NEW ZEALAND SPORTS MERCHANDISING LTD V DSL LOGISTICS LTD CA CA691/2009

NEW ZEALAND SPORTS MERCHANDISING LTD V DSL LOGISTICS LTD CA CA691/2009 1 December 2009IN THE COURT OF APPEAL OF NEW ZEALAND CA691/2009 [2009] NZCA 566BETWEEN NEW ZEALAND SPORTS MERCHANDISING LIMITED Appellant AND DSL LOGISTICS LIMITED Respondent Hearing: 12 November 2009 Court: Chambers, Ellen France and Baragwanath JJ Counsel: A R Galbraith QC and J F Anderson for Appellant M J Fisher for Respondent Judgment: 1 December 2009 at 4 pmJUDGMENT OF THE COURT A The appeal is allowed. B The determination made in the High Court is set aside. C In substitution for that determination, the following determination is made: Clause 7.5(a) requires the appellant to pay, before unsold goods remaining in the warehouse are returned to it: (a) any unpaid invoices properly rendered under appendix A;(b) any unpaid invoices properly rendered under appendix B with respect to goods which had been sold and dispatched to the appellant's customers prior to termination date; (c) the respondent's reasonable charges incurred or to be incurred in returning goods not sold at termination date to the appellant. C The respondent must pay costs to the appellant for a standard appeal on a band A basis, plus usual disbursements. D Costs in the High Court are, in the absence of agreement, to be fixed by that court in light of this judgment and the reasons therefor. REASONS OF THE COURT(Given by Chambers J)Termination of a storage contract[1] In 2004, DSL Logistics Limited, the respondent, and New Zealand Sports Merchandising Limited, the appellant, entered into a written agreement whereby DSL agreed to store and dispatch Sports' merchandise. The agreement was apparently a standard form agreement DSL used. [2] Under the agreement, merchandise which Sports had bought would be transported to DSL's warehouse. What DSL charged Sports for that part of its service depended on what was required of DSL in that regard, but the charges were all easily calculable by reference to the schedule in appendix A to the agreement. [3] Once the goods were in the warehouse, DSL undertook three main activities: first, it kept an inventory of the goods and produced for Sports a monthly report, recording goods in store, including their locations; secondly, it stored the goods (for an unlimited time); and thirdly, it "picked and packed". The picking and packing occurred when Sports notified DSL that particular goods stored in the warehouse hadbeen sold. What "picking and packing" involved was set out in clause 1.4(a) of the agreement. It involved finding ("picking") the designated goods, packing them, generating a packing list and way-bill label, and then dispatching them to Sports' customer. [4] The charges for the work set out in [3] were specified in appendix B to the agreement. For convenience, we shall call all DSL's work in this phase "appendix B work". DSL charged for appendix B work once it was completed. The charge depended on the nature of the piece of merchandise stored. All merchandise was categorised and the cost was expressed, in appendix B, as so much "per unit". The "per unit" charges ranged from, at the time the agreement was signed, 75 cents a unit for category 4 units to $2.50 a unit for category 1 units. In addition, specific "materials" charges for cartons, hanging bags, and plastic hangers were stipulated. [5] The agreement provided that either party might terminate it on giving three months' notice. On 20 July this year, DSL gave Sports three months' notice. The agreement terminated therefore on 20 October. Obviously, termination of the agreement gives rise to two questions. First, what happens to Sports' merchandise currently being stored in the warehouse? Secondly, what, if anything, does Sports have to pay for that part of the appendix B work which DSL will have performed by the date of termination? The answer to those questions is provided by clause 7.5(a) of the agreement, which reads as follows:Upon termination of the Agreement or part thereof for any reason, Goods shall be re-delivered to [Sports] or its agents after full payment of all charges has been made, including any charges incurred to return the Goods to [Sports].[6] The problem is the parties disagree on what that clause means. Initially, DSL contended Sports had to pay the "per unit" charges set out in appendix B, plus any charges incurred by it in returning the goods to Sports. (Subsequently, DSL offered to waive the charges it incurred in returning the goods.) Sports on the other hand argues it is not obliged to pay anything under appendix B as the appendix B work has not been completed. These goods have not been and will not be "picked and packed" in terms of the agreement. Sports does agree, however, that it will have tomeet DSL's charges incurred in returning the goods to Sports. (We shall call these "the return charges".) [7] The parties agreed that their dispute turned entirely on the proper construction of clause 7.5(a). Accordingly, the dispute was amenable to resolution utilising the fast-track procedure provided by s 24C of the Judicature Act 1908. Sports sought a determination from the High Court as to the proper construction of the clause. [8] The case was heard by Priestley J, who delivered an oral judgment: HC AK CIV 2009-404-5548 16 October 2009. He found in DSL's favour. He determined that Sports was required to pay the charges listed in appendix B ("the appendix B charges") with respect to all goods remaining within the warehouse on the termination date. He further held that Sports must pay that amount in full prior to the redelivery of the goods to it. [9] After the High Court judgment, DSL issued an invoice for approximately $291,000 in respect of the appendix B charges. The goods in question apparently have a value of about $600,000: at [16]. [10] Sports appealed. The sole issue on the appeal is whether Priestley J was correct in his interpretation of the clause in question.What is the correct construction of clause 7.5(a)?[11] It is common ground that, but for the termination, nothing would now be payable to DSL with respect to goods in its warehouse as at 20 October. That is because the right to invoice arose only after goods were dispatched to Sports' customer: see clause 3.5. Once an invoice was raised, Sports was obliged to meet it by the 20th day of the month following invoice date, "except for disbursements to third parties which [were] due on receipt of invoice". [12] Mr Galbraith QC, for Sports, submitted that termination should make no difference. DSL could not recover the appendix B charges when, through its ownaction in terminating the agreement, it would never perform all the appendix B work. Its obligation to perform all the appendix B work was an "entire" obligation. As such, Sports did not have to pay for it unless and until it was completely performed. He submitted that this interpretation was supported by the fact that the clause provided for Sports to pay DSL's "charges incurred to return the Goods": it could not have been the parties' intention that Sports would have to pay for the cost of returning the goods and the cost of a notional delivery of them to a customer, yet that was the consequence of DSL's interpretation. Even DSL had recognised the unfairness of its interpretation by offering to waive the return charges. The fact that unsold goods were not to be returned to Sports until "full payment of all charges [had] been made" was simply to reinforce that goods to be returned would not leave the warehouse until any unpaid invoices rendered for other goods in respect of which all appendix B work had been done and the return charges had been paid. [13] We are satisfied that argument is sound. An obligation is said to be "entire" when its complete performance is a condition precedent to the other party's liability (usually, to pay): see Beale (gen ed) Chitty on Contracts (30ed 2008) at [21-027]. Where a party performs only part of an entire obligation, "he can normally recover nothing, neither the agreed price, since it is not due under the terms of the contract, nor any smaller sum for the value of his partial performance, since the court has no power to apportion the consideration": Chitty at [21-030]. The qualification "normally" is inserted in the proposition to recognise three exceptions Chitty goes on to discuss: the doctrine of frustration, acceptance of partial performance, and where the defendant prevents complete performance. It is common ground none of those exceptions would apply here if DSL's obligation is correctly categorised as "entire". [14] The agreement in this case does clearly contain divisible obligations. DSL's obligations in respect of getting the goods into the warehouse are clearly divisible from its obligations in respect of appendix B work. Its charges for the former are separately categorised in appendix A and become payable before, potentially long before, it becomes entitled to charge for appendix B work. But equally clearly the obligation in respect of appendix B work is entire (ie indivisible). It is of the essence of the agreement that nothing is payable under appendix B until the merchandise has been dispatched to Sports' customer. No doubt a significant attraction of DSL'sstandard charging arrangement for Sports was that Sports did not have to pay DSL until it itself was being paid by its customers. The only exception to that position occurred in the event of termination of the agreement, whether that termination was brought about by DSL or Sports; in that event, Sports agreed it would pay the return charges. [15] We shall now set out Priestley J's reasoning and why we respectfully differ from it. We should note at the outset that Mr Galbraith and Ms Anderson did not appear for Sports in the High Court and that it would appear that Sports' then counsel did not refer the Judge to the law relating to entire and divisible obligations: we draw that inference from the absence of any discussion of such law in His Honour's judgment. Priestley J's conclusion that Sports was liable to pay the appendix B charges was based on the reference in clause 7.5(a) to Sports having to make "full payment of all charges". That had to be, His Honour reasoned, a reference back to clauses 1.3(a) and 3.1: at [34]-[35]. (Clause 1.3(a) set out what we have called compendiously the appendix B work and stated that the charges for that work were "incorporated into the agreed cost per unit in Appendix B". Clause 3.1 reiterated that.) The Judge considered Sports' suggested interpretation would mean that DSL effectively was recovering under appendix B only for those services provided "at the very end of its contracted services, namely to pick and pack and distribute": at [38]. For these reasons, he concluded "full payment of all charges" could refer only to "those charges stipulated in appendix B": at [42]. His Honour acknowledged the potential unfairness of the construction to which he had been drawn, but concluded that "the terms of the contract, being a commercial contract, as negotiated by the parties four years ago, [led him] to no other result": at [43]. [16] In response, we make the following points. First, His Honour did not refer to the last part of clause 7.5(a), namely "any charges incurred to return the Goods". It was irrelevant for interpretation purposes that DSL was waiving those charges in this particular case. The fact that Sports was contractually bound to meet the return charges makes it very unlikely the parties intended that Sports would also have to pay the appendix B charges in respect of the same goods, a component of such charges being picking and packing, including delivery. The inclusion of this phrase and the imposition of this special charge make it clear that the delivery (back) ofunsold merchandise, which would occur only on the termination of the agreement, was not to be equated with delivery to customers under appendix B. It was because the appendix B charges were not triggered that provision for the special return charges needed to be inserted. [17] Secondly, there was another interpretation of "full payment of all charges" which the Judge did not consider. That was full payment of outstanding invoices (whether appendix A or appendix B charges) which had been rendered in accordance with the agreement, ignoring the termination. In short, Sports was not to be able to recover its goods until it was fully paid up. That makes perfect commercial sense and is much more likely to represent the parties' intention than the Judge's interpretation. The Judge's interpretation involves reading clause 7.5(a) as requiring Sports to pay, before it can get back its goods, appendix B charges in respect of those goods and return the charges in respect of those goods. Our interpretation on the other hand requires Sports, before it can get back its goods, to pay any unpaid invoices, whether properly rendered under appendix A or appendix B, plus return charges with respect to unsold goods. With respect, we consider our interpretation leads to a more logical conclusion. [18] Thirdly, it is, with respect, obfuscatory to categorise Sports' argument as leading to a conclusion that appendix B charges represent only those services "at the very end", namely picking and packing. The appendix B charges were undoubtedly calculated by DSL bearing in mind all the work it might have to do from delivery to dispatch. It is, however, of the nature of entire obligations that, if the party which has undertaken the obligation does not completely perform, it does not get paid. There is no doubt, as the cases in Chitty show, that at times that can lead to unfair results, where a party may have performed substantially but recovers nothing. In actual fact, such a harsh result does not arise in this case because of DSL's stipulation that, although it might not recover its costs in respect of keeping an inventory and storing these particular goods, it will recover its costs in returning them.Result[19] We allow the appeal. We set aside the determination made in the High Court. In substitution therefor, we make the following determination:Clause 7.5(a) requires the appellant to pay, before unsold goods remaining in the warehouse are returned to it: (a) any unpaid invoices properly rendered under appendix A; (b) any unpaid invoices properly rendered under appendix B with respect to goods which had been sold and dispatched to the appellant's customers prior to termination date; (c) the respondent's reasonable charges incurred or to be incurred in returning goods not sold at termination date to the appellant.Solicitors: Lee Salmon Long, Auckland, for Appellant Castle Brown, Auckland, for Respondent