CENTRAL DAIRY GOATS LIMITED v BUBS NEW ZEALAND PTY LIMITED [2021] NZHC 1230_x000b_

CENTRAL DAIRY GOATS LIMITED v BUBS NEW ZEALAND PTY LIMITED [2021] NZHC 1230[28 May 2021]IN THE HIGH COURT OF NEW ZEALANDWELLINGTON REGISTRYI TE KŌTI MATUA O AOTEAROATE WHANGANUI-A-TARA ROHECIV-2021-485-15[2021] NZHC 1230BETWEEN CENTRAL DAIRY GOATS LIMITEDPlaintiffAND BUBS NEW ZEALAND PTY LIMITEDDefendantHearing: 18 May 2021Appearances: R J B Fowler QC for plaintiffT B Fitzgerald and S J Leslie for defendantJudgment: 28 May 2021JUDGMENT OF ASSOCIATE JUDGE JOHNSTON[1] On 21 December 2018 the plaintiff, Central Dairy Goats Ltd (CDG), and thedefendant, Bubs New Zealand Pty Ltd (Bubs), entered into an agreement wherebyCDG agreed to sell and Bubs agreed to purchase goat milk.[2] The initial term of the agreement was five years. The first "year" was a periodof five months commencing on 1 January 2019 and concluding on 31 May 2019, sothat the second year ran from 1 June 2019 to 31 May 2020.[3] Definitions in the agreement included:(a) "Annual Average Milk Price" which was defined as " the averageprice the Purchaser has paid for or will pay for Milk (per kg TMS)during that Contract Year".(b) "Milk" which was defined as " raw goat's milk produced by theSeller".(c) "TMS" which was defined as " total milk solids".[4] Clause 1.2 was headed "Rules for interpreting this document", and one suchrule was that:"Headings are for convenience only, and do not affect interpretation."[5] Pricing was dealt with in cl 6 and sch 2 of the Agreement. Materially, theseprovided as follows:6. PRICE6.1 Prices(a) The prices for Milk supplied under this Agreement will bedetermined in accordance with the pricing methodology setout in Schedule 2 for the Milk Delivered.(b) Subject to clause 6.1(c), the parties acknowledge that theprices payable for Milk per kg TMS is seasonal and may varyfrom month to month.(c) The Annual Average Milk Price for the first two (2) ContractYears will be no less than $14.00 / kg TMS.(d) If the Annual Average Milk Price for any Contract Yearsubsequent to 2019 is reduced by 10% or more of the AverageAnnual Milk Price for the previous Contract Year, the Sellermay terminate this Agreement by notice in writing to thePurchaser in accordance with clause 16.1.6.2 Price ReviewThe prices for Milk will be reviewed in accordance with the procedureset out in Schedule 2.SCHEDULE 2Pricing1. Price1.1 Methodology(a) Subject to the review procedures under Item 3 of thisSchedule 2 and having regard to the pricing principles set outin Item 2 of this Schedule 2, the price for Milk will be setaccording to a total milk solids (TMS) basis being the sum of:(i) fat; plus(ii) protein; plus(iii) lactose; plus(iv) minerals,as will be determined by an accredited third party laboratory.(b) The price for Milk may be determined seasonally by thePurchaser so long as the Annual Average Milk Price in thefirst two Contract Years do not fall below $14.00 / kg TMS.1.2 Price reduction(a) If Laboratory Tests show that the Milk is Grade 2 once withina month, the price of the Milk will not be reduced.(b) Subject to Item 1.2(c) below, if Laboratory Tests show thatthe Milk is Grade 2 more than one time within a month, theprice of all Grade 2 Milk in that month will be reduced by50c / kg TMS.(c) Unless the Seller has been informed that Milk is Grade 2, theMilk will be considered to be Grade 1 and no price reductionmay apply to the price.2. Pricing principlesThe price of Milk will be determined by having regard to the price atwhich other goat milk is priced in New Zealand.3. Price review procedures(a) Subject to clause 1.1(b), the basis or methodology fordetermining the price of Milk will be subject to review, byagreement of the Purchaser and the Seller, provided that eitherparty may request a review not more than once during eachContract Year in the Term.(b) On such a request, the Purchaser and the Seller must use theirreasonable endeavours to arrange for a duly authorisedrepresentatives of each of them to meet and negotiate on areasonable basis having regard to each party's submissions.(c) If a price review is requested, it will be negotiated on oraround the end of January of each year and will apply for thefollowing Contract Year.[6] The contract operated unremarkably during the first and second years (or17 months).[7] Not long after the end of the second year, on 10 July 2020, Bubs wrote to CDG.In this letter Bubs proposed that the parties vary the agreement. The proposal was,first, for a revised price of $11.00 / kg TMS (reduced from $14 / kg TMS) from1 October 2020 until 30 September 2021, and, secondly, for a review to be undertakenin mid-2021 to establish a new price to apply from 1 October 2021 until 31 May 2022.This proposal was said to be open for acceptance until 17 July 2020. Bubs said that,if its proposal was not accepted by CDG, then Bubs' assessment was that the milkprice payable from 1 June 2021 would be no greater than $9 / kg TMS. As I read theletter, Bubs was saying that if CDG did not accept their proposal then Bubs would notbe paying $14 / kg TMS from 1 October 2020.[8] This proposal — if that is what it was — was not acceptable to CDG. Muchcorrespondence between the parties and their solicitors followed. A great deal ofattention was focussed on the terms of the agreement, especially cl 6 and sch 2. CDGtook the position that the $14.00 / kg TMS price could not be altered except byagreement. Bubs asserted that, at least after the conclusion of the second year of thecontract, it was entitled to determine the price it was prepared to pay. The argumentsdeveloped in the correspondence were of course more detailed and sophisticated thanthat description suggests. But that is what they boiled down to.[9] In the absence of any resolution, since 1 October 2020, CDG has continued toinvoice Bubs for milk supplied at the rate of $14.00 / kg TMS, and Bubs has, as Iunderstand it, paid for that milk at the rate of $11.00 / kg TMS.[10] In the end, CDG commenced this proceeding in order to break the impasse,seeking declaratory relief in the following terms:a. A declaration that the Annual Average Milk Price under the Agreementfor the period of 1 June 2020 to 31 May 2021 is $14.00 / kg TMS;b. A declaration that the Defendant does not have a power to unilaterallydetermine the Annual Average Milk Price under the Agreement.[11] Mr Fowler and Mr Fitzgerald were on common ground in relation to theprinciples that govern summary judgment applications. Mr Fowler did not challengeMr Fitzgerald's submission as to the important principles:Summary judgment principles5. The principles applicable to summary judgment applications arewell-established. Rule 12.2 of the High Court Rules 2016 provides:12.2 Judgment when there is no defence or when no cause of action cansucceed(1) The court may give judgment against a defendant if the plaintiffsatisfies the court that the defendant has no defence to any cause ofaction in the statement of claim or to a particular cause of action.6. The words "no defence" contained within rule 12.2 have beeninterpreted as "no bona fide defence, no reasonable ground of defence,no fairly arguable defence". The concept underlying all of theseexpressions is the absence of any real question to be tried.7. In some circumstance, it may be possible to resolve questions ofcontractual interpretation at the summary judgment stage. However,that will often not the [sic] be the case. It is well established that it isinappropriate to resolve interpretation disputes in circumstanceswhere the factual matrix is relevant, or where discovery orcross-examination may be relevant, or where the discovery or cross-examination may be relevant. As the Court of Appeal recentlyconfirmed: factual matrix evidence is relevant (indeed, sometimes critically so) to thecontractual interpretation exercise. As a result, questions of contractualinterpretation may not be able to be adequately addressed in a summaryjudgment context, particularly where there is either insufficient contextualevidence before the Court, or it is necessary to resolve disputes regarding thematrix of fact.8. Summary judgment is particularly inappropriate where expertevidence is to be called, or whether the meaning may be affected byother extrinsic evidence, including prior negotiations and subsequentconduct.[Footnotes omitted][12] That appears to me to be a fair analysis.[13] Thus, CDG's application for summary judgment depends on it being able toestablish that the defence advanced on behalf of Bubs is not reasonably arguable.[14] The dispositive issue is one of contractual interpretation, and both Mr Fowlerand Mr Fitzgerald approached it on just that basis.[15] Mr Fowler's starting point was the plaintiff's prayer for relief and the terms ofthe declarations sought. He invited the Court to have regard to the fact that the firstdeclaration (that the $14.00 per kg / TMS floor price could not be changed except byagreement) would only apply down to 31 May 2021, being the end of the third year ofthe contract. This is because, in terms of the procedure set out in cl 3 of sch 2, thedeadline by which either party could trigger that process for the third year of thecontract has come and gone. Mr Fowler accepted that a declaration in those termswould not have any impact on the ability of the parties to take whatever steps wereavailable to them in respect of the fourth year of the contract commencing on 1 June2021. I am not convinced that this takes matters very far. The contention is predicatedon the proposition that cl 3 of sch 2 is the mechanism for setting price, which is thecontention that Bubs does not accept.[16] Insofar as cl 6 is concerned, Mr Fowler emphasised that both cl 6.1(a) and 6.2indicate that the price to be paid to CDG by Bubs is to be determined pursuant to sch2.[17] Turning to sch 2 Mr Fowler noted that in cl 1.1(a) the parties agreed on themethodology by which total milk solids would be measured and emphasised that in(b) of the same clause.[18] Mr Fowler went on to submit that the " guiding principle " for pricing issch 2 cl 2 which creates a mandatory obligation that the parties will have regard to"the price at which other goat milk is priced in New Zealand".[19] There is nothing in those submissions that is controversial.[20] Mr Fowler then submitted:Schedule 2, clause 3 explicitly sets a price review of procedure which is statedat [the] beginning of sub-cl (a) as being subject to the seasonal variation thatBubs can utilise under clause 1.1(b). The procedure set by clause 3 is:21.1 Attempted agreement;21.2 Either party may request a review, but not more than once in anycontract year;21.3 If a review is requested, the parties must use reasonable endeavoursto meet and negotiate;21.4 If a price review is requested, it must be negotiated on or around theend of January to apply for the following contract year.[21] Finally, Mr Fowler applied his interpretation of the contract to the facts of thiscase in the following terms:23. Bubs first sought to vary the contract price on 10 July 2020 to beeffective from 1 October 2020.24. However, on what is submitted to be the correct interpretation of thecontract, that could not possibly have been an effective request interms of Schedule 2 Clause 3 for implementation on 1 October 2020.What Bubs has purported to do does not accord with either the timingrequired by the contract or the process that has been agreed.25. Additionally, and as to substance, there is no evidence that the guidingprinciple of Schedule 2 Clause 2 has been applied.[22] As already foreshadowed, the critical aspect of Mr Fowler's argument (inrelation to both declarations sought) is the contention that in order for there to be anychange to the price to be paid to CDG by Bubs, that change can only take place viathe process set out in cl 3 of sch 2. He submitted that if that is the position then anychange must be achieved by agreement because that is what the cl 3 processcontemplates. He added that although there is no obvious mechanism within cl 3 toovercome a failure on the part of the parties to agree, this is one of those cases of thesort dealt with by the Privy Council in Money v Ven-Lu-Ree Ltd where the Court willstep in and perfect any loose ends left by the parties in their agreement by implyingsuch a mechanism (arbitration, expert determination or something along those lines).1[23] Mr Fitzgerald, like Mr Fowler, submitted that cl 6.1(a) and 6.2 directed thereader to the sch 2 in relation to the price to be paid by CDG to Bubs.1 Money v Ven-Lu-Ree Ltd [1989] 3 NZLR 129 (PC).[24] Turning to sch 2, Mr Fitzgerald submitted that cl 1.1 deals with two related butdistinct things:(a) In 1.1(a) it deals with how total milk solids are to be measured, namelyinclusive of the components enumerated in 1.1(a)(i)–(iv). In relation tothis he referred me to the affidavit of Bubs' General Manager Dairy,Mr Paine whose evidence is that this is an unusual way of assessingtotal milk solids, and that the more common methodology is to haveregard only to fat and protein.(b) In 1.1(b) it deals with the price to be paid to CDG by Bubs for milk.[25] Mr Fitzgerald placed particular emphasis on the opening passage of cl 1.1(b):The price for milk may be determined seasonally by the purchaser.[Emphasis added.][26] Like Mr Fowler, Mr Fitzgerald also placed some importance on cl 2 in whichthe parties agreed that price was to be determined by reference to " the price atwhich other goat milk is priced in New Zealand".[27] As to cl 3, which Mr Fowler relied on in advancing his contention that the priceto be paid to CDG by Bubs could not be altered except by agreement between theparties, Mr Fitzgerald submitted that this deals with the arrangement for themeasurement of total milk solids (the first element of paragraph 1.1) as opposed to theprice to be paid to CDG by Bubs (the second element). In this regard, he directed meto the opening passage of cl 3(a):Subject to clause 1.1(b), the basis or methodology for determining the priceof Milk will be subject to review [Emphasis added][28] Mr Fitzgerald's submission was therefore that this so-called price reviewprocedure was not the mechanism by which the price to be paid for milk to CDG byBubs was set or reviewed.[29] In relation to this Mr Fitzgerald referred to the affidavit evidence indicatingthat these parties had agreed to measure total milk solids in an unusual way. Hissubmission was that in those circumstances, and having regard to that evidence, itshould not come as a matter of surprise that the parties included in their contract aprocess for revisiting that methodology should either of them conclude that it wasoperating inappropriately or unfairly. I reach no view about this, except to observethat it appears to me to be a situation in which a Court may be assisted by independentevidence of industry norms that both parties may be regarded as having been aware ofat the time that they entered into the contract as an aid to its interpretation.[30] Drawing the threads of this analysis together, Mr Fitzgerald submitted that interms of price (as opposed to the measurement of total milk solids) the correct startingpoint was cl 1.1(b) of sch 2, which provides that price may be determined "by thePurchaser " and that the seller was adequately protected by a combination of cl 2 —which says that the price will be determined by reference generally to the price of goatmilk in New Zealand — and cl 6.1(d), which provides that if the purchaser proposesa price reduction of 10 per cent or more the seller will be entitled to terminate theagreement.[31] On those bases, Mr Fitzgerald submitted that Bubs' letter of 10 July 2020proposing a reduction to commence on 1 October of that year (which was certainlyabove 10 per cent) was entirely open to Bubs and that, ultimately, CDG's options wereeither to accept the proposal or cancel the contract.[32] At the conclusion of his submissions Mr Fowler sought to identify problemswith Bubs' interpretation, and it is instructive to touch on these.[33] At paragraph 26, Mr Fowler said:The Bubs interpretation focusses on Schedule 2 Clause 1.1(b) as allegedlyentitling Bubs to unilaterally effect a variation by determining the price itself,without reference to the procedure stipulated in Schedule 2 Clause 3.[34] That is correct. Mr Fitzgerald's submission is that cl 3 of sch 2 does not applyto the setting of price, or, rather, does not apply directly in the way that is relevant inthis case.[35] At paragraph 27 Mr Fowler says:If the Bubs interpretation were correct, the Schedule 2 Clause 3 procedurewould be redundant. It is unlikely the parties would have intended theseprovisions they had agreed upon to have no effect.[36] That does not follow. On Mr Fitzgerald's argument cl 3 of sch 2 applies to theprocess for measuring the total milk solids, not to the price to be paid to CDG by Bubs.[37] At paragraph 28 Mr Fowler says:Further, it is to be noted that Schedule 2 Clause 1.1(b) uses the word"seasonally", which is surely in tune with the principle stated in Clause 6.1(b)and points to the purpose of the sub-clause (effectively to allow seasonal cashflow variation within a year) and distinguishes that sub-clause from the otherprovisions intended to apply to the pricing for the overall contract year.[38] There is something in this point. In the end, though, the confusion around theuse of the word "seasonally" in this clause just casts further doubt on the properinterpretation of the contract.Discussion[39] The agreement between CDG and Bubs is certainly not a model of clarity. Itappears to me to contain a number of ambiguities and inconsistencies. This hasenabled both parties to develop respectable but diametrically opposed arguments. Ineed not resolve these. Nor, for that matter, need I reach any concluded views as tothe proper interpretation of the contract in order to deal with CDG's application.[40] It appears to me to be open to Bubs to argue that cl 1.1 of sch 2 deals with theagreed basis for measuring total milk solids which is different from (although certainlyclosely related to) the price that CDG is to be paid by Bubs for milk ,which is what isaddressed in cl 1.1(b), and that it is only the former that is capable of being challengedby either party pursuant to cl 3.[41] At that point, cl 1.1(b) stands alone in stating that the price to be paid for milkis determined "by the Purchaser".[42] As Mr Fitzgerald submits, that interpretation of the agreement would bebolstered if a Court were to accept at trial the evidence currently offered in affidavitform on Bubs' behalf that the methodology for determining total milk solids is anunusual one and that the parties, being aware of this, provided a mechanism wherebyeither could challenge that methodology in the future — cl 3. That, it seems to me, isnot a view that one can reach on the basis of untested affidavit evidence at this stage.[43] However, in the end, CDG has not established that the argument advanced onbehalf of Bubs is untenable. In other words, I am satisfied that the interpretationadvanced by Mr Fitzgerald on behalf of Bubs is at very least capable of seriousargument.[44] That conclusion is enough to dispose of the plaintiff's application for summaryjudgment.[45] Additionally, it appears to me that in order properly to interpret the contract,the Court will require independent evidence of industry standards concerning thedetermination of milk prices, and that the course of negotiations between the partiesbefore the contract was signed may also be relevant to the Court's enquiry.[46] For those reasons, the plaintiff's interlocutory application for summaryjudgment is dismissed.[47] Costs are reserved. Conventionally, an unsuccessful application for summaryjudgment does not result in a costs award in favour of the successful respondent, unlessthere are unusual circumstances. If either party wishes to invite the Court to make acosts order then counsel should file memoranda in the usual way and I will deal withcosts on the papers. Otherwise, they will simply be costs in the cause.[48] The Registrar is to set this matter down for a case management teleconferenceas soon as possible so that the necessary directions can be made to deal with theinterlocutory stages of the case so as to enable it to be set down for trial.Associate Judge JohnstonSolicitors:Cullinane Steele Ltd, Levin for plaintiffBell Gully, Wellington for defendant