Oceania Furniture Limited v Debonaire Products Limited HC Wellington CIV-2008-485-1701, 27 August 2009
- Court
- High Court
- Judgment
- 27 August 2009
- Neutral
- OCEANIA FURNITURE LIMITED V DEBONAIRE PRODUCTS LIMITED HC WN CIV-2008-485-1701 27 August 2009
Areas of law
Judgment analysis
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Facts
Debonaire, a furniture wholesaler, entered a two-year Supply Agreement with Oceania for MDF furniture componentry manufactured in China, leading Debonaire to close its own MDF manufacturing plant. From late January 2007, supply was severely disrupted due to a Chinese government directive causing the manufacturer, the Shengli Dahao factory, to restructure and eventually close in April 2007. Oceania sourced product from a new factory, but disruptions continued. Debonaire stopped making regular payments for goods received from late May 2007. Debonaire's key customer, Big Save, terminated its relationship with Debonaire, effective 1 November 2007. The Supply Agreement expired on 13 October 2007. Oceania obtained summary judgment for $328,572.73 for unpaid goods. The current proceedings concern Debonaire's counterclaims for breach of contract (failure of timely supply and breach of exclusivity) seeking damages for lost profits, and Oceania's claims for contractual interest and legal costs.
Held
- A clause qualifying a supply obligation as being 'insofar as it is within [the supplier's] control to do so' operates as a force majeure provision, but cannot be relied upon by the supplier for orders it accepts with prior knowledge of events that will prevent timely performance.
- In the context of the specific Supply Agreement, the exclusion of liability for 'consequential, indirect or special damage or loss' covers losses such as lost profits from damage to business reputation and missed business opportunities, which do not arise directly from the breach of failing to supply specific orders.
- A contractual default interest rate of 2.5% per month (30% p.a.) is an unenforceable penalty where there is no evidence it represents a genuine pre-estimate of loss.
- A party cannot breach its own ongoing contractual obligations, such as an exclusivity clause, as a purported act of mitigating losses caused by the other party's breach, where the contract has not been cancelled.
Orders
Judgment for Debonaire on its counterclaim for direct loss of profit on specific orders Oceania failed to deliver, and on its subset claims for 'agreed amounts' and short-supplied componentry, totalling $67,098.26 plus the yet-to-be-quantified lost profits. Debonaire's major claims for consequential losses (loss of Big Save contract and Funnell opportunity) failed. Oceania's claim for contractual interest was denied as a penalty, with statutory interest at 8.4% awarded instead. Oceania was awarded its claimed legal costs for the prior summary judgment application ($27,358.00). The final quantification of Debonaire's damages, the overall net financial position between the parties, and costs for the present hearing were reserved.
Key passages4
A clause providing that a party will perform an obligation 'insofar as it is within [that party's] control to do so' is more akin to a force majeure clause than an exemption clause, specifying the scope of contractual obligations rather than excluding liability for a breach.
“Where events occur which are covered by a clause of the kind here under consideration [provisions for supervening events], the party whose performance is prevented or delayed by the supervening events is not in breach at all. In this respect, such clauses differ from exemption clauses, which assume that there has been a breach and exclude or limit liability in respect of it.”
A party generally cannot rely on a force majeure clause if they knew, or reasonably ought to have known, of the supervening events at the time of accepting the relevant contractual obligation.
“On this construction, to rely on the operative clause to substantively limit its obligation to supply orders to Debonaire, Oceania will need to establish that it was not within its control to supply Debonaire by reason of events of which it did not have knowledge at the time of accepting the order.”
The interpretation of 'consequential loss' in exclusion clauses is unsettled in New Zealand, with English authorities tending to align it with the second limb of Hadley v Baxendale, while a recent Victorian Court of Appeal decision prefers giving the term its ordinary commercial meaning.
“In my view it is preferable, as found by the Victorian Court of Appeal, to consider the ordinary commercial meaning of the term “consequential losses” in the context of the particular contract. That is, I do not consider it particularly helpful to adopt the conceptual distinction used in Hadley v Baxendale to explain the type of damages that may be recoverable for breach of contract.”
A default interest clause will be deemed a penalty and unenforceable if, in the absence of evidence to the contrary, it is not a genuine pre-estimate of the likely damage from non-payment.
“In my judgment, in the absence of evidence to support it being a genuine covenanted pre-estimate of damage, and as assessed at the time the Supply Agreement was entered into, the default interest rate of 30 percent per annum is in fact a penalty and in terrorem.”
Cases mentioned in judgment
Legislation mentioned
- Sale of Goods Act 1908, s 3, s 19, s 32, s 37
- Contractual Remedies Act 1979, s 9
- Judicature Act 1908, s 87
- High Court Rules, r 11.27