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High Court of New Zealand Decisions |
Last Updated: 25 June 2011
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2008-404-004657
BETWEEN LOKTRONIC INDUSTRIES LIMITED Plaintiff
AND STEPHEN JOHN DIVER First Defendant
AND SDR LIMITED Second Defendant
AND ROY BOWYER Third Defendant
AND TRIMEC TECHNOLOGY LIMITED Fourth Defendant
AND NEIL RICHARD HINGSTON Fifth Defendant
AND NEIL HINGSTON ENGINEERING LIMITED
Sixth Defendant
AND ASSA ABLOY NZ LIMITED Seventh Defendant
Hearing: 28-30 June, 1-8 July 2010
Appearances: S A Grant and K J Dawson for Plaintiff
M H L Morrison and S J Nicholson for First and Second Defendants Z G Kennedy and S K Hindle for Third, Fourth and Seventh Defendants
P L Rice and B P Molloy for Fifth and Sixth Defendants
Judgment: 30 March 2011 at 11:00 AM
JUDGMENT OF COURTNEY J
This judgment was delivered by Justice Courtney on 30 March 2011 at 11:00 am
pursuant to R 11.5 of the High Court Rules.
Registrar / Deputy Registrar
Date..............................
LOKTRONIC INDUSTRIES LTD V DIVER & ORS HC AK CIV-2008-404-004657 30 March 2011
Table of Contents
Para No
Introduction [1]
The manufacturing agreement
Was there an oral contract between Loktronic and NHEL for the
manufacture of the electronic drop bolts? [6] Notice on termination [19] Distribution agreement with Trimec [28] Notice on termination [37] Termination by Trimec [40]
Background to the intentional torts
The relationship between Loktronic, Mr Diver and effeff [48]
The joint venture between Trimec and NHEL [56] Inducing breach of the manufacturing and distribution contracts [61] Relevant principles [62]
Mr Hingston [71] Mr Diver and SDR [79] Trimec and Mr Bowyer [87] Assa Abloy NZ Limited (AANZL) [92]
Interference by unlawful means
Relevant principles [102]
The unlawful means [106] Conspiracy to injure for unlawful purpose and/or by unlawful means [121] Conspiracy to injure for unlawful purpose [124] Conspiracy to injure by unlawful means [128]
Failure to mitigate [130] Damages [136] Interest [153] Conclusion [156]
Introduction
[1] For some years prior to 2002 the plaintiff, Loktronic Industries Limited (Loktronic), had a profitable business supplying electronic products to both the domestic and export markets. Its most lucrative product was an electronic drop bolt, the LB25 series. The bolt’s novel features were that it was able to accept multiple voltages, was field convertible between fail safe and fail secure, able to accept either DC or AC current, able to function adequately on double-action doors, could incorporate anti-tamper wiring as standard and had dead bolt monitoring.
[2] Loktronic’s largest export customer was a German company, effeff Fritz Fuss GMEH and Co (effeff), which it had secured with the assistance of an agent, Stephen Diver.1 Loktronic also acted as distributor for an Australian company, Trimec
Technology Pty Limited (Trimec).2 Loktronic’s situation changed when effeff3
acquired Trimec and the Trimec board determined that it would add Loktronic’s
drop bolt to its own stable of products.
[3] The drop bolt had always been manufactured for Loktronic by Neil Hingston Engineering Limited (NHEL).4 Trimec offered NHEL a joint venture under which NHEL agreed to stop manufacturing for Loktronic and instead manufacture the bolt exclusively for Trimec. NHEL accepted that offer and terminated its relationship with Loktronic at a meeting on 23 July 2002. At the same time Trimec terminated its relationship with Loktonic. The result was that Loktronic could no longer supply the drop bolt to its customers and also lost the profit previously derived from distributing Trimec products in New Zealand.
[4] Loktronic alleges that the defendants, either alone and in combination, caused the loss of both its domestic and export business. It sues for a total of $10.9m,
alleging that:
1 The first defendant, who acted through his company SDR Ltd, the second defendant.
2 The fourth defendant.
3 By then effeff was part of the Swedish Assa Abloy group, as was the seventh defendant.
4 The sixth defendant.
a) By terminating its relationship with Loktronic, NHEL breached an oral contract under which NHEL agreed to manufacture the drop bolt exclusively for Loktronic (the manufacturing contract);
b) By terminating its relationship with Loktronic, Trimec breached an oral contract with Loktronic under which Loktronic was appointed Trimec’s exclusive New Zealand distributor (the distribution contract);
c) The defendants, except for NHEL, induced NHEL to breach the manufacturing contract;
d) The defendants, except for Trimec, induced Trimec to breach the distribution contract;
e) The defendants, except for NHEL, interfered with the manufacturing contract and the defendants, except for Trimec interfered with the distribution contract by unlawful means;
f) The defendants, or some of them, conspired with an unlawful object or purpose to injure Loktronic; and
g) The defendants conspired to injure Loktronic by unlawful means.
[5] The various causes of action depend, in part, on Loktronic establishing the existence and breaches of the manufacturing and/or distribution contracts. The defendants deny that any contract existed between them of the kind alleged and maintain that there was no more than an ongoing practice of order and supply between the respective parties. Because of the significance of this issue to all of the causes of action I intend to deal with the alleged existence and breaches of these contracts first.
The manufacturing agreement
Was there an oral contract between Loktronic and NHEL for the manufacture of the electronic drop bolts?
[6] NHEL was a small lock manufacturing business operated by its director, Neil Hingston and his son, Matthew. NHEL had purchased the business in 1984. Mr Hingston, a former avionic engineer, was regarded by other witnesses as an honest man with good technical skills. I would add to that, based on my observations of Mr Hingston and the evidence, that Mr Hingston was commercially inexperienced and naïve.
[7] When Mr Hingston bought the business its only significant customer was Loktronic Distributors Limited (LDL), whose General Manager was Peter Calvert. In 1989 Mr Calvert incorporated Loktronic, the plaintiff in this case. It acquired the business of LDL and continued to purchase locks from NHEL. It also maintained a life insurance policy over Mr Hingston. There was no written agreement between NHEL and Loktronic. However, Mr Calvert gave evidence of a discussion in which Mr Hingston agreed that NHEL would manufacture locks exclusively for Loktronic. In return, Loktronic agreed not to buy locks of the kind NHEL manufactured from anyone else. He said the deal was “sealed with a handshake”.
[8] Mr Hingston denied that any such agreement had been reached and said that NHEL simply continued to supply locks on the same non-exclusive basis as it had done previously with LDL. However, some of Mr Hingston’s answers in cross- examination were inconsistent with this position:
He says – Mr Calvert says that you agreed – that you and he agreed that he would only buy your product from you and that you would only sell to him. Do you agree with that?.....Yes.
And is that why you described yourself as having effectively one customer?.....That’s right.
[9] In trying to reconcile Mr Hingston’s answers in cross-examination with his evidence-in-chief I looked to the parties’ conduct over the course of their relationship and during the negotiations between NHEL and Trimec.
[10] First, Mr Hingston confirmed in cross-examination that during the time NHEL manufactured bolts for Loktronic he did minimal work for any other company. A very small number of drop bolts were supplied to customers other than Lokronic and none at all after 1999. Over a period of 13 years Loktronic represented virtually all of NHEL’s revenue.
[11] The drop bolt had been developed between 1996 and 1998 by Loktronic and NHEL in collaboration. An electronics engineer, Mr Glanville, designed the software for the product. The two new features the lock offered were the ability to convert between power to open (fail secure) and power to lock (fail open) easily and the ability of the lock to detect the voltage that it was connected to and automatically adjust to run at that voltage between 10-28 volts. There was conflict between Mr Calvert and Mr Hingston over just how innovative the electronic dead bolt was. Mr Hingston did not believe it would support a patent and assigned his rights in the bolt to Loktronic (as did Mr Glanville) without payment. When Mr Hingston gave the assignment he was aware of Mr Calvert’s belief that a valid patent could be obtained and of Mr Calvert’s intention to pursue that course but never expressed the view that patents were not likely to be valid. Loktronic did, in fact, spend over
$100,000 obtaining patents for the bolt in New Zealand, Australia, China, Hong Kong, Singapore, Taiwan and countries covered under the Patent Co-operation Treaty.
[12] Thirdly, there was unchallenged evidence of Mr Hingston asking Mr Calvert to formalise the supply agreement between the two companies. The purpose of this request was to assist Mr Hingston’s son Matthew to obtain a mortgage by demonstrating that he had secure employment. Mr Calvert said that he suggested NHEL obtain independent legal advice but then when he followed it up “Mr Hingston said that Matthew Hingston now accepted that I was a person of honour and that he trusted me as a man of my word not to terminate our agreement.” Mr Calvert was not cross-examined on this evidence and Mr Hingston did not comment on it in his evidence.
[13] Fourthly, when Loktronic secured its contract with effeff Mr Calvert provided NHEL with a copy.
[14] Fifthly, when issues arose regarding the quality of the bolts being produced by NHEL for effeff Mr Diver suggested that Loktronic look for an alternative manufacturer but Mr Calvert refused to do so because of the agreement between Loktronic and NHEL. Similarly, under cross-examination, Mr Calvert described an occasion on which Mr Hingston told him about a visit Mr Hingston had had from a previous designer of the electronic module used in the Loktronic bolt. That person proposed that Mr Hingston manufacture a product for him. Mr Hingston declined and felt constrained to tell Mr Calvert about the visit. Mr Calvert offered this as showing that Mr Hingston felt bound by the agreement between NHEL and Loktronic. Mr Calvert was not challenged on this evidence and Mr Hingston made no comment on it in his evidence.
[15] These pieces of evidence show a pattern extending back many years of conduct consistent with the existence of a contract between Loktronic and NHEL. Against this, however, is evidence of a meeting with Loktronic’s solicitor attended by Mr Hingston and his son Matthew and Mr and Mrs Calvert on 19 July 2002. By that time Mr Hingston had told Mrs Calvert (from whom Mr Calvert was separated) that he had been approached by Assa Abloy (as the ultimate owner of Trimec). Mr Calvert claims that all he knew was that NHEL had been approached by someone. There was a meeting with Mr Calvert’s solicitor. Mr Hingston said that he understood that the purpose of the meeting was to persuade NHEL to continue supplying Loktronic and there was no mention of an exclusive supply agreement, nor any suggestion that NHEL should give notice to terminate any existing arrangement.
[16] The notes made by Loktronic’s solicitor, which compared the strengths and weaknesses of the respective companies, identified as a weakness of NHEL that it had only one customer and a weakness of Loktronic that it was dependent on its suppliers of product. There was no record of any suggestion that NHEL was bound to continue supplying Loktronic exclusively. When it was put to Mr Calvert in cross-examination that NHEL supplying somebody else would be contrary to a contract between NHEL and Loktronic he answered that there was no suggestion during the meeting that Loktronic would not be supplied in the usual fashion by whoever it was that Mr Hingston was negotiating with. I accept that Mr Calvert went to the meeting not appreciating the nature or the significance of the approach
that had been made to Mr Hingston and not realising that change was imminent. Placed against the pattern of so many years I do not place significant weight on this meeting.
[17] Finally, when Mr Diver, on behalf of Trimec, approached NHEL and specifically enquired as to whether there were contractual arrangements between NHEL and Loktronic Mr Hingston assured him that no contract existed. Mr Hingston gave an indemnity to Trimec in relation to any claims brought by Loktronic as a result of the joint venture. Mr Hingston’s assurance to Trimec and his indemnity were inconsistent with a belief that any agreement existed. However, they were also inconsistent with his conduct over many years in dealing with Mr Calvert. Although the indemnity could have reflected a genuine belief on Mr Hingston’s part that he was not contractually bound to Loktronic I consider the more likely explanation to be that Mr Hingston naively believed that unless an agreement was recorded in writing it was not binding.
[18] The evidence as a whole supports the existence of a contract between Loktronic and NHEL under which NHEL would manufacture the electronic bolt exclusively for Loktronic and Lokronic would buy exclusively from NHEL.
Notice on termination
[19] Finding that there was an agreement between NHEL and Loktronic brings me to the question of whether Loktronic was entitled to notice of termination and, if so, the length of such notice. The general principles by which these questions are determined can be found in the statements of the Privy Council in Australian Blue Metal Limited v Robert Frank Hughes:5
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 question whether a requirement of reasonable notice is to be applied in a contract is to be answered in the light of the circumstances existing when the contract is made. The length of the notice, if any, is the time that is deemed
5 Australian Blue Metal Limited v Robert Frank Hughes [1963] AC74 at 98-99 applied in Paper
Reclaim Ltd v Aotearoa International Ltd [2006] 3 NZLR 188.
to be reasonable in the light of the circumstances in which the notice is given. The implication of reasonable notice is intended to serve only the common purpose of the parties. Whether there need be any notice at all, and, if so, the common purpose for which it is required, are matters to be determined as at the date of the contract; the reasonable time for the fulfilment of the purpose is a matter to be determined as at the date of the notice. The common purpose is frequently derived from the desire that both parties may be expected to have to cushion themselves against sudden change, giving themselves time to make alternative arrangements of a sort similar to those which are being terminated.
[20] In Paper Reclaim Ltd v Aotearoa International Ltd the Court of Appeal, considering the appropriate notice in the facts of that case, approved the statement by Penlington J in Anchor Butter Co that relevant matters in determining the period include:6
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.
[21] Fulfilling the purposes identified in Australian Blue Metal does not, however, include ensuring or assisting the recipient of the notice to reproduce the business comparable to what previously existed. In Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd McHugh JA made the following observation:7
It is, of course, unnecessary that the recipient of a notice should do as well in his first years of new business as he did in his old business. 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.
[22] This point was also made by the Supreme Court in Paper Reclaim. Referring to the passage in Australian Blue Metal already cited, the Court observed:
[8] [I]n our view, the Privy Council could not have been intending to suggest that a reasonable period of notice must necessarily be sufficient for the recipient to be able to build up a business comparable to that which it enjoyed under the contract or before the contract was entered into. If that was what had been desired, Aotearoa should have taken steps at the outset to obtain express contractual protection by the stipulation of a fixed term or a fixed period of notice. Instead, by making an informal arrangement of the kind which can only sensibly be understood as being terminable on
6 [1997] 3 NZLR 107 at 124.
7 (1988) 14 NSWLR 438 at 453.
reasonable notice, it took the risk that it might be disadvantaged to some extent when and if notice were given. The Courts do not effectively re-write such contracts by requiring an extended period of notice merely because the recipient of the notice may be deprived of the advantages it was enjoying under the terminable contract.
[23] Looking at what would be reasonable in this case having regard to the circumstances of both parties, it is evident that termination by either party would have left the other in real difficulty. NHEL depended almost entirely on Loktronic for survival; indeed, it was this vulnerability that finally prompted Mr Hingston to opt for the joint venture with Trimec. Mr Rice submitted on behalf of NHEL that this fact pointed to short notice being reasonable because a lengthy notice period could be economically disastrous for NHEL; since Loktronic was NHEL’s only customer a long notice period might result in Loktronic simply using up existing stocks and starving NHEL out of income until the notice period had expired. In this regard he pointed out that Loktronic held, on average, three to four months of stock in its stores and therefore already had a buffer in place to cushion it from sudden termination of supply. Whilst there is some merit in this argument, it is clearly not the view held by NHEL in 2002, as NHEL agreed to a period of six months notice with Trimec under the joint venture agreement.
[24] Mr Rice further submitted that there was no need for a long period because Loktronic had no hope of retaining its main export customers anyway. It was not, however, inevitable that Loktronic would have lost all its customers immediately. I discuss this later in relation to the assessment of damages, but it is sufficient to note at this stage that in 2002 Loktronic’s contract with effeff still had two years to run. Since Loktronic had effeff (and other customers) it was always in a stronger position than NHEL in the event of the relationship breaking down and it is likely that, with adequate notice, Loktronic could have found another manufacturer and resumed supply to its customers.
[25] In Paper Reclaim which concerned a long-time exclusive agreement, the
Court of Appeal having briefly surveyed some of the recent cases fixing terms of reasonable notice8 considered that:9
8 J B Paterson & Sons Ltd v Fletcher Concrete & Infrastructure Ltd HC Rotorua M89/00, 13
February 2001, Morris J; Hirequip Holdings Ltd v City Hire Centre (1973) Ltd HC Napier CIV-2004-
441-000362, 3 October 2005
[T]he bulk of judicial authority would suggest that in comparable circumstances the Courts have fixed notice periods of about one year. Those authorities are important because we have little doubt that had a reasonable business person in the position of either party consulted a lawyer before deciding what notice period to give, that lawyer would have suggested about a year, based on authorities readily accessible in the law reports and texts.
[26] Mr Rice pointed to the periods of one and three months allowed in L J Smits Ltd v Auto-Tec International Ltd10 and Silhouette International Gesellschaft mbH v OHL Corporation Ltd,11 which were regarded as reasonable for the termination of sole distributorships. However, neither case involved an exclusive arrangement of the type that existed between NHEL and Loktronic.
[27] Looking at the length and exclusive nature of the relationship I consider a term of six months to be reasonable. I therefore conclude that NHEL was bound to give six months notice on termination. Its failure to do was a breach of the contract.
Distribution agreement with Trimec
[28] Loktronic alleged that in August 1992 it entered into an oral agreement with Trimec under which Loktronic became Trimec’s only New Zealand distributor. The oral agreement was said to have been made between Mr Calvert and Trimec director, Roy Bowyer, on the basis that Loktronic would order product from Trimec and pay for it in accordance with Trimec’s trade terms and Trimec would, in turn, supply the product to Loktronic. It was alleged that the contract contained an implied term that neither party would terminate without giving reasonable notice. Loktronic maintains that it abided by this agreement for 10 years between 1992 and 2002.
[29] Trimec’s position was that there was no contract under which Loktronic had become its exclusive New Zealand distributor. Instead, there was only an informal arrangement under which Loktronic would purchase product from Trimec in
accordance with Trimec’s usual terms of trade.
9 At [77]
10 L J Smits Ltd v Auto-Tec International Ltd (1992) 5 TCLR 21.
11 Silhouette International Gesellschaft mbH v OHL Corporation Ltd HC Auckland CP1090/90,
27 June 1991.
[30] This is a convenient point at which to record Trimec’s history and my impressions of Mr Bowyer. Mr Bowyer had already established and sold a successful business manufacturing electronic security alarm installations and printed circuit boards before founding Trimec. Although an electronic engineer by trade, he saw his strengths in the marketing and financial aspects of a business. The other director and shareholder in Trimec, Graham Luker, took responsibility for the engineering and production design. It was apparent from Mr Bowyer’s evidence that he had highly developed commercial skills, understood the dynamics and benefits of networking and could see commercial opportunities. At Trimec, he developed a clear structure for the distribution of products based on a desire to keep Trimec’s position flexible and protect the pricing of Trimec’s products in overseas markets.
[31] Trimec’s first significant product was an electric strike (a locking device used in commercial premises to unlock secured doors by means of an access card). Trimec arranged with a local company, Padde, to distribute the product, known as ES2000, within Australia. There was no written agreement between Trimec and Padde because Mr Bowyer had a strong view about retaining the flexibility to modify a distribution arrangement if it wished and protecting the pricing of Trimec’s products. Over the next several years Trimec appointed other distributors in different parts of the world. It had an oral arrangement with a UK company for the distribution of Trimec products. It had an oral arrangement for distribution in Singapore. It entered into distributorship arrangements in the USA and Europe.
[32] Trimec only ever had one distributor in each country. Although it preferred not to commit itself to any written agreement the evidence was clear that it did have a coherent approach to the appointment of distributors which was based on a single national distributor in any country. Mr Bowyer’s philosophy on distributors was that:
[W]e only ran one national importer in each country because to run two in parallel would basically destroy any pricing in a country in the structure.
We had common pricing at the importer level, the wholesaler level and the installer level throughout the world.
[33] Trimec’s relationship with Loktronic arose from Mr Bowyer’s discovery that its Australian distributor, Padde, had been supplying Trimec products to a New Zealand company without Trimec’s authority. The New Zealand company was Loktronic and, rather than allow Padde to supply product to Loktronic, Mr Bowyer preferred that Loktronic dealt directly with Trimec. Mr Bowyer’s evidence on this issue was that:
On or around 17 August 1992 I approached Mr Calvert to discuss whether Loktronic would be prepared to represent Trimic in New Zealand. Trimec was interested in dealing with a national importer, namely one that would on-sell products to wholesalers. This structure was identical to that which Trimec had in Australia with Padde and IEC in the UK.
During our discussions regarding the distribution of Trimec’s products, it was agreed that Trimec would supply Loktronic at the international discount price against purchase orders and Loktronic would provide forecasts of its stock requirements. The proposed arrangement with Loktronic reflected the arrangements which Trimec had with its other distributors across the world. As noted, these included that Loktronic would place an order with Trimec, Trimec would invoice Loktronic and Loktronic would pre-pay Trimec by TT however later, within 30 days.
[34] The fact that Loktronic was more than a mere purchaser of Trimec products is also evident from Mr Bowyer’s reaction when he became aware that Loktronic was selling Trimec product directly to installers and end-users at discounted prices. He was unhappy at this, concerned that it would:
[C]ause problems for the New Zealand distribution network thereby reducing the attraction of Trimec’s products to wholesalers in the market. Loktronic enjoyed a national importer discount as a national importer, based on the expectation that national importers would on-sell to wholesalers. There were multi-level discounts which provided good margins for the national importer, the wholesaler and the installers.
[35] Mr Kennedy, for Trimec and Mr Bowyer, submitted that requests by Mr Calvert during 1996 that Trimec place its distribution arrangement with Loktronic on a more formal footing showed that what existed was simply an informal arrangement rather than a contract. However, those requests are to be considered in context; Mr Calvert had been concerned about the fact that another New Zealand company, Grinnell Sales, had begun selling Trimec products. Mr Bowyer identified the supplier of Grinnell as its Australian distributor Padde and put a stop to it. In these circumstances I do not accept that a request for an existing
oral agreement to be reduced to writing undermines the existence of the oral agreement.
[36] I am satisfied from all the evidence that the arrangement between Trimec and Loktronic was an oral contract under which Loktronic was Trimec’s exclusive distributor in New Zealand.
Notice on termination
[37] Given the nature of the relationship and its duration I find also that it was implied into the agreement between Trimec and Loktronic that the agreement would only be terminated on reasonable notice. The real question is what the extent of that notice should be.
[38] I have already discussed the relevant principles and considerations in determining this question above in respect of NHEL. The circumstances were not dissimilar to those that existed in Silhouette in which a three month notice period was required. Loktronic did not depend entirely on Trimec products; they made up about 25-30% of its domestic sales and a much smaller proportion of its overall sales. Its servicing of customers would not be unduly affected, particularly as it could continue to source Trimec products from Trimec’s new distributor. Obviously, it would not make the same profit but it could not expect that, given the nature of the agreement. From Trimec’s point of view, however, there was no minimum purchasing requirement on Loktronic and Trimec had no other distributor in New Zealand.
[39] In these circumstances, a three month notice period, the same as was regarded as reasonable in Silhouette, would have been reasonable.
Termination by Trimec
[40] Trimec does not, however, accept that it terminated the contract. Its position is that if a contract existed, which it denies, Loktronic repudiated the contract and that it accepted the repudiation. This assertion arises from a meeting held at Loktronic’s offices on 23 July 2002. The ostensible purpose of the meeting was for
Mr Hingston to advise Mr Calvert of the joint venture between NHEL and Trimec and the fact that NHEL would no longer be manufacturing the drop bolt for Loktronic.
[41] It was obvious that this would be a fraught meeting. Mr Bowyer and Mr Diver both acknowledged that they expected a strong response from Mr Calvert to the news. Mr Hingston was nervous about delivering the news and Mr Diver went to the meeting specifically anticipating that he might need to calm the situation down.
[42] Mr Bowyer gave evidence that over the course of the preceding year (2001), he had become concerned at Mr Calvert’s performance. He gave evidence about difficulties reported to him between Mr Calvert and Loktronic customers. He also suggested that Loktronic’s payments had slowed, though I do not accept that assertion. He said that he tried unsuccessfully to discuss these problems with Mr Calvert by phone. Mr Bowyer then claimed that in July 2002 he decided to address the concerns with Mr Calvert face-to-face and use the opportunity of a large order from Loktronic to do so. He instructed Trimec not to despatch the order and when Mr Calvert contacted him regarding the delay he said that there were issues that he wanted to discuss and that he would do so on 23 July 2002.
[43] Mr Bowyer seemed to suggest in his evidence that it was simply coincidental that Mr Hingston had arranged to see Mr Calvert to give him the news about the joint venture on the very day that Mr Bowyer had arranged to see Mr Calvert to discuss unrelated problems in the Trimec/Loktronic relationship. If that was what he was suggesting, I do not accept it. Given what Mr Bowyer knew would be the outcome for Loktronic of the joint venture, his evidence that this was a “good opportunity” for him to discuss the matters that were concerning him with Mr Calvert is simply not plausible.
[44] The various accounts of the meeting were reasonably consistent. Mr Hingston told Mr Calvert about the joint venture. Mr Bowyer then spoke. On his own evidence he “commented on Mr and Mrs Calvert’s relationship difficulties and queried the effect this might have on Loktronic and its ability to meet its
financial obligations”. This latter point was one that all who knew Mr Calvert would have realised was likely to provoke a strong reaction. Mr Calvert was an old- fashioned businessman who prided himself on prompt payment. Indeed, in the car on the way to the meeting, Mr Bowyer had expressed concern about Loktronic’s continuing ability to pay and been told by Matthew Hingston that NHEL did not share that concern and that if Mr Bowyer were to express that view to Mr Calvert would not be happy. Mr Calvert did react strongly. He ushered his visitors out of Loktronic’s premises. There is some dispute as to whether he shouted abuse at the visitors in front of staff. I think it highly likely that he did.
[45] The following day Mr Bowyer wrote to Mr Calvert. He advised that it had been his intention to discuss a mutually acceptable wind-down of the supply arrangements between Trimec and Loktronic but that Mr Calvert’s decision to terminate the meeting had prevented him from doing so. He then asserted:
The manner in which you concluded the meeting gives us no choice but to interpret your actions as signalling your decision for a definitive severance of the relationship between LK and TT, which we herein accept.
Accordingly we formally confirm advice to you that TT will be transferring its distribution agency in New Zealand to an alternative party.
[46] Mr Calvert’s reaction was, on the evidence, very much what Mr Bowyer, Mr Hingston and Mr Diver expected. For Mr Bowyer to convey that this reaction gave Trimec no choice but to treat the contract as being at an end was, in my judgment, disingenuous. I consider that Trimec cynically took the opportunity to portray the way the meeting had ended as repudiation by Loktronic because it suited it to do so. The weight of the evidence was clearly to the effect that Trimec was looking to move its business to an Assa Abloy company in New Zealand; this was not necessarily Mr Bowyer’s desired outcome but it was clearly the desire of Trimec’s chairman, Geoff Norcott. The evidence was clear that Mr Norcott was responsible for such decisions. Mr Bowyer said in evidence that he would have consulted with Mr Norcott before writing the letter.
[47] On the evidence I find that, more likely than not, it was Mr Norcott’s decision to write to Loktronic purporting to accept a repudiation by Loktronic. This opportunity represented a means of achieving the desired end whilst retaining the
moral high ground. I do not accept that there was repudiation of the contract by Loktronic. I find, instead, that Trimec’s letter 24 July 2002 constituted a breach of the obligation to terminate on reasonable notice.
Background to the intentional torts
The relationship between Loktronic, Mr Diver and effeff
[48] The events leading up to the termination of the manufacturing and distribution contracts form the basis for the allegations that some or all of the defendants induced the breaches of those contracts, caused loss by unlawful means, conspired to injure for unlawful purposes and conspired to injure by unlawful means. The relevant events had their origins in Mr Diver’s offer to assist Loktronic marketing its products in Europe.
[49] Mr Diver is a former public servant who has worked in the Ministry of Foreign Affairs and Trade both in New Zealand and in Europe. His positions have included senior Trade Commissioner to Germany, Switzerland and Austria prior to
1996. He speaks fluent German and has knowledge of other Slavic languages.
[50] In 1995 Mr Diver incorporated a company, SDR Limited, which acted as an adviser and consultant for New Zealand exporters looking to enter the German and eastern European markets. In 1996 Mr Diver approached Mr and Mrs Calvert, offering SDR’s services to identify export customers in Europe. The agreement between Loktronic and SDR was that professional fees were to be charged at a daily rate with a success fee of 5% of the FOB sales to companies identified through SDR.
[51] Mr Diver and Mr Calvert both attended a trade fair in Cologne in early 1997 where they met the managing director of effeff, Martin Brandt. Negotiations facilitated by Mr Diver culminated in a three-year supply contract between Loktronic and effeff signed in March 1998. That three-year period was later extended to 2003. Under it effeff agreed to buy a minimum of 5,000 bolts each year. The supply agreement between Loktronic and effeff did not get off to a good start because of quality control problems. Mr Diver had some involvement in trying to smooth over these issues which continued through 1999.
[52] In mid-1999 effeff engaged SDR to advise on its acquisition of Trimec. Mr Diver did not perceive any conflict between acting for Loktronic in its dealings with effeff and acting for effeff in relation to Trimec. There were, however, also discussions between effeff and Mr Diver about the possibility of effeff acquiring Loktronic. Acting on effeff’s behalf in February 2000 Mr Diver presented a letter to Mr Calvert expressing effeff’s interest in acquiring Loktronic. Mr Calvert indicated his desire and intention to deal directly with Mr Brandt rather than through Mr Diver and there ensued correspondence between Mr Calvert and Mr Brandt regarding effeff’s interest. Soon after this Mr Calvert terminated Loktronic’s relationship with SDR. This was achieved amicably with a payment by Loktronic to SDR of a relatively modest lump sum in full and final payment of any amounts that might become due under the terms of their agreement.
[53] Mr Diver’s relationship with effeff continued on, however, and in 2000 effeff acquired Trimec. About the time that effeff acquired Trimec it was, itself, acquired by the Swedish company Assa Abloy so that Trimec and effeff became part of the Assa Abloy group. Mr Diver went onto the Trimec board as Assa Abloy’s representative, but without voting rights.
[54] These developments had implications for Loktronic because effeff started to come under pressure from Assa Abloy to purchase from within the Assa Abloy group. In April 2000 Mr Brandt wrote to Mr Calvert explaining that fact and proposing that, in order to provide greater security for both effeff and Loktronic, effeff acquire Loktronic’s patents, enabling it to move the manufacturing of the bolt to effeff itself. The letter also again intimated interest by effeff in acquiring Loktronic.
[55] Mr Calvert, however, was not interested in ceding control over Loktronic to effeff. This was a fateful decision for Loktronic. I have already described Mr Calvert as an old-fashioned businessman. The evidence is clear that he was honest and put a high value on personal relationships in business and on the autonomy of his own business. But he could also be rather prickly and frustrating to deal with. The significant aspect of Mr Calvert’s personality was, in my judgment, a very conservative and traditional mindset. Although clearly able to establish and
maintain relationships with export customers Mr Calvert lacked any interest in joining a wider group of companies and could not see that the globalisation of his industry would affect Loktronic regardless of his wishes.
The joint venture between Trimec and NHEL
[56] It was against this background that events giving rise to the termination of the manufacturing and distribution agreements began to unfold. Following effeff’s acquisition of Trimec the Trimec board comprised Mr Norcott as chairman, Mr Brandt (of effeff), Mr Bowyer and Mr Luker (both without voting rights and only for the duration of their “earn-out” period) and Mr Diver (without voting rights). According to Mr Bowyer and Mr Diver, Mr Norcott controlled board discussions and decisions. He was also the regional manager for the Assa Abloy group in the Asian Pacific region and was therefore concerned with the interests of the Assa Abloy group generally. Mr Norcott did not give evidence even though he was the only officer of Assa Abloy NZ Ltd with knowledge of the relevant events and even though he was clearly the decision-maker on the Trimec board. Nor was he referred to in the pleadings. Comments by Mr Bowyer and Mr Diver suggested that Mr Norcott’s involvement in the decisions about the joint venture was significant. I was sufficiently concerned about making findings concerning Mr Norcott to invite further submissions from counsel on the point.
[57] Trimec’s forecast profit had been based to a significant extent on the expectation that the new products being developed by Mr Luker would be ready for market within a short time. By mid-2002, however, it was clear that these new products would not be available in time to increase Trimec’s profits sufficiently. Mr Diver gave evidence about the frustration of the Trimec board at the lack of growth in the company and the discussions about acquiring other businesses as a strategy for growth.
[58] The picture that emerged from the various witnesses was that Mr Norcott and Mr Brandt were anxious to improve Trimec’s profitability and began to consider possible acquisitions as a means of doing that. Loktronic’s drop bolt was regarded as one means by which that might be done. I find that the suggestion to acquire the
rights over the electronic bolt came initially from Mr Brandt and Mr Diver and was immediately recognised by Mr Norcott as a means of advancing not only Trimec’s position, but also that of the Assa Abloy group; Mr Norcott also sat on the board of the New Zealand companies Lockwood Arrow Ltd and Interlock Group Limited (previously called AANZL), both members of the Assa Abloy group. Lockwood Arrow Ltd was a door closer manufacturer and AANZL a window lever manufacturer. Mr Bowyer perceived that an acquisition of NHEL would lead to the appointment of one of these companies as Trimec’s distributor in New Zealand because that would ensure that all profit from Trimec products (including the electronic bolt) would be retained within the Assa Abloy group.
[59] Mr Brandt and Mr Diver knew from experience that there was no point in approaching Mr Calvert with a view to acquiring Loktronic. Acquiring NHEL was the most likely means of securing the rights to manufacture the bolt. In June 2002
Mr Diver approached NHEL on behalf of Trimec. He was unimpressed with the modest manufacturing operation that he found but was impressed by Mr Hingston. He obtained some financial information from Mr Hingston and subsequently prepared a draft paper with Mr Bowyer which was finalised as an “extraordinary board paper” dated 24 June 2002 and circulated by Mr Bowyer. The paper contained the following assessment of the impact on Loktronic of Trimec acquiring NHEL:
With the sale of Hingston Engineering, Loktronic’s business will probably close. Calvert will need to find an immediate alternative contract manufacturer and new distributors. Also TT [Trimec] and effeff will shift their agencies to Interlock [the New Zealand Assa Abloy company]. Hence he is left without a domestic or export business. His response may be physical aggression towards the Hingston family and they should be prepared for it.
[60] Mr Norcott decided against acquiring NHEL. He was particularly influenced by the report that Graham Luker and Thomas Schtocker (head of research and development for Assa Abloy) considered the patents held by Loktronic on the bolt to be indefensible. However, Trimec was still keen to acquire the drop bolt and a new proposal was made, a joint venture between Trimec and NHEL. As part of the negotiations Trimec sought Mr Hingston’s assurance that NHEL had no binding contractual commitment to Loktronic. NHEL and the new joint venture company,
MANZ, provided indemnities for litigation arising from the joint venture. Under it
NHEL would manufacture the electronic bolt exclusively for Trimec.
Inducing breach of the manufacturing and distribution contracts
[61] This cause of action is brought against all parties except NHEL. As a preliminary point, Mr Kennedy, for Mr Bowyer, Trimec and AANZL, submitted that in order to succeed on this cause of action Loktronic had to prove that all or some of them induced the breach of both contracts. I do not accept that submission. If the evidence supports a finding that some of the defendants induced the breach of either contract, then the tort will have been established in relation to that contract.
Relevant principles
[62] The tort of inducing breach of contract, established in Lumley v Gye,12 depends upon a person procuring a contracting party to breach his or her contract. The elements of the tort are:
A legally enforceable contract;
The defendant knows that his or her conduct would
induce a breach; 
The defendant intends to procure
a breach;
The defendant engaged in conduct which did in fact
induce a breach of the contract; and
The conduct inducing the breach caused loss or
damage to the plaintiff.
[63] The first major issue in the present case is the extent of the defendants’ knowledge; a defendant must know that he or she is inducing a breach of contract. In OBG Ltd v Allan, in which the development of intentional torts causing economic
loss was extensively canvassed, the House of Lords observed that:13
12 Lumley v Gye (1853) 2 E & B 216; 118 AllER 749.
13 OBG at [8].
[39] To be liable for inducing the breach of contract you must know that you are inducing a breach of contract. It is not enough that you know that you are procuring an act which, as a matter of law or construction of the contract, is a breach. You must actually realise that it will have this effect. Nor does it matter that you ought reasonably to have done so.
[64] The House of Lords referred, as an example of a defendant who ought to but does not, realise that his actions will result in a breach of contract, to its decision in British Industrial Plastics Ltd v Ferguson. The Court of Appeal had concluded that the defendant had “vindicated [his] honesty...at the expense of his intelligence”.14
The House of Lords agreed with the assessment that, although the defendant should have realised that his actions would result in breach of contract, his honest belief that it would not meant that he did not have the requisite knowledge.
[65] However, the House of Lord’s statement in OBG does not mean that only actual knowledge will suffice. I accept Ms Grant’s submission that knowledge of the contract may be either actual15 or constructive, where the party has the means of knowledge but deliberately disregards them or is indifferent or reckless as to whether the conduct will procure a breach or not. Constructive knowledge was sufficient in Emerald Construction Co Ltd v Lowthian16 where officers of a trade union applied pressure to a building contractor to get a “labour only” sub-contract terminated. They did not know the terms of the sub-contract but were nevertheless held to have known that their actions would result in the termination of the sub-contract. Lord Denning observed that:17
Even if they did not know of the actual terms of the contract but had the means of knowledge – which they deliberately disregarded – that would be enough. Like the man who turns a blind eye. So here, if the officers deliberately sought to get this contract terminated, heedless of its terms, regardless whether it was terminated by breach or not, they would do wrong. For it is unlawful for a third person to procure a breach of contract knowingly, or recklessly, indifferent whether it is a breach or not.
[66] In OBG the House of Lords cited this passage with approval:
[41] This statement of law has since been followed in many cases and, so far as I am aware, has not given rise to any difficulty. It is in accordance with the general principle of law that a conscious decision not to enquire into
14 [1938] 4 All ER 504 at 513.
15 See Pete’s Towing Services Ltd v Northern Industrial Union of Workers [1970] NZLR 32 at 46.
16 [1966] 1 All ER 1013.
17 At 1017.
the existence of a fact is in many cases treated as equivalent to knowledge of that fact (see Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd [2001] UKHL 1, [2001] 1 All ER 743, [2003] 1 AC 469). It is not the same as negligence or even gross negligence; in British Industrial Plastics Ltd v Ferguson, for example, Mr Ferguson did not deliberately abstain from inquiry into whether disclosure of the secret process would be a breach of contract. He negligently made the wrong inquiry but that is an altogether state of mind.
[67] The other significant element of the tort is the intention to procure a breach of contract; not only must the defendant know that his conduct will induce a breach of contract, he must also intend that breach to happen. There is, however, a distinction to be drawn between the end sought to be achieved, the means used to achieve the end and the unintended consequences of those means. In OBG the House of Lords described the position as follows:
[42] [I]f someone knowingly causes a breach, it does not normally matter that it is the means by which he intends to achieve some further end or even that he would rather have been able to achieve that end without causing a breach.
[43] On the other hand, if the breach of contract is neither an end in itself nor a means to an end, but merely a foreseeable consequence, then in my opinion it cannot for this purpose be said to have been intended. That, I think, is what Judges and writers mean when they say that the claimant must have been “targeted” or “aimed at”.
[68] In OBG the House of Lords contrasted the issue of intention in the context of inducing a breach of contract with the tort of injuring by unlawful means, concluding that the concept of intention was the same:
[62] Finally, there is the question of intention. In the Lumley v Gye tort, there must be an intention to procure a breach of contract. In the unlawful means tort, there must be an intention to cause loss. The ends which must have been intended are different. South Wales Miners’ Federation v Glamorgan Coal Ltd [1905] AC 239, [1904-7] All ER Rep 211 shows that one may intend to procure breach of contract without intending to cause loss. Likewise, one may intend to cause loss without intending to procure breach of contract. But the concept of intention is in both cases the same. In both cases it is necessary to distinguish between end, means and consequences. One intends to cause loss even though it is the means by which one achieved the end of enriching oneself. On the other hand, one is not liable for loss which is neither a desired end nor a means of attaining it but merely a foreseeable consequence of one’s actions.
[69] In this case the requirement of intention requires particular care in considering the position of Mr Hingston, Mr Diver and Mr Bowyer who were acting
in their capacities as directors of NHEL and Trimec respectively and within the scope of their authority. In these circumstances a director will not be personally liable for the tort of inducing breach of contract18 unless he or she acts with intent to injure.19
[70] I turn now to consider the liability of the various defendants.
Mr Hingston
[71] Mr Hingston’s position is that he honestly believed there was no binding contractual arrangement between NHEL and Loktronic. If he did honestly hold that belief he will not be liable for his conduct which did lead to a breach of that arrangement.
[72] Mr Hingston had met with Mr Diver on 11 June 2002. Among the things they discussed were the issue of intellectual property and NHEL’s relationship with Loktronic. According to Mr Diver, Mr Hingston assured him that the patents were valueless and that NHEL had no contractual obligation to Loktronic. Mr Hingston’s evidence was to like effect; he said that he had told Mr Diver that NHEL did not have any formal written arrangement with Loktronic and just supplied stock when requested. NHEL and MANZ backed up these assurances with indemnities under the joint venture agreement.
[73] In asserting constructive knowledge by Mr Hingston through his indifference as to the existence of the manufacturing agreement Ms Grant relied on the fact that Mr Hingston was expressly advised by his accountant during the negotiations that he should obtain the advice of a lawyer about “where he stood in relation to Loktronic”. It appears that Mr Hingston did take a step towards obtaining legal advice; amongst the exhibits is a handwritten letter to NHEL’s solicitor dated 22 July 2002 in which Mr Hingston set out the history of his business. Significantly, he said in it that when he purchased the business it was “making exclusively for [Loktronic’s predecessor]
and I took over on that basis but without any written contract or agreement”.
18 Said v Butt [1920] 3 KB 497; applied in Winchester International (NZ) Ltd and Anor v Cropworth
Seeds Ltd CA 226/04, 5 December 2005.
19 Root Quality Pty Ltd v Root Control Pty [2000] FCA 980; (2000) 177 ALR 231 at 268.
Mr Hingston went on to describe the arrangements between NHEL and Loktronic as being separate companies with “no formal tie-up between each other but we have co- operated and worked together with Loktronic doing the marketing and us doing the manufacturing” noting that NHEL was the only supplier of the electronic bolt.
[74] However, although Mr Hingston understood that he ought to have been obtaining legal advice on this point and it appeared from the evidence that NHEL’s solicitor was provided with copies of the joint venture agreement, there was no evidence that the handwritten letter was actually sent or, if it was, whether Mr Hingston received advice as to the matters raised.
[75] Had Mr Hingston not been alerted by his accountant to the need to obtain legal advice on his relationship with Loktronic, I would have concluded that he did honestly believe that there was no contract between them. However, I find that Mr Hingston proceeded with the joint venture agreement knowing that there could very well be an issue over his relationship with Loktronic but electing not to pursue that matter; in other words he was indifferent to the question of whether NHEL had any contractual obligations to Loktronic. I therefore proceed on the basis that Mr Hingston had constructive knowledge of the manufacturing contract through his indifference to the issue. It is clear, therefore, that he knew that entering into the joint venture would result in a breach of that contract.
[76] The remaining issue is whether Mr Hingston intended to cause loss to Loktronic; if not he will not be liable for inducing the breach of contract, since he was acting in his capacity as NHEL’s director. It was clear to Mr Hingston that the loss of NHEL as manufacturer would badly affect Loktronic’s business. Mr Hingston acknowledged in cross-examination that he knew that after NHEL ceased supplying Loktronic, Loktronic would not be able to fill orders from effeff, which he knew to be Loktronic’s main export customer. In these circumstances, in acting to effect a breach of the manufacturing agreement, I find that Mr Hingston did so with the intention of injuring Loktronic; the loss to Loktronic was not merely a foreseeable consequence of Mr Hingston’s actions, it was the only means by which he could sever the relationship so as to allow NHEL to enter the joint venture with Trimec.
[77] In terms of the distribution agreement, Mr Hingston acknowledged that he was aware of it but the evidence does not support a finding that he intended or did any act to effect a breach of it. Entering the joint venture did not inevitably (at least to Mr Hingston’s knowledge) have the effect of severing the distribution agreement.
[78] I therefore find that Mr Hingston is liable to Loktronic for inducing the breach by NHEL of the manufacturing agreement. He is not, however, liable in respect of the breach by Trimec of the distribution agreement.
Mr Diver and SDR
[79] Mr Diver only met Mr Hingston once during his relationship with Loktronic and was not told the exact nature of the relationship. In his evidence Mr Diver observed that, based on that introduction, the relationship could have been as a Loktronic subsidiary, joint venture, supplier, contractor or something entirely different. It is, however, clear from information that Mr Diver acquired in his later dealings with Loktronic that he appreciated that Mr Hingston operated independently of and had a contractual arrangement of some kind with Loktronic.
[80] I do not accept Mr Diver’s suggestion that Mr Calvert endeavoured to conceal the true nature of NHEL’s operation. That is inconsistent with Mr Diver’s own recollection of Mr Calvert complaining to him that his supplier did not even have a fax machine; a statement such as this conveyed all too clearly that NHEL was a small-time manufacturer. There were also discussions between Mr Calvert and Mr Diver about Loktronic’s manufacturer, resulting from the problems caused by NHEL’s inability to produce product to the requisite quality. This put strain on Loktronic’s relationship with effeff and Mr Diver accepted that he had encouraged Mr Calvert to shift the manufacturing but that Mr Calvert refused to do so.
[81] There is some inconsistency between Mr Calvert and Mr Diver on Mr Calvert’s exact response to Mr Diver’s suggestion that he move the manufacturing operation away from NHEL, with Mr Calvert maintaining that he specifically told Mr Diver that he could not do so because of the agreement he had
with NHEL. Mr Diver’s recollection was that Mr Calvert said that he could get his
product made elsewhere but chose not to.
[82] The information Mr Diver had, however, was clearly sufficient to alert him to the possibility that there was a contract. He specifically asked Mr Hingston about NHEL’s contractual obligations to Loktronic and obtained from NHEL an indemnity in respect of any “real or supposed liability to Loktronic for supply of solenoid bolts”. Mr Diver asserted, and I accept, that an indemnity of this kind is common in the kind of transaction Trimec and NHEL were entering into but Mr Diver also acknowledged in cross-examination that there was a risk that Loktronic might take steps to enforce an obligation on NHEL to supply the bolts to it.
[83] Mr Diver was faced with a conflict between what he knew of the relationship between NHEL and Loktronic and Mr Hingston’s denial of that fact. In some circumstances, an assurance of the kind Mr Hingston gave could be enough to satisfy someone in Mr Diver’s position that his earlier knowledge and understanding was wrong. In this case, however, I do not consider that Mr Diver was either entitled to or, in fact, did fully accept what Mr Hingston said. It must have been apparent to Mr Diver that Mr Hingston was commercially naïve. Mr Diver, however, was not. He was in the difficult position of being given an assurance which contradicted his own knowledge. It was not practical to make enquiries of Mr Calvert. Mr Diver could, however, have done more in terms of his enquiries with Mr Hingston. Faced with a person of limited commercial understanding it was a straightforward matter to require Mr Hingston to obtain advice from a solicitor or even to have discussed the matter himself with NHEL’s solicitor. Mr Diver could also have obtained legal advice himself; in evidence he said, somewhat ruefully, that it had not been considered necessary for Trimec to obtain legal advice because the proposed transaction with NHEL was so small.
[84] I find that Mr Diver chose to accept Mr Hingston’s assurances, notwithstanding that they conflicted with everything he knew about the arrangement between NHEL and Loktronic. Had Mr Diver genuinely turned his mind to the totality of the information that he had it is inconceivable that he would have accepted Mr Hingston’s assurances at face value. In these circumstances I find that Mr Diver
proceeded with indifference as to whether NHEL entering into the joint venture would amount to a breach of its contract with Loktronic. This is a finding that I do not make lightly because Mr Diver was an impressive witness and one whose evidence I accept as generally reliable.
[85] Although Mr Diver provided his services to Trimec via SDR, on the issue of the joint venture he was acting in his capacity as a director of Trimec. Although SDR might be fixed with Mr Diver’s knowledge I do not consider that SDR itself acted on that knowledge. Therefore, SDR cannot be liable for inducing a breach of the contract. But Mr Diver will, like Mr Hingston, be liable if he intended to injure Loktronic. Mr Diver’s specific purpose, as a director of Trimec, was the advancement of Trimec’s interests. But that could not be achieved without NHEL breaching the manufacturing contract. I find that Mr Diver had constructive knowledge of the manufacturing agreement and intended to induce NHEL to breach it. He is, therefore, liable for inducing the breach of that contract.
[86] In relation to the distribution agreement, I find that Mr Diver had either actual or constructive knowledge of that agreement. The most compelling evidence of this is the specific reference in the extraordinary board paper which he helped prepare in which the transfer of the Trimec agency from Locktronic to an Assa Abloy company is specifically envisaged as occurring either at the same time or soon after the termination of the manufacturing agreement. However, because of Mr Diver’s status as a director of Trimec he could not be personally liable for inducing Trimec to terminate the distribution agreement unless he was acting for the purpose of injuring Locktronic. I find that in relation to the distribution agreement, Mr Diver’s actions do not evidence an intention by him to injure Locktronic. Unlike his involvement in the NHEL negotiations, Mr Diver was not required to, and did not, take any steps in relation to the distribution agreement. The decision by Trimec to terminate the distribution agreement was, on the evidence, no more than a consequence of the acquisition of NHEL that Mr Diver foresaw.
Trimec and Mr Bowyer
[87] Trimec is, of course, fixed with Mr Bowyer’s knowledge. It is also fixed with the knowledge of its other directors, relevantly Mr Diver and Mr Brandt. I have already discussed what Mr Diver knew. I find that Mr Brandt knew of the existence of Loktronic’s independent manufacturer; Mr Calvert gave unchallenged evidence of an incident in which Mr Brandt had commented to Mr Calvert that Loktronic must have a large team of engineers and research and development staff and, when told that the manufacturing was undertaken by contractual arrangement, expressed the wish that effeff could do likewise but was constrained by the German trade unions. It is also evident from my earlier discusison that Trimec intended to induce a breach of the manufacturing contract in order to gain access to NHEL’s services for itself. I therefore find that Trimec is liable for inducing NHEL to breach the manufacturing contract.
[88] Mr Bowyer acknowledged in evidence that he was aware that NHEL or Mr Hingston manufactured product for Loktronic. Mr Bowyer had met Mr Hingston on a boating trip in March 1993. It was clear from his description of that meeting that he had a very good idea of the position that Mr Hingston occupied. He described Mr Hingston as “...the enemy. He was the competition. I would have no interest in him”. Mr Bowyer also met with Mr Hingston as part of the joint venture negotiations. Given Mr Bowyer’s experience, Mr Hingston’s commercial naivety would have been obvious to him.
[89] I consider that Mr Bowyer knew from information acquired previously from Loktronic that there was a contractual arrangement between Loktronic and NHEL. He did not know the details, but he knew that NHEL’s only client was Loktronic and that Loktronic did not use any other bolt manufacturer. The question is whether, having been told by Mr Hingston that there was no contractual arrangement he believed that to be the case or whether he turned a blind eye to that problem and proceeded on the basis of Mr Hingston’s assurance.
[90] I find that Mr Bowyer was also prepared to accept the risk that a contractual arrangement existed between NHEL and Loktronic and, with the comfort of the
indemnity given by NHEL, was indifferent to the true position. Mr Bowyer is, however, only liable personally if he intended to injure Loktronic by his actions. It will be apparent from my discussion regarding Mr Hingston and Mr Diver, that Mr Bowyer did hold this intention; he was acting to advance Trimec’s interests by securing NHEL’s manufacturing services for Trimec. This could only be achieved by NHEL breaching its contract, as he (constructively) knew. I find that Mr Bowyer is personally liable for inducing Trimec to breach the manufacturing contract.
[91] I have found that Mr Bowyer was also aware of the distribution agreement and I am satisfied that he acted in effecting the breach of it by Trimec, with an intention to harm Loktronic. As I have already accepted, Mr Bowyer did not desire the termination of the distribution agreement. That was, however, an end that Mr Norcott did desire because it was a means of improving Assa Abloy’s overall position. I find that when Mr Bowyer wrote terminating the distribution agreement he was doing so in furtherance of this end. He may have done so reluctantly but he nevertheless did so for the purpose of furthering Assa Abloy’s commerical interests and that purpose could only be achieved through the elimination of Loktronic from the Assa Abloy distribution chain. I therefore find that Mr Bowyer is liable for inducing Trimec to breach the distribution contract.
Assa Abloy NZ Limited (AANZL)
[92] AANZL was incorporated in late 2001 and soon afterward acquired the assets of and changed its name to Interlock Group Ltd, though it is named in the pleadings as AANZL. I refer to it as AANZL/Interlock. It was a wholly owned subsidiary of Assa Abloy Australia Pacific Pty Ltd. Neither Mr Diver nor Mr Bowyer held positions with AANZL/Interlock at the relevant times. I find, therefore, that their knowledge is not to be attributed to AANZL/Interlock. Mr Norcott was, however, a director throughout the relevant period as well as chairing the Trimec board.
[93] If AANZL/Interlock were liable it could only be as a result of Mr Norcott’s actions. Although Mr Kennedy acknowledged that Mr Norcott knew the contents of the extrordinary board paper he submitted that, nevertheless, there was no evidence that Mr Norcott had knowledge of either contract. Mr Kennedy submitted that the
board paper does not mention any manufacturing contract requiring the relationship between Loktronic and NHEL to continue and that it made no reference to any contract between Trimec and Loktronic. I do not accept that submission. The extraordinary board paper noted that:
Hingston Engineering ...has no brand – rather it badges the bolts for Loktronic’s distributors. Hingston only manufactures for Loktronic ...and has no other clients. The relationship between Peter Calvert and Neil Hingston as well as his son, Matthew, has deteriorated sharply, to the extent that Loktronic is looking for an alternative contract manufacturer.
[94] These details provided Mr Norcott with the essential information about the relationship between Loktronic and NHEL. From it he knew that NHEL was Loktronic’s contract manufacturer and that NHEL had no other clients. Mr Norcott could not have known the terms of the contract and indeed the paper conveys that Loktronic was seeking to terminate the arrangement (which was not correct). The unmistakable fact that emerges from the information, however, is that there was a contract between Loktronic and NHEL.
[95] I also find that the board paper was clear that Loktronic was a distributor for Trimec. Having noted that with the sale of NHEL, Loktronic’s business was likely to close, the paper added:
Also, TT [Trimec] and effEff will shift their agencies to Interlock. Hence he is left without a domestic or export market.
[96] Trimec had only one distributor in New Zealand – Loktronic. It is impossible to believe that Mr Norcott did not know that. However, if Mr Norcott did not know beforehand that Loktronic was the agent for Trimec, he must have known after he read that part of the paper. Further, the letter from Trimec 24 July 2002 written by Mr Bowyer following consultation with Mr Norcott specifically advises of the transfer of Loktronic’s distribution agency.
[97] It is not tenable to suggest that Mr Norcott did not know of the manufacturing and distribution contracts. The real question is whether AANZL/Interlock is fixed with that knowledge and if so, whether there is any act attributable to it that would render it liable for the tort of inducing breach of contract.
[98] Mr Norcott received the information in his capacity as a director of Trimec. In the usual course a company would not have imputed to it the knowledge of its director acquired in his capacity as director of another company. However, in this case the companies concerned, Trimec and AANZL/Interlock, were part of the same group and Mr Norcott’s responsibility for the group activities in the Asia-Pacific region meant that he was rquired to undertake his various directorships for the good of the group; Mr Bowyer gave evidence that Mr Norcott’s influence on the Trimec board was aimed at improving the group’s position, not just Trimec’s position. This conflicted with what Mr Bowyer described as the spirit of the acquisition agreement between effeff and Trimec, under which Trimec would be entitled to continue running its business as it did before.
[99] However, the evidence shows that, insofar as the Trimec distributorship was concerned, Mr Norcott was motivated by AANZL/Interlock’s interests, not those of Trimec. It was clear from Mr Bowyer’s evidence that his preference was for the Trimec distributorship to continue with Loktronic and he did not consider that it was in Trimec’s interests to have the distributorship moved to AANZL/Interlock. I find that Mr Norcott knew of the distributorship and intended that it be moved to AANZL/Interlock for the benefit of AANZL/Interlock and the wider group.
[100] Although there was no direct relationship between Trimec and AANZL/Interlock at this time, I am satisfied that Mr Norcott acquired knowledge in his capacity as chairman of Trimec and used that knowledge to benefit the New Zealand Assa Abloy companies, particularly AANZL/Interlock, who was the initial recipient of the Trimec distributorship (it was later transferred to the other New Zealand Assa Abloy company, Lockwood). For these reasons, I find that AANZL/Interlock is fixed with the knowledge that Mr Norcott had about both the manufacturing and distribution agreements.
[101] This same evidence answers the question as to AANZL/Interlock’s intentional actions. It was Mr Norcott’s decision to pursue and secure the electronic bolt. It was Mr Norcott’s decision to finalise the joint venture agreement with NHEL. During at least one meeting between Mr Diver, Mr Bowyer and Mr Hingston, recorded in a file note of Mr Hingston’s, there is discussion about the
possibility of employment by Matthew Hingston and Interlock. I find that in advancing the joint venture Trimec was doing so, in part, as a means of advancing the interests of AANZL/Interlock by securing the Trimec distributorship for it. I find therefore that AANZL/Interlock did intend to induce NHEL to breach the manufacturing agreement and Trimec to breach the distribution agreement.
Interference by unlawful means
Relevant principles
[102] Loktronic relies on the breaches of the distribution and manufacturing contracts together with alleged breaches of its patent and copyright interests as establishing the tort of interference with trade by unlawful means.
[103] The OBG decision reviews and re-states the elements of this tort. I note that there is some difference between the majority and Lord Nicholls on one aspect and Ms Grant invited me to adopt the wider position propounded by Lord Nicholls. However, I intend to apply the law as it is stated by Lord Hoffman for the majority:
[47] The essence of the tort therefore appears to be (a) a wrongful interference with the actions of a third party in which the claimant has an economic interest and (b) an intention thereby to cause loss to the claimant.
[49] [A]cts against a third party count as unlawful means only if they are actionable by that third party. The qualification is that they will also be unlawful means if the only reason why they are not actionable is because the third party has suffered no loss. In the case of intimidation, for example, the threat will usually give rise to no cause of action by the third party because he will have suffered no loss. If he submits to the threat, then, as the defendant intended, the claimant will have suffered loss instead. It is nevertheless unlawful means. But the threat must be to do something which would have been actionable if the third party had suffered loss.
[51] Unlawful means therefore consists of acts intended to cause loss to the claimant by interfering with the freedom of the third party in a way which is unlawful as against that third party and which is intended to cause loss to the claimant. It does not in my opinion include acts which may be unlawful against a third party but which do not affect his freedom to deal with the claimant.
[104] In this case the issue of intention is significant. Intention in the context of this case requires a careful distinction between an intended end and the unintended
consequences. In Van Camp Chocolates Ltd v Aulsebrook20 Cooke J drew the clear distinction between an intention to cause loss through unlawful means and the unintended consequences of unlawful means:
If the reasons which actuate the defendant to use unlawful means are wholly independent of a wish to interfere with the plaintiff’s business, such interference being no more than an incidental consequence foreseen by and gratifying to the defendant, we think that to impose liability would be to stretch the tort too far.
[105] It is, however, clear that where the intention is to enrich onself, if the means adopted to eachieve that end causes loss, there will exist an intention to cause loss. The practical effect of this is illustrated by the outcome of one of the appeals being heard in OBG, that of Douglas v Hello! Ltd. That case involved the unauthorised publication of wedding photographs. The couple concerned, Michael Douglas and Catherine Zeta-Jones, had an exclusive arrangement under which OK! magazine was entitled to publish photographs of their wedding. When rival magazine Hello! published photographs obtained by an unauthorised photographer OK! sued Hello! The controlling shareholder of Hello! gave evidence that his intention was solely to publish photographs that would interest his readers, not to injure OK! Reversing the Court of Appeal’s finding that there was no intent to injure the House of Lords held:
[134] Thus the position of Senor Sanches Junco was that he wished to defend his publication against the damage it might suffer on account of having lost the exclusive. But that, it seems to me, is precisely the position of every competitor who steps over the line and uses unlawful means. The injury which he inflicted on OK! in order to achieve the end of keeping up his sales was simply the other side of the same coin.
Lord Sumner made this point pungently in Sorrell v Smith [1925] AC 700 at
742, [1925] All ER Rep 1 at 20:
How any definite line is to be drawn between acts, whose real purpose is to advance the defendants’ interests, and acts, whose real purpose is to injure the plaintiff in his trade, is a thing I feel at present beyond my power. When the whole object of the defendants’ action is to capture the plaintiff’s business, their gain must be his loss. How stands the matter then? The difference disappears.
20 Van Camp Chocolates Ltd v Aulsebrooks [1984] 1 NZLR 354 at 360.
The unlawful means
[106] There are five unlawful means alleged. The first is interfering with the manufacturing and distribution contracts, which arise from the allegation just dealt with of inducing breach of contract. Inducing a breach of contract has previously been held to constitute unlawful means for the purposes of this tort.21 I find that the acts of inducing NHEL to breach the manufacturing contract and Trimec to breach the distribution contract constitute unlawful means.
[107] The second means relied on is the alleged deliberate misrepresentation by Mr Bowyer and Mr Diver by making false statements to Mr Hingston about Loktronic’s commercial prospects that Loktronic was considering having the lock made in China and that effeff was intending to stop ordering from Loktronic. As a matter of law, a deliberately misleading statement made to NHEL would, if actionable, constitute an unlawful means.22
[108] Mr Hingston gave unchallenged evidence-in-chief that when he met with
Mr Diver and Mr Bowyer they told him that:
Effeff were not happy with the situation with Loktronic and they were looking at not buying any more bolts from Loktronic if Mr Calvert was involved. So we could see the writing on the wall, that is – the lock company who were the biggest in the world and still are, were not going to be buying from Loktronic and if they were not going to be buying from Loktronic we would have nothing to make if we stayed with Loktronic. If we had nothing to make we had no future. So I had no job and my son had no job.
[109] There was no cross-examination on this evidence from counsel for either
Mr Diver or Mr Bowyer.
[110] Mr Bowyer and Mr Diver knew that Loktronic had a four-year contract with effeff, so there was no basis on which they could genuinely have thought that Loktronic’s relationship with effeff was at risk. However, Mr Hingston said that he was led to believe that Mr Calvert was already investigating Chinese manufacturers
and suppliers and this was a factor that influenced his decision to proceed with the
21 Proprietors of Parininihi Ki Waiotara Block v Manuirirangi HC New Plymouth CP18/99, 31
October 2003.
22 Lonrho PLC v Fayed [1989] 2 AllER 65; [1990] 2 QB 479.
joint venture. In cross-examination he said that he thought it was Mr Bowyer who had made that statement, though Mr Bowyer believed it was Mr Hingston who told him that, not the other way around.
[111] The extraordinary board paper that Mr Diver and Mr Bowyer prepared following the meeting with Mr Hingston recorded that the relationship between Mr Calvert and Mr Hingston had deteriorated to the extent that Loktronic was looking for an alternative contract manufacturer. Mr Diver could not recall where he got that information from and thought it probably came from Mr Hingston. However, that would be inconsistent with Mr Hingston’s unchallenged account of the discussion. Mr Hingston said (and I find this to be the case) that Mr Calvert had never told him he was going to have the bolts made elsewhere. Mr Hingston did have some worries but they were based on the fact that Loktronic had priced some components off-shore. I am satisfied on the evidence that Mr Bowyer and Mr Diver misled Mr Hingston into thinking that Loktronic’s contract with effeff was at risk and that NHEL’s position as the manufacturer of the electronic bolt was at risk.
[112] The third allegedly unlawful means was inducing breaches of the effeff contract and the contracts that Loktronic held with IEC and Alarmcom. As I have already noted, inducing a breach of contract with a third party is a step that, if actionable by that third party, would constitute an unlawful means. Loktronic’s export customers of note were effeff, IEC in the UK and Alarmcom in Singapore. In his evidence Mr Bowyer said that within a day or two after the meeting on 23 July
2002 he advised both IEC and Express Alarms that Loktronic’s manufacturing arrangement with NHEL and its distribution arrangement with Trimec had both ended but conveyed that NHEL would supply product to Trimec and that new orders for electronic drop bolts would be met by Trimec under the new joint venture.
[113] The following day, 24 July 2002, IEC’s managing director contacted Mr Calvert to thank him for past service and express his concern for the future. In doing so he referred to the phone call he had had from Mr Bowyer. When Mr Calvert contacted the managing director of Alarmcom later in the day he was told that Mr Bowyer had already been in touch.
[114] The reality may well have been that Loktronic could not continue to supply effeff, IEC or Alarmcom. However, on 23 July 2002 that was, as yet, unknown. It is clear on Mr Bowyer’s own evidence that he interfered with these relationships. I find that his actions amounted to interference by unlawful means through inducing a breach of the contract with effeff (by ensuring that Loktronic could no longer perform its supply obligations). I stop short, however, of finding that Mr Bowyer induced breaches of contract with IEC and Alarmcom because the evidence was not clear as to the nature of the arrangements with those customers.
[115] Fourthly, it is alleged that Mr Diver disclosed confidential information belonging to Loktronic in breach of his ongoing fiduciary obligation as Loktronic’s former agent. This allegation is not one that, as a matter of law, could constitute an unlawful means. Loktronic could have sued Mr Diver directly for breach of fiduciary duty. No third party is affected by the alleged breach in a way that could justify action against Mr Diver. I therefore do not intend to deal further with this allegation.
[116] The final allegation is that the defendants breached Loktronic’s patent. The pleaded facts on which this allegation is based are that NHEL and MANZ have, since 23 July 2002, manufactured electronic bolts in breach of Loktronic’s patent and that Lockwood Arrow has distributed those bolts. Rather than embark on a lengthy discussion of all the points raised by the defendants it is sufficient to deal with the question of proof of infringement of a patent in order to see that this aspect of the plaintiff’s claim cannot stand.
[117] The Patents Act 1953 provides a comprehensive framework for the granting of patents and, amongst other things, the right to sue for the infringement of a patent. The procedure for suing for infringement of a patent is set out under Part 22 of the High Court Rules. The plaintiff in an infringement claim must prove infringement of a valid patent. In doing so it needs to comply with the procedural requirements of Part 22 of the High Court Rules which include r 22.2 requiring the plaintiff in any proceeding for infringement of a patent to deliver particulars of the breaches relied on with the plaintiff’s statement of claim, state which aspects of the specification of
the patent are alleged to be infringed and give at least one instance of each type of infringement.
[118] Ms Grant argued that there is a presumption as to the validity of patents. She relied on the decision in American Cyanimid v Ethicon.23 However, the context in which American Cyanimid was decided (interlocutory application for interim relief) does not support the argument that, in a substantive proceeding, the Court should proceed on the basis of a presumption as to validity. That would be contrary to the provisions of the Patents Act 1953.
[119] The defendants argued that Loktronic could and should have brought any claim alleging infringement in accordance with Part 22 of the High Court Rules. Its failure to do so and, in particular, its failure to comply with the requirement to provide full particulars of the alleged infringement mean that the allegations of infringement of the patents cannot succeed. I accept this argument and find that the alleged infringement of patent could not constitute unlawful means for the purposes of this cause of action.
[120] The result of these conclusions is that Trimec, Mr Bowyer and Mr Diver all interfered in Loktronic’s contracts with NHEL and effeff by making false representations to Mr Hingston and inducing the breach of the effeff contract. These actions reflected an intention to cause loss to Loktronic, being undertaken as a means of benefiting Trimec at the expense of Loktronic.
Conspiracy to injure for unlawful purpose and/or by unlawful means
[121] The plaintiff pleads alternative causes of action in conspiracy to injure for unlawful purpose and conspiracy to injure by unlawful means. Both require a combination in the sense of common intention to do the act which is the object of the alleged conspiracy.24
[122] The tort of conspiracy to injure for an unlawful purpose requires a combination acting for the purpose of intentionally injuring the plaintiff. The tort of
23 American Cyanimid v Ethicon [1975] 1 All ER 504, 508.
conspiracy to injure by unlawful means requires a combination acting to injure using unlawful means. These respective torts are described in SSC & B; Lintas New Zealand Ltd v Murphy:25
An “unlawful purpose conspiracy” consists of a combination of two or more persons who agree to act in concert for the purpose of intentionally injuring a defendant in his trade or other legitimate interests. If the agreement is put into effect, and if actual damage is thereby caused, such an enterprise is actionable in tort even though the joint enterprise does not involve the commission of any act which would otherwise be unlawful. But there is no tort if the predominant purpose of the enterprise is to promote the legitimate interests of those concerned, even though it is intended, incidentally, to cause injury to the plaintiff in order to further those interests – provided always that the joint enterprise does not involve any act which would be unlawful if done by one person (Crofter Handwoven Harris Tweed Co Ltd v Veitch [1942] AC435).
An “unlawful means conspiracy” is a combination of persons who act in concert so as to intentionally injure the plaintiff in his trade or other legitimate interests by an act which is independently unlawful. Conspirators who resort to unlawful means to attain their purpose are liable in tort if actual injury is caused to the plaintiff, notwithstanding that their predominant purpose is to further their own legitimate interests (Ware and De Freville Ltd v Motor Trade Association [1921] 3 KB40 (CA)).
[123] I consider each of the allegations separately.
Conspiracy to injure for unlawful purpose
[124] Loktronic alleges that two or more of the defendants combined with the predominant purpose of injuring Loktronic specifically by removing Loktronic from the market as a supplier of the electronic bolt. The requirement of combination is one that is clearly satisfied in this case. The evidence was clear that the defendants acted in concert in pursuit of the electronic bolt. Whether they did so for the purpose of injuring Loktronic or to advance the commercial interests of the Assa Abloy group is the real issue.
[125] What constitutes a predominant purpose to injure was explained by Viscount
Simon LC in Crofter:26
The question to be answered, in determining whether a combination to do an act which damages others is actionable, even though it would not be
25 SSC & B; Lintas New Zealand Ltd v Murphy [1986] 2 NZLR 436 at 460.
actionable if done by a single person, is not “did the combiners appreciate or should they be treated as appreciating that others would suffer from their action?” but “what is the real reason why the combiners did it?”. Or, as Lord Cave puts it “what is the real purpose of the combination?”. The test is not what is the natural result to the plaintiffs of such combined action or what is the resulting damage which the defendants realise or should realise will follow but what is in truth the object in the minds of the combiners when they acted as they did. It is not consequence that matters, but purpose.
[126] It was argued on behalf of Mr Diver that he and SDR had as their predominant purpose fulfilling their professional obligations to Trimec which involved exploring means by which Trimec might acquire the electronic bolt for itself in order to advance its commercial interests. It was argued on behalf of Mr Bowyer and Trimec that their predominant interest was to improve Trimec’s commercial position by acquiring the electronic bolt. It was argued on behalf of Mr Hingston and NHEL that they were motivated predominantly by concern for the financial security of Mr Hingston and his family.
[127] It was argued on behalf of Loktronic that the predominant purpose of the defendants, or some of them, was to injure Loktronic and this purpose was the result of Loktronic’s stubborn refusal to sell its business to effeff. However, even on Loktronic’s view of things the overriding purpose of the defendants’ actions was to secure Loktronic’s business for themselves to obtain a financial benefit. I also accept that, even though the defendants all recognised that their actions would injure Loktronic, perhaps even fatally, their overriding interest was the advancement of Trimec’s financial position and that of the wider Assa Abloy group. For this reason, this cause of action cannot succeed and it is unnecessary to go on and consider other aspects of the tort.
Conspiracy to injure by unlawful means
[128] An unlawful means conspiracy requires a combination made with the intention of injuring the plaintiff and effected by unlawful means. Unlike the unlawful purpose conspiracy, where unlawful means are alleged it is unnecessary for the plaintiff to show that injury to it was the predominant intention; it will be
sufficient that the intention to injure is a concurrent or even subsidiary purpose.27
Further, intention in this context will be shown if those party to the conspiracy knew that injury to the plaintiff was a likely consequence of their planned actions.
[129] I have already found that Mr Bowyer and Mr Diver (and as a result, Trimec) combined to use unlawful means, namely false statements made by Mr Bowyer and Mr Diver to induce NHEL to breach the manufacturing contract and preventing Loktronic from performing its obligations to effeff through inducing NHEL to breach its contract. These defendants all knew that the consequence of their actions would be loss to Loktronic and I therefore find the tort proven against Trimec, Mr Bowyer and Mr Diver.
Failure to mitigate
[130] Although Mr Hingston and NHEL pleaded a failure to mitigate, I was not addressed on this aspect in closing and nor do I consider that there was any failure on Loktronic’s part to mitigate losses resulting from NHEL’s and Trimec’s breaches of contract. It was not disputed that Loktronic had a duty to mitigate any loss it had sustained but the obligation is only to take reasonable steps and Loktronic was not
obliged to embark on hazardous commercial enterprises.28
[131] Mr Calvert gave evidence that following the loss of the electronic bolt, the effeff business and the Trimec distributorship, Loktronic could not trade profitably alone. He merged the business with the business of a new partner to establish a new company, Loktronic Innovationz Limited (Innovationz) and transferred Loktronic’s business to Innovationz for the book value of the stock ($460,000) and $1 for goodwill. The new shareholders of Innovationz, Mr and Mrs Taylor, held 25% of the company with Mr Calvert’s interests holding 65% and his son, Andrew, holding
10%. Mr and Mrs Taylor brought with them new agencies, some stock and a client base. The financial performance of Innovationz has, however, been very significantly less than Loktronic’s performance.
[132] The defendants asserted that Mr Calvert could and should have identified and engaged various subcontractors to produce the components of the bolt and arranged
for assembly of them or assembled them himself. NHEL called evidence from the managing director of a plastic injection moulding company which had manufactured a lockset for the electronic bolt range for MANZ and said that there was nothing to have prevented him from producing those dies for any other customer within about six weeks.
[133] Mr Calvert, however, gave evidence that Loktronic was unable to manufacture the electronic bolt after 23 July 2002. It did not have any manufacturing facilities. NHEL had physical possession or control of the moulds, dies and other equipment and also the design of the printed circuit board and related software. Mr Calvert did not have sufficient details of all the contractors that NHEL had previously used and in the one instance that he attempted to contact one of the companies his approach was rejected because of the similarity with Mr Hingston’s product.
[134] I do not accept that Loktronic was in a position to produce the bolt quickly enough to retain its customer base. I accept that it could have obtained a new manufacturer but I find that doing so would have taken several months. Ironically, reverse engineering of the electronic bolt was something that Trimec itself could have undertaken had it simply wished to add an electronic bolt to its product range, but it considered that the quicker route was to simply acquire NHEL as a manufacturer.
[135] Further, the reality was that manufacturing the electronic bolt was only part of the issue. There was no point in having an electronic bolt to sell without having a customer to sell it to and, because of Trimec’s disruption of Loktronic’s relationship with effeff, it was obvious that even if Loktronic could produce a new electronic bolt within a short time, it would still have lost its major customer. For these reasons I do not accept the assertion that Loktronic failed to mitigate its loss by not taking steps to produce the new electronic bolt within a short time. In the circumstances, the sale of its business to Innovationz was a reasonable course.
Damages
[136] Loktronic claims that the defendants’ conduct effectively caused the loss of its business for which it claims $10.9m. I intend to assess damages only by reference to the losses arising from the intentional torts because all the defendants except SDR are liable for various of those torts and the losses resulting from the breaches of contract are subsumed into those losses.
[137] There is little authority in New Zealand on the assessment of damages for intentional torts. The settled position does, however, seem to be that in an action for inducing breach of contract damages are at large, with the plaintiff not required to prove specific damage.29 In the absence of specific authority, I intend to take that approach to the other intentional torts that have been proved in this case.
[138] Loktronic calculated its claim on the basis of its net projected profit before interest and tax and the assumption that it would have retained the electronic bolt and the Trimec distributorship between 23 July 2002 and 3 November 2009 together with the estimated value of the business as at 3 November 2009. The claim included interest of $276,776.58 (at 7.5%) and a reduction of $462,000 being payment received for stock by the new company, Innovationz. The defendants asserted that this calculation wrongly assumed that both the manufacturing and distribution contracts would have remained on foot and challenged the profit projections on which the calculation was based.
[139] I accept that the loss of the electronic bolt and Trimec distributorship meant the loss of Loktronic’s entire business. Although the electronic bolt and the Trimec distributorship accounted for about 70% of Loktronic’s sales, it would be unrealistic to conclude that there was a viable business on the basis of the remaining 30%. I was satisfied from Mr Calvert’s evidence that what remained was simply too little to enable Loktronic to maintain any semblance of the business and that the best course was to sell what was left. The appropriate assessment is therefore the value of the
business in July 2002, taking into account the sale of the remaining assets.
29 Exchange Telegraph Co v Gregory [1896] 1 QB 147 CA at 153; Goldsoll v Goldman [1914] 2 CH
603.
[140] There was no direct evidence as to the value of Loktronic’s business in 2002. However, the accountant who gave evidence for Loktronic, Mr Hagen, had calculated the value of the business in 2008 by applying a multiple of four to the pre- tax profit figure for that year. The capitalisation of earnings is a recognised method of assessing the value of a business and I have adopted that approach and applied it to the gross profit figure appearing in the consolidated profit and loss report as at
31 March 2002. I note, of course, that the date I am attempting to assess the value at was July 2002. However, I do not think that anything turns on the use of the year end figure.
[141] The total gross profit for the 2002 financial year was $568,168.26. Applying Mr Hagen’s approach this would mean that a value could have been put on the business in mid-2002 of $2,272,673. I note that in his evidence Mr Diver described Loktronic in passing as a $1–2m company, which is consistent with the figure I have reached. From that figure must be deducted the sum of $462,000 received by Loktronic from Innovationz. This leaves $1,819,673 as the loss to Loktronic.
[142] However, there was a real possibility that Loktronic’s profits would have been affected in any event once Trimec had resolved to begin supplying the electronic bolt itself. This raises a question of causation. Assistance is to be had on this issue from the Court of Appeal’s decision in Schilling v Kidd Garrett Ltd.30 The Court was considering the appropriate approach to fixing damages where an employee had, in breach of his contract, obtained for himself an agency previously held by his employer. Richmond P considered that:31
The correct approach would have been to decide in the first place whether Kidd Garrett, if that company had had a proper opportunity to “get in first” with Husqvarna, would have had any appreciable chance of retaining the agency notwithstanding the concern which Husqvarna would naturally feel on learning from Kidd Garrett that Schilling had left their employment and notwithstanding Schilling’s own freedom, after allowing Kidd Garrett a proper opportunity, to compete for the agency himself. If the chance to which Kidd Garrett were entitled was of any real value then they are entitled, as appears from Chaplin v Hicks [1911] 2 KB 786, to something more than merely nominal damages, however difficult it may be to arrive at an assessment of such damages. But if no real value can be attributed to the
opportunity which has been lost then only nominal damages can be recovered.
[143] A similar approach was taken in SSC & B: Lintas New Zealand Ltd v
Murphy32 and EIL Brigade Road Ltd v Brown & Ors.33
[144] Assa Abloy’s global ambitions meant that Loktronic’s place in the market would inevitably change. I consider that the assessed value of the business must be discounted to reflect the uncertainties resulting from Trimec’s interest in acquiring the bolt for itself and in having its products distributed by other Assa Abloy companies.
[145] The first unknown was what Trimec would have done had it known that NHEL was required to give six months notice terminating its contract with Loktronic. It may have been prepared to wait for NHEL’s notice period to expire and then begin manufacturing the bolt. Alternatively, it may have sought to design or reverse engineer its own bolt. In either case even though Loktronic could have found a replacement supplier within that time, it would have been competing directly with Trimec.
[146] Trimec was part of a multi-national group and, as such, would have had ready access to other companies within the group. It would also have had the strength of the group behind it in terms of marketing. On the other hand, Loktronic would have retained its well-known brand and Mr Calvert was well-known in the market and enjoyed the goodwill of Loktronic’s export customers. I consider that Loktronic would have had a respectable chance of competing with Trimec, though it inevitably would have lost some business.
[147] I also need to consider the possibility that Trimec may have decided against pursuing the electronic bolt if could not have acquired it as quickly and cheaply as the joint venture allowed. It is clear that there was real pressure from Mr Norcott to build growth within Trimec. Although one means of achieving this was the acquisition of the electronic bolt this was not an inevitable outcome because there
were other candidates for acquisition being considered and it is clear that NHEL was regarded sceptically within Trimec; Mr Diver had not been impressed with the quality of its manufacturing and the joint venture was simply a way to acquire the bolt without having to design one itself or reverse engineer one, both of which would have taken time and money. So it is possible that if securing the electronic bolt had proved more time-consuming or costly Trimec may have turned its attention to some other means of achieving the growth that it desired.
[148] The other contingency for Loktronic was the loss of the Trimec distributorship which Loktronic could not have expected to retain in the long-term. It is clear that Assa Abloy would continue to pursue its policy of encouraging, or even requiring, members of the group to trade amongst themselves and Mr Norcott was clearly in favour of moving the distributorship from Loktronic to a New Zealand company that was part of the Assa Abloy group. The only unknown was how long that change might take. The impression that emerges from the evidence is that the acquisition of NHEL was regarded as an opportunity to “tidy up” the situation with Loktonic’s distributorship. However, it is also clear that Mr Bowyer saw Loktronic as the best distributor for Trimec’s products in New Zeasland. There must have been a reasonable prospect that, had the joint venture with NHEL not proceeded, Mr Bowyer’s view would have prevailed, at least until he left Trimec in early 2004.
[149] The discount to be applied to reflect these various contingencies is a matter of evaluation based on an overall assessment of the evidence. Taking into account the factors that I have discussed I consider that the appropriate discount is 30%.
[150] The final point to consider in applying this discount is the fact that Loktronic was assured of its contract with effeff until May 2004 and that the defendants’ conduct deprived it of the ability to perform that contract. The discount should not be applied to the remaining value of the contract because there was no risk that, had the defendants acted lawfully, any part of it would have been lost.
[151] The most satisfactory evidence I have as to the remaining value of the
contract appears from Loktronic’s consolidated profit and loss report as at 31 March
2002 which shows net profit (sales less cost of sales and overheads but before tax)
from supplies to Germany for that financial year as $266,524.40. Assuming the net profit continued over the subsequent two years as it had in the financial year ending
31 March 2002, Loktronic’s loss can be assessed at $22,210 per month which, for
the 23 remaining months of the contract, produces at total loss of $510,830.
[152] From the figure I have assessed as the value of the business I therefore apply a discount to the sum net of the effeff contract i.e. $1,810,673 less $510,830. This means applying a 30% discount to the figure of $1,299,843, which produces
$909,891. I then add back the amount of the effeff contract which results in a final assessment of Loktronic’s loss of $1,420,721.
Interest
[153] Loktronic has claimed interest from the date of the loss down to the date of judgment. The prescribed rate throughout that period is 7.5%. However, I do have concerns about awarding interest at that rate for the entire period. From early 2009 interest rates as set by the Reserve Bank have been well below 7.5%. In these circumstances I consider the best course is to award interest at the Judicature Act rate of 7.5% from 23 July 2002 to 31 December 2008 and at 5% from 1 January 2009 down to the date of judgment. Interest on the judgment debt which is payable under r 11.27(1) of the High Court Rules will also be payable at 5%.
[154] Finally, in case it becomes relevant for any purpose, I mention the long delay between the first hearing in this matter in 2009 and the delivery of judgment because it clearly impacts on the amount of interest awarded. This case was set down for trial for one week in 2009 on the basis of counsels’ estimate. Very early in the hearing I expressed my concern that one week was inadequate but was assured by all counsel that it would be adequate. Within a short time, however, it was evident that at least another two weeks was required. Regrettably, the Registry was unable to allocate a further two weeks until August 2010 when the hearing resumed. By November 2010, I had formed the view that Mr Norcott’s knowledge and conduct would need to be addressed in my judgment to a greater extent than had been dealt with in submissions. I therefore invited counsel to make further written submissions, the last of which I received in December 2010.
[155] The result is that the defendants have received a judgment a year later than might otherwise have been the case and interest will be payable on that judgment for the entire period. However, the purpose of interest is quite simply to compensate the party who has been out of pocket. There is no reason for me to reduce the interest award.
Conclusion
[156] I have found that both the manufacturing and distribution contracts existed and that Loktronic was entitled to notice of termination under them, being six months under the manufacturing contract and three months under the distribution contract. Both NHEL and Trimec were in breach of their respective contracts when they terminated them in July 2002 without notice.
[157] In relation to the intentional torts I have found that:
d) The allegation of conspiracy for unlawful purpose is not proven;
[158] Termination of the manufacturing contract without notice resulted in the loss to Loktronic of the major part of its business, including the value of the remaining time to run under the effeff contract. It was untenable for Loktronic to continue its business and it acted reasonably in selling it to Innovationz.
[159] I assess the net loss to Loktronic of its business as $1,420,721. There will be judgment in favour of Loktronic against each defendant except SDR for that amount.
[160] Interest is payable on the judgment sum at 7.5% from 23 July 2002 to 31
December 2009 and at 5% from 1 January 2009 to the date of judgment. Interest on the judgment debt will also run at 5%.
[161] Counsel may file memoranda addressing the issue of costs. The plaintiff should file its memorandum by 18 April 2011, the defendants by 2 May 2011 and
the plaintiff in reply by 16 May 2011.
P Courtney J
Solicitors: Baldwins, P O Box 5999 Wellesley Street, Auckland 1141
Fax: (09) 373-2123
Lowndes Jordan, P O Box 5966 Wellesley Street, Auckland 1141
Fax: (09) 309-1445 – M Morrison / S Nicholson
Minter Ellison Rudd Watts, P O Box 3798 Shortland Street, Auckland 1140
Fax: (09) 353-9701 – Z Kennedy / S Hindle
Haigh Lyon, P O Box 119 Shortland Street, Auckland 1140
Fax: (09)307-0353 – B Molloy
Counsel: S A Grant, P O Box 4338 Shortland Street, Auckland 1140
Fax: (09) 309-1904
P L Rice, P O Box 4341 Shortland Street, Auckland 1140
Fax: (09) 309-7633
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URL: http://www.nzlii.org/nz/cases/NZHC/2011/275.html