IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

CIV 2007-419-000845

UNDER	the Fair Trading Act 1986

IN THE MATTER OF	breach of the Fair Trading Act 1986, Passing off, and Breach of Distribution Agreement

BETWEEN	MECHANICAL PLASTICS CORP Plaintiff

AND	HOLDFAST NZ LIMITED Defendant

Hearing:	14 September 2010

Counsel:	DL Marriott for plaintiff
BP Henry and PJ Knapp for defendant

Judgment:	16 September 2010 at 3:00pm

JUDGMENT OF ASSOCIATE JUDGE FAIRE [on application to strike out]

This judgment was delivered by me on 16 September 2010 at 3:00pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Solicitors:	James & Wells, Private Bag 11 907, Auckland
Dennis J Gates, PO Box 222, Whangaparaoa

MECHANICAL PLASTICS CORP V HOLDFAST NZ LTD HC HAM CIV 2007-419-000845  16 September
2010

The application

[1]       The defendant applies to strike out those parts of the third amended statement of claim which pleads a contract cause of action against the defendant.  The specific paragraphs are paragraphs 2.1 to 2.11 and 5.1 to 5.2 of the third amended statement of claim.

[2]       Although not specifically pleaded as such, the application was advanced on the  basis  that,  in  respect  of  the  alleged  contract  cause  of  action  no  reasonably arguable cause of action is available.

The court’s approach to a strike out application:

[3]       A defendant who seeks an order striking out all or part of a pleading must satisfy the requirements of r 15.1.  Rule 15.1 provides:

The court may strike out all or part of a pleading if it –

(a)	discloses  no  reasonably  arguable  cause  of  action,  defence,  or  case appropriate to the nature of the pleading; or

(b)        is likely to cause prejudice or delay; or

(c)        is frivolous or vexatious; or

(d)        is otherwise an abuse of the process of the court.

[4]       The court’s approach to a strike out application was summarised in Attorney- General v Prince and Gardner as follows:

A striking-out application proceeds on the assumption that the facts pleaded in the statement of claim are true.  That is so even although they are not or may not be admitted.  It is well settled that before the Court may strike out proceedings the causes of action must be so clearly untenable that they cannot possibly succeed.   (R Lucas & Son (Nelson Mail) Ltd v O’Brien [1978] 2 NZLR 289 at pp 294-295; Takaro Properties Ltd (in receivership) v Rowling [1978] 2 NZLR 314 at pp 316-317); the jurisdiction is one to be exercised sparingly, and only in a clear case where the Court is satisfied it

has the requisite material (Gartside v Sheffield, Young & Ellis [1983] NZLR
37 at p 45; Electricity Corporation Ltd v Geotherm Energy Ltd [1992] 2
NZLR  641);  but  the  fact  that  applications  to  strike  out  raise  difficult questions  of  law,  and  require  extensive  argument  does  not  exclude jurisdiction (Gartside v Sheffield, Young & Ellis).

[5]       The  principles  referred  to  above  were  endorsed  in  Couch  v  Attorney- General.

[6]       The court can have regard to evidence either put forward in opposition or support of the application provided it does not contradict that which is pleaded in the statement  of  claim:  Attorney-General  v  McVeagh.      Although  r 15.1  permits  a striking out of part of a pleading the court discourages partial strike out applications: Apple Fields Ltd v New Zealand Apple and Pear Marketing Board and Whitman v Airways Corporation of New Zealand Ltd.

[7]       A partial strike out of a pleading may be justified where the portions to be struck out support a cause of action which relies on different facts to the remaining causes of action in the claim.  That is because both the preparation for trial and the time of the trial itself may be substantially reduced thus justifying the benefit of the interlocutory examination.

Background

[8]       Before analysing the specific matters advanced in support of the application and  the  grounds  for  opposing  it,  I  set  out  the  background  summary  from  the judgment delivered on an application by the defendant seeking summary judgment.

[9]       The  plaintiff  is  an  American  corporation  carrying  on  business  as  a manufacturer and exporter of building products, including wall anchors.

[10]     The defendant is a New Zealand company which carries on business as an importer and distributor of building products, including wall anchors.

[11]     On  20  October  1994  the  plaintiff  and  the  defendant  entered  into  an agreement.   That provided for the defendant purchasing particular products of the plaintiff for distribution and sale in New Zealand.   Those products included the plaintiff’s hollow wall toggler and alligator anchors.  They are both marketed under the ‘Toggler’ trademark.

[12]     The formal agreement was for an initial period of one year.   It could be renewed for a second year if the defendant purchased a minimum value of product. It could then be further extended subject to mutually agreed minimum purchase benchmarks.

[13]     The formal agreement contained the following terms:

a)        The defendant was required to package the products in accordance with conditions which were specified in the agreement;

b)        The  defendant  was  required  to  use  its  best  efforts  to  develop effectively the maximum volume of sales of the product continually throughout the market in the territory reserved for the defendant;

c)        The agreement gave the defendant an exclusive territory, being New Zealand and certain South Pacific Islands not actually revealed in the copy of the agreement provided to the Court;

d)        The   agreement   specified   the   defendant’s   marketing   area   of responsibility for the sale of the products as:

i)         The “do-it-yourself (DIY)” market which means the consumer orientated retail trade (including retail hardware stores, home centres,  lumberyards, supermarkets, drug stores,  department stores, etc); and

ii)        The  “construction  trade”  market  which  means  the  non- consumer orientated distribution to the construction and industrial trade (including speciality fastening wholesalers, contractors, job-site tradesmen, electrical wholesalers, plumbing wholesalers, mill supply houses, etc);

e)        The  agreement  covered  the  use  of  trademarks  and  patents  and provided for any situation where there was an infringement of same. It also has specific provisions dealing with what was to happen on the termination of the agreement;

f)         The agreement set out the terms and conditions of sale in an exhibit annexed to it;

g)        There is also a choice of law provisions nominating the laws of the State of New York, United States of America and an arbitration provision; and

h)	The agreement provides that it is an entire agreement.

[14]     The formal agreement was not renewed on expiry of the initial one-year period  on  20  October  1995.    The  plaintiff  pleads  that  the  formal  agreement terminated at that date.  That is common ground.

[15]     The  plaintiff  pleads  that  the  agreement  was  replaced  by  an  informal distribution agreement which came into operation from 20 October 1995.

[16]     The  plaintiff  further  pleads  that  it  terminated  the  agreement  in  2006  by advising the defendant that it would cease to supply the plaintiff’s products to the defendant.  It has an alternative pleading, however, that it terminated the agreement by letter dated 30 April 2007.

[17]     It is common ground that trading between the plaintiff and the defendant continued after 20 October 1995.   The defendant denies, however, that that was

pursuant to an informal distribution agreement on the same terms as the formal agreement, which had not been renewed.

[18]     Ray Staiger Limited on 22 November 2006 was appointed the exclusive New Zealand distributorship agency for the plaintiff’s hollow wall toggler and alligator anchors.

The pleaded contract

[19]     In its third amended statement of claim, the plaintiff pleads a new or informal distribution agreement in paragraph 2.6.  Paragraph 2.6 provides:

Informal Distribution Agreement

1.1	Upon the termination of the Formal Agreement, the parties intended that they should henceforth be bound by the terms of a new agreement incorporating at least those terms of the Formal Agreement set out in paragraph 2.3 herein (“the Informal Agreement”).

Particulars

(a)	The termination of the Formal Agreement on 20 October 1995 occurred without notice or mention by either party;

(i)	Prior to and subsequent to 20 October 1995 the parties were engaged in regular communication, yet the termination of the Formal Agreement was not mentioned by either party to the other at any time prior to that date, after that date or at any time prior to these proceedings being already in contemplation;

(ii)	Prior to and subsequent to 20 October 1995 the parties were engaged in a continuing course of conduct that was unaltered and unaffected by the termination of the Formal Agreement, including, but not limited to, an order placed on 12 October
1995 by the defendant for stock of the plaintiff’s products with specific intructions requiring supply “on 1st November”
1995.

(b)        Subsequent to 20 October 1995 the parties continued to act towards each other as if they were both still bound by at least those terms of the Formal Agreement pleaded in paragraph 2.3 herein;

(i)	It was the plaintiff’s understanding that the obligations pleaded in paragraph 2.3 herein continued in force as between the parties;

(ii)	The plaintiff continued to demand compliance with its requirements for packaging and promotional material and the

defendant continued to seek the plaintiff’s approval prior to undertaking any changes to packaging or promotional material;

(iii)	The defendant continued to seek and obtain promotional artwork, material and stock from the plaintiff;

(c)	Subsequent to 20 October 1995 the parties continued to represent to each other that the parties were bound by the terms of a “Distribution Agreement”;

(i)	On at least 10 June verbally and in writing and 11 July 1996 in writing, the Plaintiff expressly demanded the defendant comply with its obligation under “the distribution agreement” to supply market information and reports.

(ii)	The defendant responded by supplying the information sought without questioning or challenging the assertion that it was a party to, or obligated under, a distribution agreement.

(d)	From 20 October 1995 the relationship between the plaintiff and the defendant continued to be that of manufacturer/appointed
distributor;

(i)	Both the plaintiff and the defendant continued to represent to each other, and to third parties, that the defendant was the plaintiff’s New Zealand distributor of the plaintiff’s products;

(ii)	The Plaintiff sought and obtained at its own expense, at the defendant’s request, BRANZ approval for some of its products;

(iii)	The defendant assisted with registration requirements for the plaintiff’s New Zealand trade mark portolio;

(iv)	All requests for the plaintiff’s products received by the plaintiff from third parties within New Zealand were referred to the defendant as the plaintiff’s New Zealand distributor. The defendant acknowledged all such referrals and contacted the third parties on that basis;

(e)	The defendant continued to purchase the plaintiff’s products from the plaintiff, and continued to sell the plaintiff’s products within the territory identified under the formal agreement;

(f)	The plaintiff continued to allow the defendant to use, and the defendant alone continued to use, the plaintiffs trade marks identified in the Formal Agreement (‘the plaintiff’s trade marks”) in relation to the plaintiff’s goods;

(g)	The plaintiff continued to direct, and, save as expressly pleaded elsewhere in this Third Amended Statement of Claim, the defendant continued to observe, the manner in which the plaintiffs trade marks could/could not be used and the manner in which the plaintiffs products could be packaged and marketed including that the plaintiffs products could only be packaged in the plaintiffs packaging or such other packaging as the plaintiff had approved;

(h)	The parties thus recognised that at least the terms of the Formal Agreement set out in paragraph 2.3 herein, continued to apply under the Informal Agreement in all material respects, in the same way as they had whilst the Formal Agreement remained in force.

[20]	The third amended statement of claim contains in paragraph 2.3 the alleged terms of the formal agreement which are as follows:

a)	The Formal Agreement included the following terms: “2	Appointment
MPC grants Distributor the right to distribute the Products for the
Market in the Territory.

3.1	Packaging

Distributor shall package the products in accordance with the conditions specified in Exhibit B, entitled “Packaging Requirements", which is attached to this Agreement…

3.2	Sales Efforts

Distributor will use its best efforts to develop effectively the maximum volume of sales of the Products continually throughout the Market in the Territory.

Distributor will use all available means to promote the Products effectively, including but not limited to such means as advertising and direct sales promotion throughout commerce and industry, and also to promote resale through its retailer and wholesaler network throughout the Territory.

3.3	Inventory

Distributor shall maintain at all times a sufficient inventory of the Products to satisfy the anticipated demand for the Products in the Territory.

4	Trade Marks and Patents

Distributor agrees that it will not use any of the marks and/or patents of MPC or any of its affiliates mentioned in Article 1.1 or any reproduction, counterfeit, copy or colourable imitation thereof, or any mark and/or patent confusingly similar thereto, except with the permission of and, upon specifying that, they are acting as a distributor of the Products for MPC.

In no event shall Distributor use any such marks and/or patents as part of a company or trade name nor in any manner which, in the opinion of MPC, could indicate that Distributor is associated in any way other than as a distributor of the Products.

5.1	Infringement of Trademarks and Patents

Distributor shall not at any time do, or knowingly allow to be done, any act or thing which will impair ownership and rights of MPC in and to the said trademarks and/or patents.

Distributor agrees that it will not obliterate, remove, conceal, or modify any mark of MPC appearing on any of the Products, nor will it append any additional marks thereto without the prior written consent of MPC.

6	Marketing and Sales Information

Distributor agrees to furnish MPC in regular intervals, when available, with all information and statistics as set out in Exhibit C in order to enable MPC to follow the sales and to be aware of the market development in the Territory.

10.1	Legal Situation of Distributor

Distributor buys and sells in its own name and for its own account. It acts as an independent trader as regards both MPC and the customers. It shall effectively promote the sale of the Products in the Territory, without being authorised to act in the name of MPC. Furthermore, it shall safeguard the interests of MPC with the due diligence of the responsible businessman. Distributor shall bear all of its own expenses for its operation and staff, except for such items as MPC shall by prior written agreement undertake to pay.

10.5	Waiver of breach

The failure of either party to require the performance of any term of this Agreement, or the waiver by either party of any breach of this Agreement, shall not prevent a subsequent enforcement of such term nor be deemed a waiver of any subsequent breach.”

[21]     What is pleaded in paragraph 2.3 of the third amended statement of claim are some of the express terms contained in the terminated formal agreement but not all. The following articles which were contained in the formal agreement are not alleged to be part of the informal agreement:

a)	Article 3.4 dealing with sales outside the territory;

b)	Part of Article 5.1 dealing with trademarks and patents;

c)	Article 10.2 dealing with confidentiality;

d)	Article 11 dealing with dispute resolution; and

e)	Article 12 the entire agreement provision.

Choice of law

[22]     The formal or written agreement which was terminated, contains in clause

10.4, a statement that the agreement is to be construed according to the laws of the state of New York, United States of America.   Neither counsel relies on that provision.  The application therefore must be decided by reference to the law of New Zealand.  The law of the state of New York is presumed, in these circumstances, to be the same as the law of New Zealand:   Mount Cook (Northland) Ltd v Swedish
Motors Ltd.

The defendant’s case

[23]     In summary the defendant’s position is:

a)        The parties expressly agreed that the distribution agreement would terminate on 20 October 1995;

b)        There is no evidence of the parties forming the necessary intention to enter into an informal agreement to extend some of the terms of the formal agreement beyond 20 October 1995;

c)        There  were  no  specific  negotiations  from  which  a  court  could determine that the parties had agreed to enter into a new contract on some of the terms previously specified in the formal agreement.  The defendant says the provision in the formal agreement providing for a patent protected product was essential to it and without that term it would not be prepared to be bound by terms which were onerous to it;

d)        The position post the termination of the distribution agreement was nothing more than a commercial arrangement where orders for the

supply of goods were placed by the defendant with the plaintiff.  The plaintiff made the supply.  The defendant paid for the goods supplied; and

e)        When the position set out in (d) is considered against the terms which were set out in the formal agreement there is no basis for concluding that the parties entered into a new contract following termination of the written contract in 1995.

The plaintiff’s opposition

[24]     The plaintiff’s position in summary is that there is a body of correspondence between the parties which read in conjunction with the actions of the parties, both immediately before and after termination of the formal written contract, provides a basis for pleading that a further agreement exists and as to the terms of that further agreement.

[25]     Mr Marriott  relied  specifically  on  the  following  matters  to  support  the position outlined in the previous paragraph, namely:

a)        The expiry of the formal agreement passed without either party noting any change in position;

b)        On  the  expiry  of  the  formal  agreement  both  parties  continued  to transact and behave towards each other in a manner that showed that each intended to continue to be bound by certain terms of the previous agreement;

c)        Intention to be bound by a new agreement can be inferred from the parties’ conduct and, in particular, from the conduct subsequent to the termination of the formal agreement;

d)        The  parties  at  times  acknowledged  the  existence  of  a  formal agreement including the existence of specific obligations; and

e)        That  the  parties  continued  to  act  as  if  they  were  bound  by  the agreement subject, of course, to those areas where it is alleged that the defendant was in breach.

The  possible  explanations  for  the  parties’  actions  post  termination  of  the written contract

[26]     Two possibilities arise, namely

a)        Either there is a new contract on terms similar to the distribution agreement which form the basis for the continuing steps taken by the parties and which included the supply of product and the payment for the product and the distribution of the product; or

b)        The parties’ subsequent actions are simply explained on the basis that the defendant would make an order for the supply of the plaintiff’s products  and  the  plaintiff  would  thereafter  supply the  products  in return for payment for same by the defendant.

The issue

[27]     Do the pleaded facts and the material contained in the affidavits provide a foundation for the existence of the contract which is alleged?   In short, is there a basis for a possible finding that a contract of the sort pleaded exists?

[28]     In Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand

Ltd the prerequisites to the formation of a contract were listed as:

a)         An intention to be immediately bound (at the point when the bargain is said to have been agreed); and

b)         An agreement, express or found by implication, or the means of achieving an agreement (eg an arbitration clause), on every term which:

(i)	was legally essential to the formation of such a bargain;
or

(ii)	was regarded by the parties themselves as essential to their particular bargain.

At [54] and [56] guidance is given as to the width of inquiry when considering the issue of whether a contract has been formed, namely:

[54]      Whether the parties intended to enter into a contract and whether they have succeeded in doing so are questions to be determined objectively. In considering whether the negotiating parties have actually  formed  a  contract,  it  is  permissible  to  look  beyond  the words of their “agreement” to the background circumstances from which it arose – the matrix of facts. This can include statements the parties made orally or in writing in the course of their negotiations and drafts of the intended contractual document.

[56]      It   is   also   permissible   when   considering   contract   formation (or rectification) to look at subsequent conduct of the parties towards one another, including what they have said to each other after the date of the alleged contract.

The contract pleading analysed

[29]	Paragraph 2.6(a)(i) of the third amended statement of claim provides:

2.6	Upon the termination of the Formal Agreement, the parties intended that they should henceforth be bound by the terms of a new agreement incorporating at least those terms of the Formal Agreement set out in paragraph 2.3 herein (“the Informal Agreement”).

Particulars

a.   The termination of the Formal Agreement on 20 October 1995 occurred without notice or mention by either party;

i.	Prior to and subsequent to 20 October 1995 the parties were engaged in regular communication, yet the termination of the Formal Agreement was not mentioned by either party to the other at any time prior to that date, after that date or at any time prior to these proceedings being already in contemplation;

[30]	It is self-evident from this pleading that there is no precise offer to contract on the new terms which are pleaded which is followed by an acceptance of that offer.

[31]     The  formal  agreement  which  the  parties  signed  provides  evidence  of  an express  intention that  there  would  be  no  extension  unless  the extension  was  in writing.

[32]     The relevant parts of article 12, the entire agreement provision provide:

No change, modification, extension, renewal, revision, discharge, abandonment, waiver or termination of the agreement or of any of the provisions herein contained or any notice of termination hereof given by MPC  shall  be binding upon  MPC  unless  made  by a  duly authorised in writing.  Any modification or amendment of any provision of this agreement must be in writing and bear the signatures of the authorised representatives of both parties.

[33]     Although  the  plaintiff  pleads  that  the  formal  agreement  was  terminated, Mr NH Garfield, its director, in his affidavit, in referring to the formal agreement says that it was “never expressly terminated or renewed”.   He goes on to say that “neither party turned their minds to the termination provisions of the formal agreement”.  He adds though that the obligations created under the formal agreement continued in force on an informal basis between the parties.   He claims his understanding is supported by the course of dealing between the parties subsequent to the October 1995 termination.

[34]     Mr Garfield observes that the plaintiff’s standard conditions of sale contained no obligations on a distributor to:

a)        Promote the plaintiff’s products;

b)	Provide the plaintiff with marketing and sales information; or c)	Comply with the plaintiff’s packaging requirements.
[35]     Mr Marriott took me through a series of email correspondence between the parties  spanning  over  some  ten  years  or  more  wherein  reference  is  made  to promotion of the plaintiff’s products, marketing and sales information and the need to comply with the plaintiff’s packaging requirements.  Certainly, there is evidence of the defendant responding to requests which are made by the plaintiff on the basis that the agreement was extended.  That, however, is not the full picture.

[36]     If one goes to the correspondence relied upon by Mr Marriott which starts prior to the termination of the agreement, reference is made in particular in the facsimile  of  10 May 1995  from  the  plaintiff  to  the  defendant’s  director,  of  the plaintiff’s responses to threatened action by the defendant.  The response is to refer to the specific provisions of the formal agreement which apply on its termination. Far from supporting the position that the formal agreement was effectively being extended or rolled over, this correspondence clearly supports the opposite position. That is, that the terms of the formal agreement apply with the result that there would be no extension of it.

[37]     The same correspondence evidences complaints by the defendant about the plaintiff’s compliance with the contract.  That is inconsistent with there being any intention on the defendant’s part to extend the formal agreement.

[38]     I invited both counsel to refer me to any authority where an agreement had been rolled over, that is where the court had been asked to find that a new agreement on similar terms to that which previously existed could be inferred from a course of conduct only.  Counsel advised me that their research had not turned up any specific example.

[39]   The pleading itself does not provide a proper outline of the essential requirements for the formation of the contract.  The evidential material that has been placed before me, which would seem to include all the surrounding matrix of facts, does not provide any support for the formation of a contract on the terms alleged in the third amended statement of claim.  The plaintiff has now had three attempts at amending its pleading.  I drew specific attention to the problem about the contract
pleading  in  the  9 February  2009  judgment   on  the  defendant’s  application  for

summary judgment.   There does not therefore appear to be any further basis that might found a proper factual foundation for the proposition that the plaintiff and defendant intended to enter into a further contract on the terms pleaded.

[40]     The plaintiff appears throughout to have set the rules as to how it wished its relationship with the defendant to proceed.  The formal contract itself is evidence of

that.   It set out the rule for variations or extensions which clearly has not been followed.  I am satisfied that there is no reasonably arguable contract cause of action available to the plaintiff on the basis pleaded.  On that basis, clearly, paragraphs 5.1 to 5.2 of the third amended statement of claim must be struck out.

[41]     Mr Marriott, in his notice of opposition, pleads that paragraphs 2.1 to 2.11 are relevant to the other two causes of action.  In view of the fact that counsel did not expressly address on the point, despite the fact that I raised it at the time, I do not strike out those paragraphs of the third amended statement of claim.   Their significance, however, is limited to the remaining causes of action.

Orders

[42]     I order that the contract cause of action be struck out and, in particular, paragraphs 5.1 to 5.2 of the third amended statement of claim are struck out.

Costs

[43]     At the conclusion of the hearing I invited counsel to indicate whether they required to make separate submissions on the question of costs.  Both confirmed to me  that  they  accepted  that  Category  2  and  Band B  for  the  steps  taken  were appropriate in this case.  They however asked me to reserve the question of costs in the first instance on the basis that if they could not agree memoranda would be filed. Accordingly, I reserve costs and order that if counsel are unable to agree memoranda in support, opposition and reply on the question of costs shall be filed and served at seven-day intervals.

Further conference

[44]     I allocate a case management conference by telephone with counsel for 9am on  Friday,  22 October  2010.    The  following  matters  will  be  addressed  at  that conference:

a)	disposal	of,	or	allocation	of	a	fixture	for,	any   outstanding interlocutory application;

b)	whether the issues requiring resolution at trial recorded in paragraph

1(d), (e), (f), (g) and (h) of my minute of 2 July 2008 require revision;

c)	settlement   and   whether   a   mediation   or   a   Judicial   settlement conference should be ordered;

d)	trial duration, the fixing of the trial date and the making of any special trial directions that are required.

Counsel shall file and serve memoranda dealing with these items two working days before the conference.

JA Faire
Associate Judge