CEDENCO FOODS V AKIAKI LIMITED (FORMERLY CIRCLE PACIFIC LIMITED) HC NAP CIV 2007-441-439

CEDENCO FOODS V AKIAKI LIMITED (FORMERLY CIRCLE PACIFIC LIMITED) HC NAP CIV 2007- 441-439 21 November 2007IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY CIV 2007-441-439BETWEEN CEDENCO FOODS Appellant AND AKIAKI LIMITED (FORMERLY CIRCLE PACIFIC LIMITED) Respondent Hearing: 5 September 2007 Appearances: D Salmon for appellant N Gray for respondent Judgment: 21 November 2007 at 3 p.m.JUDGMENT OF POTTER JIn accordance with r 540(4) High Court Rules I direct the Registrar to endorse this judgment with a delivery time of 3 p.m. on 21 November 2007.Solicitors: LeeSalmonLong, P.O. Box 2026, Shortland Street, Auckland Sainsbury Logan & Williams, P.O. Box 41, NapierIntroduction[1] Cedenco Foods ("Cedenco") appeals against a judgment of Judge R L Kerr in the District Court at Napier issued on 15 May 2007 which gave summary judgment for the respondent in the sum of $112,531.81 together with costs and interest to be fixed. The judgment sum was made up of amounts of $24,872.79 and $87,659.02 claimed by the respondent to be the balance owing by Cedenco for the supply of processed squash in two batches between February 2006 and May 2006. [2] Subsequent to the supply being made the respondent changed its name from Circle Pacific Limited to Akiaki Limited, but at the time of the events the subject of these proceedings, the respondent was known as Circle Pacific Limited. For convenience I shall refer to the respondent as Circle in this judgment.The appeal[3] The notice of appeal claims that the Judge was wrong in fact and law in finding that Cedenco had no arguable defence to Circle's claims, including by: a) finding that Cedenco lacked "mutuality"; b) finding (or appearing to find) that there was no breach by Circle of express or implied obligations to Cedenco; c) failing to find that there was an implied term in the contract that the product to be supplied by Circle was fit for the purpose for which it was supplied; d) finding that there was no arguable set off. [4] It is further claimed that the Judge purported to make factual findings where there was conflicting affidavit evidence.Factual background[5] By agreement for sale and purchase dated 24 February 2006 Cedenco purchased the business of Circle which was based in Hastings. It was a term of the agreement in clause 5.7 that Cedenco would engage Circle to process 150 metric tonnes of frozen squash pieces for Cedenco, provided the parties could agree the margin for the processing. [6] Circle and Cedenco subsequently agreed the terms and conditions upon which the squash would be processed by Circle and supplied to Cedenco. Buyer specifications for the processing of the squash were supplied to Circle by Sunrise Coast, a wholly owned subsidiary of Cedenco ("Sunrise"), acting as agent for Cedenco. The specifications included stipulation of a core minimum cooking temperature of 75 degrees. [7] Cedenco supplied the raw material to Circle for processing. During the period February to May 2006 Circle processed the squash, supplied it to Cedenco in two batches, and raised invoices which were paid in part by Cedenco. [8] The processed squash was subsequently sold to a Japanese buyer, Life Foods. It was common ground that the sale of the processed squash to Life Foods was made by Sunrise, which is an unlimited company incorporated in New Zealand. Although at paragraph 19 of its counterclaim Cedenco pleads that Cedenco entered into an agreement with Life Foods in Japan whereby Life Foods agreed to purchase, and Cedenco agreed to supply, frozen squash pieces, the argument on Circle's summary judgment application at first instance and on appeal proceeded on the basis that the supply of the processed squash to Life Foods was made by Sunrise. [9] Life Foods complained to Sunrise that parts of the squash were uncooked and withheld payments from Sunrise for the squash claimed to be defective. [10] Cedenco then withheld payment to Circle on the basis that it suffered loss in excess of $100,000 ($168,286.54 is claimed by way of counterclaim) as the result of Life Foods withholding payment. Cedenco asserts that Circle failed to process thesquash in terms of the agreement and specifications, and failed to provide product which was fit for the purpose for which it was required.The pleadings[11] Circle's statement of claim alleges breach of contract by Cedenco in failing to make payment of the unpaid balances due for the processed squash supplied in the first and second batches, after crediting payments made by Cedenco. The amounts claimed are $38,522.04 and $90,987.95 in respect of the first and second batches respectively. Summary judgment was given for the sums of $24,872.79 and $87,659.02 respectively, which appears to take account of two invoices disputed by Cedenco in its notice of opposition to summary judgment. [12] The opposition to summary judgment claims failure by Circle to process the squash in accordance with the agreed specifications and that as a consequence Cedenco has suffered loss of more than NZ$100,000 which it claims gives Cedenco a valid defence to Circle's claims. This is the essence of the defence pleaded by Cedenco in its statement of defence. [13] By its counterclaim Cedenco pleads that it entered into an agreement with Life Foods in Japan for the supply by Cedenco and the purchase by Life Foods of frozen squash pieces; that Cedenco, through its subsidiary Sunrise, has received claims against it for both A and B grade squash processed by Circle that was supplied to Life Foods, that the squash was insufficiently cooked with hard uncooked internal centres and hard skins on the squash pieces; and that as a result of Circle failing to process the squash in accordance with the specifications and provide product fit for the purpose, Cedenco/Sunrise has suffered a loss of $168,286.54. The counterclaim alleges breach of contract, negligence and breach of the Fair Trading Act by Circle.The judgment[14] The Judge held:• There was no "mutuality" between Cedenco and Sunrise in relation to the loss claimed by Cedenco and that "the defence simply cannot succeed" (at [20]). In reaching that conclusion the Judge accepted that the loss resulting from the claim by Life Foods was incurred by Sunrise alone because Sunrise and not Cedenco was the contracting party with Life Foods, and that this was not a situation in which the corporate veil could be lifted to show, in effect, that Cedenco and Sunrise are one and the same entity.• Failure to specifically plead set-off notwithstanding earlier notification of it being raised as a defence (which was known to the plaintiff) prohibited set-off from being argued. However, the Judge subsequently said at [29] of the judgment that while no application was made by the defence to amend the statement of defence to plead set-off, that, of itself, he did not see as fatal but indicative of "a certain dilatoriness".• While it appeared that the statement of defence and counterclaim was filed within the required period he would permit late filing of those pleadings if it was required.• Circle had established its claim in terms of the contract between it and Cedenco and the specifications relating to the way in which the squash should be processed, particularly as to heat.• He was not persuaded that this was a case that could not be dealt with as a summary judgment. He gave judgment for the plaintiff for the sums of $24,872.79 and $87,659.02 with costs and interest to be fixed.Summary judgment principles[15] Circle's application for summary judgment was made under r 152 District Court Rules 1992, which provides:152 Judgment if there is no defence or if no cause of action can succeed(1) The Court may give judgment against a defendant if the plaintiff satisfies the Court that the defendant has no defence to a claim in the statement of claim or to a particular part of the claim.[16] The Judge reminded himself of the well established principles applicable on summary judgment. He referred to Pemberton v Chappell [1987] 1 NZLR 1, that summary judgment is to enable a plaintiff to obtain judgment where there is really no defence to the claim and so put an end to the spectacle of a worthless defence being raised and pursued for the purpose of delay. But in Wallingford v Mutual Society(1880) 5 App Cas 685, 693, Lord Selbourne LC said: It is of, at least, equal importance that parties should not, in any such way, by a summary proceeding in the chambers be shut out from their defence when they ought to be admitted to defend.[17] In Haines v Carter [2001] 2 NZLR 167 the Court of Appeal said the process of summary judgment is intended to be summary. A defendant who wishes to maintain that there is an arguable defence is required to identify that defence in accordance with the ordinary rules and give appropriate particulars of it and a reasonable level of circumstantial detail. But summary judgment cases are not to be dealt with on the basis that the rules provide a procedural straight jacket. Common sense, flexibility and a sense of justice are required. The Courts are entitled in a summary judgment context to be sceptical of defences which emerge at the last minute. [18] Pemberton v Chappell is also authority that the onus of establishing that there is no defence is on the plaintiff and where a defence raises credible questions of fact upon which the outcome of the case may turn, summary judgment is inappropriate.Approach on appeal[19] Mr Gray for Circle referred to the remarks of Giles J in Washworld Services (Auckland) Ltd v M F Astley Ltd HC AK, HC90/98, 11 August 1998:This is an appeal and the appellant bears the onus of establishing that the Judge below has been wrong either in applying the applicable legal principles or in reaching determinations on the facts. Accepting, as I do, that in summary judgment applications the evidence is addressed on affidavits and that I am in as good a position as the Court below to reach determinations, nonetheless an appellate Court is not simply entitled to substitute its views for that of the Court below. Rather its duty is to determine whether or not there was a proper basis open on the evidence upon which the Court below could have reached the decision that it did. If there is such a basis and if the Court below has applied the proper legal tests then the decision should stand. That this is the correct approach has been made clear by the Court of Appeal in Rae v International Insurance Brokers (Nelson Marlborough) Ltd & Anor (CA258/95) judgment 11 August 1997. The correct approach is clearly articulated by Tipping J at p 12: While not purporting to set out an exhaustive test, there are two conventional circumstances in which an Appellate Court may differ from the trial judge on a matter of fact. They are: (a) If the conclusion reached was not open on the evidence, i.e. where there was no evidence to support it, and (b) If the Appellate Court is satisfied the trial judge was plainly wrong in the conclusion reached.The pivotal issue[20] It became clear in the course of oral submissions that the pivotal issue on summary judgment and on appeal was whether Cedenco has suffered any loss it can recover by way of damages against Circle. If not, it has nothing it can claim by way of set-off against Circle's claim, and no defence to Circle's claim. [21] Mr Salmon for Cedenco, suggested it was "a logical proposition" that loss suffered by Sunrise out of the supply contract with Life Foods was a loss ultimately suffered by Cedenco as the parent company of Sunrise, which if Cedenco could not set-off against Circle's claim, let Circle off "scott-free" thereby revealing a legal "black hole". He asked for the opportunity to present further written submissions on this aspect. [22] Further submissions were filed for Cedenco dated 11 September 2007 and in reply by Circle dated 14 September 2007. Having considered these submissions and the submissions presented at the hearing, I turn to consider the issues of "mutuality" and set-off."Mutuality"[23] Cedenco submits that Judge Kerr was in error in finding that there was no mutuality between Cedenco and Sunrise for the purposes of recovering the loss arising under the contract with Life Foods. [24] Circle says that Cedenco offered no authority or legal analysis to support its argument that there is sufficient identity between the parties on the basis that Sunrise's loss is ultimately suffered by Cedenco. Reference is made to the long- established principles maintaining separate corporate personalities at common law:Lee v Lee Air Farming Ltd [1961] NZLR 325 (PC). It is argued that absent exceptional circumstances justifying lifting of the corporate veil, it must be the contracting party who suffered the loss for the contracting party to recover more than nominal damages. It is said that there are no exceptional circumstances present in this case, and that none have been argued by Cedenco. [25] Mr Salmon in the further submissions relating to the recoverability of damages, submits that the facts of this case come within what have been described as "black hole" cases. "Black hole" cases are those where the loss has been suffered by the third party, who has no cause of action, and where the promisee has a cause of action but has suffered no loss. He refers to the developing area of the law where exceptions have been made to the general principle that a party to a contract may only recover for its own loss.Principles[26] The general rule of common law is that a contracting party can only recover its own loss, and cannot recover damages in respect of a loss suffered by a third party: The Albazero, Albacruz (cargo owners) v Albazero (owners) [1977] AC 774, 845; Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518. [27] The nature of the exception to this rule referred to by Mr Salmon has not been discussed in detail in many New Zealand authorities. The most comprehensive consideration is that of Miller J in McKinlay Hendry Ltd & anor v Tonkin & TaylorLtd HC WN CIV 1999-485-78, 22 March 2004. In that case, the plaintiffs sued on the basis that they had a contract with Tonkin & Taylor, although Tonkin & Taylor's letter of engagement for geo-technical services was in fact with another company, which became a subsidiary of the second plaintiff. [28] Miller J began with the proposition that damages are compensatory, and it is inherent in the concept of compensation that only the person who has suffered the loss is entitled to have it made good by compensation. Compensation for a third party's loss is a contradiction in terms: Alfred McAlpine Construction v Panatown. [29] The Judge then referred to the legal "black hole" that can arise where B agrees under a contract with A to confer a benefit on C. If A breaches the contract, C cannot recover at common law because of the doctrine of privity and B cannot recover anything more than nominal damages because it has suffered no loss. (In C's case, reform has been effected in New Zealand by the Contracts (Privity) Act 1982.) He noted that the law has recognised a number of exceptions to the general rule, but that the principal and arguably the only true exception is the rule in Dunlop v Lambert (1839) 6 Cl & F 600. This rule was explained in The Albazero [1977] AC 774, where Lord Diplock said (at 847): in a commercial contract concerning goods where it is in the contemplation of the parties that the proprietary interests in the goods may be transferred from one owner to another after the contract has been entered into and before the breach which causes loss or damage to the goods, an original party to the contract, if such be the intention of them both, is to be treated in law as having entered into the contract for the benefit of all persons who have or may acquire an interest in the goods before they are lost or damaged, and is entitled to recover by way of damages for breach of contract the actual loss sustained by those for whose benefit the contract is entered into (emphasis added).[30] The Dunlop v Lambert exception was extended to construction contracts inLinden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd; St Martins Property Corporation Ltd v Sir Robert McAlpine Ltd [1994] 1 AC 85. Lord Browne- Wilkinson considered that the St Martins case fell within the rationale of exceptions to the general rule that a plaintiff can only recover damages for its own loss. The contract was for a large development of property which, to the knowledge of the parties to the contract, was going to be occupied and possibly purchased by thirdparties. It could be foreseen that damage caused by a breach would cause loss to a later owner and not merely to the plaintiff as the original contracting party. It was considered proper to treat the parties as having entered into the contract on the footing that the plaintiff would be entitled to enforce contractual rights for the benefit of those who suffered from defective performance but who, under the terms of the contract, could not acquire any right to hold the defendant liable for breach. It was said to be truly a case in which the rule provides "a remedy where no other would be available to a person sustaining loss which under a rational legal system ought to be compensated by the person who has caused it". [31] Miller J said the main point was that the rule in Dunlop v Lambert is confined to cases in which the parties contemplated that the ownership of the property might be transferred to another party during the currency the contract. But he also considered what has been described as the wider formulation of the rule. The wider formulation would have it that B sues to recover its own loss and not that of C. B's loss takes the form of its performance or expectation interest in the contract with A. The wider approach has some judicial support in English cases: Darlington Borough Council v Wiltshier Northern Limited [1995] 1 WLR 68; McAlpine Construction v Panatown. Miller J said the significance of the wider formulation is that where it applies the plaintiff recovers for its own interest and the loss suffered for not receiving the bargain contracted for. He accepted that the wider formulation might, as a matter of logic, allow a contracting party to recover that loss in a case where the contract was not entered for a third party's benefit, provided of course that such losses were foreseeable (at [64]). [32] However, Miller J preferred the narrow formulation as corresponding to the purpose of the rule in Dunlop v Lambert. The premise of the rule is that the loss being recovered is that of the third party for whose benefit the contract was entered, not that of B, the rule being designed to deal with a problem created by the doctrine of privity of contract. Damages should therefore be measured in the hands of C (which may amount to more or less than B's loss). On that basis, he considered it difficult to see why A should compensate B unless B is to account to C for the damages. However, his principal conclusion was that the rule did not apply at allbecause the parties did not envisage that the contract was entered into for the benefit of the second plaintiff, which suffered the loss, and the claim failed. [33] McKinlay Hendry Ltd v Tonkin & Taylor was appealed to the Court of Appeal, on a separate point relating to the claim that Tonkin & Taylor had been negligent. Miller J held that Tonkin & Taylor had been negligent, which caused loss to the second plaintiff. However, he held that McKinlay Hendry could not recover as it did not suffer the loss and the second plaintiff was not owed a duty of care. The latter finding was appealed, but upheld by the Court of Appeal: CA81/04, 9 December 2005. [34] The exceptions to the general rule were also considered in a strike out application in DB Breweries Ltd v Mainzeal Property and Construction Ltd HC AK CP418/96, 5 July 1999. In that case, DB Breweries sued Mainzeal following a fire that occurred at the plaintiff's premises as a result of work being carried out there by employees of a sub-contractor. DB sought leave to discontinue against Mainzeal. Mainzeal wished to proceed with its counterclaim which alleged DB was obliged to arrange insurance cover for itself and all subcontractors. DB applied to strike it out, on the basis that Mainzeal no longer had any liability to DB, and therefore had no basis for any counterclaim against it in that respect. It was contended that Mainzeal was not entitled to seek relief on behalf the subcontractor because it could not seek relief for losses other than its own. [35] Randerson J reviewed the relevant authorities, and noted the trend towards the progressive expansion of exceptions to the general rule that a plaintiff may only recover damages for his own loss demonstrated by Linden Gardens. He said:It is abundantly clear from an examination of the authorities that the Courts have been endeavouring for some time to fashion remedies to ensure that a party to a contract who promises to confer a benefit on a third party is held to the bargain. The process of creating exceptions to the general rule is on- going and shows not sign of abating (emphasis added).[36] Randerson J held that Mainzeal had established a clearly arguable case to pursue its counterclaim for relief against DB, either upon the ground that Mainzeal would sustain a loss of its own if other defendants made out a claim for relief againstMainzeal for indemnities, or alternatively on the basis that Mainzeal had sustained a loss because if Mainzeal's contentions as to the proper meaning of the contract were upheld, it had not received the benefit for which it bargained, namely insurance cover for itself and the other parties. It was arguable that DB must have contemplated Mainzeal and subcontractors would rely on existence of insurance cover.Conclusion[37] There is not a great deal of New Zealand authority on the matter, and as Randerson J noted in DB Breweries, this is a developing area of the law which is certainly not settled in this jurisdiction. However, as is evident from the authorities discussed, on either the narrow or wider formulation of the rule, the relevant contractual context must include the parties' contemplation of the effect of the contract on a third party. It is not the case here that Circle contemplated the possibility of Sunrise sustaining the loss. Therefore, Cedenco is unable to rely on the above authorities to recover that loss.Set-off[38] Circle argues that Cedenco has not specifically pleaded set-off, and that its failure to do so prohibits it from arguing set-off as an answer to Circle's claim. Circle also argues that given the lack of mutuality between Sunrise and Cedenco, Cedenco is unable to make out a defence of equitable set-off. [39] Cedenco argues that its loss is so closely related to Circle's claim that it would be unjust to decide one without taking the other into account.Principles[40] The general principles are encapsulated in Grant v NZMC Ltd [1989] 1 NZLR 8, 12-13:A defendant may set-off a cross-claim which so affects the plaintiff's claim that it would be unjust to allow the plaintiff to have judgement without bringing the cross-claim to account. The link must be such that the two are in effect interdependent: judgment on one cannot fairly be given without regard to the other; the defendant's claim calls into question or impeaches the plaintiff's demand. It is neither necessary, nor decisive, that claim and cross-claim arise out of the same contract.[41] The issue regarding the identity of the parties in the context of set-off arose inHamilton Ice Arena Ltd v Perry Developments Ltd [2002] 1 NZLR 309 (CA). Perry and Hamilton Ice entered into an agreement for the sale of Hamilton Ice's premises to Perry, with a lease back to Hamilton Ice. In a separate contract the shareholders of Hamilton Ice agreed to refurbish other premises for Perry. Hamilton Ice fell into arrears in its rent and Perry re-entered the premises and forfeited the lease. Hamilton Ice claimed that money was owing under the refurbishment contract, and sought relief against forfeiture on the basis of an equitable set-off for that amount. [42] The Court referred to Halsbury's Laws of England where the authors say that, save for certain exceptions, a set-off may only be maintained where the claims to be set off against each other exist between the same parties and in the same right (none of the exceptions, which are set out in 42 Halsbury's Laws of England 4th ed. 1999 at 447ff, apply here). The Court said that the need for identity of the parties is also consistent with the proposition that the cross-claim is regarded in equity as fully or pro tanto extinguishing the plaintiff's right to judgment on the claim. The concept of extinguishment is difficult if the cross-claim is made by a different party. [43] In response to the suggestion, which was not pressed in argument, that the case might have been one for lifting the corporate veil, the Court said that the case fell a long way short of raising circumstances in which it would be appropriate to lift the corporate veil of Hamilton Ice and treat it and the shareholders as being the same person in law. The Court did not rule out the possibility that in some unusual circumstance it might be appropriate to allow equitable set-off where there is no identity of parties, but said any such circumstance (other than one justifying the lifting of the corporate veil) would have to be consistent with the extinguishment rationale.[44] The lack of identity between the parties in that case was fatal to the claim to set-off, the shareholders being different parties in law from their company Hamilton Ice. The Court had regard for the fact that the shareholders personally guaranteed Hamilton Ice's rental obligations. If Perry had sought to claim arrears of rental from the shareholders, the cross-claim for payment under the refurbishment contract would have qualified for equitable set-off, subject to the need to show sufficient interdependence.Conclusion[45] Likewise in this case, there is lack of identity between the parties which is fatal to Cedenco's claim to set-off, on the basis of the extinguishment rationale. There is no independent argument outside of the mutuality argument for lifting the corporate veil. [46] My conclusion is that the defence of equitable set-off is not available to Cedenco. It is not simply a matter of inadequate pleading (a point on which Circle placed significant weight), but the unavailability to Cedenco of the substantive defence, on the facts of this case. [47] I would add that this outcome does not in my view, lead to injustice as contemplated in Grant v NZMC Ltd (refer [39] above). Cedenco is a commercial entity which may generally order its commercial affairs and contracts as it sees fit. It may for sound commercial reasons elect to construct certain contractual relationships through subsidiary or associated companies. But the consequence can be absence of the essential interdependence required to enforce contractual claims of the parent company, as in this case.Conclusions[48] The findings of lack of mutuality and lack of interdependence to found a set- off are essentially two sides of the same coin. Any loss that may have been suffered arising from the supply by Sunrise to Life Foods, was suffered by Sunrise, notCedenco, and cannot found a claim or set-off by Cedenco arising under its contract with Circle. The Judge was not in error in finding that Cedenco's defence cannot succeed. [49] Given these findings, it is unnecessary that I consider the other grounds of appeal. Nor do I need to consider Circle's argument under the heading Assumed Liability of Sunrise to Life Foods. However, I observe that the lack of any evidence of Sunrise's contract with Life Foods, appears to ask the Court to assume that Sunrise was under a legal liability to Life Foods for the amount claimed as a loss. The loss is not proven. [50] The appeal is dismissed.Costs[51] Circle has been successful and is entitled to costs which I consider should be on a 2B basis. I expect counsel will settle issues of costs in light of that indication. However, because of the express request of Circle to be heard on costs, I reserve leave to apply within 7 days of the date of this judgment with any response by Cedenco within a further 7 days.