Moonlighting International Pty Ltd v International Lighting Pty Ltd

REASONS FOR JUDGMENT 1 This is an interlocutory application in which the applicants seek two orders. In substance the first is that the fourth respondent, Kim Lighting Inc, be restrained from acting on the termination of the appointment of the first applicant, Moonlighting International Pty Ltd, as one of its Australian distributors. The second is that both the first respondent, International Lighting Pty Ltd, and Kim Lighting be restrained from representing that International Lighting is the exclusive distributor in Australia of the products manufactured by Kim Lighting. 2 The material facts that give rise to this action are set out in my ruling of 24 December 1999. On that day the applicants had applied for, but were denied interim relief against the respondents. I will not repeat what I said on that occasion save to the extent that it is necessary to understand these reasons. 3 Moonlighting says that it is the Australian distributor of Kim Lighting products the existence of that agreement is accepted for the purpose of this application. By notice given on 8 November 1999 the distributorship was terminated with effect from 1 December 1999. Moonlighting argues that this period of notice was unreasonable. It contends that it was entitled to at least six months' notice. In my earlier ruling I expressed the opinion, albeit tentatively, that twenty-one days' notice was not reasonable. Now I am required to reach a more considered, although not a final view, because of the interlocutory relief the applicants seek. 4 According to the common law of this country, whether notice is reasonable must be judged as at the date when the notice is given in the light of what had happened and the circumstances at that time: Australian Blue Metals Ltd v Hughes [1963] AC 74 at 99; Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361 at 376-377; Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438 at 444, 454. What is a reasonable time is a question of fact about which opinions may differ substantially. 5 It is not clear, however, if the relationship between the parties is to be governed by Australian law. The law which governs the rights and liabilities of parties arising out of contract is what is referred to as the proper law of the contract: Merwin Pastoral Co Pty Ltd v Moolpa Pastoral Co Pty Ltd & McKindlay (1933) 48 CLR 565 at 573. In determining the proper law of the contract the court is to be guided by the actual or presumed intention of the parties. When the parties have not stated their intention the law selected is that with which the contract "has the most real connection": Bonython v The Commonwealth (1948) 75 CLR 589 at 601. That law will be ascertained by taking into account the terms of the contract, the situation of the parties and all of the surrounding circumstances: The Assunzione [1954] P 150 at 175. 6 The agreement upon which the applicants bring this action is said to have been made in California, in the United States of America, which happens to be the State of incorporation of Kim Lighting. By that agreement, so it is alleged, Kim Lighting appointed an Australian distributor (a predecessor of Moonlighting) to distribute its goods, being goods which are manufactured in the United States. Terms of the alleged agreement were that Kim Lighting would sell goods to the distributor who would pay for those goods in California in US currency. Under the agreement the distributor was to take title and obtain possession of the goods in the United States under FOB contracts. Except for the fact that certain activities were to be performed by the distributor in Australia, it would seem that the proper law of the contract upon which Moonlighting relies is Californian law. 7 In Mendelson-Zeller Co Inc v T & C Providores Pty Ltd [1981] 1 NSWLR 366 Rogers J considered a contract for the sale of goods in terms similar to those alleged here save that it did not include the appointment of a distributor. His Honour said (at 371): "In the instant case, in my view the contract has much the closer connection with the State of California. The obligations of the shipper, except for the presentation of the documents, all took place in California. Payment was made in California; the currency of the United States was employed as the currency of the contract; the goods were United States goods; there is room for the view that the property in the goods passed in the United States. The fact that delivery was made in Sydney was not an essential incident of the contract between the parties." Perhaps the fact that the distributor was to carry on activities in Australia might result in the conclusion that the contract has its most real connection with this country, but I rather doubt that this is the correct view. 8 If the proper law of the contract is the law of California as I suspect it to be, to apply that law it must be proved as a fact by expert evidence: Lazard Brothers & Co v Midland Bank, Ltd [1933] AC 289 at 298. Thus is seems that, statutory provision or agreement apart (as to which see United States Surgical Corporation v Hospital Products International Pty Ltd [1982] 2 NSWLR 766 at 801), the court is not entitled to conduct its own enquiry into foreign law. Where, as here, the relevant foreign law has not been proved, the court will apply the law of the forum: The Parchim [1918] AC 157 at 161; Dynamit Actien-Gesellschaft v Rio Tinto Co, Ltd [1918] AC 260 at 301. 9 As it turns out, the law in the United States as regards termination of contracts entered into for an indefinite term is much the same as local law. In Haines v City of New York 41 NY 2d 769 (1977) it was said that a distributorship agreement was like a contract of employment into which there would be implied a term permitting termination at will: see also Slonaker v P G Publishing Co 338 Pa 292 (1940). Later cases, however, recognise the substantial investment often required by a distributor under a distributorship agreement and have held, absent a contrary provision, that the agreement can only be terminated on reasonable notice: see e.g. Atlantic Richfield Co v Razumic 480 Pa 366 (1978) (a franchise agreement); Lockewill Inc v United States Shoe Corp 547 F2d 1024 (8th Cir 1976). 10 Here there are two principal factors which are said to be important in assessing the required period of notice. The first is that as at 8 November 1999 Moonlighting had a substantial number of orders from its clients which would take some months to fulfil. If Kim Lighting used the termination of the distributorship as a reason for not supplying Moonlighting with products, Moonlighting would suffer considerable loss. Accordingly it argues that the parties contemplated that appropriate notice would be given so that Moonlighting would not be in breach of its commitments. 11 Without denying the reasonableness of this proposition, Kim Lighting says that it was not its intention to refuse to supply Moonlighting with products to enable it to meet its contractual obligations. On the contrary, Kim Lighting says and it is the case, that on a number of occasions it has made it clear to Moonlighting that it will continue to supply Moonlighting with the products needed to meet contracts made before 1 December 1999. This notwithstanding, Moonlighting is correct when it says that the existence of incomplete contracts is a matter to be taken into account in determining the reasonableness of the period of notice of termination. 12 The second factor is the considerable amount of labour that has been undertaken and the expense that has been incurred in preparing quotations to submit to potential customers and which have not yet been accepted. The work involved included: consulting with architects and engineers, preparing designs, preparing detailed specifications to meet a potential customer's requirements and the like. Moonlighting says that ordinarily it takes approximately six months after a final quotation has been submitted before an order is received and that there is a substantial likelihood that many of its quotations will be accepted. If they are and Moonlighting is not in a position to fulfil the resultant contracts, not only will Moonlighting be unable to recoup the expenditure that it has incurred in tendering for the business, but it will also be deprived of earning a profit on those transactions. 13 I do not doubt that it will often be the case that before a distributorship agreement entered into for an indefinite period can be terminated the distributor should be afforded a reasonable opportunity to recover his setting up expenses. It is reasonable to suppose that parties enter into a distributorship agreement on the basis that it would continue at least for so long as was necessary for the distributor to recover his initial outlay. Another way of looking at the matter is to say that it would be in breach of an implied covenant of dealing in good faith to terminate a distributorship before the setting up expenditure had been recouped: Bak-A-Lum Corp of America v Alcoa Building Products Inc 69 NJ 123 (1976). 14 It is not clear whether the same principle should apply in relation to work done and expenditure incurred in the ordinary course of operating a business. It is certainly reasonable from Moonlighting's point of view that the contract should not be terminated before it has had an opportunity to recover that cost and expense. What is not certain is whether that was also the actual or presumed purpose of Kim Lighting. On this application I need not finally decide the issue. It is sufficient if I am of the view that there is a serious question to be tried at trial on whether it was the common purpose of the parties that the distributor should have time to recoup the cost and expense of quoting for work. On balance I am of the opinion that it was their purpose, bearing in mind that Kim Lighting was aware of the manner in which its distributor was required to conduct its business and it was also aware of the considerable losses that would be suffered by an early termination. 15 Although not the subject of evidence, Moonlighting is also entitled to have taken into account the time that will be taken to secure a replacement supplier if one is available. Due to the absence of evidence on this point, I will assume that this would not take a lengthy period. 16 Doing the best that I can on the available material, it seems to me that it is seriously arguable that six months' notice was the period of notice that was required in the circumstances. Some portion of that period has already been allowed. Indeed Moonlighting only seeks protection until around the beginning of May 2000. 17 The purpose in restraining the termination of the distributorship is so that Kim Lighting will continue to supply its products to Moonlighting. However Kim Lighting says that whatever is the true nature of the distributorship, it is under no obligation to supply products to Moonlighting. The question is whether the contrary position is sufficiently arguable to sustain the relief the applicants seek. 18 The purpose of the distributorship was to have the distributor promote Kim Lighting products in this country. The distributor was to do this by offering to sell Kim Lighting products. Of necessity there could not be any explicit agreement concerning the quantity of and price at which products would be sold to the distributor. However, that products were to be sold to the distributor is not a matter that is seriously in dispute. Mr Evanoff, the Vice President Sales of Kim Lighting, who negotiated the distributorship on its behalf, concedes that he said that the distributor could purchase Kim Lighting products as long as it met credit terms. Mr Liosatos, a director of Moonlighting, says, and this is not challenged, that the agreement was that the distributor would trade on the usual trading terms which had subsisted between it and Kim Lighting in the past. The way that business had been conducted is as follows. Kim Lighting regularly published a price list for its products. Unless there was some special arrangement negotiated, Moonlighting purchased its products from Kim Lighting at the price stipulated in the current price list. Often there were orders for products to which the price list did not apply as the goods that were ordered did not appear in the price list. According to Mr Evanoff the price that was then charged was one that was arrived at following negotiation. 19 It is clear that there cannot be a contract if a material term is neither settled nor implied by law and the "contract" contains no machinery for ascertaining it: Foley v Classique Coaches, Ltd [1934] 2 KB 1 at 13. Price is a material matter in connection with a contract for the sale of any property. It is not, however, necessary for parties to a contract for the sale of goods to include in the contract a term as to the price. In the absence of an agreement as to price or machinery for ascertaining it, the law implies an obligation upon the buyer to pay a reasonable price: Wenning v Robinson (1964) 64 SR(NSW) 157, see also s 13 of the Goods Act 1958 (Vic). It is interesting to note that the same position prevails in California: see s 2305 of the Californian Uniform Commercial Code (1999). In my view, as regards products not on the price list, the parties should be understood as having agreed that the distributor would pay a reasonable price. Even if the parties cannot agree upon that price it can be established by the court. 20 In the result, I am satisfied that it is sufficiently arguable for the purposes of an interlocutory injunction that (a) there was in existence a distributorship agreement which required Kim Lighting to sell its products to Moonlighting at its published list price or if a product was not on the list at a reasonable price and (b) that agreement was wrongfully terminated. The next question that arises is whether, as a matter of discretion, an injunction should be granted. 21 In In re Wait [1927] 1 Ch 606 Atkin LJ said (at 630) that, speaking generally, courts of equity did not decree specific performance (and I would say injunctions) in contracts for the sale of commodities which could ordinarily be obtained in the market where damages was a sufficient remedy. 22 Recently, however, courts have begun to protect long-term supply agreements recognising that the plaintiff's survival in business often depends upon guaranteed supply. Damages will not be a sufficient remedy in those circumstances: see eg Sky Petroleum Ltd v VIP Petroleum Ltd [1974] 1 WLR 576; Baxter Motors Ltd v American Motors (Canada) Ltd 1973 40 DLR (3d) 450. In Evans Marshall & Co Ltd v Bertola SA [1973] 1 WLR 349 the Court of Appeal granted an interlocutory injunction restraining breach of a sole distributorship agreement, emphasising the difficulty of assessing damages in such a case. 23 However, there are problems in granting relief the effect of which would be to keep parties to a long-term contract. The difficulty is in the need for the court to supervise the continuing relationship. But this is no bar to the grant of relief. It is merely one factor, although a very important one, that is to be taken into account. 24 In my view Moonlighting is entitled to relief in view of the harm that it will suffer if the court withholds a remedy. In this regard Moonlighting has proposed a complex form of orders that would require Kim Lighting to supply Moonlighting with products at certain prices and upon certain terms and conditions. I do not think that it is appropriate to grant relief in those terms. 25 The complaint that Moonlighting makes is that Kim Lighting had unlawfully terminated its distributorship. The appropriate order to make is that Kim Lighting be restrained from acting upon its notice of termination. That was the relief that was granted in Sanderson Motors (Sales) Pty Ltd v Yorkstar Motors Pty Ltd [1983] 1 NSWLR 513. The order will not continue until the trial of the action. The order should only operate until 30 April 2000. A trial will not occur before then. It is for that reason the order will be for a limited time. I do not expect that Kim Lighting will refuse to sell goods to Moonlighting during the currency of the injunction. Moonlighting has indicated that it will pay for all goods that it purchases at the current list price and that it will provide security for any credit. Moonlighting has also indicated that it will not order any goods that do not appear in the price list. Even if it did, I do not think that there is a serious risk that Moonlighting and Kim Lighting will be unable to determine the reasonable price for those goods. If they do not, the court will. 26 I appreciate that the effect of the order that I propose to make is that Moonlighting will obtain all that it seeks at trial. If it turns out that the order should not have been made the respondents will be entitled to rely upon the undertaking in damages. In that connection it is unlikely that Kim Lighting will suffer any damage. International Lighting who will not be the exclusive distributorship as early as it wishes may suffer some loss, but it is not likely to be great. 27 The remaining issue is the claim that International Lighting and Moonlighting be restrained from representing that International Lighting is the exclusive distributor of Kim Lighting. 28 The injunction that I have said I will grant has the effect that, for a period of approximately four months, International Lighting will not be the exclusive distributor of Kim Lighting products. It follows that if during the currency of the injunction International Lighting or Kim Lighting represent that International Lighting is the exclusive distributor of Kim Lighting products, that will be a false representation. Further, it will be a representation that is likely to cause Moonlighting to suffer loss of business. It does not seem to me that there is any risk that these respondents will now make a representation that International Lighting is the exclusive distributor. Thus it is not appropriate to grant the relief sought. If either International Lighting or Kim Lighting do engage in misleading conduct in the future the applicants can apply to the court at short notice to obtain the appropriate remedy. 29 Finally, I must deal with costs. It is appropriate that the costs of the application against Kim Lighting be reserved. In so far as the costs against the remaining respondents are concerned they should be the respondents' costs in the cause. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.