IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2010-409-002175

BETWEEN	MOORHOUSE KITCHENS AND APPLIANCES LIMITED
Plaintiff

AND	NELSON KITCHEN APPLIANCES LIMITED
Defendant

Hearing:	2 December 2010

Appearances: G Riach for the Plaintiff
G Ryan for the Defendant

Judgment:	7 December 2010 at 4.00 pm

JUDGMENT OF WYLIE J

This judgment was delivered by Justice Wylie on 7 December 2010 at 4.00 pm
Pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar
Date

Solicitors/Counsel:
Graeme Riach, Harmans Lawyers, Christchurch (graeme.riach@harman.co.nz) Glen Ryan, Duncan Cotterill, Christchurch (glen.ryan@duncancotterill.com)

Case Officer: Emily Twemlow

MOORHOUSE KITCHENS AND APPLIANCES LIMITED V NELSON KITCHEN APPLIANCES LIMITED HC CHCH CIV-2010-409-002175  7 December 2010

[1]       Moorhouse   Kitchens   and   Applicances   Ltd   (“Moorhouse”)   is   seeking summary   judgment   against   the   defendant,   Nelson   Kitchen   Appliances   Ltd (“Nelson”), in the sum of $413,454.52, together with interest pursuant to the Judicature Act 1908 and costs.

The Pleadings

[2]       Moorhouse asserts that Nelson has no defence to the single cause of action raised in its statement of claim.

[3]       The statement of claim is straightforward.   It alleges breach of contract. Moorhouse asserts that:

a)	It is a kitchen appliance retailer based in Christchurch.

b)        The defendant is also a kitchen appliance retailer, with its Head Office in Christchurch, but carrying on business in Nelson.   It is a related company to Moorhouse.

c)	Moorhouse and Nelson entered into an oral agreement whereby:

i)         Nelson  would  place  orders  for  appliances  and  other  goods utilising Moorhouse’s trading accounts with wholesale suppliers.

ii)        The goods would be purchased by Moorhouse and would then be sold to Nelson for the wholesale price charged by the supplier to Moorhouse.

iii)       The  goods  would  be  delivered  direct  to  Nelson  by  the wholesale supplier.  Moorhouse would invoice Nelson for the goods on its standard terms and conditions of sale except that

the time for payment would be extended to the end of the month following delivery, rather than being prior to delivery.

iv)       All volume rebates earned by Moorhouse on goods purchased from suppliers would be retained by Moorhouse, even though the  rebates  may  have  been  earned  in  respect  of  goods purchased by Nelson, in consideration for Moorhouse carrying out administration services for Nelson without charge.

d)	During the period May to July 2010, goods were purchased by Nelson pursuant to this agreement to a total value of $260,726.33.

e)	Moorhouse has demanded this sum from Nelson.

f)	Between July and September 2010, further goods to a total value of

$236,855.80 were purchased by Nelson pursuant to this agreement, increasing the sum outstanding to $497,582.13.

g)	Nelson is in breach of the agreement, because it has refused and/or neglected to make payment.

[4]       Nelson has filed a notice of opposition.  It disputes that there was agreement for Moorhouse to retain rebates from goods purchased for Nelson.  It asserts that it is entitled to set off against the sum sought by Moorhouse the unpaid rebates and other monies owing by Moorhouse to it.

[5]       Nelson has quantified the amount of claims to set-off as follows:

a)	Rebates for period 1 July 2007 to 31 March 2008	$89,799.63	
b)	Rebates for period 1 April 2008 to 31 December 2009	$234,852.83	
c)	Rebates for period 1 January 2010 to 30 September 2010	$82,913.90	
d)	EHP stretch target	$2,983.88	
e)	Award stretch target	$2,904.28	
f)	Timaru Joinery invoice	$51,024.58	
	Total	$464,479.10	

[6]       It is common ground between the parties that since the proceedings were filed, Nelson has made a payment to Moorhouse of $33,103.03, and Moorhouse has accepted a liability to Nelson in the sum of $51,024.58 in respect of timber and joinery supplied to it by Nelson.  Accordingly, Moorhouse now seeks judgment in the sum of $413,454.52 plus interest.

[7]       Affidavits have been filed by a Mr Early, who is a director of Moorhouse. An affidavit in reply was filed by a Mr Veitch, who is a chartered accountant, and who at all relevant times acted for both Moorhouse and Nelson.   For Nelson, an affidavit has been filed by a Mr Langdon, who is the sole director and shareholder of that company.

[8]       After Moorhouse had filed its affidavit in reply, Mr Langdon sought to file a further affidavit.  Mr Riach for Moorhouse objected.  Mr Ryan for Nelson argued that the affidavit should be admitted.   He referred to the decision of Hansen J in Nelson Lifecare Centre Ltd v Sampson.

[9]       The rules make no provision for the filing of further affidavits after the affidavits  in  reply  have  been  lodged.    However,  Courts  have  permitted  such affidavits where they consider that the interests of justice require them.

[10]     Here  I am satisfied that it is appropriate to admit Mr Langdon’s further affidavit.  First, he responds to assertions made by Mr Veitch.  Mr Veitch did not file an affidavit at the outset, but only by way of reply.  He raises fresh issues.  Further, Mr Langdon responds to assertions made by Mr Early in his affidavit in reply. While he should have dealt directly with the matters raised in his first affidavit, if Mr Langdon’s  further  affidavit  is  not  admitted,  the  consequence  could  be  that summary judgment could be entered in favour of Moorhouse, notwithstanding that Nelson may have a valid defence.

Background

[11]     Mr Early and his wife own, either directly or indirectly, all of the shares in Moorhouse.  It is a retailer of “high end” electrical appliances.  It has a large shop in Moorhouse Avenue, Christchurch.

[12]     Nelson was incorporated in March 2007.  It has a share capital of 100 shares, all of which are held by Mr Langdon.  Mr Early asserts that 75 per cent of the shares are held by Mr Langdon on trust for him and his wife.  Mr Langdon is Mrs Early’s son, and Mr Early’s stepson.  Mr Early says that the trust documentation was never documented.   Mr Langdon for his part denies that he holds any of the shares in Nelson on trust for Mr and Mrs Early.  He says that it was agreed that Mr and Mrs Early would have a 50 per cent interest in the dividends paid out on the shares (if any), plus 50 per cent of any remaining shareholders’ equity on a winding up.

[13]     Moorhouse is a licensee of the “Kitchen’Things” brand, and because of its association  with  that  group,  it  is  able  to  obtain  attractive  buying  terms  from suppliers.   In particular, it can qualify for rebates, calculated on the level of sales over a given period.  Rebates can take different terms.  Some can take the form of an advertising rebate, others a straight product purchase rebate.   Depending on the supplier, there may be stretch target rebates, which are earned when a certain level of sales is achieved by a business.

[14]     Mr Langdon states that when he and Mr Early were discussing establishing the new business, he produced profit forecasts which showed Nelson retaining all the rebates on products ordered, and that he shared those forecasts with Mr Early.  He asserts that Mr Early never said to him that the rebates should not be included in the forecast.  Mr Early does not deal with this assertion in his affidavit in reply.

[15]     Mr Early asserts that there was an oral agreement in the terms set out above

— see [3](c) above.  He states that given the close relationship between the parties, the agreement was not documented.  Mr Langdon accepts that it was agreed, at least in the start up phase, that Nelson would order stock through Moorhouse’s accounts with  suppliers,  and  that  Moorhouse  would  provide  Nelson  with  administrative

services.   He says  that  Nelson was to pay Moorhouse a nominal fee for those services on invoice.  He denies that it was agreed that Moorhouse was to retain the rebates earned in respect of Nelson’s products purchased through Moorhouse’s accounts, and says that it was agreed that rebates earned in respect of orders placed through Moorhouse’s account by Nelson would be passed on to Nelson.

[16]     Mr Early says that the parties traded on the basis he asserted from early 2007, that Nelson purchased its stock through Moorhouse, that it was invoiced accordingly, and that it paid on invoice until the dispute the subject of these proceedings.   He asserts that Moorhouse’s staff carried out the accounts and administrative work for Nelson  and  that  no  charge  was  made  for  that  service,  and  that  all  rebates  for purchases were to be retained by Moorhouse.  Mr Langdon accepts that Moorhouse sent invoices to Nelson on a regular basis, and he acknowledges that the Moorhouse invoices did not give Nelson credit for rebates.  He asserts that this reflected the fact that each invoice issued by Moorhouse to Nelson usually included orders made by Nelson to a variety of suppliers, with different rebate percentages and arrangements. As as a result, it was simpler for Moorhouse to invoice Nelson for the invoice cost to it without rebate, and to ensure that the rebate payment was accounted for later.  He says that this was discussed on numerous occasions with Mr Early, and on some occasions in the presence of Mrs Early.   He also states that Moorhouse has never sent an invoice to Nelson for the administrative services provided.  He says that on each occasion Mr Early would say to him that he (Mr Early) needed to collate the information and that he would get back to him.  Mr Langdon says that he was patient because  Moorhouse  was  experiencing  financial  difficulties  and  it  was  not  in  a position to make payment of the rebates owing.  Mr Early for his part denies all of this and says that it is fabrication.

[17]     Both parties point to contemporaneous documents in an endeavour to support their respective contentions.  Mr Early notes that Mr Langdon was heavily involved in  the  business  of  both  companies,  effectively  in  a  managerial  role,  and  with particular emphasis on financial accounting as between the companies.  He notes that in his capacity as a director of Nelson Mr Langdon adopted and signed financial statements for the years ended 31 March 2008 and 31 March 2009, and that those accounts did not show any receivables owed by Moorhouse to Nelson for rebates,

nor  any  liability  on  the  part  of  Nelson  to  Moorhouse  for  administrative  fees. Mr Langdon for his part refers to the draft projections discussed above, and to an email  which  Mr  Early  sent  him  on  16  July  2010.    Mr  Langdon  had  asked  a Ms Collie,  the  accounts  person  at  Moorhouse,  to  send  Nelson  invoices  for  the administrative services provided.  Mr Early replied:

Obviously I need to do up invioces [sic] for the management fee in the last three years and also staorage [sic] fees for the same period.

[18]     Both parties agree that a dispute arose within the family in January 2010, and that matters came to a head between them shortly thereafter.  On 26 January 2010, Mr Langdon wrote to Mr Early telling him that the parties needed to “square up rebates owed and management fees between Moorhouse and Nelson”.  Mr Early did not respond in writing to that email.   He says, however, that he made it clear in discussions with Mr Langdon that he had no intention of changing the arrangement which  he  says  had  been  in  place  from  the  outset.    He  also  noted  that  Nelson continued to purchase and pay for stock subsequent to the email.  On 6 July 2010, Mr Langdon sent a further email to Mr Early.  Again he noted that the parties needed to tidy up “the money owed to Nelson from Moorhouse for rebates”.  He expressly stated that Nelson was claiming a set-off until the balance was cleared.   He noted that this could affect Moorhouse’s cash flow, and offered to come to some arrangement for payment over a period of time.  Again it seems that Mr Early did not respond to this email.   At the same time, Nelson stopped paying Moorhouse for stock ordered.  Nevertheless, Nelson continued to put orders through Moorhouse’s account, and Moorhouse allowed this to continue.

[19]     On 13 August 2010, formal demand was made by Moorhouse’s solicitors on Nelson for payment of the sum then outstanding in respect of the months of May, June and July 2010.   That letter did not refer to the claimed set-off.   Nor did it request Nelson to desist from ordering products through Moorhouse’s accounts with suppliers.   In the event, an additional $236,855.80 of goods were purchased by Nelson through Moorhouse since July 2010.

[20]     Against this general background, there are a number of rather more serious assertions.  Mr Early asserts that Mr Langdon is attempting to force Moorhouse by

inappropriate means to accept his point of view on the rebate issue.   He refers to “commercial blackmail”.   Mr Langdon for his part asserts that Moorhouse is interfering  in  Nelson’s  contractual  relationships  with  suppliers,  and  blocking attempts that Nelson is making to obtain supply, in its own name.

Submissions

[21]     Mr Riach for Moorhouse asserted that there is no dispute that the goods have been received by Nelson, or as to the quantum of Moorhouse’s claim, apart for the claimed set-off for rebates.   He argued that unless the Court finds that there is an arguable defence in relation to the rebates, then it must follow that Moorhouse is entitled to summary judgment.

[22]     Mr Riach submitted that Mr Langdon in his first affidavit does not allege an agreement between the parties under which Nelson was to receive rebates.   He argued  that  Mr  Langdon’s  explanation  that  the  invoices  sent  by  Moorhouse  to Nelson did not give Nelson credit for rebates because this was simpler was not credible.   He pointed to the assertion by Mr Veitch that Mr Langdon was heavily involved in the financial side of the business, and noted that he adopted and signed accounts  for  Nelson  which  made  no  reference  to  any  receivables  owed  by Moorhouse to Nelson for rebates.

[23]     Mr Riach then argued that neither a legal nor an equitable set-off can be established by Nelson.  In this regard, he submitted that there is no evidence of an agreement by Moorhouse to give a credit for the rebates as between the parties, and that there is no liquidated debt owed by Moorhouse to Nelson so as to qualify for a legal set-off.   Further, he argued that there is no equitable set-off and that Nelson remains entitled to bring a claim against Moorhouse for the claimed rebates if it wishes  to  do  so.    He  submitted  that  Moorhouse’s  claim  is  simply  for  goods purchased and supplied, and that there is nothing unjust about Moorhouse receiving payment for items that have been deliberately purchased by Nelson, and not paid for by it.  He asked me to adopt a robust approach to the alleged factual disputes, and to discount the assertions made by Mr Langdon in his affidavit.   He submitted that

those assertions are inconsistent with the undisputed contemporaneous documents and the trading practices adopted over the years in question.

[24]     Mr Ryan for Nelson submitted that Nelson is entitled to a set-off against the amount claimed.  He argued that the set-off arises by virtue of the oral agreement made  between  Moorhouse  and  Nelson  as  to  the allocation  of  rebates  earned  in respect of product orders placed by Nelson, with Moorhouse’s agreement, through Moorhouse’s accounts with suppliers.  He submitted that Nelson’s claim to a rebate is a liquidated cross-claim, arising in the same right as the claim in respect of which Moorhouse seeks judgment.  He submitted that the claim was both a legal set-off, because it is for a liquidated sum, and an equitable set-off, because Nelson’s claim so affects Moorhouse’s claim as to make it unjust not to bring it into account.

[25]     Mr Ryan referred to Moorhouse’s assertion that it was to retain the rebates in consideration for providing administrative services to Nelson.  He submitted that that is not credible.  He argued that the administrative services provided were relatively modest, whereas the amount which Moorhouse claims for the unpaid rebates totals some $413,000 over the three-year period.  He queried why Nelson would agree to the terms alleged by Moorhouse, and noted Mr Langdon’s evidence that Nelson could have established its own direct relationships with suppliers and thus qualified for rebates.  He submitted that the terms of the agreement, as alleged by Mr Early, simply do not make commercial sense.  He also submitted that the alleged agreement has to be considered against the relationship of the parties as it stood at the time.  He noted the family connection, and submitted that the relationship between Mr Early and Mr Langdon was clearly one based on trust.

[26]     Mr   Ryan   submitted   that   there   is   a   reasonably   arguable   defence   to Moorhouse’s claim.  He argued that the affidavit evidence raises several significant factual disputes, and that the summary judgment application should be declined.  He asserted that on Mr Langdon’s evidence, a set-off is available to the defendant, and that the plaintiff cannot establish that Nelson’s contention does not amount to a set-off.

Analysis

[27]     This dispute turns on the terms of the alleged oral agreement between the parties.   If Mr Early’s assertions are correct, then Moorhouse must be entitled to judgment.  If Mr Langdon’s assertions are correct, then Nelson must be entitled to set off against the amounts claimed by Moorhouse the rebates which have not been credited to it.

[28]     In a summary judgment application, a set-off can be regarded as a defence and it is for the party seeking summary judgment to establish that the defendant’s contention does not amount to a set-off. 

[29]   The principles governing set-off and counter claim were discussed by McGechan J in Roberts’ Family Investments Ltd v Total Fitness Centre (Wellington) Ltd,  and they were comprehensively reviewed by the Court of Appeal in Grant v NZMC Ltd.   Somers J there noted as follows:

The principle is, we think, clear.  The defendant may set-off a cross-claim which so affects the plaintiffs’ claim that it would be unjust to allow the plaintiff to have judgment 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 defendants’ claim calls into question or impeaches the plaintiffs’ demand. It is neither necessary, nor decisive, that claim and cross-claim arise out of the same contract.

[30]     There are two types of set-off — legal and equitable.   The distinction was explored by the Court of Appeal in Grant.

[31]     Legal set-off is confined to liquidated claims.  Here the claim being made by Nelson is directly connected to the claim being made by Moorhouse.  Both arise out of the alleged agreement.  Further, the claim being made by Nelson is a monetary claim,  and  it  has  been  quantified  by reference  to  documents  made  available to

Nelson by Moorhouse.  Nelson invited Moorhouse to check the amount claimed by reference to the relevant documentation.   Moorhouse has not disputed the amount claimed.     The  various  English  statutes  noted  in  Grant  (which  still  apply  in New Zealand) permit the set-off of mutual debts.

[32]     Further, equity restrains an action to allow a set-off.  An equitable right is not limited to liquidated cross-claims, but extends to unliquidated claims for damages. Here Nelson’s claim is clearly so connected with Moorhouse’s claim that it would impeach Moorhouse’s title to be paid and raise an equity in Nelson, making it unfair that it should pay Moorhouse without deduction.

[33]     There are significant factual disputes between Mr Early and Mr Langdon.  I have summarised those disputes briefly in [12] to [18] above.  There are documents which point in both directions.  The accounts for Nelson approved and signed by Mr Langdon do not support the claimed set-off.  On the other hand, the email sent by Mr Early to Mr Langdon does not support his version of the alleged agreement.

[34]     In my judgment, the affidavits leave a lot of issues unanswered.   There is agreement on some facts, but conflict on others.  It cannot be said that that conflict is plainly contrived.

[35]     There are disputed issues of material fact between the parties.  There may be further material facts which need to be ascertained by the Court.  Those facts cannot confidently be concluded from the affidavits.

[36]     These matters were the subject of comment in Westpac Banking Corporation v M  M Kembla New Zealand Ltd.     Although  this case involved  a defendant’s application for summary judgment and a different test applies, the Court’s comments in relation to material facts apply equally to a plaintiff’s application for summary judgment.  The Court said:

[62]      Application for summary judgment will be inappropriate where there are disputed issues of material fact or where material facts need to be ascertained  by  the  Court  and  cannot  confidently  be  concluded  from affidavits.  It may also be inappropriate where ultimate determination turns

on a judgment only able to be properly arrived at after a full hearing of the evidence. …

[63]      Except in clear cases, such as a claim upon a simple debt where it is reasonable to expect proof to be immediately available, it will not be appropriate to decide by summary procedure the sufficiency of the proof of the plaintiff’s claim…

[37]     This statement of principles has been endorsed by the Privy Council in Jones v Attorney-General.

[38]     In  my  view,  it  is  inappropriate  in  the  present  case  to  proceed  to  enter judgment against the defendant on a summary basis.  The terms of the alleged oral agreement need to be determined at trial, before any judgment is based on that agreement.

[39]     Accordingly, I decline to award summary judgment in favour of Moorhouse. I direct that the proceedings should go to trial in the normal way.

[40]     To advance matters, I make the following directions:

a)        The defendant is to file a statement of defence within 10 working days of the date of this judgment.

b)        Both parties are to prepare verified lists of documents that are or have been in their control and which relate to the matters in question in the proceeding, and file and serve the same within a further 10 working day period.

c)        Inspections are to take place within a further 10 working day period.

d)        Any further interlocutory applications are to be filed within a further five working day period thereafter.

[41]   The proceedings are to be scheduled for a case management telephone conference on the first available date thereafter before an Associate Judge who will

make such further directions as are necessary to ensure that they are ready for trial and allocate a hearing date.

[42]	Notwithstanding submissions made to the contrary, by Mr Ryan, costs are reserved in accordance with the principles discussed in NZI Bank Ltd v Philpott.
They can be dealt with in the substantive hearing.

Wylie J