyarrangement for automotive paint and associated colour-matching and otherequipment.[3] BRL disputes that it is obliged to comply with a statutory demand. It says itwas entitled to terminate the agreement without paying the associated termination feebecause the products supplied by BASF during the 18-month tenure of the agreementwere not of merchantable quality.[4] The essential issue in the appeal is whether it was open to the Associate Judgeto find that there was a substantial dispute about the statutory demand or an apparentcounterclaim. It is for BASF to persuade us there is an error. If so, it will be entitledto a fresh assessment in terms of Austin, Nichols & Co Inc v Stichting Lodestar.3Facts[5] BASF and BRL entered into a "Supply and Provision of Paint and OtherEquipment Agreement" on or about 4 August 2016. The agreement provided forBASF to be the exclusive supplier of automotive paint and associated products to BRLfor a period of five years. The parties agreed an annual minimum purchaserequirement of $132,000 (excluding GST) and the supply of certain associated goodsand equipment by BASF to BRL at no cost.[6] Clause 5 of the agreement provided that sales of BASF products were to be onthe basis of BASF's "General Terms and Conditions of Sale". Clause 5 furtherprovided that if a particular product did not "suit the requirements of [BRL], BASFreserves the right to discuss this with the [BRL] to ensure a satisfactory outcome forboth parties". The agreement did not provide for any other dispute mechanism orprocess for dealing with complaints.3 Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141.[7] Clause 7 of the agreement provided that if BRL breached the agreement orfailed to fulfil the annual minimum purchase requirement, BASF was entitled toterminate the agreement by 14 days' written notice and to demand the payment of anagreed amount, depending upon the remaining term of the agreement. If cancellationtook place in Year 2, the payment required was $60,556.[8] Clause 6 of the agreement concerned price and referred specifically to the pricefor Glasurit paint products. Glasurit is BASF's premium paint product offering.According to BASF, the Glasurit paint range is used extensively throughoutNew Zealand and accounts for about 15 per cent of automotive paints supplied inNew Zealand.[9] BRL ordered and used the Glasurit paint products for over 18 months — fromAugust 2016 to April 2018. It paid for each order. BASF says that BRL did not raiseany performance issues with the paint during that time.[10] Although there is no contemporaneous documentary record of BRL'srepudiation or BASF's recession or termination, it is common ground that BRLrepudiated (or terminated) the agreement in April 2018, that BASF treated therepudiation as wrongful and that both parties treated the agreement as having beenterminated from that point. There was no dispute that the termination was in Year 2of the agreement, such that if BRL was not entitled to terminate the agreement, thenits termination would be a repudiation of the agreement or an anticipatory breach ofthe exclusivity commitment or minimum supply obligation, in which case BASF wasentitled to the Year 2 termination payment of $60,556.[11] In or about November 2018, BASF issued a tax invoice for payment of$58,623.55 (including GST). That amount is the $60,556 owing in respect oftermination in Year 2, less a credit for the unused goods that BASF uplifted from BRL.No payment was received.[12] BASF subsequently referred the matter to its debt collection agent. Thesolicitors for the debt collection agent issued a letter of demand for the amounts owedby BRL on 26 July 2019. No response was received to that letter. The statutorydemand was issued on 9 September 2019. The amount demanded was $49,843, aftera further credit note was issued by BASF for returned stock on 2 February 2019.The Associate Judge's decision[13] The Associate Judge considered the case to be finely balanced. On the onehand, BRL's evidence was not especially strong. It had filed affidavits from BRL'sdirector, Mr A J Wijdeven, BRL's paint shop manager, Mr T Smuts, and the owner ofanother panel and paint shop, Mr M Young. The Associate Judge noted that theaffidavit evidence addressed matters in general terms without providing specificinformation as to the nature of the difficulties BRL says it had with BASF's paintsystem and without explaining exactly what steps it took, nor who had responsibilitywithin the BRL for dealing with BASF in connection with the issue when complaintswere raised and the terms in which they were raised.[14] The Associate Judge also noted that there was a distinct lack ofcontemporaneous material recording such complaints. It also seemed from BASF'sevidence that its Glasurit paint system was a well-established one, with a significantshare of the New Zealand market and the extravagant assertions made by Mr Wijdevenand Mr Smuts that it was an inherently defective product seemed improbable at best.4[15] The Associate Judge went on to say that against all those factors the owner andmanager of a Pukekohe paint and panel shop was not likely to invest time and effortin generating correspondence with half an eye to having a contemporaneous record forcourt proceedings. Additionally, when BASF's debt collectors first raised thepossibility of BASF being entitled to substantial liquidated damages, Mr Wijdeven'sfirst response and description of his view of matters was quite consistent with theposition BRL took on this application. The Associate Judge noted that it was fair toadd that, between August 2016 and April 2018, it was obvious that Mr Wijdeven andMr Smuts genuinely believed that, for whatever reason, the BASF Glasurit paintsystem was proving troublesome. Although he did not put a great deal of weight onthis, there was also the supporting evidence of Mr Young, who says that in his4 High Court judgment, above n 1, at [49].Hamilton-based panel and paint shop he too experienced problems with BASF'sGlasurit paint system.5[16] The Associate Judge concluded that although the case was finely balanced, inthe end, the view he had come to was that the ultimate issue, whether BASF's Glasuritpaint system as sold by BASF to BRL was of merchantable quality was an issue thatshould be determined at trial. He set aside BASF's statutory demand.6Appellant's submissions[17] BASF submits that the statutory demand ought not to have been set aside. Itsubmits that the evidence filed by BRL had not established even a substantial disputethat BASF breached an implied duty that the products supplied would be ofmerchantable quality. Even if BASF did breach the warranty (which it says isinarguable), that would not affect BRL's obligation to pay the amount demanded inthe statutory demand. At best, BASF says that it would establish a counterclaim.However, even if it had established a substantial dispute about breach, BRL has notestablished a substantial dispute that the breach caused a financial loss and certainlynot one of an amount capable of offsetting the counter-claim.[18] BASF further submitted that the proposition that the Glasurit paint productsare not of merchantable quality is inherently implausible because of the widespreaduse in the market. Furthermore, the evidence filed by BRL does not come close toovercoming that inherent implausibility because of BRL's own use of the productsover 18 months and the lack of detail or corroborating evidence in circumstanceswhere BRL could otherwise have been expected to provide it.[19] BASF submits that it is common ground that BRL ordered, paid for, and usedthe Glasurit paint products for about 18 months. BASF says that this ought to bedispositive of a claim that the products were not of merchantable quality. BRL triesto address this by saying that it experienced problems with the product immediately5 At [50].6 At [51].and complained promptly. However, this evidence amounts to little more than anunsupportive assertion and does not establish a substantial dispute.Discussion[20] Section 290(4) of the Companies Act 1993 enables a court to set aside astatutory demand if it is satisfied that:(a) there is a substantial dispute whether or not the debt is owing; or(b) the company appears to have a counterclaim, set-off, or cross-demandand the amount specified in the demand less the amount specified in thecounterclaim is less than the prescribed amount; or(c) the demand ought to be set aside on other grounds.[21] The use of the word "satisfied" calls for the exercise of an evaluative judgmentby the Court, and it is inapt to import notions of the burden or standard of proof.7[22] It is not a high threshold. As stated by the High Court in Freemont Design andConstruction Ltd v W Stevenson & Sons Ltd:8[8] A Court is not required to accept uncritically any or every disputedfact. However the Court will not reject even dubious affidavit evidence, eventhough there must be suspicion of good faith of the deponent if there is anessential core of complaint that support a defence. In essence, the inquiry iswhether or not the assertion made passes the threshold of credibility.[23] The key question in this appeal is whether the Associate Judge was right toconclude that BRL had passed the threshold of credibility in asserting either a disputeas to whether the debt is owing or a counterclaim, set-off or cross-demand in asummary hearing in which the dispute itself was not to be tried. BRL was not requiredto prove it had a good defence, merely that it was arguable as a matter of law.7 Mega Project Holding Ltd v Orewa Developments Ltd [2020] NZCA 111 at [53].8 Freemont Design and Construction Ltd v W Stevenson & Sons Ltd HC Auckland CIV-2005-404-4807, 20 April 2006 (citations omitted).[24] While the Associate Judge acknowledged that the case was finely balanced, wedo not consider that he fell into error in reaching an evaluative judgment that thestatutory demand should be set aside. BASF can still have its day in court, but it isunable to rely on the summary procedure of issuing a statutory demand. The statutorydemand procedure is set out in the Companies Act under the heading "Companyunable to pay its debts" in pt 16, "Liquidations". There is no suggestion that BRL isunable to pay its debts. It just disputes it is indebted to BASF.[25] We have taken the following matters into account in making our assessment:(a) The Associate Judge found that both BRL's director and paint shopmanager genuinely believed that "for whatever reason the BASFGlasurit paint system was proving troublesome".9(b) Detailed descriptions of the difficulties with the Glasurit paint productswere given by both BRL's director and paint shop manager. AlthoughBASF said that the difficulties could be attributed to a lack ofunderstanding of how to use the BASF equipment and products, it isevident there have been problems.(c) When BRL's director was first contacted by BASF's debt collectors, hisresponse was quite consistent with the position BRL took on theapplication.(d) Although BASF's evidence was that the Glasurit range of paintproducts have a 15 per cent market share in New Zealand and hencemust be of merchantable quality, BASF's credit manager, Mr I A Yeoell,stated in an affidavit, "Of course, as with any product (and perhapsespecially paint), it is possible that issues can arise with particularbatches. When that happens, the customer raises the issue with us andthe issue is addressed".9 High Court judgment, above n 1, at [50].(e) There is undisputed evidence that, on at least two occasions, BRLrequested assistance because staff were having issues with the Glasuritpaint products. BASF responded, first, by organising training for BRLstaff and, secondly, by replacing some of the equipment previouslyprovided to BRL.(f) BRL's paint shop manager said, apart from the two occasionsacknowledged by BASF, he was in contact with Mr B Hanson, fromBASF, "on a weekly basis" for help and assistance, but did not receiveit (this evidence was in a reply affidavit and BASF has not had theopportunity to respond).(g) Evidence was provided in the form of an affidavit from another paneland paint shop owner, who stated that Glasurit paint products "werepoor quality, and particularly hard to work with". He said they wereconstantly redoing paint jobs because of issues they experienced withcolour matching and the impact on the overall application of theproduct.[26] We do not need to determine whether the issue is properly characterised as adisputed debt or a counterclaim. Although BASF criticises the assertion by BRL thatit has lost "hundreds of thousands of dollars" as a result of alleged defects in the BASFpaint products as unsubstantiated because financial statements have not been provided,we are prepared to accept that figure in the context of all the affidavit evidence assufficient for a summary procedure in which the essential core of a complaint mustpass a threshold of credibility only.Result[27] The appeal is dismissed. BASF may still issue proceedings against BRL toobtain the termination fee and our judgment is not to be seen as an indication of theoutcome of such proceedings one way or the other.Solicitors:Bell Gully, Auckland for AppellantKeegan Alexander, Auckland for Respondent