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Res Ipsa

Paper Reclaim Ltd v Aotearoa International Ltd CA70/04, 14 March 2006

Court
Court of Appeal
Judgment
14 March 2006

Areas of law

Contract - Oral Agreement - Joint Venture - Implied Terms - Reasonable Notice for Termination - Breach of Contract - Repudiation - Fiduciary Duty - Damages - Exemplary Damages
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Judgment analysis

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Facts

Since the early 1980s, the principals of Paper Reclaim and Aotearoa worked together in the waste paper industry. Aotearoa alleged that in late 1984 or early 1985, an oral agreement was formed whereby Aotearoa would cease its own baling operations and act as the exclusive export agent for Paper Reclaim. This relationship continued until early 2001, when Paper Reclaim sent a letter that effectively ended their cooperation. Aotearoa sued for breach of contract and fiduciary duty. The High Court, per Nicholson J, found in favour of Aotearoa, holding that an oral joint venture agreement existed which could only be terminated on reasonable notice, which he determined to be eight years. Paper Reclaim appealed this liability judgment.

Held

  1. An oral commercial agreement of indefinite duration without an express termination clause is terminable by either party on reasonable notice.
  2. The period of reasonable notice required to terminate a long-standing exclusive agency agreement was one year, not eight years, as the purpose of notice is to allow for alternative arrangements, not to rebuild the business to its former state or fund entry as a major competitor.
  3. Exemplary (punitive) damages are not available as a remedy for breach of contract in New Zealand.
  4. A commercial relationship entered into at arm's length on an equal footing does not give rise to fiduciary duties where the parties' obligations are governed by the contract, which includes an implied term of good faith.
  5. An implied term of good faith is not breached by a party engaging in domestic sales to a customer, even with the knowledge that the customer will then export the goods, where the contract only governed the party's own export activities and did not restrict its domestic trade.
  6. Indemnity costs are not justified by a finding that one party's evidence on a disputed factual matter (the making of an oral contract many years ago) is preferred over the other's, as this does not automatically equate to perjury or improper conduct in defending the proceeding.

Orders

The appeal is allowed in part. The High Court's finding of an eight-year reasonable notice period is replaced with a finding that a notice of at least one year would have been required. The findings for the respondent on the third (fiduciary duty) and seventh (sales to Carter Holt) causes of action are set aside. The judgment for the respondent on the fifth cause of action (AMCOR sale) is set aside. The proceeding is remitted to the High Court for determination of quantum. The High Court's costs order is set aside. The High Court order allowing Aotearoa to amend its claim to include exemplary damages is set aside.

Key passages8

The courts are entitled to look at the whole context of the parties’ relationship in reaching a view as to whether a bargain was concluded and as to its terms.

“It is well accepted that the courts are entitled to look at the whole context of the parties’ relationship in reaching a view as to whether a bargain was concluded and as to its terms: BCNZ v Daniels (1998) 2 NZBLC 103,535 at 103,541 and see further Burrows, Finn & Todd Law of Contract in New Zealand (2ed 2000) at [3.3.1].”

It does not require very much to induce a court to read into an agreement of a commercial character a provision that the arrangements shall be terminable only upon reasonable notice.

“It is true that it does not require very much to induce a court to read into an agreement of a commercial character, either by construction or by implication, a provision that the arrangements between the parties, whatever they may be, shall be terminable only upon reasonable notice.”

The length of reasonable notice is determined at the time and in light of the circumstances in which the notice is given, not at the date the contract was made.

“[T]he length of notice is not determined in light of circumstances at the date on which the contract was made but rather is determined, normally, at the time and 'in the light of the circumstances in which the notice is given': Australian Blue Metal at 99.”

Relevant matters in determining the period of reasonable notice include carrying out existing commitments, giving notice to customers, bringing negotiations to fruition, and obtaining the fruits of any extraordinary expenditure or effort.

“[R]elevant matters in determining the period include 'carrying out existing commitments, giving notice of the termination of supply to existing customers, bringing current negotiations to fruition and, where appropriate, obtaining the fruits of any extraordinary expenditure or effort carried out within the scope of the agreement'.”

A distributor who enters into a terminable agreement inevitably runs the risk of adverse trading consequences for a substantial period upon termination.

“The termination of his business, whenever it occurs, is very likely to have adverse trading consequences for a substantial period. However, that is the risk which a distributor, who enters into an agreement terminable at any time, inevitably runs.”

There is no need for equitable intervention to impose fiduciary duties in a standard commercial contract entered into at arm's length and on an equal footing, where parties could have protected their positions with express terms.

“The parties in this case, as in Hospital Products Limited v US Surgical Corp (1984) 156 CLR 41, entered into their arrangement at arm’s length and on an equal footing. It was open to them to include in their contract whatever terms they thought necessary to protect their respective positions... There is no need for equitable invention in this standard commercial contract...”

Exemplary damages are not available for breach of contract in Australia and the United Kingdom.

“Exemplary damages are not available for breach of contract in Australia. That position has been clear since Butler v Fairclough (1917) 23 CLR 78 and has recently been reaffirmed... The position is the same in the United Kingdom.”

The doctrine of efficient breach, which allows parties the option of breaking a contract and paying compensatory damages, is a reason to discourage awards of exemplary damages in contract.

“Fifthly, the doctrine of efficient breach dictates that contracting parties should have available the option of breaking the contract and paying compensatory damages, if they are able to find a more remunerative use for the subject matter of the promise. To award exemplary damages would tend to discourage efficient breach.”

Cases mentioned in judgment

  • Airwork (NZ) Limited v Vertical Flight Management Limited [1999] 1 NZLR 641

    Applied
  • Anchor Butter Co Ltd v Tui Foods Limited [1997] 3 NZLR 107

    Applied
  • Aotearoa International Limited v Paper Reclaim Limited HC AK CP117/01

    Overturned
  • Aotearoa International Limited v Scancarriers A/S [1985] 1 NZLR 513

  • Attorney-General v Blake [2001] 1 AC 268 (HL)

  • Attorney-General v Gilbert [2002] 2 NZLR 342

  • Australian Blue Metal Limited v Hughes [1963] AC 74

    Followed
  • BCNZ v Daniels (1998) 2 NZBLC 103,535

    Applied
  • Boulder Consolidated Limited v Tangaere [1980] 1 NZLR 560 (CA)

    Applied
  • Butler v Fairclough (1917) 23 CLR 78

    Followed
  • Crawford Fitting Co v Sydney Valve and Fittings Pty Limited (1988) 14 NSWLR 438

    Applied
  • Decro-Wall International SA v Practitioners in Marketing Limited [1971] 1 WLR 361 (CA)

  • Gray v Motor Accident Commission (1998) 196 CLR 1

    Followed
  • Hirequip Holdings Limited v City Hire Centre (1973) Limited HC NAP CIV2004-441-362 3 October 2005

  • Hospital Products Limited v US Surgical Corp (1984) 156 CLR 41

    Applied
  • Hospitality Group Pty Limited v Australian Rugby Union Limited (2001) 110 FCR 157

    Followed
  • J W Paterson & Sons Limited v Fletcher Concrete and Infrastructure Limited HC ROT M89/00 13 February 2001

  • Kiwi Gold NL v Prophecy Mining NL CA30/91 18 July 1991

    Applied
  • Martin-Aker Aircraft Co Limited v Canadian Flight Equipment Limited [1955] 2 QB 556

  • Meates v Attorney-General [1983] NZLR 308

    Applied
  • Paperlight Limited v Swinton Group Limited [1998] CLC 1667

    Distinguished
  • Rae v International Insurance Brokers (Nelson Marlborough) Limited [1998] 3 NZLR 190

    Applied
  • State Insurance Limited v Cedenco Foods Limited CA216/97 6 August 1998

  • Telecom Corporation New Zealand Limited v Business Assocs Limited CA7/93 23 June 1993

  • Vorvis v Insurance Corporation of British Columbia [1989] 1 SCR 1085

  • Whiten v Pilot Insurance Co (2002) 209 DLR (4th) 257

  • Winter Garden Theatre (London) Limited v Millennium Productions Limited [1948] AC 173 (HL)

Legislation mentioned

  • Contractual Remedies Act 1979, s 8
  • High Court Rules, r 48C(4)(a), r 109, r 115