OCEANIA FURNITURE LIMITED V DEBONAIRE PRODUCTS LIMITED HC WN CIV-2008-485-1701

OCEANIA FURNITURE LIMITED V DEBONAIRE PRODUCTS LIMITED HC WN CIV-2008-485-1701 11 June 2010IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV-2008-485-1701BETWEEN OCEANIA FURNITURE LIMITED Plaintiff AND DEBONAIRE PRODUCTS LIMITED Defendant Hearing: 20 May 2010 Appearances: J J Delany for the plaintiff R C Laurenson for the defendant Judgment: 11 June 2010 at 4.00pmJUDGMENT ON DAMAGES OF CLIFFORD JIntroduction[1] As recorded in my judgment of 27 August 2009, in 2007 the plaintiff, Oceania Furniture Limited, and the defendant, Debonaire Products Limited, were parties to a contract ("the Supply Agreement") whereby, in response to orders from Debonaire, Oceania procured MDF furniture componentry from China and sold it to Debonaire. Debonaire assembled furniture from that componentry and on-sold it to furniture retailers in New Zealand. [2] During 2007, Oceania faced difficulties in procuring such product. In turn, that caused supply problems for Debonaire in New Zealand. A dispute arose. As a result, Oceania sued Debonaire for unpaid product and (contractual) default interest and legal costs. Debonaire counterclaimed for loss of profits and other amounts. [3] On 3 December 2008, Associate Judge Gendall awarded Oceania summary judgment against Debonaire for $328,572.73. That judgment represented unpaidpurchase moneys owed to Oceania by Debonaire for ten container loads of furniture componentry supplied by Oceania to Debonaire under the Supply Agreement. [4] In the same decision, the Judge: a) stayed Oceania's enforcement of that summary judgment, pending the hearing and determination of Debonaire's counterclaims; b) declined to enter judgment for Oceania as regards default interest; and c) awarded costs against Debonaire on the summary judgment on a 2B basis. [5] In a hearing which took place in May last year, Debonaire pursued its counterclaims against Oceania, and Oceania its claims for interest and legal costs in terms of the contractual provisions of the Supply Agreement. [6] In my judgment of 27 August 2009 I found that: a) Debonaire was entitled to contractual damages for the direct profit it lost as a result of Oceania's non-delivery of some seven containers of MDF furniture componentry ("the Seven Containers"). b) Debonaire was also entitled to damages of $67,998.02 for what were called the sub-set claims. c) Oceania was not entitled to interest at the stipulated rate in the Supply Agreement (30 percent per annum) as that was a penalty. It was entitled to interest owed on the judgment sum ordered in the summary judgment proceeding ($382,572.73) from the date the cause of action arose until the date of summary judgment, and running from the date of the summary judgment in accordance with rule 11.27, at the rate prescribed in s 87 of the Judicature Act 1908 (8.4 percent per annum).d) Debonaire was to pay legal costs and expenses of $27,358.00 to Oceania in accordance with the terms of the Supply Agreement, as incurred up until the point in time at which the summary judgment was obtained. [7] Because Debonaire had claimed for a general loss of profits, there was no evidence that enabled me to fix the quantum of the direct profit it had lost as a result of Oceania's non-delivery of the Seven Containers. Accordingly, at [216] of my judgment, I invited "the parties to submit a memorandum to me within 21 days indicating the basis upon which they proposed to address the questions of the quantification of the damages payable to Oceania by Debonaire". I also invited further submissions on the overall effect of the counterclaim rules, and on the question of costs. [8] That invitation initiated a series of memoranda filed by the parties, telephone conferences and rulings by me on a variety of issues. It is not necessary that I traverse that ground again at this point. Suffice to say that, as a result of various applications and rulings, at a hearing on 20 May 2010 the following matters were considered: a) quantification of the damages payable by Oceania to Debonaire in respect of the breach of contract as regards the non-delivery of the Seven Containers; b) applications by Debonaire under the recall (HR11.9) and slip (HR11.10) rules: i) that GST be added to the judgment I awarded Debonaire in respect of the sub-set claims; and ii) that my judgment in Oceania's favour as regards the award of contractual costs up to Associate Judge Gendall's grant of summary judgment be, in effect, reversed.[9] In addition, there was some discussion of how I should determine the overall effect of my judgment, and the question of costs as regards the May 2009 hearing and subsequently. [10] I will deal with each of those issues in turn.Quantification of damages payable to Debonaire by Oceania[11] Debonaire first quantified what it said were the damages due to it for lost profits on the Seven Containers in an affidavit of Ying (Shirley) Fan, Debonaire's financial controller, dated 17 September 2009. It did so on the basis of what Ms Fan identified as being the total sale price of that product, less direct costs of assembly and freight. Using GST inclusive figures, Ms Fan calculated lost direct profits of $201,716.75. Debonaire also claimed for pre-judgment interest of $35,939.30 on those GST inclusive profits, on the basis that the goods would have been sold and paid for (as I understand was the contemplation under the Supply Agreement) within 100 days of the MDF componentry having been shipped ex Oceania's sourcing factories in China. On that basis, Debonaire claimed that damages of $236,726.05 were due to it from Oceania as at the date of judgment. [12] In response to Ms Fan's first post-judgment affidavit, Oceania filed an affidavit from its expert accountancy witness, Mr Purcell. Mr Purcell disputed the basis upon which lost profits on the Seven Containers had been calculated. By Mr Purcell's calculation, the damages payable by Oceania to Debonaire representing those profits were $79,538.63. [13] Oceania filed a further, and very detailed affidavit, from Ms Fan on 10 December responding to Mr Purcell's criticisms. After various memoranda had been exchanged, and after I had held a further telephone conference, I issued a detailed minute on 26 February 2010. In that minute I recorded the following observations:[30] I note that Mr Purcell, in his calculations, would appear to adopt a similar methodological approach to Ms Fan. That is, he derives a specific profit figure for the seven containers. The principal difference is that Ms Fan does so by reference to actual figures she says would have applied, rather than the average figures adopted by Mr Purcell. In my view, the issuefundamentally is one of assessment by me of the reliability of the "actual" numbers adduced by Ms Fan, as opposed to the average numbers adopted by Mr Purcell. [31] In terms of the admissibility, therefore, of Ms Fan's evidence, the issue is one of the potential unfairness to Oceania in putting that evidence before the Court at this stage in the proceeding. [32] The fairness issue is best seen as ensuring Oceania has an opportunity challenge those "actual" costs. Oceania has proposed, as I understand Mr Delaney's memorandum of 15 December, that that issue be addressed by Debonaire providing similar evidence (i.e. actual price, sales and costs figures) for other MDF product sold by it at the relevant time. I think it is appropriate that Debonaire provides such evidence. The practical consideration is, given the no doubt significant costs that this exercise has already given rise to and the relatively small amount of money involved, that a sensible way be found of doing that. [33] The other limb of this proceeding, that of summary judgment, relates to some nine containers of MDF product supplied by Oceania to Debonaire that Debonaire did not pay for. On 3 December, Associate Judge Gendall granted Oceania summary judgment in respect of the outstanding purchase price owed to it with respect to those containers. Debonaire is now to provide an equivalent analysis of the direct profits derived from the sale of the MDF product in those containers as an effective "cross-check", as I understand Mr Delany quite properly to be looking for, of Ms Fan's evidence.[14] As a result of that ruling, Ms Fan provided a further detailed affidavit setting out the "cross check" calculation. [15] When the matter came to be heard before me on 20 May, Oceania accepted the accuracy and calculation methodology relied on by Debonaire, subject to one general qualification. Mr Purcell accepted that Debonaire had used accurate figures and therefore that Debonaire would have sold furniture manufactured from the Seven Containers at the prices, and having incurred the costs, calculated by Ms Fan. Nevertheless, Debonaire had derived its lost profit calculation in terms of a "perfect world" outcome. By that, I understood Mr Purcell to be referring to the likelihood that there would have been damaged componentry contained in the Seven Containers, that all of the componentry might not have been successfully assembled into finished furniture in New Zealand, and that, moreover, at the end of the day, there may have been a certain amount of componentry that simply was not assembled or furniture that simply was not sold. They would appear to be not unreasonable propositions.[16] Although I acknowledge the commonsense of those propositions, at the same time Debonaire did not cross-examine Ms Fan, nor indeed Debonaire's managing director Mr Smith, nor its external adviser, Mr Lazelle, who had both filed affidavits earlier on in the process. On that basis, the proposition that the calculation is a perfect one has not been put to Debonaire's witnesses, they have had no opportunity to respond to it and any adjustment I were to make for the "real world" factors referred to by Mr Purcell would simply be a guess on my part. On that basis, I do not consider it would be appropriate for me to do so and therefore, in general terms, I accept Ms Fan's quantification. [17] Of the various adjustments that, in general terms, Mr Purcell had said were necessary in his affidavit of 19 November, the only specific adjustment that remained at large at the hearing of 20 May was the question of GST. [18] Ms Fan's calculation of the lost profit margin included GST. Similarly, interest was calculated on the basis of a GST inclusive lost profit margin. [19] I do not consider that to be appropriate. [20] The damages being calculated here are with respect to goods that had not been supplied, and therefore on which no GST has been charged or is chargeable by Oceania. Conceptually, therefore, the receipt of the lost profits damages award would not be subject to GST by my understanding, and it is not appropriate to include GST within that calculation. I consider that view is confirmed by the material provided to me by Mr Delany. Moreover, Debonaire provided no evidence as to the basis upon which GST was payable, beyond Ms Fan's assertion that she had included GST in her calculations because Oceania had included it in its calculations for the purposes of its summary judgment. The claim for the summary judgment was, however, for goods supplied that had not been paid for. As goods were supplied by Oceania, it is appropriate that damages include GST as Oceania will be required to account for the GST component of the sale price. That is not the case here, as lost profits are being calculated for goods that have not been supplied.[21] On that basis the net profit figure payable by Oceania to Debonaire is to be GST exclusive, and interest as claimed is to run on that GST exclusive amount. [22] The arithmetic would appear to be that a deduction should be calculated and made to each of Ms Fan's original figures of lost profits of $201,716.75 and interest thereon of $35,009.30 by dividing each of those amounts by 9, to get the GST component, and then deducting that GST component from the original figure. By my arithmetic, the result is that the lost profits figure is $179,303.78 and the interest figure is $31,119.38. [23] As will be apparent, I consider that Debonaire's claim for interest, albeit on the GST exclusive amount, is appropriate in terms of s 87 of the Judicature Act 1908. The general rule is that interest runs from the time when a cause of action arose. I consider that – given the underlying commercial arrangements between the parties – the anticipated date of receipt by Debonaire from its customers of the purchase price of goods supplied is the best available indicator of that time. That is the basis upon which Debonaire calculated interest, which I therefore accept.Recall and correction applications[24] By way of interlocutory application dated 17 December 2009, Debonaire applied for orders that my judgment be recalled to the effect that the order that Debonaire pay contractual legal costs and expenses of $27,358 be rescinded and that GST be added to the amount of damages awarded ($67,998.26) in respect of the sub- set claims. [25] Alternatively, Debonaire sought correction of my judgment under the slip rule to the effect that GST be added to the award of damages for the sub-set claims. [26] As far as applications for recall go, the principles are usefully summarised inMcGechan at HR11.9.01. The position remains as set out in Horowhenua County v Nash (No 2). 1 As noted by McGechan, in Erwood v Maxted and Others,2 the Court1 Horowhenua County v Nash (No 2) [1968] NZLR 632.2 Erwood v Maxted [2010] NZCA 93.of Appeal has recently recorded its concern with the proliferation of unjustified applications to recall, emphasising that where the rule dealing with accidental slips or omission could not be relied on (in the High Court HR11.10) then applications for recall under HR11.9 would be decided on the basis of a strict application of the principles in Horowhenua County v Nash, as confirmed by the Court of Appeal inUnison Networks Ltd v Commerce Commission.3 In that context, the comment of the Court of Appeal in Unison – that the third category of Nash is intended to be narrow, and that cases appropriate for recall on that basis are likely to be rare – is to be noted. [27] The application of the slip rule is a more straightforward matter. Under the High Court Rules, an accidental slip or omission may be corrected under r 11.10. What is sought to be correct must be the result of a slip; the rule may not be used where a more convenient form of order is subsequently thought of. Nor may it be invoked to vary an order in a fundamental way. A litigant cannot use the rule to improve the judgment that has been obtained. [28] In effect, the slip rule is to be used in order to correct and properly reflect in a judgment the manifest intention of the Court. [29] I turn now to apply those principles to the defendant's applications.My award of contractual legal costs[30] Debonaire seeks recall of my judgment of 27 August 2009 under HR11.9 to the extent that I ordered contractual legal costs were payable by Debonaire to Oceania. On that point I found as follows:[208] Pursuant to the same clause in the contract [i.e. that providing for default interest], Oceania also claims for "all expenses and costs (including legal costs as between solicitor and client) in connection with these proceedings, including its summary judgment application". I did not understand Debonaire to contend that the costs claimed in connection with the summary judgment application of $27,358.00 were not payable under the Supply Agreement. In my view, given the terms of the Supply Agreement, that was an appropriate concession. I therefore find that Oceania is entitled under the Supply Agreement to these legal costs and expenses.3 Unison Networks Ltd v Commerce Commission [2007] NZCA 49.[209] Beyond this, it is clear that the provision in the Supply Agreement does not apply to costs incurred after Oceania obtained summary judgment. The proceedings since then have not been to obtain or attempt to obtain a remedy for Debonaire's failure to pay. Instead they have been directed at Debonaire's counter claims for breach of contract and the sub-set claims.[31] Debonaire now contends that that decision reflects a misunderstanding by me of the submissions I heard, and accordingly should be recalled. In particular, Debonaire says that – whilst it may not have put its position as clearly as it might have done – there was no such concession in its submissions. [32] In its written synopsis of opening submissions Debonaire put the position this way:54.13 Does the plaintiff's claim for costs under the contract survive the summary judgment and order made at summary judgment. 54.14 If so, should the exercise of the Court's discretion allow them.[33] It then submitted:55.6 The plaintiff's claim for contractual legal costs and expenses does not survive the summary judgment already entered because the contractual provision is limited to the plaintiff "obtaining or attempting to obtain a remedy for failure to pay".[34] During the course of Mr Laurenson's opening submissions, he referred me to the revised statement of claim that had been filed on the eve of the hearing. There, for the first time, Debonaire had pleaded the defence of the effect of the summary judgment to this part of Oceania's claim. There was some preliminary objection by Mr Delany to that pleading. That objection was not sustained, and Mr Delany subsequently filed a revised statement of defence to the counterclaim. [35] The matter was not further referred to in Mr Laurenson's opening for Debonaire. [36] In Debonaire's written synopsis of its closing submissions, the point was put thus:38. The plaintiff's claim for contractual legal costs and expenses does not survive the summary judgment already entered because thecontractual provision is limited to the plaintiff "obtaining or attempting to obtain a remedy for failure to pay".[37] In Mr Laurenson's closing, he addressed the point in this way:Claim for costs, again in my submission that's functus. The Court has given judgment on the plaintiff's claim, and ordered costs, and in any event, there is no basis to claim it because it can – the contractual provision only relates to obtaining or attempting to obtain a remedy for failure to pay and the plaintiff has got that remedy.[38] I think the principal focus of those submissions was that the contractual provision was limited to Oceania obtaining or attempting to obtain a remedy for failure to pay. Therefore, because Debonaire had obtained its remedy for failure to pay in obtaining summary judgment, the contractual provision did not operate after that point. There was less focus, therefore, on the effect of the summary judgment on a claim for contractual costs up to that point. I accept that, in his closing oral submissions, Mr Laurenson did advance the "functus" argument by reference to the Associate Judge's decision, and in particular his award of costs to Oceania. I do not consider, however, that at any stage in argument prior to judgment that submission was as clearly put as it was in Debonaire's post-judgment submissions. Whilst, therefore, I think it is fair for Debonaire to say that it did not actually concede the validity of Oceania's claim for contractual costs up to and including the grant of summary judgment by Associate Judge Gendall, I do not think my judgment is necessarily to be classified as a simple misunderstanding of an otherwise clear position argued for by Debonaire. [39] Furthermore, and in any event, even if Debonaire had done so I think it would have been open for Oceania to argue with some force that in awarding 2B costs, Associate Judge Gendall had not necessarily turned his mind to the contractual entitlement provided by the Supply Agreement in the same way as he had, for example, to the contractual provisions for default interest found therein. [40] In these circumstances, I am not persuaded that this element of my judgment is an appropriate matter for recall.[41] I accept, however, that in quantifying that entitlement, I failed to take account the 2B award ordered by the Associate Judge on summary judgment. That is an obvious oversight. Accordingly, and pursuant to the slip rule, I amend my judgment to the extent that the award of the contractual costs should be reduced by the amount of $10,607.00 so that it becomes $16,751.00.GST on sub-set claims[42] As originally pleaded, the defendant in its counterclaim did not seek GST on the sub-set claims. That pleading was also only included in the amended pleading filed on the evening of trial. [43] In its revised pleading, the defendant sought judgment for the sub-set claims "plus GST". There was no articulation in that revised statement of claim as to the factual basis upon which that amount was claimed to be payable by way of credit to the defendant "plus GST". [44] Whilst Mr Laurenson in his opening drew my attention to the addition of the claim for GST, he made no reference to that issue in his closing submissions. Nor was any evidence directed at the trial, or in Ms Fan's damages affidavit, as to the conceptual basis upon which GST was claimed. [45] In these circumstances, I do not think Debonaire can bring its assertion that GST should now be added within the ambit of a claim for recall, nor for correction of a slip. Decisions such as Gunson v Aviation Classics Ltd,4 where the issue of GST was analysed at [199] – [204], and Meter Minders Limited v Ark Innovations Limited, where French J discusses GST at [110] – [111], show that in general terms proof that GST is payable on an amount ordered by way of damages is required.5 It could be in the form of showing that IRD had in fact required GST to be paid on the judgment or that, in the general run of things, the proper characterisation of a payment was so clearly one that would involve its recipient, as the supplier of relevant goods and services, to be liable for a GST payment. I am not in a position4 Gunson v Aviation Classics Ltd [2004] 3 NZLR 836.5 Meter Minders Limited v Ark Innovations Limited HC Christchurch CIV-2007-409-002873, 1 August 2008.to reach that conclusion as regards the sub-set claims. I do not think it is sufficient to simply claim GST, without providing some evidential basis that it is in fact payable. If there is any evidence in the extended record of this proceeding, it was not drawn to my attention in this context. On that basis, I decline the defendant's application for recall or correction for a slip with respect to that matter.The overall result of my judgment[46] The overall result of my judgment would therefore appear to be that: a) Oceania is to pay to Debonaire: i) $210,423.15 in respect of damages, and interest thereon up to judgment, for breach of contract; and ii) $67,998.26 in respect of the subset claims; and b) Debonaire is to pay $16,751.00 to Oceania for contractual legal costs. [47] As at the date of my judgment, Oceania owed $261,670.41 (exclusive of costs on my judgment and subsequently) to Debonaire. [48] Applying – as would seem appropriate – a simple set-off between that amount and the amount owed by Debonaire to Oceania on that day in respect of the earlier summary judgment ($386,510.49) means that as at the date of my judgment Debonaire owed Oceania $124,840.08. Interest will accrue on that judgment sum at 8.4 per cent until payment. [49] Leave is reserved if either party disagrees with this analysis.Costs[50] For Oceania, Mr Delany asked that I not address the question of costs until Oceania has had the opportunity to consider whether a Calderbank offer Oceaniaprovided to Debonaire on 2 April affects costs. Accordingly, I will not rule on costs. I invite Oceania's submission on that issue, and request that be provided within 14 days of this judgment, with a reply from Debonaire seven days thereafter. [51] I note two further matters: a) In his memorandum of 18 September Mr Laurenson also sought interest on the amount of damages awarded in respect of the sub-set claims. That application was not pursued at the hearing on 20 May, and was not mentioned in Mr Laurenson's written submissions. On that basis I do not award interest on the damages on the sub-set claims. Furthermore, I think there is considerable strength in Mr Delany's initial response to possibly anticipated submissions on this point in his written submissions for the purposes of the hearing on 20 May, that it is not possible to identify a relevant date by reference to which pre-judgment interest would sensibly accrue on that amount. b) Pursuant to the slip rule, I also correct my judgment of 27 August 2009 where, in the final paragraph, the reference in the second to last line should be "damages payable by Oceania to Debonaire". [52] In all of this I thank counsel for the helpful way in which they have both conducted this litigation."Clifford J"Solicitors: Cooper & Co, P O Box 13009, Wellington for the plaintiff (Counsel J J Delany – john@terracechambers.co.nz) Gillespie Young Watson, P O Box 30940, Lower Hutt for the defendant (Counsel: R C Laurenson – resultlaw@xtra.co.nz)