Water Guard Nz Ltd v Cynortic Water Systems Ltd

• Jurisdiction: New Zealand
• Judge: Miller J
• Judgment Date: 27 June 2016
• Neutral Citation: [2016] NZCA 291
• Docket Number: CA592/2015
• Court: Court of Appeal
• Date: 27 June 2016

BETWEEN

Water Guard Nz Limited

Appellant

and

Cynortic Water Systems Limited

First Respondent

Mark James Sullivan and Susan Mary Sullivan

Second Respondents

[2016] NZCA 291

Court:

Harrison, Miller and Kós JJ

CA592/2015

IN THE COURT OF APPEAL OF NEW ZEALAND

Appeal against a High Court (HC) decision which found that the respondent had not committed the tort of inducing a breach of contract and against the HC's refusal to make a declaration that the respondent did not enjoy any legal or beneficial interest in the rights, title or interests of the manufacturer under the Exclusive Distribution Agreement (EDA) — cross-appeal by the respondent against the HC finding that the appellant had breached its obligation to give a third party the first option to purchase the business when it sold the intellectual property and all the business, against the HC finding that the consent given by the third party to the transfer of the EDA was for a sale to the respondent of all the manufacturer's rights; cross appeal against the granting of an injunction requiring that all parts should be bought from the respondent — the parties were involved in the making and distribution of a Water Guard unit (a water filtration device) — whether the appellant had lost the intellectual property, which it owned under the EDA and the right of first option to purchase — whether the HC had been wrong to deny the appellant a declaration that the respondent enjoyed no rights of the manufacturer under the EDA.

Counsel:

M J Fisher and H L Hui for Appellant

D G Hurd and J R King for Respondents

• A The appeal is dismissed.

• B The cross-appeal is allowed.

• C We set aside the injunction granted against Cynortic Ltd.

• D The appellant must pay the respondents one set of costs for a standard appeal on a band A basis and usual disbursements. We certify for two counsel.

JUDGMENT OF THE COURT

REASONS OF THE COURT

(Given by Miller J)

Introduction

1 A Water Guard unit is a filtration device which filters water for particles and treats it using ultraviolet light to kill bacteria. The parties to this litigation are or were involved in making the units and distributing them in New Zealand and the Pacific. The manufacturer and distributor sold their respective businesses to third parties at about the same time. Those transactions led to this litigation.

2 It is first necessary to name the protagonists. A confusion of company names led the trial Judge, Asher J, to identify them according to their human principals and the parties have adopted the same nomenclature on appeal: 1

• (a) Cynortic Ltd (in liquidation) is called Bragulla Ltd. The company and its principal, George Bragulla, are known as the Bragulla interests. Bragulla Ltd is the original manufacturer of the units.

• (b) Midgen Enterprises Limited (Midgen Ltd) and its principal, David Midgen, are known as the Midgen interests. Midgen Ltd is the original distributor for Bragulla Ltd pursuant to an exclusive distribution agreement, which we will call the EDA.

• (c) Water Guard NZ Ltd (Morgan Ltd) and its principal, Stewart Morgan, are known as the Morgan interests. Morgan Ltd bought the distribution business from the Midgen interests under an agreement known as the MMA (for Midgen-Morgan Agreement).

• (d) Cynortic Water Systems Ltd (Sullivan Ltd), whose principals are Mark and Susan Sullivan, are known as the Sullivan interests. Sullivan Ltd bought the manufacturing business from the Bragulla

  interests under an agreement known as the BSA (for Bragulla-Sullivan Agreement) and a subsequent addendum to the BSA.

3 Asher J tried two proceedings. They were not amalgamated but rather were heard consecutively on the footing that all of the evidence was admissible in both. The first proceeding focused on the MMA. 2 The Morgan interests alleged that misrepresentations were made about the distributorship business, and further that the units Midgen Ltd supplied were defective. This claim succeeded in small part, Asher J finding that no misrepresentations were made but there were certain defects in some units. Damages remain to be fixed.

4 The second proceeding was brought by Morgan Ltd against the Bragulla and Sullivan interests. 3 As Asher J put it, the pleading was not easy to follow but could be broadly summarised as a series of allegations that the defendants had acted in a manner inconsistent with Morgan Ltd's rights under the EDA. For present purposes, the claim may be said to focus on an option to purchase the manufacturing business (or right of first refusal) in the EDA, and the impact of the addendum to the BSA on Morgan Ltd's rights under the EDA. Asher J granted certain relief against Bragulla Ltd, which was by then in liquidation. So far as the Sullivan interests were concerned, he recorded that there was to be an accounting for a very small profit made on certain sales in New Zealand. He otherwise dismissed the claims against them and refused a declaration that Sullivan Ltd had no interest in the EDA. 4

5 This appeal and cross-appeal are confined to the second proceeding. The protagonists are the Morgan and Sullivan interests, respectively the purchasers of the distribution and manufacturing businesses.

Narrative

6 The EDA was executed on 23 June 2010. Bragulla Ltd granted Midgen Ltd the exclusive right to market, distribute and sell Water Guard units in New Zealand and the Pacific Islands for a term of ten years. It included the right to use all

registered trademarks, patents and copyright for marketing, advertising and promotion. Ownership of the intellectual property remained with Bragulla Ltd, which undertook to maintain it. If either party chose to sell its business the other party would have first option to purchase:

In case of either party wishing to sell his business, the other party shall have first option to purchase same at the agreed formula above [the greater of one and a half times gross profit or annual turnover].

Apart from the option to purchase, the EDA said nothing about assignment. Notably for present purposes, it did not insist that any transfer to a third party include a novation, such that the distributor might enforce its rights directly against an assignee of the manufacturer's business.

7 Morgan Ltd purchased the distributorship business from Midgen Ltd under the MMA, which was signed on 16 September 2013, became unconditional on 15 October and settled on 1 November 2013.

8 At about the same time, the Bragulla interests negotiated the sale of the manufacturing business to Sullivan Ltd. The BSA was signed on 26 September 2013, declared unconditional on 8 November and settled on 24 February 2014. It contained no express assignment of the manufacturer's rights under the EDA but it extended to the entire business and it is not in dispute that the business included these rights, along with ownership of the Water Guard intellectual property.

9 In an email exchange of 7 October Messrs Midgen and Bragulla granted reciprocal waivers of their options to purchase, in these terms:

I herewith declare that I do not want to exercise my option to purchase your business.

These waivers were recognised as prerequisites to both transactions, and they were given in each case before either agreement became unconditional. The Midgen waiver was supplied to the Sullivans' solicitor on 10 October.

10 Mr Morgan was not told of the sale to Sullivan Ltd at first. After he learned of it on about 17 October he claimed that the Midgen waiver was “not legally valid” and “the Distributor” ought to have been offered the right to purchase. On 27 October, following a meeting with Mrs Sullivan, he nonetheless consented to the sale:

As Sole Director of [Morgan Ltd] I consent to the sale by [Bragulla Ltd] of its rights under the Agreement to your company even though the Distributor was not offered the first option to purchase [Bragulla Ltd's] business as required by the Agreement. It is noted that at the time of George [Bragulla]'s request to Dave Midgen to acknowledge his intent with regard to this option the [Midgen Ltd] business sale to the writer had already been declared unconditional. Therefore the email from Dave Midgen was not legally valid.

I confirm your advice at our meeting that as the purchaser of [Bragulla Ltd's] business, you acknowledge the Agreement in place between [Bragulla Ltd] and [Morgan Ltd] and will be bound by its terms and conditions including the Distributor's option of distribution rights for part or all of Australia.

11 Following settlement Mr Morgan soon encountered problems with the units and the distributorship business. These issues were dealt with in the first proceeding, which is not the subject of the appeal. We do not understand it to be in dispute that, as Asher J found, he became “belligerent and disparaging” with Mr Bragulla and the Sullivans, who had not yet taken possession of the manufacturing business but became involved after they were committed unconditionally to the purchase on 8 November. 5 This was unnecessary and unfortunate; the Sullivans were not the cause of Mr Morgan's problems and they understood that their business would prosper only if his did. Mrs Sullivan tried to establish a good working relationship but she found Mr Morgan impossible to deal with. Mr Bragulla accordingly took it on himself to deal with Mr Morgan. Unfortunately, he responded in kind to Mr Morgan and evidenced an imperfect understanding of his obligations, 6 none of which improved matters.

12 In an attempt to separate the Sullivans from Mr Morgan, Mr Bragulla sent the Sullivans, on 8 January 2014, an addendum to the BSA, which provided that the EDA did not “form part of the assets and intangibles being sold” under the BSA, acknowledged that Bragulla Ltd retained its rights and obligations under the EDA,

and set up back to back obligations on the part of the Sullivan interests so that Bragulla Ltd...