Protocol Ltd v New Image Natural Health Ltd Hc

• Jurisdiction: New Zealand
• Judge: Doogue
• Judgment Date: 16 September 2011
• Neutral Citation: [2011] NZHC 1129
• Date: 16 September 2011
• Court: High Court
• Docket Number: CIV-2011-404-258

[2011] NZHC 1129

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2011-404-258

BETWEEN

Protocol Limited

Plaintiff

and

New Image Natural Health Limited

First Defendant

and

New Image Group Limited

Second Defendant

Appearances:

Mr D Chisholm for plaintiff

Mr S Cook and Ms G Mayes for defendants

Counsel:

Mr D Chisholm, Barrister, Auckland — email: david@dchisholm.co.nz for plaintiff

Buddle Findlay, P O Box 1433, Auckland — email: sherridan.cook@buddlefindlay.com / gemma.mayes@buddlefindlay.com for defendants

JUDGMENT OF ASSOCIATE JUDGE Doogue

Background

1 The individual who stands behind the plaintiff company is Mr Clive Lewis. Mr Lewis has had an extensive career in business and marketing and at one point established a well-known brand of bottled water. In 2007, he entered into discussions with Fonterra Co-Operative Group Ltd (“Fonterra”) with a view to taking a licence of the technology that that company had developed for the production of a colostrum beverage, “COL+”. Mr Lewis considered that the product had vast potential for sale in Asian countries including China. The plaintiff company in due course obtained the rights in the technology and a licence to manufacture and sell the product. It was not able to harness this opportunity on its own and required a commercial partner for that purpose. Eventually its enquiries took it to the second defendant and in due course agreements were entered into between the two entities. In outline, the structure of the arrangement was that a new company which the parties were to each have an interest in was to be incorporated, which would be the owner of the licences to make and market the product. Thereafter a sub-licensing arrangement would be entered into with the licensee being the second defendant. The plaintiff was concerned to ensure that it retained management of the colostrum beverage business because it had expertise in the area of marketing the class of products to which COL+ belonged, whereas the New Image companies did not. The plaintiff was to receive:

• a) Royalty payments equivalent to the royalties that were payable to Fonterra;

• b) Share options in the first defendant, New Image Natural Health Ltd, that were exercisable on the attainment of certain volume targets;

• c) A base fee of $140,000 plus GST per annum and expenses; and

• d) Full management of the colostrum beverage business.

2 The last of these was to be arranged by means of a management services agreement (“MSA”) which the parties duly entered into.

3 In detail, the parties entered into four written contracts. These were the “commercial agreement”, the “shareholders? agreement”, the “sub-licence agreement”, and the MSA. All four contracts were entered into on the same date, 15 May 2009.

4 As a result of the arrangements entered into, the second defendant became the party which would in effect manage the COL+ business. The second defendant agreed, amongst other things, to meet the obligations which the sub-licensee was under to Fonterra. Some equipment was to be purchased from Fonterra as part of the arrangement which would be used to manufacture the product.

5 The plaintiff's general stance, in summary, was that these two parties brought different items of value “to the table” when negotiating the agreement. Mr Lewis was said to have marketing skill and knowledge of the so-called Fast Moving Consumer Goods (“FMCG products”) as well as the access to the Fonterra license. The defendants had the financial and corporate resources to harness the proposal and would make the product a commercial reality.

6 However, at its initial stages, the intended project was not a success. The first stage was the launch of the COL+ product in the Singapore market. Sales undershot those projected by a wide margin. On 12 November 2009, following a directors? meeting, the defendants wrote to the plaintiff advising that the company was of the view that it ought to suspend the MSA and in particular proposed:

• a) The plaintiff would be released from its obligation to provide services;

• b) The defendants would continue to pay the plaintiff the fee to which it was entitled under the agreement; and

• c) The parties would otherwise continue to be bound by their obligations under the agreement.

7 The letter further stated that the proposal in the letter was intended to address:

… our short term needs and is without prejudice to the [defendants?] legal rights under the Agreement or otherwise. In saying this, I am not suggesting that we intend to exercise any rights in particular. I simply want to make it clear that the above proposal is confined to the present situation.

8 The writer of the letter, Mr Lyttelton, also stated his view that the company understood that it had the power to issue “directions” of this kind pursuant to clause 7.2(d) of the MSA.

9 In the response that Kensington Swan wrote on behalf of the plaintiff dated 17 November 2009 it was contended that under cl 7.2(d) there was no power of the sort claimed to give those directions. In a later letter dated 8 December 2009 Kensington Swan made the following comments:

Notwithstanding the purported suspension, Protocol expects to continue to be provided with usual monthly reports, any plans and performance information in relation to the colostrum shot business. Furthermore, we assume that New Image will continue to honour all other agreements with Clive and Protocol, including in relation to the reimbursement of [expenses] ….

At this stage New Image has indicated that the purported extension [sic] is until 1 March 2010. We require confirmation that the purported suspension will not be extended beyond that date. If such confirmation is not forthcoming, then Protocol is not prepared to wait and see what may eventuate, and may commence an action for specific performance of the Agreement or any other legal action it considers appropriate.

10 Mr Stewart who was a director of both the defendant companies gave evidence. He said a decision to suspend the MSA was made at the directors? meeting on 11 November 2009. At that meeting, he said, Mr Lewis had proposed that a further $20 million be invested in order to get the project to the point where it was viable. There was also concern that the strategy of developing the product on the basis that it was of the category apparently referred to in the relevant industry of FMCGs was flawed. That and the failure of the Singapore launch, amongst other things, caused alarm bells to ring.

11 The letter of 12 November 2009 and the background to it (including material relating to the board meeting which preceded the sending of the letter) show that by that date most, if not all, of the scale of the Singapore problem had emerged and the defendant companies were aware of the inaccuracy of the forecasts which had been prepared. Because of the terms on which the suspension letter was couched, it would seem that they also took the view, even at that stage, that the plaintiff had caused or contributed to the problems. The proposal which they made in their suspension letter was that the contract should be “suspended” for the period 18 November 2009 to 1 March 2010, that is, a period of three and a half months.

12 Over the following approximately six-month period, the plaintiff continued to receive the appropriate proportion of the $140,000 annual fee. It did not receive royalties. No steps were taken in furtherance of the option which the plaintiff had to buy shares in the first defendant.

13 However, on 5 May 2010, the second defendant wrote saying that it was giving eight weeks? notice of termination of the MSA which would take effect on 30 June 2010. The reasons given were that the defendant had not made progress with the Singapore market, it no longer required the services provided under the MSA and other staff were able to fulfil the role of the plaintiff. The notice did not make reference to the plaintiffs alleged defaults.

Submissions

14 The plaintiff essentially seeks to have the defendants perform the terms of their contracts with it. The obligations of the defendants, if they are enforceable, are to:

• a) pay to the plaintiff royalties for the use of the Fonterra licence;

• b) pay the plaintiff what it is owed under the MSA; and

• c) permit the plaintiff to exercise certain share purchase options in the first defendant.

15 The plaintiff seeks a declaration that the contract is still on foot.

16 The defendants say that they validly and effectively cancelled the contract. They say that cancellation was justified on the grounds that:

• a) the MSA ought to be constructed as though it contained a term providing for the right for either party to cancel the contract on reasonable notice; or

• b) alternatively, because of the sub-standard performance of the contract on the part of Mr Lewis, the most important of which was the alleged incompetence or negligence in the preparation of consumption forecasts for the COL+ product in the Singapore market, and because of the cost that the defendants would need to budget for in bringing the product to the Singapore market.

17 The defendants also say, in the alternative, that the declaration the plaintiff is trying to obtain is in effect an order for specific performance, which would require that the defendant carry out the terms of a contract that is in substance an agreement for personal services. The law will not permit this.

18 In answer, the plaintiff says:

• a) the MSA provided for termination of the contract on a number of grounds but termination on reasonable notice was not one of them;

• b) it is not necessary for the Court to determine the breach issue and if it had to, the plaintiff denies that there was any breach of...