Perkier Foods Ltd v Halo Foods Ltd

Hearing dates: 6 th February 2019

HHJBlairQC:

Background

The Applicant seeks urgent interim injunctions against the Respondent in connection with their commercial relationship. The Applicant designs and creates recipes and specifications for food snack products which it markets and supplies to the wholesale market. The Respondent is involved with assisting companies such as the Applicant in product development and the manufacture of such food snack products.

In late 2016 the Respondent approached the Applicant with a view to undertaking the manufacture of the Applicant's products. At that time they were being made by another company. The parties entered into two agreements – the Manufacturing Agreement (dated 5 July 2017) and a Memorandum of Understanding (signed by the Applicant on 5 July 2017 and the Respondent on 10 July 2017).

The Manufacturing Agreement set out very detailed arrangements governing, amongst other things, the ordering, manufacture, sourcing of raw materials, packaging and design, stocking, pricing and supply of the Applicant's products according to the Applicant's recipes and purchase orders. The sorts of products it was initially intended to cover were Perkier Bars, comprising a range of differently flavoured healthy snacking bars which were suitable for those suffering from allergies.

Section 6 of the Manufacturing Agreement is headed ‘ Payment’ and clause 6.2 reads: “ The Customer shall settle the Invoice in full within 30 days of the invoice date unless otherwise agreed by the Supplier’ (which reflects Clause 2.7: “ Standard terms shall be 30 days following the invoice date”). There were contractual provisions for disputes about payment, a mechanism for resolving them and a specified daily rate of interest on overdue amounts.

Section 10 deals with ‘ Term and Termination’. The Agreement was to continue for 3 years from the date of receipt by the Respondent of the Applicant's first order. Either party could terminate on not less than 6 months' notice, given no sooner than 2 ¹/₂ years into the 3 year minimum term. Further rights of termination at any time were given to each party by clause 10.2. These include: 10.2.a. a failure to perform a material term of the agreement without remedying it within 28 days of being given notice to do so; 10.2.b. being in default of payment for 60 days; 10.2.c. if someone takes any action, application or proceeding in respect of the other for a voluntary arrangement / administration / winding up / liquidation / bankruptcy and the like; and 10.2.d “ the other is unable to pay its debts within the meaning of Section 123 Insolvency Act 1986…”

Section 12 deals with Further Product Development and Production Trials. The parties set out their intentions for the addition of more products to be manufactured by the Respondent pursuant to this contract and the manner by which they would become subject to this contract and, if not, who would bear the development/trial costs. In the latter case, if a full commercial launch did not go ahead within 6 months of production trials being conducted the Applicant would be invoiced for those costs. Full commercial launch is defined as including listings in at least one major multiple customer and a production forecast for an agreed target prior to Production Trials. The Respondent reserved the right of first refusal to manufacture any of the Applicant's new snacking products which were within its competencies and technologies.

At the same time as that Manufacturing Agreement was signed, the Memorandum of Understanding (‘MOU’) was entered into by the parties. This agreement was solely directed towards the development of something called Perkier Bites. The Applicant had a very great deal of potential market interest in a new concept, namely bags of smaller spherical bite-sized healthy snacks. The Respondent was planning to purchase a new machine, manufactured in Germany (the Kruger machine), which had the ability to produce such moulded shapes. I am told that no other manufacturer in the UK has such a machine and the ability to create these products.

The MOU included an acknowledgment by the Applicant that “ equipment acquired by the Supplier is not for the exclusive use of the Customer” and that the Respondent would procure “ the equipment, machinery and moulds required for manufacturing moulded cereal pieces on a commercial scale”. However, the Respondent also agreed not to use “ this technology to create a product for another customer with the same or similar recipes or which could be mistaken for a Perkier product by a consumer”. Expenses relating to production trials were to be governed by the Manufacturing Agreement and it stated that “ 3.3a commercial launch resulting from this project shall be incorporated into the Manufacturing Agreement”. The MOU was directed towards the launch of these Bites by early 2018. Either party could terminate the MOU upon breach of the commitments made by the other.

It is the Applicant's case that production trials for Bites were complete because the Respondent's Managing Director was saying by email on 10 July 2018 that he did not see what a further trial would achieve and the product had been costed. Post-trial costings had been agreed by the Respondent for the cereal ball launches (email of 13 September 2018 at 12:25). A price adjustment was agreed in October 2018. Final detailed product specifications were concluded on 5 November 2018.

The Applicant says it then pursued a full launch of the product and it started placing orders for production — small orders on 16/9/18, 1/11/18, 12/11/18 and 15/11/18 (presumably as samples for the launches) followed by orders worth £20,034 on 16/11/18 and £30,041 on 19/12/18. The Respondent had provided its costings on 13 September 2018 based on the final trial production parameters and accepted it would foot the trial costs if the Applicant ordered at least 500,000 bags of each of the 3 variants of the Bites in a 12 month period. It was acknowledged by the Respondent that it would take up to 6 months to build up to the necessary minimum production run of 80,000 bags (and a minimum of 40,000 bags per flavour) but that no order would be below £15,000 during the build-up to that level. It would seem to me that the 16/11/18 and 19/12/18 orders were placed with that very much in mind.

The Applicant states that the Bites product is fundamental to its continuing growth and to attracting customers in a highly competitive market place. It is in the midst of a funding round in order to attract capital for scaling-up its business and any interference with its current course will be catastrophic to its very existence.

On 14 January 2019 the Respondent's Managing Director telephoned the Applicant's Managing Director to say that the Respondent would no longer produce the Bites.

The Respondent says that the Applicant has not been co-operative in addressing necessary adaptations to its product specification, which it says are required because the manufacturing process is not capable of efficiently coping with handling the ingredients in a large scale production run to achieve the requisite level of quality control and without causing costly failures of parts of the equipment. Essentially, the Respondent says that the product cannot be produced efficiently at the price levels agreed. The Applicant says that the Respondent successfully produced the first two large orders and it must continue to fulfil all of its contractual obligations. It seeks a mandatory injunction requiring the Respondent to continue to manufacture the Bites to the contractual specification and deliver them to their order as required by the Manufacturing Agreement.

Various justifications have since been put forward by the Respondent for refusing to manufacture and supply the Bites. Some concern pricing, some the interpretation of the contractual agreements, some involve criticisms of the Applicant's conduct.

The next step taken by the Managing Director of the Respondent on 18 January 2019 was to seek to impose a credit limit upon the Applicant of £20,000. A few minutes later he emailed to decline to undertake any New Product Development (‘NPD’) in 2019, referring to clause 12.6 of the Manufacturing Agreement (the clause giving the Respondent first refusal on developing any new snacking products). The Respondent later confirmed that it had not intended this to be taken as indicating that it was declining to continue their ongoing NPD on the Applicant's Bars which had already commenced.

A skeleton argument in relation to this application was prepared by counsel on behalf of the Respondent the day before the hearing which explained the latter NPD position and stated (at paragraph 39) “… The Manufacturing Agreement is nothing more than a commercial supply contract with a short finite period to run. Halo will continue to supply Perkier Bars for its term which account for 91% of Perkier's turnover”.

However, notwithstanding that being part of the Respondent's stated position on 5 February 2019 through its counsel's skeleton argument, an undated letter was delivered to the Applicant on the morning of the hearing from Mr Tague, the Managing Director of the Respondent, which reads as follows:-

“ I refer to the Manufacturing Agreement between Perkier Foods Limited and Halo Foods Limited dated 5 July 2017 (the “Agreement”).

“ This letter constitutes written notice of...