When Written Contracts Pass Their Expiry Date

28 Jan 2013 |

A recent High Court decision highlights the risks and uncertainties of trading without a written contract or past the expiry date of a written contract. The dispute in Cerebos Gregg’s Ltd v Paulmac Ltd [2012] NZHC 2796 was one that could have been avoided if the parties had agreed to extend or replace their previous agreement, rather than letting that agreement lapse.

The Facts
Cerebos Gregg’s and Paulmac signed a five-year distribution contract in 2005 which gave Paulmac the right to sell Gregg’s products in the Manawatu, Horowhenua and Wanganui region. The contract included a restraint of trade clause which prevented Paulmac from selling Robert Harris coffee products in that region for two years after the contract’s end. The contract had a 31 December 2009 expiry date recorded in it. That date passed without the contract being formally renewed or replaced, but the parties continued supplying and distributing Gregg’s products until 5 May 2011.

If that two year period ran from the expiry date in the contract it would have ended on 31 December 2011. This is the view Paulmac took and it started selling Robert Harris coffee products throughout the region from that date. Cerebos Gregg’s view was that the two years should run from the date it stopped supplying Paulmac with Gregg’s products and it sought an interim injunction restraining Paulmac from trading in Robert Harris coffee until 5 May 2013. 

The Decision
To be awarded an interim injunction, Cerebos Gregg’s would have to prove there was a serious issue to be tried and that the balance of convenience was in its favour. The balance of convenience test involves a balancing of the harm done to the defendant if an injunction is granted, compared with the harm done to the plaintiff if an injunction is not granted. 

The Court held there was a serious issue to be tried, although in this case it did not grant an interim injunction on the basis that damages would be an appropriate remedy. In making this decision it considered the limited the time remaining under the restraint of trade and the major impact an injunction would have on Paulmac’s business. That meant Cerebos Gregg’s could continue with its claim that Paulmac was in breach of the restraint and seek damages, but Paulmac could carry on trading those products for the time being.   

What this means for you
If you have entered into a written contract, it is important that you diary the expiry date. When the contract expires, a positive decision should be made to replace, terminate or review the contract. It is also especially important to be mindful of any restraint of trade clause in a contract and to consider the impact this might have on your business when it comes into effect at the end of the agreement.

Prepared by Lesley Brook