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Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407 (16 December 2009)
Last Updated: 22 December 2009
NEW SOUTH WALES COURT OF APPEAL
CITATION: Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407
FILE NUMBER(S): 40253/07; 40348/07
HEARING DATE(S): 23/3/09-26/3/09
JUDGMENT DATE: 16 December 2009
PARTIES: Franklins Pty Ltd (Appellant in 40253/07; Cross-Respondent in 40348/07) Metcash Trading Ltd (Respondent in 40253/07; Cross-Appellant in 40348/07)
JUDGMENT OF: Allsop P Giles JA Campbell JA
LOWER COURT JURISDICTION: Supreme Court - Equity Division
LOWER COURT FILE NUMBER(S): 50018/05
LOWER COURT JUDICIAL OFFICER: Palmer J
LOWER COURT DATE OF DECISION: 21 March 2007; 4 May 2007; 13 September 2007; 17 October 2007
LOWER COURT MEDIUM NEUTRAL CITATION: Franklins Pty Ltd v Metcash Trading Ltd [2007] NSWSC 242 Franklins Pty Ltd v Metcash Trading Ltd (No 2) [2007] NSWSC 446 Franklins Pty Ltd v Metcash Trading Ltd (NSWSC, Palmer J, 13 September 2007) Franklins Pty Ltd v Metcash Trading Ltd (NSWSC, Palmer J, 17 October 2007)
COUNSEL: A Meagher SC; S Fendekian (for Franklins Pty Ltd) J Simpkins SC; M Friedgut (for Metcash Trading Ltd)
SOLICITORS: Blake Dawson, Sydney (for Franklins Pty Ltd) Freehills, Sydney (for Metcash Trading Ltd)
CATCHWORDS: CONTRACTS – construction and interpretation of contracts – use of surrounding circumstances – whether ambiguity in the words of the contract is required before surrounding circumstances can be examined – businesslike or commercially sensible construction – relationship with surrounding circumstances – scope of admissible surrounding circumstances – CONTRACTS – construction and interpretation of contracts – subsequent conduct – whether the subsequent conduct of the parties can be examined to construe a written contract – relationship with objective theory of contract – extent of permissible use of evidence arising after the execution of a written contract – CONTRACTS – construction and interpretation of contracts – recitals – use of recitals as an aid to construction – EQUITY – equitable remedies – rectification – common intention of the parties – role of commercial context in determining the common intention of the parties – rationale for rectification – nature of the common intention required – standard of proof for common intention of the parties – test for appellate intervention – ESTOPPEL – equitable estoppel – whether the parties could be taken to have assumed or expected the existence of a binding agreement which differed the written agreement as executed – whether parties would be assumed to be free to withdraw from negotiations – estoppel by convention – need for a common assumption to be adopted by both parties – whether estoppel by convention can arise from pre- contractual negotiations
LEGISLATION CITED: Conveyancing Act 1919 Evidence Act 1995 Land Ordinance of 1899 of British New Guinea Sale of Goods (Vienna Convention) Act 1986 Trade Practices Act 1974 (Cth) Uniform Civil Procedure Rules 2005
CATEGORY: Principal judgment
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TEXTS CITED: D Browne, Ashburner’s Principles of Equity, 2nd ed, (1933) Butterworth & Co R Burnett and V Bath, Law of International Business in Australia (2009) Federation Press FM Douglas, “Modern Approaches to the Construction and Interpretation of Contracts” (2009) 32 Australian Bar Review 158 E A Farnsworth, Farnsworth on Contracts, 3rd ed (2004) Aspen Publishers Lewison, The Interpretation of Contracts, 4th ed (2007) Sweet & Maxwell G McMeel, “Prior Negotiations and Subsequent Conduct – The Next Step Forward for Contractual Interpretation?” (2003) 119 LQR 272 Morrison & Goolden, Norton on Deeds, 2nd ed (1928) Sweet & Maxwell Seton’s Judgments and Orders, 7th ed, (1912) vol 2 JJ Spigelman, “From text to context: contemporary contractual interpretation” (2007) 81 ALJ 322 Lord Steyn, “The Intractable Problem of the Interpretation of Legal Texts” (2003) 25 Sydney Law Review 5 UNIDROIT Principles of International Commercial Contracts (3rd ed) Vienna Convention on International Sale of Goods (1980)
DECISION: For formal orders see para [686] In brief- (1) Trial judge's construction of formal Supply Agreement, whereby Wholesale Price for a Product requires deduction from Metcash's Wholesale 5 price of all allowances and discounts whatsoever, confirmed. (2) Trial judge's order for rectification of formal Supply Agreement replaced by an order (a) inserting into the definition of Wholesale Price for a Product an exception not requiring five specified types of allowance or discount to be deducted from Metcash's Wholesale 5 Price; and (b) for greater caution, deleting words in parenthesis from clause 4.4(a). (3) Metcash's contentions of estoppel and misleading and deceptive conduct rejected. (4) Declaration made concerning extent of Franklins' contractual right of access to Metcash documents. (5) Minor or consequential amendments made to trial judge's answers to specific questions. (6) Proceedings remitted to court below. (7) Metcash's cross-appeal otherwise dismissed. (8) Metcash to pay Franklins' costs of appeal and cross-appeal.
JUDGMENT:
IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL
CA 40253/07
CA 40348/07
SC 50018/05
ALLSOP P
GILES JA
CAMPBELL JA
16 DECEMBER 2009
FRANKLINS PTY LTD v METCASH TRADING LTD METCASH TRADING LTD v FRANKLINS PTY LTD HEADNOTE
(This headnote does not form part of the Court’s judgment)
On 14 September 2001, Franklins and Metcash entered into a written contract (the Supply Agreement) under which Metcash would supply products to Franklins for its supermarkets. At the time the agreement was entered, Franklins was a newcomer (known as “Pick ‘n Pay”) in the Australian retail grocery industry and Metcash was an established supplier. Nevertheless, Franklins wished to establish and control its own relations with manufacturers and negotiate its own pricing terms, with Metcash to operate primarily as a “box mover”, rather than being Franklins’ negotiating agent with suppliers.
The calculation of wholesale prices in the supermarket industry involved the deduction of certain discounts and allowances that suppliers would give to their purchasers, which could be of two kinds: published (which were shown on suppliers’ invoices or published trading terms) or confidential (which were individually negotiated between suppliers).
During the negotiations leading up to the Supply Agreement, the parties held a meeting (the “Pie Chart Meeting”) to discuss some of the allowances and discounts that Metcash was then collecting, which were set out in a pie chart diagram. The pie chart identified various specific discounts and allowances and noted that Franklins would be unable to collect several of them. Subsequently, Metcash produced a list, known as the “Laminated List”, (which was approved by Franklins) that divided up certain published and confidential allowances and discounts between Franklins and Metcash into ones that Franklins would collect, ones that Metcash would collect and pass on to Franklins, and five benefits that Metcash would collect and retain for itself. Metcash had in its internal computer system a method of calculating a wholesale price known as “Wholesale 5”, which it used to invoice some of its other clients, that only deducted a few specific published discounts.
A dispute arose between Franklins and Metcash over the price Metcash was charging Franklins for the products it was supplying. The dispute centred around the definition of “Wholesale Price” in the Supply Agreement (set out at para [97]), which included as part of the definition “... less all allowances and discounts (such as ... [listing several examples])...”. Franklins asserted that Metcash was required to pass on to Franklins all allowances and discounts whatsoever in calculating the Wholesale Price, and that it was entitled to exercise certain rights of inspection against Metcash. Metcash alleged that all that was required was the deduction of certain specified allowances and discounts. Further, Metcash brought a cross-claim seeking rectification of the contract, and also alleging that Franklins was estopped from asserting the construction it contended for. The trial judge found in favour of Franklins on the construction of the agreement, holding that it required the deduction of all allowances and discounts whatsoever; but held that the contract should be rectified to deduct only published allowances and discounts. Both Franklins and Metcash appealed.
Held (per Allsop P, Giles JA and Campbell JA):
Construction of the contract
(1) Nature of construction: A written contract should be construed bearing in mind those facts at the time of the execution of the contract that the parties knew, or that it can reasonably be assumed they knew, that could impact upon the meaning of the words of the contract: [14] per Allsop P (Giles JA at [63] agreeing); [305], [322] per Campbell JA (Giles JA at [42]-[43] agreeing).
(2) Whether ambiguity is required: It is not necessary to find an ambiguity in the words of a written contract before the surrounding circumstances can be examined as an aid to construction: [14]-[18] per Allsop P (Giles JA at [63] agreeing); [239]- [305] per Campbell JA (Giles JA at [42]-[43] agreeing).
(3) Scope of admissible background: To be admissible, the evidence of surrounding circumstances must be relevant to a fact in issue and probative of the surrounding circumstances known to the parties, or of the purpose or object of the transaction, including its genesis, background, context and market in which the parties are operating. Evidence of negotiations, probative of the actual intentions of the parties, is inadmissible: [24] per Allsop P (Giles JA at [63] agreeing). Surrounding circumstances can be examined if they enable the meaning of the words used in the document to be ascertained as that meaning would appear to a reasonable person who knew the facts concerning those circumstances; declarations of subjective intention are not admissible: [337] per Campbell JA (Giles JA at [42]-[43] agreeing).
(4) A written contract is a legal act with a meaning which may transcend the initial parties or persons through whom they act, which provides a reason for caution in equating the scope of the admissible background with all that in ordinary communication a reasonable person would see as relevant. If there is an ordinary grammatical meaning of the words used in a written contract, that meaning must be given significant force, although read with the admissible evidence of surrounding circumstances. It falls to be determined in each case whether words would be understood otherwise in light of the context and purpose revealed by the admissible evidence: [49]-[53] per Giles JA.
(5) Objective theory of contract: The objective theory of contract is now firmly established in Australian law by High Court authority: [4]-[5] per Allsop P (Giles JA at [63] agreeing); [50] per Giles JA; [322] per Campbell JA (Giles JA at [42]- [43], [58] agreeing).
(6) Subsequent conduct of the parties for purposes of construction: The use of subsequent conduct is forbidden to prove any matter that cannot legitimately enter into the construction of a written contract in accordance with the objective theory of contract. In particular, it cannot be used to prove what the parties meant by particular terms they have used in their contract. However, events occurring after the time of the execution of the contract may be admissible as retrospectant evidence probative of the surrounding circumstances at the time the written contract was executed: [6]-[13] per Allsop P (Giles JA at [63] agreeing); [58] per Giles JA (Allsop P at [41] agreeing); [309]-[329] per Campbell JA (Giles JA at [42]-[43], [58] agreeing).
(7) State of the law relating to subsequent conduct: The law concerning the use of subsequent conduct of the parties to construe a written contract has been authoritatively stated by the High Court in Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 83 ALJR 196; 251 ALJR 322 at [35]. It is no longer necessary to consider the effect of previous conflicting High Court, intermediate appellate court or Privy Council authorities: [10]-[13] per Allsop P (Giles JA at [63] agreeing); [307]-[318], [330]-[332] per Campbell JA (Giles JA at [43], [58] agreeing). However, this does not affect the law concerning the use of subsequent conduct for purposes other than the construction of a written contract: [13] per Allsop P (Giles JA at [63] agreeing); [323]-[327] per Campbell JA (Giles JA at [42]-[43], [58] agreeing).
(8) Construction of commercial contracts: The principle that commercial agreements should be given a businesslike or commercial construction that does not flout business commonsense is closely related to the requirement that contracts be construed in light of the surrounding circumstances at the time of the execution of the contract. The nature and extent of the commercial aims and purposes of the agreement are part of the surrounding circumstances, and are how the court comes to know what business commonsense is. The need for a businesslike construction also directs the approach to be taken when selecting the appropriate construction of the words used by the parties: [19]-[23] per Allsop P (Giles JA at [63] agreeing); [361]-[362] per Campbell JA (Giles JA at [42]-[43] agreeing).
(9) Recitals as an aid to construction: Recitals can be used as an aid to construction of an operative provision in an agreement without a need to find ambiguity in the words of the operative provisions. The recitals are a means by which the surrounding circumstances and purpose of the transaction can be ascertained: [379]-[390] per Campbell JA (Allsop P at [29] and Giles JA at [42]- [43] agreeing). (10) The construction of the Supply Agreement: The trial judge’s construction of the Supply Agreement was correct upon consideration of the meaning of the words used, read as a whole, in light of the surrounding circumstances (including as stated in the recitals) and the requirement that the contract be given a construction that does not flout business commonsense, and excluding the evidence of the subsequent conduct of the parties: [60]-[62] per Giles JA (Allsop P at [41] agreeing); [337]-[358], [363]-[378], [391]-[398] & [399] per Campbell JA (Allsop P at [1], [28] and Giles JA at [42]-[43], [62] agreeing). The subjective intentions and expectations of the officers and agents of Franklins and Metcash are not available as surrounding circumstances for the purposes of construction, although they might assist in an action for rectification: [54], [57] per Giles JA (Allsop P at [41] agreeing); [337] per Campbell JA (Giles JA at [42]-[43] agreeing).
Rectification
(11) The trial judge’s decision: The trial judge’s finding of the common intention of the parties, for the purposes of rectification, that only published discounts were to be deducted had implicit in it that the parties would have considered the full range of discounts and reached a common understanding on which of them should be deducted. A rectification order should alter the contract to no greater extent than necessary to make it accord with the common intention of the parties at the time the written agreement was executed: [431]-[439], [448] per Campbell JA (Allsop P at [30] and Giles JA at [42] agreeing).
(12) Test for appellate intervention: A finding with respect to a continuing common intention is a mixed finding of fact and law, reviewable in accordance with the principles in Fox v Percy [2003] HCA 22; (2003) 214 CLR 118:[430], [432] per Campbell JA (Allsop P at [30] and Giles JA at [42] agreeing).
(13) Rationale for equitable intervention in rectification: The rationale of rectification is that it is unconscientious for a party to a written contract to seek to apply the contract inconsistently with what he or she knows was the common intention of the parties at the time the written contract was entered. That rationale requires a positive finding of what the common intention was at the time the written agreement was entered, concerning the subject matter of the terms in which it is sought to be rectified. That common intention must be sufficiently well- defined and clear to be able to be stated in words that can be incorporated in a contract, and that have sufficient certainty to be contractually enforceable: [443]- [450], [511], [514], [528] per Campbell JA (Allsop P at [30] and Giles JA at [42] agreeing).
(14) Standard of proof of common intention: Rectification will only be granted on clear and convincing proof of a continuing common intention, shown to have existed up to the point of execution of the written instrument. A court of equity would be cautious in finding that a written agreement mistakenly recorded the parties’ common intention in a situation where both parties were represented by solicitors who negotiated the terms of the contract, since there is an inherent unlikelihood that solicitors on both sides of the transaction would have each failed to grasp and express the intention of their clients, and both be mistaken in the same way. [451]-[461], [511] per Campbell JA (Allsop P at [30] and Giles JA at [42] agreeing).
(15) The parties’ common intention: The parties never turned their mind to the full range of potential discounts and allowances which could be received by Metcash and Franklins, and so cannot have had a positive common intention, at the time the contract was entered into, to deduct only published discounts to the exclusion of all others. The Laminated List explicitly reserved only five specific discounts and allowances to Metcash. The Supply Agreement should be rectified to allow Metcash to retain only those five discounts and allowances that the parties, in compiling the Laminated List and negotiating on that basis, specified it could retain: [435]-[439], [509]-[514], [539]-[540] per Campbell JA (Allsop P at [30] and Giles JA at [42] agreeing).
(16) Rectification for abundant caution: A clause which on its proper construction does not strictly need rectification may still be rectified ex abundanti cautela (for abundant caution) to make the meaning clear on the face of the document: [539] per Campbell JA (Allsop P at [26]-[27] and Giles JA at [48] agreeing).
Estoppel and Trade Practices Act Claims
(17) Equitable estoppel: The elements necessary to establish promissory estoppel were not made out. The mere fact that the parties conducted their business according to the Laminated List is not a basis for assuming that Franklins knew that Metcash was acting in reliance on at assumption that Franklins would be bound to purchase products at prices calculated in accordance with the Laminated List. An “entire agreement” clause would not prevent the operation of an equitable estoppel: [554]-[571] per Campbell JA (Allsop P at [32]-[33] and Giles JA at [42] agreeing).
(18) Estoppel by convention and Trade Practices Act claim: There was no common assumption adopted by the parties sufficient to establish an estoppel by convention. Johnson Matthey Ltd v AC Rochester Overseas Corp (1990) 23 NSWLR 190 discussed: [572]-[577] per Campbell JA (Allsop P at [32], [34] and Giles JA at [42] agreeing). Metcash’s claim under the Trade Practices Act was not made out: [635] per Campbell JA (Allsop P at [32] and Giles JA at [42] agreeing).
Right of Inspection
(19) Of the clauses dealing with the right of inspection, at least clause 2.6 survived termination: [104], [601]-[602] per Campbell JA (Allsop P at [35] and Giles JA at [42] agreeing). Franklins is not estopped from asserting any right of inspection. [609]-[627] per Campbell JA (Allsop P at [35] and Giles JA at [42] agreeing). In exercising the court’s discretion in the crafting of an order to enforce the contractual right of inspection, it might be arguable that it ought to be granted on terms of an undertaking of confidentiality: [627], [687] per Campbell JA (obiter) (Allsop P at [35]-[38] agreeing, Giles JA at [64] expressing no opinion). Such a limitation may need to find its source in the contract, informed by considerations of business commonsense or good faith: [36]-[38] per Allsop P (obiter).
**********
CONTENTS
Para No.
ALLSOP P 1
The objective theory of contract 4
Later conduct and the construction and interpretation of written contracts 6
The lack of need for ambiguity before resort is had to legitimate surrounding circumstances 14
The approach to the construction of commercial contracts 19
The extent of the materials available as surrounding circumstances 24
The balance of the reasons of Campbell JA 25
Clause 4.4(a) 26
Relevant surrounding circumstances 28
Recitals 29
Rectification 30
Estoppel and the Trade Practices Act claims 32
Right of inspection 35
Relief and Costs 39
The reasons of Giles JA 41 GILES JA 42
Franklins’ right of inspection 64
CAMPBELL JA 66
Nature of the Case 67
Issues on the Appeal and Cross-Appeal 83
“Wholesale 5” in the Metcash Computer System 81
Issues on the Appeal and Cross-Appeal 83
Summary of Conclusions 90
PART A – FACTUAL MATTERS
The Supply Agreement 92
The Course of Negotiation 106
20 April 2001 Meeting 108
1 May 2001 PowerPoint Presentation 110
The Oral Evidence Generally 114
Returning to the 1 May 2001 Meeting 119
8 May 2001 Draft Agreement 134
17 May 2001 Letter 137
24 May 2001 Letter 138
The Public Announcement 148
Blake Dawson Waldron 31 May 2001 Redraft 149
Mr Reitzer’s Letter 4 June 2001 156
Mr Stanbridge Replies 7 June 2001 160
The 14 June 2001 Letter Agreement 161
The 14 June 2001 Meeting 167 The Pie Chart Meeting – 12 July 2001
Purpose of the Meeting 171
The Pie Chart Itself 175
Discussion at the Meeting 181
The Laminated List 186
The Diversity of Benefits
The Finding Below Concerning Benefits 190
Other Types of Benefits 195
Mr Hunter’s 13 July Draft 202
Ms Ho’s 1 August 2001 Draft 208
Mr Hunter’s 7 August 2001 Reply 212
The 4 March 2003 Letter 218
The 6 March 2003 Meeting 228
Termination 233
PART B – CONSTRUCTION OF THE AGREEMENT 234
The Trial Judge’s Reasoning 235
Ambiguity Necessary Before Using Context in Interpretation? 239
Assistance from Context – Law 240
Codelfa 243
Developments in England 262
Maggbury 274
Royal Botanic Gardens 277
High Court Cases After Royal Botanic Gardens 286
Comparison with Statutory Interpretation 293 Other Recent Authorities on Role of Ambiguity in Contractual Construction 298
Subsequent Conduct as an Aid to Construction 306
The Operation of the Law of Precedent Concerning Subsequent Conduct 330
Royal Botanic Gardens Exemplifies Using Post-Contract Conduct? 333
Unhelpfulness of Subsequent Conduct Re Laminated List 336
Relevant Surrounding Circumstances to This Contact 337
Uncommerciality of the Trial Judge’s Construction? 359
The Significance of Clause 4.4(a) 367
Use of Recitals – Principles 379
Use of Recitals – Application 391
Conclusion Concerning Construction 399
PART C – RECTIFICATION
Metcash’s Pleaded Case 400
The Agreed Issue 407
Metcash’s Submissions Below on Rectification 408
The Judge’s Findings Concerning Rectification 411
Metcash’s Evidence on Subjective Intention 428
Test for Appellate Alteration of a Rectification Order 430
Correctness of the Judge’s Common Intention Finding? 431
Scope of Reconsideration of Rectification 440
Principles Concerning Rectification 443
The Standard of Proof for Rectification 451
Reconsideration of the Facts 462
The Finding about Mr Zelinsky’s Understanding of the Letter of 17 May 467 Mr Summers’ Evidence 472
The 31 May 2001 Change to “Wholesale Price” 476
Mr Perlov’s Evidence 478
The Pie Chart Meeting 479
Error Re Meaning of Asterisk in Pie Chart? 497
Pie Chart Meeting and Laminated List Not a Basis for Rectification? 509
Rectification Limited to Metcash Keeping Small-Value Benefits? 513
Metcash’s Case on Rectification 515
Segregate the Pricing and Benefits Aspects, and Rectify Only the
Price Clauses? 518
Rectify to Deduct Only Particular Identified Published Benefits? 525
Failure to Call Mr Hunter 533
Rectify Clause 4.4(a)? 539
PART D – ESTOPPEL 541
Metcash’s Estoppel Pleading 542
The Judgment Below on Estoppel 546
The Question and Answer 551
Equitable Estoppel? 553
Estoppel By Convention? 572
Follow Johnson Matthey? 577
Equuscorp Rules Out Estoppel from Pre-Contractual Events? 578
Franklins’ Estoppel Concession 583
PART E – FRANKLINS’ RIGHTS OF ISSUE 586
Question 19 587 Question 21 609
PART F – TRADE PRACTICES ACT 1974 628
PART G – ORDERS AND PROCEDURAL MATTERS
4 May Declarations and Orders 636
Orders and Declarations Concerning Supply Agreement in its Rectified Form? 648
Franklins’ Application for Leave to Amend 670
Costs 685
Orders 686
Postscript 687
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IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL
CA 40253/07
CA 40348/07
SC 50018/05
ALLSOP P
GILES JA
CAMPBELL JA
16 DECEMBER 2009
FRANKLINS PTY LTD v METCASH TRADING LTD METCASH TRADING LTD v FRANKLINS PTY LTD
Judgment
1 ALLSOP P: I have had the advantage of reading the reasons in draft of Campbell JA. I agree with his Honour’s view as to the proper construction of the definition of “Wholesale Price” in cl 1.1 of the Supply Agreement and with the orders he proposes as to rectification. I agree with his Honour’s analysis of the facts and I adopt his Honour’s conclusions and reasons in that respect. I would prefer to express my own reasons in relation to some of the legal issues in the case. I will deal with the balance of his Honour’s reasons after I have dealt with these legal issues.
2 A number of important propositions concerning the law of contract were canvassed in argument and are dealt with by Campbell JA: the objective theory of contract; the circumstances in which and the extent to which surrounding circumstances can be examined in the process of construction and interpretation of a written contract; the approach to construction and interpretation of a commercial contract; and whether post-contractual conduct can be utilised in aid of the construction and interpretation of a written agreement.
3 Binding and authoritative decisions provide the answers for all these questions for an Australian intermediate appellate court.
The objective theory of contract
4 There can be no doubt that until the High Court of Australia says otherwise the underpinning legal theory in the law concerning the formation, construction and interpretation of contracts is the so-called objective theory of contract: Taylor v Johnson [1983] HCA 5; 151 CLR 422 at 428-432 and especially 429 where Mason ACJ, Murphy J and Deane J said that “the clear trend in decided cases and academic writings has been to leave the objective theory in command of the field”; Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8; 209 CLR 95 at 105 [25] where Gaudron J, McHugh J, Hayne J and Callinan J stated clearly that contract formation was to be objectively assessed; Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; 218 CLR 451 at 461-462 [22] where the Court (Gleeson CJ, Gummow J, Hayne J, Callinan J and Heydon J) made clear the objective task of ascertaining of the meaning of documents; Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; 218 CLR 471 at 483 [34] where the Court (Gleeson CJ, McHugh J, Kirby J, Hayne J and Callinan J) referred with approval to the expression of the matter by Gleeson CJ in the New South Wales Court of Appeal in Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 549 that the “general test of objectivity ... is of pervasive influence in the law of contract”; and Toll (FGCT) Pty Limited v Alphapharm Pty Limited [2004] HCA 52; 219 CLR 165 at 179- 182 [40]- [46] where the Court (Gleeson CJ, Gummow J, Hayne J, Callinan J and Heydon J) reiterated the primacy of the objective theory in the determination of rights and liabilities in contract.
5 No further analysis of, or citation about, that basal proposition need therefore be undertaken. There may be residual debate about how the objective theory applies in particular cases: Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309.
Later conduct and the construction and interpretation of written contracts
6 Much ink has been spilt over the last 30 years on this topic. It is intimately connected in analysis with the applicable underpinning theory of the determination of contractual rights and liabilities. If, as the above references make clear, the governing theoretical framework as to the determination of contractual rights and obligations is the objective theory, it is difficult to see how later conduct has a place in the ascertainment of the parties’ objectively assessed intentions. As the High Court made pellucid in Pacific Carriers v BNP Paribas at 461-462 [22], Equuscorp v Glengallan at 483 [34] and Toll v Alphapharm at 179 [40], the construction of a written contract is to be determined by what a reasonable person in the parties’ position would have understood it to mean in the circumstances and context in question. How parties later acted, probative of what they themselves thought their obligations were, is difficult to reconcile with the objective paradigm.
7 Of course, if another paradigm were to be put in place, no such difficulty would arise. For instance, Arts 4.1-4.3 of the UNIDROIT Principles of International Commercial Contracts (3rd Ed) gives a primary role to the ascertainment of the actual common intention of the parties:
“ARTICLE 4.1 (Intention of the parties) (1) A contract shall be interpreted according to the common intention of the parties. (2) If such an intention cannot be established, the contract shall be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it in the same circumstances. ARTICLE 4.2 (Interpretation of statements and other conduct) (1) The statements and other conduct of a party shall be interpreted according to that party’s intention if the other party knew or could not have been unaware of that intention. (2) If the preceding paragraph is not applicable, such statements and other conduct shall be interpreted according to the meaning that a reasonable person of the same kind as the other party would give to it in the same circumstances. ARTICLE 4.3 (Relevant circumstances) In applying Articles 4.1 and 4.2, regard shall be had to all the circumstances, including (a) preliminary negotiations between the parties; (b) practices which the parties have established between themselves; (c) the conduct of the parties subsequent to the conclusion of the contract; (d) the nature and purpose of the contract; (e) the meaning commonly given to terms and expressions in the trade concerned; (f) usages.”
8 Article 8 of the Vienna Convention on International Sale of Goods (1980) (the “CISG”) is to similar effect to Art 4.2 of the UNIDROIT Principles. It is unnecessary to discuss the effect, if any, which the adoption of the CISG into the laws of all States and Territories (see, as to New South Wales, the Sale of Goods (Vienna Convention) Act 1986) will have on the primacy of the objective theory. See generally, R Burnett and V Bath Law of International Business in Australia (Federation Press 2009) at 13-14 and in particular the United States cases at footnote 51; and see E A Farnsworth Farnsworth on Contracts (3rd Ed Aspen Publishers 2004) at [7.12].
9 To a significant degree the approach to the construction and interpretation of contracts in the UNIDROIT Principles and the CISG reflects civil law principles: see Lord Hoffmann’s comments in Chartbrook Limited v Persimmon Homes Limited [2009] UKHL 38; [2009] AC 1101 at 1119-20 [39]. This underlying difference in basal framework explains the brevity of the reference to the civil law by Lord Hoffmann in his discussion of the admissibility of pre-contractual negotiations in Chartbrook Limited v Persimmon Homes Limited at 1119-20 [39] and the absence of any such reference in Lord Mance’s restatement of the principles of interpretation of a legal document in In re Sigma Finance Corporation [2009] UKSC 2 at [9]- [11].
10 In Agricultural and Rural Finance Pty Limited v Gardiner [2008] HCA 57; 83 ALJR 196, Gummow J, Hayne J and Kiefel J formed a majority of the Court and at 205 [35] clearly and unequivocally stated “the general principle [is] that ‘it is not legitimate to use as an aid in the construction of [a] contract anything which the parties said or did after it was made’”, citing James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 583 at 603; and Administration of Papua and New Guinea v Daera Guba [1973] HCA 59; 130 CLR 353 at 446. Heydon J at 232 [163] was to the same effect as a matter of principle; to the contrary, Kirby J at 220-221 [115].
11 I note that in Australian Medic-Care Company Ltd v Hamilton Pharmaceutical Pty Limited [2009] FCA 1220 at [119], Finn J expressed the view that the present state of the law in Australia is not yet settled on whether it is possible to use post- contractual conduct as an aid to construction of a written document, though his Honour accepted that the “more favoured view” was that it is not. By reason of what was said in the High Court in Agricultural and Rural Finance v Gardiner, I would respectfully differ from Finn J. In regard to this question, I respectfully agree with Campbell JA that the expressed approach of the majority High Court judgment in Agricultural and Rural v Gardiner evidences a departure from statements in earlier High Court authorities to the contrary, being in particular Farmer v Honan and Dunne [1919] HCA 13; 26 CLR 183 at 197 where Isaacs J and Rich J expressly followed Watcham v Attorney-General of the East Africa Protectorate [1919] AC 533 at 540, being the Privy Council decision taken as authority for the use of the later conduct to construe a written agreement; Thornley v Tilley[1925] HCA 13; 36 CLR 1 at 11 where Isaacs J expressly referred to utilising later conduct in the process of construction; Sinclair Scott & Company Limited v Naughton [1929] HCA 34; 43 CLR 310 at 327 per Isaacs J; E.T. Fisher & Company Pty Limited v The English Scottish and Australian Bank Ltd [1940] HCA 42; 64 CLR 84 at 102 where Williams J applied Watcham; and White v Australian and New Zealand Theatres Limited [1943] HCA 6;67 CLR 266 at 275 and 281 where Starke J and Williams J, respectively, expressly permitted later conduct to construe a document. These cases can be taken to have been departed from by Agricultural and Rural Finance v Gardiner.
12 By 1974, English law stood firmly against Watcham and any general principle of contractual interpretation permitting later conduct to construe a written agreement to be taken from it: L Schuler AG v Wickman Machine Tool Sales Ltd [1973] UKHL 2; [1974] AC 235 at 252 (Lord Reid), 260 (Lord Morris), 261- 262 (Lord Wilberforce), 265-270 (Lord Simon) and 272 (Lord Kilbrandon). Lord Wilberforce (at 261) called Watcham a precedent he had thought to be “nothing but the refuge of the desperate”. To the extent that prior to Agricultural and Rural Finance v Gardiner an absence of authoritative statement by the High Court to the contrary permitted that “refuge” to be availed of (albeit supported by earlier High Court authority), that is no longer so.
13 This clearing of the ground in respect of contractual construction and interpretation leaves untouched the role, if the facts admit, of “later” conduct in: (a) ascertaining whether there was a contract formed and when it was formed: Howard Smith and Company Limited v Varawa [1907] HCA 38; 5 CLR 68 at 78; Barrier Wharfs Limited v W Scott Fell & Company Limited [1908] HCA 88; 5 CLR 647 at 668-669 and 672; and ABC v XIV Commonwealth Games at 547-548 and cases there cited; (b) revealing probative evidence of antecedent surrounding circumstances; and (c) revealing probative evidence of facts relevant to rectification, estoppel or any other legal, equitable or statutory rights or remedies that may impinge on an otherwise concluded, construed and interpreted contract.
The lack of need for ambiguity before resort is had to legitimate surrounding circumstances
14 The state of the law in this respect is to be ascertained from a number of High Court cases: Maggbury Pty Limited v Hafele Australia Pty Limited [2001] HCA 70; 210 CLR 181 at 188 [11]; Pacific Carriers v BNP Paribas at 461-462 [22]; Zhu v Treasurer of the State of New South Wales [2004] HCA 56; 218 CLR 530 at 559 [82]; Toll (FGCT) v Alphapharm at 179 [40] and International Air Transport Association v Ansett Australia Holdings Limited[2008] HCA 3; 234 CLR 151 at 160 [8] and 174 [53]. These cases are clear. The construction and interpretation of written contracts is to be undertaken by an examination of the text of the document in the context of the surrounding circumstances known to the parties, including the purpose and object of the transaction and by assessing how a reasonable person would have understood the language in that context. There is no place in that structure, so expressed, for a requirement to discern textual, or any other, ambiguity in the words of the document before any resort can be made to such evidence of surrounding circumstances.
15 As Campbell JA points out, the approach to construction of the documents in question by the High Court in Agricultural and Rural Finance v Gardiner at 205 [38] and in Park v Brothers [2005] HCA 73; 80 ALJR 317 at 325[39] did not involve any consideration of ambiguity.
16 Further, intermediate appellate courts have been clear in their expression of view that these recent decisions of the High Court are to the effect that the identification of ambiguity is not a precondition to examining legitimate surrounding circumstances: Lion Nathan Australia Pty Ltd v Cooper Brewery Ltd [2006] FCAFC 144; 156 FCR 1 at 10-12 [45]- [52] (Weinberg J), 22 [100] (Kenny J) and 48 [238] (Lander J) agreeing with Finn J at first instance [2005] FCA 1812; 223 ALR 560 at 573 [78]; Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; 69 NSWLR 603 at 626 [107]- [109] (Tobias JA, with whom Mason P and Campbell JA agreed); Synergy Protection Agency Pty Ltd v North Sydney Leagues’ Club Limited [2009] NSWCA 140 at [22] (myself, with whom Tobias JA and Basten JA agreed) and Masterton Homes Pty Ltd v Palm Assets Pty Ltd [2009] NSWCA 234; 261 ALR 382 at 384-385 [1]- [3] (myself with whom Basten JA agreed) and see also to like effect [113] (Campbell JA).
17 None of the above High Court decisions discussed what some have seen as the tension in Sir Anthony Mason’s reasons in Codelfa Constructions Pty Limited v State Rail Authority of New South Wales [1982] HCA 24; 149 CLR 337 between what was written at 348-351 and the expression of the “true rule” at 352. That what was said in Codelfa at 352 can be taken to conform with the apparent width of the principle expressed at 348-351 can, if it arose for consideration, be taken from:
(a) an acceptance of the views of Spigelman CJ expressed in South Sydney Council v Royal Botanic Gardens [1999] NSWCA 478; 10 BPR 18,961 at 18,966 [35] and in Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235; (2008) Aust Contracts R ¶90-274 at 90,340 [7]-[13] (otherwise unaffected by the High Court decision) and extra-judicially in “From text to context: contemporary contractual interpretation” (2007) 81 Australian Law Journal 322; (b) a recognition that the phrase used by Mason J in Codelfa at 352 “if the language is ambiguous or susceptible of more than one meaning” does not mean that the susceptibility of the language to more than one meaning must be assessed without reference to the surrounding circumstances or extrinsic material; (c) a recognition of the width of the guiding authorities that Mason J discussed at 348-351, in particular Prenn v Simmonds [1971] 1 WLR 1381 at 1383-1384; Utica City National Bank v Gunn 118 NE 607 (1918); Reardon Smith Line Ltd v Hansen- Tangen [1976] 1 WLR 989 at 995-997; and DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; 138 CLR 423 at 429; and (d) a recognition of the width of the approach in England even in the 1920s: Lake v Simmons [1927] AC 487 at 509 per Viscount Sumner: “commercial contracts are to be interpreted with regard to the circumstances of commerce with which they deal, the language used by those who are parties to them, and the objects with which they are intended to secure”, cited by Gleeson CJ in McCann v Switzerland Insurance Australia Limited [2002] HCA 65; 203 CLR 579 at 589 [22] and IATA v Ansett at 160 [8].
18 In any event, whether or not aspects of the reasons of Mason J require, as a matter of theory, any exegesis, the High Court has clearly stated the position conformably with the cases referred to at [17 (c)] above and discussed by Mason J in Codelfa at 348-351. This can be taken from the clarity of the expression of principle in the later High Court cases to which I have referred, as well as from the references in Pacific Carriers v BNP Paribas at 461-462 [22], Zhu at 559 [82] and IATA v Ansett at 160 [8] to Codelfa at 350 and 351, and not 352. The issue is therefore not one for resolution otherwise than by application of current High Court authority.
The approach to the construction of commercial contracts
19 The essential character of the task of construction of commercial contracts can be seen in a number of authoritative decisions of the High Court, and of other courts authoritatively endorsed by the High Court. A commercial contract should be given a businesslike interpretation: McCann at 589 [22]. Thus, the nature and extent of the commercial aims and purposes of the agreement or parts thereof are part of the essential background circumstances: “the genesis of the transaction, the background, the context, the market in which the parties are operating”: Codelfa at 350 quoting Reardon Smith at 995-996 cited by the Court in Zhu at 559 [82] and see Lake v Simmons at 509 cited by Gleeson CJ in McCann at 589 [22] and IATA at 160 [8]. The need for a businesslike construction not only informs the nature and extent of the extrinsic material legitimately of assistance, but it also directs the approach to be taken to the ascription of meaning to the words used by the parties. The words should be given a construction so as “to avoid ... [making] commercial nonsense or is shown to be commercially inconvenient”: Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at 313-314 (Kirby P) cited by the Court in Zhu at 559 [82]. This is not only a reflection of the place of the informing surrounding circumstances, it is also a requirement not to approach words in a business contract pedantically or in a manner prone to defeat the evident commercial purpose. They should be read “fairly and broadly, without [the court] being too astute or subtle in finding defects”: Hillas & Co Limited v Arcos Limited [1932] UKHL 2; (1932) 147 LT 503 at 514 per Lord Wright cited in Australian Broadcasting Commission v Australasian Performing Right Association Limited [1973] HCA 36; 129 CLR 99 at 109-110. Similar expressions of the correct approach eschewing detailed semantic and syntactical analysis to lead to a construction contrary to business commonsense can be seen in what Lord Diplock said in Miramar Maritime Corporation v Holborn Oil Trading Ltd [1984] AC 676 at 682 and Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201. As Gleeson CJ, Gummow J and Hayne J said inMaggbury at 198 [43] in the context of citing the relevant passage from Lord Diplock’s speech in Antaios, what is “business commonsense” is an objectively ascertained matter and thus referable to the evidence, and a matter about which there may be dispute. (It is not to be forgotten that shipping cases such as Miramar and Antaois were dealt with by judges of great stature and experience in the context of markets and practices with which they were intimately familiar.)
20 It may be, as here, that there is a real contest about the appropriate commercial perspective to take from the surrounding circumstances. This may be a function of contested evidence and produce the need for findings of fact to be made in those contested areas. It may also be a reflection of the fact that the parties brought evidently different commercial aims and purposes to the bargain. In neither case is the evidence of the commercial aims and purposes thereby necessarily unhelpful.
21 In many cases, the reality of commercial life and bargaining can be seen to underpin and explain the objective theory. Sometimes, beyond platitudes and obvious commercial aims, negotiating parties may well be at pains not to expose what they want from the terms and operation of an agreement. To do so may damage their bargaining position. In such cases, as in many cases, the bargaining that takes place is over what words are acceptable and the commercial aims and objects of negotiation give a framework and context to understanding what the bargained-for words mean.
22 The requirement of giving a business meaning for a business contract is not a new principle. Lord Mansfield observed in 1761 in Hamilton v Mendes [1761] EngR 56; (1761) 2 Burr 1198 at [1761] EngR 56; 1214; 97 ER 787at 795 in speaking of the notion of business sense: “The daily negociations and property of merchants ought not to depend upon subtleties and niceties; but upon rules, easily learned and easily retained, because they are the dictates of common sense, drawn from the truth of the case.” Lord Halsbury LC in Glynn v Margetson & Co [1893] AC 351 at 359 said “a business sense will be given to business documents.” I have already referred to Viscount Sumner in Lake v Simmons. 23 It goes without saying that these statements of approach do not provide licence for “judicial rewriting” of the agreement: see Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd [2008] NSWCA 5 at [27] per Basten JA (with whom Giles JA and Tobias JA agreed). Nevertheless, the necessity to approach the construction and interpretation of commercial documents with these statements of principle in mind is real. The importance of these statements of principle in the approach to construction of commercial documents can be seen eloquently in Homburg Houtimport BV v Agrosin Private Ltd (The ‘Starsin’) [2003] UKHL 12; [2004] 1 AC 715. Judges may disagree about the result in any particular case, but the principles are clear.
The extent of the materials available as surrounding circumstances
24 The High Court authorities to which I have referred and in particular Pacific Carriers v BNP Paribas and Toll, and the recognition of the significance of the objective theory assist in appreciating the scope of the evidence that is admissible. The evidence, to be admissible, must be relevant to a fact in issue, probative of the surrounding circumstances known to the parties or of the purpose or object of the transaction, including its genesis, background, context and market in which the parties are operating. What is impermissible is evidence, whether of negotiations, drafts or otherwise, which is probative of, or led so as to understand, the actual intentions of the parties. Such evidence might be legitimate, however, if directed to one of the legitimate aspects of surrounding circumstances. The distinction can be subtle in any particular case. As Macfarlan JA and I said in Kimberley Securities Limited v Esber [2008] NSWCA 301 at [5]:
“The possible subtlety of the distinction can be seen in Lord Wilberforce’s reasons in Prenn v Simmonds ... at 1384-1485, and the recognition that the objective commercial aim may, possibly, be ascertained from some aspect of what has passed between the parties. The distinction can also be seen in what Mason J said in Codelfa at 352 about prior negotiations and their legitimate use ‘to establish objective background facts which were known to both parties and the subject matter of the contract’, and their inadmissibility ‘in so far as they consist of statements and actions of the parties which are reflective of their actual intentions or expectations’. ...”
The balance of the reasons of Campbell JA
25 As I have said, I agree with the factual analysis of Campbell JA. Against that background, I can be brief as to the issues upon which I wish to say something.
Clause 4.4(a)
26 I do not consider that cl 4.4 (a) strictly requires rectification. Set against the context described by Campbell JA and the definition of “Wholesale Price” construed and rectified in the way his Honour does, clause 4.4(a) can be seen as a shorthand for “Wholesale Price” in a provision dealing with calculation. Any reading of the text which led to a doubling of any subtraction would be uncommercial and contrary to business convenience, and commonsense. The “Wholesale Price” in cl 4.4(a) is to be understood by reference to its definition in cl 1.1 not by reference to the shorthand in the right hand column.
27 Nevertheless, as Campbell JA points out, an order for rectification can be made out of an abundance of caution. Given the time and money the parties have thusfar spent on this dispute, I agree that the order as proposed by Campbell JA should be made in the interests of good order, clarity and finality.
Relevant surrounding circumstances
28 I agree with the analysis by Campbell JA of the relevant surrounding circumstances to the construction of the Supply Agreement and, in particular, the definition of “Wholesale Price” in cl 1.1 and of his construction of that definition.
Recitals
29 I agree with Campbell JA that the approach to documentary interpretation which eschews the need to discern textual or other ambiguity before having resort to extrinsic material supersedes many older authorities which appear to restrict the use of recitals in the construction of operative provisions to cases where the operative provision is ambiguous. I also agree with his Honour’s analysis of the recitals to the Supply Agreement in the construction of the definition of “Wholesale Price” in cl 1.1.
Rectification
30 Subject to one comment, I agree with the conclusions and reasons of Campbell JA in respect of the rectification of the definition of “Wholesale Price” in cl 1.1.
31 I was initially attracted to the submission put forward by Mr Meagher that the parties should be taken to have intended that the definition in cl 1.1 should operate in its construed width, leaving the parties from time to time to debate, by reference to the law of estoppel, whether what was being done fitted into the concessions or permissions given by Mr Zelinsky at the “Pie Chart Meeting”. For the reasons given by Campbell JA, and the clear desirability of quelling the controversy before the Court, resolution of such issues is more appropriate in the manner suggested by Campbell JA by rectification. This approach is reinforced by the underpinning and informing equitable consideration in relation to rectification of the need for conscientious behaviour – a matter that would also underpin any estoppel in the manner of reconciliation posited by Mr Meagher. Estoppel and the Trade Practices Act claims
32 Subject to the following comments, I agree with the conclusions and reasons of Campbell JA on Metcash’s estoppel and Trade Practices Act claims.
33 I agree with Campbell JA that the entire agreement clause would not prevent the operation of an equitable estoppel. This was the view I tended to favour (Drummond J and Mansfield J agreeing) in Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833; 117 FCR 424 at 543-544 [444]- [449].
34 I also agree with Campbell JA that the relationship between an entire agreement clause, the parol evidence rule, estoppel by convention and the correctness of Johnson Matthey Ltd v AC Rochester Overseas Corp (1990) 23 NSWLR 190 and the cases which apply it may require a close examination of the character of estoppel by convention, including the question as to whether it is a common law or equitable doctrine. This is unnecessary to decide here. What can be said, however, if the estoppel employed is equitable in character, is that the common law parol evidence rule will not impede its proper operation.
Right of inspection
35 Subject to one comment, I agree with the reasons of Campbell JA in relation to the right of inspection.
36 As to the question of confidentiality affecting the terms of any order, I would only add that such a limitation may need to find its source in the contract. If the contract gives a right of access, that right should be able to be vindicated in full by an order of the Court. Nevertheless, the business commonsense of some reasonable recognition of the character of the information might be seen to inhere in the right of access in the interpretation of the agreement: cf Gordon & Gotch Australia Pty Limited v Horwitz Publications Pty Limited [2008] NSWCA 257 at [35]- [39].
37 Alternatively, there may also be a foundation for the limitation based on confidentiality in any requirement (if present) to exercise contractual rights in good faith for their limited contractual purposes.
38 It is unnecessary to make any further comment on possible sources of a restriction of the kind foreseen in Campbell JA’s reasons.
Relief and Costs
39 I agree with Campbell JA’s reasons under the heading “G Orders and Procedural Matters”.
40 I agree with the orders proposed by Campbell JA. The reasons of Giles JA
41 I also respectfully agree with the reasons of Giles JA concerning the construction and interpretation of the definition of “Wholesale Price” in cl 1.1 and of the extent of the relevance of the surrounding circumstances in this case to that task.
42 GILES JA: I have had the considerable benefit of reading the reasons of Campbell JA in draft. I agree that the trial judge was correct in his construction of the Supply Agreement. I agree that he was incorrect in the manner in which he rectified it, and that it should instead be rectified in the manner proposed by Campbell JA. I agree with his Honour’s conclusions on the other issues in the appeal and cross-appeal.
43 Subject to the following observations, which are concerned with the construction of the Supply Agreement and Franklins’ right of inspection, I agree with his Honour’s reasons for his conclusions. My observations assume familiarity with the reasons.
44 For convenience, I repeat the critical definition of Wholesale Price in cl 1.1 of the Supply Agreement –
“Wholesale Price for a Product means Metcash’s ‘Wholesale 5’ price for that Product, being the Supplier’s wholesale list price for that Product in the State or Territory in which the Business is located at the time of Metcash’s delivery of that Product to [Franklins], less all allowances and discounts (such as trade discounts, distributor allowances, warehouse allowances, bulk buy allowances and cash discounts) provided to Metcash by that Supplier.”
45 This definition is taken up in the definition of “Purchase Price”, as the commencing integer variously adjusted for case deals, ullage allowances, profit margin and service fees. The Purchase Price is then the price at which, in the operative cl 4.3(a), Franklins will purchase the Products from Metcash.
46 Clause 4.4 then states how Metcash will invoice Franklins for Products, setting out a pro forma calculation of a Purchase Price. It commences with the integer of the Wholesale Price, accompanied by words in parentheses which, again for convenience, I repeat –
“Wholesale Price (ie ‘Wholesale 5’ for the State or Territory in which the Business is located, less warehouse allowances and trade, distributor, and cash discounts to provided to Metcash by that supplier)”
47 There is disconformity between Wholesale Price as defined in cl 1.1 and Wholesale Price as described in the words in parentheses in cl 4.4(a). However, it is plain that in the construction of the Supply Agreement the former prevails, and not only because it is the defined phrase taken up in the definition of Purchase Price which is in turn the subject of the operative clause 4.3(a). As Campbell JA notes, there is “some textual incoherence” in cl 4.4(a), and irrationality in apparent double deduction of warehouse allowances and trade, distributor and cash discounts. The description also omits the important temporal element, to which I later refer, that the wholesale list price be the price at the time of Metcash’s delivery of the Product to Franklins.
48 As Campbell JA also notes, cl 4.4 is a machinery provision dealing with invoicing, and in my view the words in parentheses descriptive of Wholesale Price were no more than the draftperson’s incomplete and inaccurate reminder of the definition in cl 1.1, signified as such by the introductory “ie”, not themselves carrying a contractual meaning of Wholesale Price. For that reason, it is strictly not necessary to rectify the Supply Agreement by deletion of the descriptive words; they remain as an incomplete and inaccurate reminder of Wholesale Price as defined in the now rectified definition. However, I agree that there should be rectification for more abundant caution.
49 I agree that, as the law has developed, it is not necessary to find ambiguity in the words of a written contract before going to context and purpose in the construction of the contract. The question is the scope of the material to which regard may be had in ascertaining the “meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of contract” (Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; [1998] 1 WLR 896 at 912; [1997] UKHL 28; [1998] 1 All ER 98 at 114, adopted in Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181 at 188 [11]).
50 In Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 76 ALJR 436; 186 ALR 289 at [39], the High Court said that Codelfa Construction Pty Ltd v State Rail Authority of NSW[1982] HCA 24; (1982) 149 CLR 337, rather than the arguably broader view of the admissible “background” taken in decisions of the House of Lords to which reference was made, should be followed. There is, with respect, good reason for caution in equating the material to which regard may be had with all that in ordinary communication a reasonable person would see as relevant, as is the thrust of the House of Lords decisions. A formal contract is not a conversation, or a letter, between persons who understand it to accord with some prior course of communications and seek the subjective intention of the speaker or writer. It is a legal act, to be approached according to the objective theory of contract, with its meaning transcending the immediate parties in the event of assignability and assignment; and even absent assignment, commonly a written contract will fall to be understood and obeyed through persons other than those engaged in its negotiation and privy to all that passed between the negotiators. In the present case, the Supply Agreement could have had a long life, and be acted upon by Franklins and Metcash long after Messrs Summers, Robbins, Zelinsky, Reitzer, Jablonski and others had left the respective companies.
51 Regard can not be had to evidence of “the antecedent oral negotiations and expectations of the parties” in order to construe the contract: Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596 at 606, taken up by Mason J in Codelfa Construction Pty Ltd v State Rail Authority of NSW at 352. His Honour there said, in part of a passage cited by Campbell JA –
“... Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification. Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties’ presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.”
52 This was preceded by his Honour’s observation that evidence of surrounding circumstances is not admissible to contradict the language of a contract when it has a plain meaning. Although ambiguity need not be found before going to context and purpose in the construction of the contract, I do not think that what his Honour said in the words extracted above has been displaced.
53 Consistently with this, if there is an ordinary grammatical meaning of the words used in a written contract, that meaning must be given significant force although read with the admissible evidence of surrounding circumstances. Words are ordinarily used in a conventional and grammatical way, and a formal written contract prepared over a period, with drafts exchanged, referred for instructions and varied as in the present case, has considerable claim to adherence to the ordinary grammatical meaning. It comes down to a determination in each case whether the words are to be understood otherwise in the light of the context and purpose revealed by the admissible evidence, including whether they are intractable and do not admit of departure from the conventional and grammatical use. I take the adjective from the judgment of Mason and Wilson JJ in Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation [1981] HCA 26; (1981) 147 CLR 297 at 320, a case of statutory construction in which their Honours described the rules of construction as rules of common sense designed to ascertain the legislative intention by reference to the language of the instrument viewed as a whole but postulated that the language may be “intractable”.
54 The words “all allowances and discounts” in the definition of Wholesale Price, shown to mean “all” by the following words “such as ...”, are explicit. The descriptive words in cl 4.4(a) of the Supply Agreement must then be taken into account, and could be said to give rise to ambiguity, but they are to be explained in the manner I have earlier set out. Beyond that, as appears from the reasons of Campbell JA, there is very little in the circumstances surrounding entry into the Supply Agreement supporting that, in the document as finally executed, the words should not have the amplitude they bear on their face. The negotiations in which Wholesale 5 was referred to as the price at which goods would be supplied, and the subjective intentions and expectations of (for example) Messrs Summers, Zelinsky and Reitzer, are not available as surrounding circumstances.
55 The fact that Metcash had a Wholesale 5 price, produced by its computer system, which deducted only four or five published discounts, did not say much of the Wholesale Price agreed between the parties when it was plain that other adjustments could readily enough be made (for example, to reflect case deals made by Franklins). It was known that many other allowances and discounts could be negotiated referable to Franklins’ volume, and as the discussion at the Pie Chart Meeting and the production of the Laminated List show, the parties were aware that confidential benefits could be obtained by Metcash on Franklins’ volume and at least as to the term adherence/volume benefit it was agreed that Franklins should get it. There is nothing uncommercial in confidential benefits going to Franklins rather than Metcash. The purpose of the Supply Agreement included that each of Metcash and Franklins would make a profit from the supply of the Products under it, but that does not translate to what confidential discounts should be retained by Metcash or should go to Franklins and it was not shown by evidence that one or other construction of the Supply Agreement would bring unprofitability to one or other of the parties.
56 There were in fact grounds in the circumstances in which the Supply Agreement was entered into for the definition of Wholesale Price to mean what it said. First, as earlier mentioned the Supply Agreement could be in force for a long period, and it is unlikely that Metcash was to be left with the receipt of all confidential benefits which might come about referable to Franklins’ volume. Secondly, that also would not sit well with Metcash being the “box mover” and Franklins having the interface with Suppliers; in particular, because negotiation by Metcash of other confidential benefits would inhibit or preclude Franklins’ negotiations in that respect with Suppliers.
57 To the extent to which the executives of Franklins or Metcash had subjective understandings of Wholesale 5 and that the price at which Franklins would purchase was the Wholesale 5 price, and that those understandings were shared, there could be grounds for rectification. But, as I have said, these are not part of the surrounding circumstances to which regard can be had for the construction of the Supply Agreement. While it is not necessary to rest the decision on it, in my view even if that were not the case, the subjective understandings would not displace the explicit meaning of the words of the definition. As is demonstrated in Campbell JA’s analysis when considering rectification, for at least two reasons there was not a common understanding that the Wholesale Price would be, unalloyed and in all circumstances, the Wholesale 5 price. First, there was an agreed deduction of the term adherence/volume benefit. Secondly, the understandings did not encompass the field of all possible confidential discounts; to repeat, the Supply Agreement could operate over a long period, and it should not be taken that Franklins bound itself to Metcash retaining other benefits which might come about.
58 I agree that on current High Court authority the subsequent conduct of the parties is not admissible as an aid to the construction of the Supply Agreement. There is consistency with the law concerning evidence of the circumstances surrounding the making of a contract, with its basis of the objective theory of contract. The subsequent conduct of the parties may show what they intended to be their contract or what they thought their contract was. That would not be admissible as evidence of the circumstances surrounding the making of the contract. In any event, for the reasons given by Campbell JA the subsequent conduct of the parties is unhelpful as an aid to the construction of the Supply Agreement.
59 Some assistance is gained, it seems to me, by considering the point of the definition of Wholesale Price in cl 1.1.
60 The argument on appeal took the words from “being” to the end of the definition as an explanation of Metcash’s Wholesale 5 price for a Product: that is, the definition began by equating Wholesale Price with Metcash’s Wholesale 5 price, and then gave a content to Metcash’s Wholesale 5 price which included deduction of allowances and discounts. Thus it was Metcash’s argument that, because Metcash’s Wholesale 5 price in fact allowed only for deduction of the four or five published discounts, that together with the surrounding circumstances on which it relied should as a matter of construction lead to deduction only of the four or five published discounts. 61 The point of the definition, it seems to me, was as follows. The Wholesale 5 price could not be taken up in the abstract. It required geographic and temporal content for the purposes of the Supply Agreement, according to the relevant State or Territory and, importantly, according to the time of delivery rather than (for example) the date of Franklins’ order. That content was then further expressed, for the purposes of the Supply Agreement, by the words “less all allowances and discounts (such as trade discounts, distributor allowances, warehouse allowances, bulk buy allowances and cash discounts) provided to Metcash by that Supplier”. In short, the defined Wholesale Price was a construct for the purposes of the Supply Agreement. It is a mistake to take Metcash’s ordinarily understood Wholesale 5 price, with its particular deductions, as intended to govern the definition, and the inclusion of distributor allowances in the examples of allowances and discounts to be deducted, although distributor allowances were not part of the Wholesale 5 price calculation, is thus readily enough understood. The definition is intended as such, and not as a surrogate warranty in the manner postulated by Campbell JA.
62 For these reasons, which supplement and I do not think are at odds with the reasons of Campbell JA, as a matter of construction of the Supply Agreement there were to be deducted from the Supplier’s list price all allowances and discounts provided to Metcash by Suppliers, not limited to the four or five published discounts taken into the Wholesale 5 price.
63 Since writing the forgoing I have read the reasons of Allsop P in draft. I respectfully agree with his Honour’s discussion of the legal issues concerning the law of contract.
Franklins’ right of inspection
64 I would prefer not to join in the suggestion that an order enforcing the right of inspection under cl 2.6 might be subject to a discretionary confidentiality limitation. As Allsop P says, any limitation may have to be found in the contract. The matter was not argued, and should be left until it arises, if it ever does (common sense between the parties should not be excluded).
65 I agree with the orders proposed by Campbell JA.
66 CAMPBELL JA:
Nature of the Case
67 In 2001 the Appellant (“Franklins”) was a new entrant to the retail level of the Australian grocery and supermarket industry. It was in the process of acquiring 76 stores in New South Wales and the right to use the long- established “Franklins” name. It was also contemplating opening additional stores in New South Wales and elsewhere in Australia. However, it did not have any warehouse of its own.
68 The Respondent (“Metcash”) was already involved in the Australian grocery and supermarket industry. It had acquired the warehouse operation previously conducted in several States by Davids’ Holdings, and also operated a franchising business under which it franchised the right to operate retail outlets under the “IGA” brand.
69 Over the period April 2001 to September 2001 Franklins and Metcash negotiated, and ultimately entered, a contract whereby Franklins agreed to purchase exclusively from Metcash those products that Metcash stocked at the time of Franklins submitting an order. That agreement was ultimately embodied in a contract dated 14 September 2001 (the “Supply Agreement”). The parties recorded, in a section headed “INTRODUCTION” at the start of that Agreement:
“B. [Franklins] and Metcash wish to combine their buying power to buy from Suppliers on the best possible terms. C. Metcash and [Franklins] wish to establish a strong working relationship as wholesaler/distributor and retailer respectively to enable them to compete effectively against Woolworths and Coles. D. [Franklins] recognises Metcash’s need to cover all incremental costs, make an acceptable profit and be in a long term contractual relationship. E. Metcash recognises [Franklins’] need to obtain competitive terms and reliable supplies from Suppliers and Metcash. F. [Franklins] will be ‘in control of its destiny’ in that it will have the interface with all Suppliers and collect all rebate and co-op funds and negotiate all case deals. G. Metcash will principally be the ‘box mover’. H. Metcash has agreed to supply [Franklins] with Products for the Businesses and [Franklins] has agreed to acquire Products for the Businesses, during the Term, on the terms and conditions set out in this agreement.”
70 The Supply Agreement was terminated on 31 January 2005.
71 On 8 February 2005 Franklins began litigation in the Commercial List of the Supreme Court of New South Wales against Metcash, alleging (in broad terms) that it had been overcharged by Metcash for products supplied while the Agreement was on foot, and that Metcash was denying Franklins its contractual right to inspect and copy documentation of Metcash to ascertain the extent of the overcharge. 72 The scale of the dealings between Franklins and Metcash pursuant to the Supply Agreement had been very large. Faced by a contention that in an average week Metcash had supplied Franklins with around 13,500 different product lines, from around 600 or 650 different suppliers, and that the task of inspecting and analysing Metcash’s documentation in the way Franklins contended it was entitled to do would be vast, Bergin J (as her Honour then was) ordered the trial of a group of separate issues.
73 Those issues came ultimately to be defined by 21 separate questions. While the terms of some of the questions will need to be discussed in more detail later, their broad aim was to decide what legal obligations existed between the parties concerning the price that would be charged for goods supplied, and what, if any, legal obligations Metcash continued to have after termination of the Agreement to permit Franklins to inspect its records.
74 Palmer J heard evidence and argument concerning those 21 questions over 11 hearing days in September 2006, and received extensive further written submissions in October and November 2006. He delivered a judgment stating his answer to those of the questions that he thought it appropriate to answer on 21 March 2007: Franklins Pty Ltd v Metcash Trading Ltd [2007] NSWSC 242 (the “Principal Judgment”). He delivered three other judgments in May, September and October 2007, dealing with various contentions of the parties about the consequences of the answers given to the questions in the Principal Judgment: Franklins Pty Ltd v Metcash Trading Ltd (No 2) [2007] NSWSC 446; Franklins Pty Ltd v Metcash Trading Ltd (NSWSC, Palmer J, 13 September 2007, unreported); Franklins Pty Ltd v Metcash Trading Ltd (NSWSC, Palmer J, 17 October 2007, unreported). I shall refer to these judgments, respectively, as “Judgment 2”, “Judgment 3” and “Judgment 4”. All references I make to the judgment below will be to the Principal Judgment, unless I say otherwise.
75 Franklins was granted leave to appeal against these judgments on 14 March 2008. Metcash has filed a cross-appeal.
76 The dispute about the price at which the goods were sold arises from the fact that in the grocery and supermarket industry it is common for a supplier of goods to have a wholesale list price, and for a purchaser to be able to obtain various kinds of discounts or rebates from that price, or to obtain an allowance (which might be in cash or kind) as a result of purchasing the goods.
77 Some of those benefits (to adopt a neutral term that I will use elsewhere in this judgment) are referred to as being “published”. The primary judge (at [13]) explained “published” discounts and allowances as follows:
“It is common ground between the parties that, in broad terms, there are two types [of] discounts or allowances operating between suppliers and wholesalers such as Metcash. The first category is called ‘published’ discounts and allowances, being those discounts or allowances given pursuant to trading terms which are shown on the suppliers’ invoices or in published trading terms. Such discounts and allowances are also referred to as ‘on invoice’ and, paradoxically, ‘off invoice’. Some people refer to them as ‘on invoice’ because their terms are shown on the face of the invoice as is the deduction from list price in accordance with those terms. Some people refer to them as ‘off invoice’ because the deductions are taken off the price as shown on the invoice.”
78 Other benefits are referred to as confidential ones, and are negotiated individually between a supplier and a particular purchaser.
79 The essence of Franklins’ complaint about the price at which it was charged for goods is that Metcash obtained from suppliers various confidential benefits on goods that were on-sold to Franklins, but did not pass on to Franklins the benefit of those confidential benefits.
80 In broad terms, the primary judge held that the correct construction of the Supply Agreement required Metcash to calculate the price at which it sold goods to Franklins on a basis that passed on to Franklins all discounts and allowances whatsoever that it received from a supplier, whether or not they were published. However, he held that it had been the common intention of Franklins and Metcash that the only discounts and allowances that Metcash would pass on would be published ones. He ordered that the Supply Agreement be rectified accordingly. He found that Metcash had not established that Franklins was estopped concerning the construction of the Supply Agreement. He found that Franklins were entitled to inspect any document of Metcash that related to any benefit that Metcash was obliged to pass on to Franklins under the Supply Agreement as rectified.
“Wholesale 5” in the Metcash Computer System
81 The trial judge found (at [15]), and it was not challenged on the appeal, that:
“... Metcash had inherited from Davids Holdings’ business a pricing system in its computer called ‘Wholesale 5’, which was the price basis according to which it sold to its supermarket customers. This pricing system passed on to Metcash’s customers the ‘published’ discounts (otherwise called the ‘on invoice’ or ‘off invoice’ discounts) which had been obtained by Metcash from its suppliers but did not pass on the confidential discounts, which Metcash retained as part of its profit.”
The connection between the price generated by Metcash’s computer that it called “Wholesale 5”, and the price that Metcash was obliged to charge Franklins for goods purchased, lies at the heart of these proceedings. 82 The judge (at [51]) accepted the following evidence from Mr Andrew Reitzer, Chief Executive Officer of Metcash, about what “Wholesale 5” meant to Metcash itself and the role that Wholesale 5 played in Metcash’s operations (at [48]):
“We [ie Metcash] have a basic selling price in our system called ‘Wholesale 5’. We also refer to that as the ‘net net stripped cost’. We take the combined volume of all independent supermarkets that buy from us and negotiate as best we can with manufacturers and take the discounts that apply to warehouse buys, quantity purchases, trade discounts and the cash discount to arrive at what we call the ‘net net stripped cost’. This is in our computer and as internal Metcash jargon is called ‘Wholesale 5’. That price is our selling price to all our supermarket customers, whether IGA or other brands, like Foodland, or customers that don’t operate under a brand or banner. This is the only way we work. We have a very old legacy system. The whole organisation is built around the Wholesale 5 price. The only way we can raise an invoice with any customer is to base it around the charging of Wholesale 5. ... ‘Net net stripped cost’ starts with the supplier’s list price but is then reduced by warehouse allowances, trade discounts, quantity buy discounts and cash discounts that appear on the invoice. In other words, the usual discounts that appear on the manufacturer’s invoice are deducted from the manufacturer’s wholesale list price. ... We also do marketing for franchise customers like IGA. We collect what I call the ‘merchandising or trading terms’ from manufacturers. These monies are not reflected in the Wholesale 5 price. These are confidential trading terms that do not appear on the manufacturer’s invoice. In other words, there is of course a raft of discounts, rebates and co-op moneys that we collect that are not in Wholesale 5. They relate, amongst other things, to advertising moneys, confidential rebates and growth rebates.”
Issues on the Appeal and Cross-Appeal
83 In its appeal, Franklins contends that the primary judge was in error in ordering that the pricing provisions of the Supply Agreement be rectified.
84 In its cross-appeal, Metcash contends that the primary judge was in error in construing the contract to require the passing on of all discounts and allowances of whatsoever kind. Rather, it contends the proper construction requires Metcash to pass on to Franklins only four (or alternatively five) specific types of discount or allowance. Metcash supports that construction by relying on surrounding circumstances known to both parties, the parties’ mutual understanding of how they used the language utilised in the contract, the subsequent conduct of the parties, and the alleged uncommerciality of the construction that the primary judge adopted. 85 Alternatively, Metcash contends that the primary judge rectified the contract in an incorrect fashion, and that the common intention of the parties had been that Metcash would be obliged to pass on to Franklins only the four (or five) nominated types of discount or allowance, not all “published discounts”.
86 As a further alternative, Metcash contends that Franklins is estopped from asserting that it is entitled to the benefit of anything other than the specified four (or five) types of discount or allowance. As a further alternative, Metcash contends that Franklins engaged in conduct concerning the negotiation and entry of the Supply Agreement that breached the Trade Practices Act 1974 (Cth), entitling Metcash to have the Supply Agreement varied undersection 87 Trade Practices Act, or alternatively to receive damages.
87 Metcash’s challenge to the form of orders made by the primary judge includes a contention that, by reason of its entitlement to succeed on one or more of the preceding arguments, it was entitled to a judgment in its favour in the action.
88 Franklins contends that it has a contractual entitlement to inspect all documents of Metcash relating to all discounts and allowances received by Metcash concerning goods that Metcash has sold to Franklins. Metcash contends that Franklins has a contractual entitlement to inspect only those of Metcash’s documents that record the particular sales of goods that Metcash has made to Franklins. Alternatively, it contends that if Franklins has a contractual entitlement to obtain inspection of any of Metcash’s documents relating to confidential discounts and allowances, Franklins is bound by an estoppel requiring it to exercise that right of inspection only by an independent person such as an auditor, who would himself or herself be bound by obligations of confidentiality.
89 The final matter of substance is that there are some disputes concerning the adequacy of particular orders that the judge made to give effect to his decisions about the legal relations between the parties.
Summary of Conclusions
90 In brief, the conclusions I have reached on these issues are:
(1) The judge was right in finding that the proper construction of the Supply Agreement required Metcash, in calculating the price at which it sold goods to Franklins, to deduct from the Supplier’s list price all allowances and discounts (including rebates) provided to Metcash by that Supplier. In the course of reaching that conclusion I decide that: (a) in construing a contract that is wholly in writing, it is not necessary to find there is ambiguity in the contract before using surrounding circumstances as an aid to construction; (b) subsequent conduct of the parties cannot be used as an aid to construction of a contract that is wholly in writing, if the subsequent conduct is sought to be used to prove any matter that cannot legitimately enter into construction of the contract in accordance with the objective theory of contract; (c) recitals to an agreement in certain limited circumstances are a legitimate aid to construction of the operative provisions in the agreement. (2) The manner in which the judge rectified the Supply Agreement was wrong. Instead, the Supply Agreement should be rectified in a manner that allows Metcash to retain certain specified confidential discounts and allowances that were specifically identified as ones that Metcash was to retain in a document called the Laminated List. In the course of reaching that conclusion I consider: (a) how the requirement for rectification to give effect to the common intention of the parties has the effect that matters that were outside the scope of the parties’ subjective intentions at the time the agreement was entered cannot be affected by the making of a rectification order; (b) how identification of the intention of the parties should be done as a matter of commercial substance; (c) the rationale for the “clear and convincing proof” requirement for proof of common intention. (3) Metcash has not established that Franklins is bound by any estoppel concerning the confidential benefits that Metcash is obliged to pass on to Franklins. (4) Metcash has not made out any entitlement to a remedy under the Trade Practices Act. (5) Franklins has a contractual entitlement to inspect certain documents (which resists easy summary). (6) Beyond the changed manner of rectification, the only alterations that should be made to the judge’s orders are ones that more accurately state the proper scope of the right of inspection, clarify some of the answers without changing their intended substance, and delete certain unnecessary declarations.
91 Franklins has also applied for leave to amend its Notice of Appeal. I would reject that application, on the ground that the proposed amendment is unnecessary.
PART A – FACTUAL MATTERS
The Supply Agreement
92 Following on from the matters stated in the “INTRODUCTION” already set out in para [69] above, the rest of the Supply Agreement was headed “IT IS AGREED”. Relevant provisions include:
“1.1 Definitions In this agreement: ... Businesses means the supermarket businesses listed in schedule 1 to this agreement and such other supermarkets in Australia as acquired by [Franklins] or its related body corporate, and notified to Metcash from time to time by [Franklins] or its related body corporate to be included as a ‘Business’ under this agreement, and this agreement will only commence to apply to a supermarket upon notification by [Franklins] to Metcash”.
93 Schedule 1 listed 76 individual stores, all of which were located in New South Wales. Another provision (clause 3.2) required any orders placed by Franklins to identify the Business for which the Product was ordered. The delivery arrangements established by clause 3.7 and 3.8 varied depending upon the location of the Business for which the order was placed.
94 Clause 1.1 continued:
“Case Deals means special deals negotiated by [Franklins] directly with Suppliers from time to time in relation to the purchase of any Products; ... Direct Supplier in respect of particular goods, means a manufacturer or supplier of goods that are not included as Products at the time [Franklins] wishes to buy such goods. A ‘Direct Supplier’ will become a ‘Supplier’ in respect of particular goods only if [Franklins] agrees with Metcash to include the goods as a Product in accordance with clause 4.2. For avoidance of doubt, a manufacturer or supplier may be a Direct Supplier in respect of certain goods, and a Supplier in respect of Products; ... Products means all dry goods, frozen goods, chilled goods, non food, slow movers and cigarettes, in case or other bulk quantity, that are specified in Metcash’s ‘Wholesale 5’ price list at the time [Franklins] wishes to purchase the goods, that [Franklins] requires for sale at its stores from time to time, including any goods [Franklins] and Metcash agree that Metcash will stock for it on an exclusive line basis under clause 4.2, but excluding perishables and non food delivered by a supplier directly to [Franklins]. ‘An item’ or ‘items’ of Product will mean an item or items of the goods; Profit Margin means the profit margin applied to the Wholesale Price, as set out in clause 4.4(c) [see para [101] below]; Purchase Price means:
(a) for Products comprising Cigarettes (not subject to OR subject to Case Deals): Wholesale Price + Profit Margin OR (Wholesale Price – Case Deal) + Profit Margin multiplied by the prevailing rate of GST at the time of making the taxable supply where the supply of Product is a taxable supply;
(b) for Products (except Case Deals):
(Wholesale Price – Ullage Allowance) + Profit Margin + Service Fee multiplied by the prevailing rate of GST at the time of making the taxable supply where the supply of Product is a taxable supply; and
(c) for Products subject to Case Deals:
(Wholesale Price – Case Deal) – Ullage Allowance + Profit Margin + Service Fee multiplied by the prevailing rate of GST at the time of making the taxable supply where the supply of Product is a taxable supply;
Rebates means the rebates negotiated by [Franklins] directly with the Suppliers to be paid by Suppliers to [Franklins] in relation to the Products ordered by [Franklins] through Metcash in accordance with this agreement, in addition to the allowances and discounts provided by the Suppliers to Metcash and already taken into account in the calculation of the Wholesale Price, having regard, if applicable, to the combined volume of Products purchased by Metcash (including for its related bodies corporate and IGA Franchisees) and by [Franklins], but whether or not the Suppliers also allow such rebate to Metcash, its related bodies corporate or IGA Franchisees; Service Fee means the fee set out below to be paid by [Franklins] to Metcash in relation to all Products purchased in accordance with this agreement:
(a) $0.00 per case of Products comprising cigarettes;
(b) $0.67 per case of Products purchased comprising frozen or chilled goods; and
(c) $0.59 per case of Products purchased comprising goods other than those in (a) and (b)”.
95 There was provision for the Service Fee to be indexed in a particular way during the term of the agreement. The indexing mechanism differed depending on which State or Territory the Business placing an order was located in, and recognised that different award wages or enterprise bargaining agreements might be applicable to Metcash warehouse employees in those different States and Territories. 96 Clause 1.1 continued:
“Supplier means in respect of particular goods that are Products, a supplier of Products to Metcash or a manufacturer who supplies Products to Metcash from time to time, but excludes a Direct Supplier unless [Franklins] agrees with Metcash to include particular goods of the Direct Supplier as a Product in accordance with clause 4.2. For avoidance of doubt, a supplier or manufacturer may be a Supplier in respect of certain goods that are Products, and be a Direct Supplier in respect of other goods; Term means the period referred to in clause 10.1(a) to (c) inclusive [see para [103] below]; ... Ullage Allowance means an allowance for ullage set out in clause 4.4(c) applied to the Wholesale Price for all Products ordered by [Franklins] in respect of which no claim for shortfall in delivery is made under clause 4.9”.
97 The critical definition of “Wholesale Price” in clause 1.1 was:
“Wholesale Price for a Product means Metcash’s ‘Wholesale 5’ price for that Product, being the Supplier’s wholesale list price for that Product in the State or Territory in which the Business is located at the time of Metcash’s delivery of that Product to [Franklins], less all allowances and discounts (such as trade discounts, distributor allowances, warehouse allowances, bulk buy allowances and cash discounts) provided to Metcash by that Supplier.”
98 The Supply Agreement continued:
“1.2 Interpretation In this agreement, headings and boldings are for convenience only and do not affect the interpretation of this agreement and, unless the context otherwise requires: ...
(j) no provision of this agreement will be construed adversely to a party solely on the ground that the party was responsible for the preparation of this agreement or that provision;
...
(o) if an example is given of anything (including a right, obligation or concept), such as by saying it includes something else, the example does not limit the scope of that thing;
... 2.6 Metcash to keep records of Products purchased, etc
(a) During the Term, Metcash must keep accurate records of all transactions relating to [Franklins] and its related bodies corporate, including Products, volume, price and date of purchase, and must make available to [Franklins] those records and allow [Franklins] to make copies of those records on 24 hours notice or other time agreed between the parties.
(b) Metcash must continue to make available to [Franklins] the records referred to in clause 2.6(a), and allow [Franklins] to make copies for the longer of 10 years after the termination of this agreement, or if any tax investigation or other legal proceedings are instituted during the period, until such investigation and any ensuing legal action, or other legal proceedings, and appeals are concluded.
2.7 Confidentiality
(a) Except as required by law, to take professional advice, to comply with any legal obligation, or as necessary for the performance of this agreement, neither party will disclose to or otherwise place at the disposal of any third party, in any form or by any means, any information relating to or in connection with this agreement or its performance, and each party must keep such information in the strictest confidence at all times for the Term and for 2 years after the termination of this agreement.
(b) Without limiting clause 2.7(a), Metcash must not, without [Franklin’s] prior written consent, disclose, sell, otherwise place at the disposal of, or use (other than in performance of this agreement) any information (in any form or by any means) relating to or in connection with:
(1) this agreement or its performance;
(2) [Franklins], its related bodies corporate or their purchases;
(3) the Businesses (or any of them); or
(4) Metcash’s total purchases or other requirements, which includes information on [Franklins], its related bodies corporate or the Businesses, from which, or from which together with other information, a third party may be able to deduce information in relation to [Franklins], and must keep such information in the strictest confidence at all times for the Term and for 2 years after the termination of this agreement.”
99 There was provision for the placing of orders by Franklins, and for Franklins to take delivery of the products at warehouses of Metcash unless otherwise arranged. 100 There was provision in clause 4.1(d) that, during the Term, Franklins would (save in certain exceptional circumstances) “purchase all Products required for the Businesses from Metcash”.
101 The Agreement continued:
“4.3 Purchase Price
(a) [Franklins] will purchase the Products from Metcash at the Purchase Price.
(b) Metcash will, on written notice by [Franklins], substantiate to [Franklins] within 7 days that it has provided all allowance, or discount, and paid all money owing to [Franklins] when due, and allow access by [Franklins’] officers to such of Metcash’s records as they reasonably require (including taking copies) to satisfy themselves that all allowance, discount, payment when due, has been provided or made.
4.4 Calculation of Purchase Price, Rebates and Transport Costs
(a) Metcash will invoice [Franklins] for Products as follows:
PURCHASE PRICE =
Wholesale Price (ie ‘Wholesale 5’ for the State or Territory in which the Business is located, less warehouse allowances and trade, distributor, and cash discounts provided to Metcash by that Supplier)
LESS Case Deals (clause 4.6) (if applicable)
LESS Ullage Allowance (if applicable)
ADD Profit Margin (if applicable) ADD Service Fee (if applicable)
The above is then multiplied by the prevailing rate of GST at the time of making the taxable supply where the supply of Product is a taxable supply.
(b) Other matters that may appear on the invoice separate from the Purchase Price calculation are:
ADD Transport Fees (clause 5.4) (if applicable) LESS Claim for shortfall (clause 4.9) (if applicable) LESS Rebates (clause 4.5) (if applicable)
OR (a) [Franklins] may invoice Metcash separately for Rebates; or (b) [Franklins] claim Rebates from Suppliers direct.
(c) Table re Service Fee, Profit Margin, Ullage and Payment Terms
Ullage Profit Service Payment Margin1 Fee2Per Case Terms Dry Groceries 0.08% 1.5% $0.59c 18 days3 (excluding Cigarettes) Frozen & Chilled 0.08% 1.5% $0.67c 18 days3 General NIL 1.5% $0.59c 18 days3 Merchandise Slow Movers 0.08% 1.5% $0.59c 18 days3 Cigarettes NIL 1.5% NIL Next Friday4
1. Profit Margin is applied to Wholesale 5, if applicable, and increases to 2.0% in year 3.
2. Service Fee is applied at item level on Wholesale 5 less any Case Deal loaded by [Franklins].
3. All purchases made in a week must be paid within 18 days from the Friday of the same week.
4. All purchases in a week must be paid on Friday of the next week.
4.5 Rebates
(a) [Franklins] will negotiate with and collect the Rebates from Suppliers of the Products directly.
(b) If requested by [Franklins] in writing, Metcash will deduct any Rebate owing to [Franklins] by a Supplier from Metcash’s invoice to [Franklins] and from payment Metcash is due to make to that Supplier in respect of [Franklins’] purchase.
4.6 Case Deals
(a) [Franklins] will negotiate Case Deals with Suppliers of Products directly and advise Metcash of the amount agreed between [Franklins] and the Supplier for deduction from the Wholesale Price and for claim by Metcash from the Supplier.
(b) In relation to Products purchased pursuant to Case Deals, Metcash will deduct from the Wholesale Price of the Products the amount to be deducted agreed between [Franklins] and the Supplier pursuant to the Case Deals. (c) Metcash will claim from the Supplier the amount to be claimed agreed between [Franklins] and the Supplier pursuant to the Case Deals.
4.7 Stock profits and losses Metcash will retain any stock profits and bear any stock losses realised on the Purchase Price.”
102 Clause 4.10 made provision for the Payment Terms that had been stated in clause 4.4(c) to be reviewed periodically. It continued:
“(d) In conducting such reviews, Metcash will adopt the principle that Metcash and [Franklins] must be working capital neutral and, in accordance with this principle, the difference between Metcash’s creditors days received and stock days held will be granted as payment days to [Franklins], provided always that [Franklins] must not be disadvantaged by Metcash’s Supplier altering its trading terms because of Metcash’s failure to pay fully and on time when payments are due.
(e) Metcash will provide to [Franklins] a letter from its auditors certifying the creditors days received and stock days for the quarter just expired, and the calculation of the Payment Terms applying the criteria set out in this clause. The cost of the certificate will be shared 50:50 between Metcash and [Franklins].
103 Clause 10.1 set out the Term of the Agreement. In effect, it was to endure for at least three years. At the end of the 24th month either party could give 12 months’ notice of termination, in which case the Term would end at the expiry of 36 months from its commencement. If no such notice was given, it would continue for a further period of 24 months from the end of the first 24-month period. In or before the 48th month either party could give 12 months’ notice of termination, in which case the Term would end 60 months after it began. That pattern was to continue indefinitely.
104 As well, there were provisions entitling either party to terminate if certain stipulated causes for termination arose. Clause 10.5 provided:
“Termination of this agreement however brought about: ... (b) Clause 2.6 and 2.7 will survive termination and be binding on the parties for the periods provided in those clauses ...”
105 Clause 14 included:
14.1 Amendment This agreement may only be varied by the written agreement signed by both parties. 14.2 Entire agreement All previous negotiations, understandings, representations, warranties, memoranda or commitments in relation to, or in any way affecting, the subject matter of this agreement, including the letter from Metcash to [Franklins] dated 14 June 2001 (and countersigned by [Franklins]), are merged in and superseded by this agreement.”
The letter of 14 June 2001 was annexed to the Supply Agreement.
The Course of Negotiation
106 The course of negotiation of the Supply Agreement needs to be examined in some detail, for the purpose of arguments concerning rectification of both Franklins and Metcash, for the purpose of Metcash’s argument concerning construction, and for the purpose of Metcash’s arguments concerning estoppel and the Trade Practices Act. It is convenient to set out the facts concerning negotiation here, and to consider later what, if any, relevance various of them have for particular arguments.
107 The background to the negotiations was that the chain of about 300 stores that had long traded under the name of Franklins was owned by an entity called Dairy Farm. It wished to dispose of the stores. The Australian Competition and Consumer Commission would not permit all the stores to be sold to Woolworths, and required 160 or 170 of them to be sold to independents. Metcash had had discussions with the representative of Dairy Farm about those stores being acquired by IGA independent retailers, who were customers of Metcash. It was only on 20 April 2001 that Metcash was informed that about 50 of the stores would be going to Pick ‘n Pay. Pick ‘n Pay is a South African entity involved in the grocery trade, and the parent company of Franklins. It had not previously been involved in the Australian grocery trade. Metcash also learnt that Pick ‘n Pay had bought or was doing a joint venture with Fresco, another chain of stores that was an existing customer of Metcash. The negotiations between Metcash and Franklins began against a background of Metcash’s surprise and disappointment at suddenly being informed it would not be able to obtain the Franklins stores for IGA retailers, and its realisation that there was a possibility of losing the benefit of the Fresco business.
20 April 2001 Meeting
108 Discussions began at a meeting on 20 April 2001 at the coffee bar at the Regent Hotel in Sydney. Mr Reitzer and Mr Edwin Jankelowitz, the Chief Financial Officer of Metcash, attended on behalf of Metcash. Mr Sean Summers and Mr David Robbins attended on behalf of Franklins. Mr Summers did not, it seems, ever have any formal position in Franklins, but was the Chief Executive Officer of Pick ‘n Pay. Mr Robbins was a Pick ‘n Pay executive. 109 The witnesses were in disagreement about the detail of what had been said at this meeting, beyond the fact that the possibility of Franklins entering a supply agreement with Metcash was discussed. The trial judge did not resolve those differences in the evidence beyond saying (at [100]) that it was a “very introductory meeting” at which:
“... Mr Reitzer gave some explanation of how Metcash’s Wholesale 5 price was calculated. I do not think that Mr Summers gave any indication that Franklins would accept Wholesale 5 without qualification as the price governing the supply relationship with Metcash: there was still a great deal of negotiation ahead.”
1 May 2001 PowerPoint Presentation
110 On 1 May 2001 a further meeting was held. It was attended by Messrs Summers and Robbins, and Mr Aubury Zelinsky, on behalf of Franklins. Mr Zelinsky became, in June 2001, the Managing Director of Franklins. Before then he was a Pick ‘n Pay executive. He had arrived in Australia from South Africa in March 2001. Mr Reitzer and Mr Michael Jablonski attended on behalf of Metcash. Mr Jablonski was Metcash’s Merchandising Director.
111 Prior to the meeting Mr Reitzer had prepared a PowerPoint presentation. At the meeting itself, no facilities for showing the PowerPoint presentation were available, but a hard copy version of the text of his intended presentation was distributed, and he spoke to it. In the document Franklins was referred to as “PnP”, a name derived from “Pick ‘n Pay”. Metcash was referred to as “MTT”. Relevant parts of the text of the presentation are:
“Underlying Principles
MTT and PnP wish to build a strong relationship as Wholesale / Distributor and Retailer to compete effectively in the Australian market.
MTT are to principally be the ‘Box Mover’.
PnP are to principally be the ‘Retailer’.
PnP need a direct interface with Manufacturers for Rebate + Coop.
MTT and PnP recognise each other’s need to cover costs and make a return.
PnP respect MTT’s need to hold and grow ‘buying muscle’ with manufacturers as part of the total market they serve.
PnP understand MTT’s need for this to be a long term working relationship. PnP and MTT agree to non-compete arrangements (to include Wholesale, Franchising, Retail and Acquisitions.).
... Pricing – NSW Only
MTT to charge the PnP store at ‘Wholesale 5’, being the current Manufacturer’s Wholesale List Cost less all warehouse allowances and Cash Discounts. So called ‘Stripped Nett Nett Cost’ (See Promotions for how Case Deals will be handled).
MTT to charge a Service Fee as Cents Per Case on Wholesale 5 per the attached schedule on all purchases except cigarettes. To escalate annually by the higher of CPI or the EBA increase granted.
MTT to retain the Stock Profit (Stock Revaluation with cost price movements – currently 0.30%) to cover the cost of holding the stock.
MTT to credit PnP 0.08% (Excl Cigarettes) on all invoices as Ullage. This is reversed should any claim be made on delivery.
MTT to charge a further 2.0% being the required Ebit ‘return’ to MTT on the deal.”
... Promotions / Rebate / Marketing Income
PnP to negotiate all Case Deals and advise MTT. MTT will load them, charge the stores ‘Wholesale 5 less the Case Deal’ and claim the Case Deal back from suppliers.
PnP will negotiate and collect all Rebate + Coop monies from manufacturers. Where required MTT will deduct the amounts as advised from Manufacturers and forward the money to PnP.
PnP agree to liase closely with MTT on all MTT/PnP/Manufacturer issues as a ‘common front’. Important that we work together to get more for our channel.”
112 The reference, under the heading “Pricing – NSW Only” to “EBA” was to the enterprise bargaining agreement under which Metcash warehouse employees worked. The reference to “Stock Profit” under that heading was to the fact that it was contemplated that the price charged to Franklins would be ascertained from a supplier’s list price as at the date on which Franklins placed its order, and that a supplier’s list price at that date might possibly be greater than the list price that was applicable at the time that Metcash had purchased the goods. The reference to “Ebit” was to “earnings before interest and tax”. The reference, under the heading “Promotions / Rebate / Marketing Income” to Metcash “Loading” “Case Deals” is to Metcash loading into its computer information relating to any Case Deals that Franklins might negotiate for itself. Other terms in this presentation will require further explanation later.
113 The judge made no finding about what a “case deal” was in actuality, or was understood by any of the actors in this drama to be. There was evidence from Mr Reitzer that “case deals are trial reductions for a certain period of time that are negotiated with manufacturers usually linked with a promotion that is advertised, or a trial reduction on the shelf.” I note that the definition of “Case Deal” in the Supply Agreement seems on its face to be much wider than that.
The Oral Evidence Generally
114 There was significant disagreement in the evidence about the precise statements that were made at the meeting. Indeed, it was a feature of the case that there was significant disagreement in the evidence about the precise statements that were made at practically every meeting. In many cases, the judge did not seek to resolve those differences. When he accepted the oral evidence of any witness about what had been said at a meeting, he also identified a contemporaneous record, or features of the inherent probabilities of the situation, that supported that oral evidence. His reasons for judgment cast no doubt on the honesty of the attempts of any witness to give accurate evidence, but on no occasion did he accept the reliability of evidence that purported to be based on unaided recollection and lacked independent support from the written record or inherent probabilities. When the trial occurred in 2007, and concerned events that had happened as long ago as 2001, and those giving evidence were all busy businessmen who would have had much to attend to besides this transaction since the events relating to this transaction had occurred, this reflects nothing more than the ordinary fallibility of human memory.
115 Concerning the 1 May 2001 meeting, the judge said (at [101]):
“There is no contemporaneous note of what was actually said at the meeting. Mr Reitzer’s present recollection was considerably aided by the PowerPoint presentation which he had prepared but I think it probable that much of the evidence he gave of what he said is reconstruction based upon the PowerPoint presentation, rather than actual recollection.”
116 In the context of discussion a meeting of 14 June 2001, the judge made a finding that went wider than the circumstances of that particular meeting (at [141):
“All witnesses who gave evidence about what was said at this meeting – and other meetings at which no contemporaneous note was taken – suffered from the lapse of time in their recollections as to what was said.” 117 Concerning a meeting referred to in evidence as the “Pie Chart Meeting” that was held on 12 July 2001, the judge found (at [152]):
“In my opinion, the evidence given by all witnesses in relation to what was said at the 12 July meeting is a combination of fragmentary recollection and reconstruction influenced by firm beliefs in the merits of the parties’ respective cases.”
118 All submissions of either party in this appeal that place reliance on particular pieces of oral evidence must be evaluated bearing in mind the judge’s caution about the reliability of all the oral evidence.
Returning to the 1 May 2001 Meeting
119 Notwithstanding this general difficulty about the unreliability of purely recollection-based evidence in the case, there was some common ground in the evidence concerning the 1 May 2001 meeting.
120 One piece of common ground was that Mr Reitzer said words to the effect of:
“As Sean [Summers] requested, you [Franklins] will negotiate all your own case deals and, if you want, we will load this information for your stores into our system and deduct this from invoices rendered by suppliers. You will negotiate and collect all of your own merchandising money. You do not want us to collect this and pass it on. We are, however, willing to do that if you change your mind.”
121 It was also common ground that, in relation to the last bullet point of the PowerPoint presentation script under the heading “Promotions / Rebate / Marketing Income”, Mr Summers said words to the effect of:
“I do not want manufacturers to think that we are working together. As I have told you before, we want to own our relationship with our suppliers.”
122 It was also common ground that Mr Reitzer said:
“All purchases this week for cigarettes need to be paid in full by next Friday. For all other products, the principle that I will apply is whatever the creditor’s terms are less the stock on hand will be treated as credit days. Currently our credit days are 32 and our stock in hand is 14 days. That will give you 18 days. You will have 18 days from the Friday to pay.”
123 This element of the proposal, concerning the period of credit Metcash would extend to Franklins, never changed, and was ultimately embodied in the Supply Agreement as clause 4.10(d) (set out at para [102] above). The commercial significance of the arrangement whereby the period of credit that Metcash gave Franklins had to be “working capital neutral” was that extending a period of credit to Franklins did not involve Metcash in any need to have more working capital than it would have needed had Franklins not been its customer, because the period of credit that Metcash extended to Franklins was part of the longer period of credit that the supplier of the goods extended to Metcash. This makes puzzling how it was that Metcash could claim a stock profit “to cover the cost of holding the stock”, but as Metcash’s entitlement to the stock profit has never been challenged that puzzlement leads nowhere.
124 Mr Summers’ statement included an assertion that he had said:
“Metcash are not to negotiate on Franklins’ volumes. Metcash are not to go away and negotiate new lines to be listed in Franklins’ stores.”
Mr Reitzer denied that Mr Summers had made any such statement. The judge did not specifically resolve this difference in evidence but, from the general tenor of the judge’s remarks about the oral evidence, Mr Summers’ assertion should be taken to be not established.
125 It was common ground that Mr Summers accepted the principle of paying a mark-up of 2%, but requested that Metcash “gradually move to 2% so as to give us an opportunity to get on our feet”.
126 In a witness statement that identified, paragraph by paragraph, every aspect of Mr Reitzer’s evidence with which he disagreed, Mr Summers did not dispute Mr Reitzer’s statement that he said:
“We receive discounts from certain manufacturers called ullage. For those suppliers we do not return spoiled or damaged stock. In place of that, the manufacturer gives us a percentage discount called ullage. With the exclusion of cigarettes, we will pass an ullage allowance of .08% on to you. This is not the total ullage that we will receive in relation to your volume. The ullage percentage is not in the Wholesale 5 price and it is not in the merchandising terms. We will retain part of it on your volume, because of breakages in the warehouse.”
127 The judge recorded a difference in the oral evidence concerning the terms in which Wholesale 5 had been discussed at the meeting. The nub of the difference was that the Metcash witnesses said that the Wholesale 5 price was the wholesale list price less certain identified allowances and discounts, while Mr Summers’ account was that Wholesale 5 had been explained in terms in substance identical to those that follow the words “being” in the definition of Wholesale Price in the Supply Agreement.
128 The judge recorded that Mr Zelinsky had given evidence that at the 1 May 2001 meeting he had said: “We will be negotiating directly with suppliers regarding price, trading terms and product range. We want to operate independently of Metcash. All we want Metcash to do is distribute the goods to us. We accept that Metcash ought to be paid a pick fee for providing that service and a profit margin on all goods that are supplied.”
129 Concerning this, Mr Reitzer’s statement in reply disputed only the word “price”, and the mode of expression but not the substance of the third sentence. (He recollected Mr Zelinsky saying that Franklins “wanted Metcash to be its ‘box mover’”.) While he had no recollection of the final sentence, he did not dispute that it had been said.
130 The judge recorded (at [107]):
“What Mr Zelinsky said was consistent with what Mr Summers says that he had told Mr Reitzer at their first meeting on 20 April: ‘We will not be a super- franchisee. We want to have our own buyers in place negotiating all our trading terms and discounts’.”
131 The judge also recorded Mr Summers’ evidence that at the 1 May meeting he had said:
“It was important from [Franklins’] perspective that Franklins maintained a direct relationship with its suppliers and be able to negotiate directly with those suppliers in respect of rebates that Franklins was entitled to receive as a retailer. This would ensure that Franklins did not become a ‘super-franchisee’ along the lines of Metcash’s IGA stores, in which case Franklins would have no control over negotiations with suppliers.”
132 When the judge recorded that evidence without criticism or recording any contrary evidence, I take it that he accepted that evidence.
133 The specific finding that the judge made about the 1 May 2001 meeting was at [109]:
“In light of the trouble to which Mr Reitzer had gone to prepare the PowerPoint presentation, in which he stated how Wholesale 5 was calculated and that it would be the price at which Franklins would buy, I conclude that it is inherently probable that at the 1 May meeting he adhered substantially to his ‘script’ and discussed Wholesale 5 in the terms in which it is set out in the PowerPoint presentation. This probability is supported by the evidence of Messrs Reitzer and Jablonski and by the way in which Wholesale 5 was described in a letter dated 17 May 2001 from Mr Reitzer to Mr Zelinsky, to which I will come in a moment.”
8 May 2001 Draft Agreement 134 Mr John Hunter and Ms Natasha Zusman were both in-house solicitors of Metcash. On 8 May 2001 Ms Zusman emailed to Mr Robbins a draft supply agreement. The covering email said that the draft “incorporates the points discussed at the meeting” on 1 May. The draft included as recitals:
“A. The Australian grocery and supermarket industry is a highly competitive industry dominated by Coles and Woolworths supermarkets. B. Metcash and Pick n Pay wish to establish a strong long term relationship as wholesaler/distributor and retailer respectively to compete in the Australian grocery and supermarket industry. C. Pick n Pay and Metcash wish to combine their buying power with manufacturers in order to assist the growth of the independent grocery market they serve. D. Metcash will principally be the ‘Box Mover’ and has agreed to supply Pick n Pay with the Products for the businesses during the Term on the terms and conditions set out in this agreement. E. Pick n Pay will Principally be the ‘Retailer’ and has agreed to purchase the Products for the Businesses during the Term on the terms and conditions set out in this agreement. F. Metcash and Pick n Pay acknowledge each other’s need to cover costs and make a profit. G. Metcash acknowledges that Pick n Pay needs to have a direct relationship with manufacturers in relation to rebates.”
135 Its definitions included:
“Case Deals means special deals negotiated by Pick n Pay directly with manufacturers in relation to the purchase of cases of certain of the Products;” “Purchase Price means for each Product the Wholesale Price plus the Service Fee and the Additional Fee less the Ullage Allowance.” “Rebate means the rebate negotiated by Pick n Pay to be paid by manufacturers to Pick n Pay in relation to the Products ordered through Metcash in accordance with this agreement.” “Wholesale Price means ‘Wholesale 5’ for each Product being the current wholesale list price of the manufacturer of the relevant Product applicable as at the date the Product is delivered to Pick n Pay less all warehouse allowances and cash discounts provided to Metcash by that manufacturer.”
136 The operative provisions included:
“4.1 Purchase Price Except in relation to Case Deals, Pick n Pay will purchase the Products from Metcash at the Purchase Price plus any applicable delivery fee charges.” “4.12 Rebates
(1) Pick n Pay will negotiate and collect the Rebate from manufacturers of the Products directly.
(2) If requested by Pick n Pay, Metcash will deduct the Rebate owing to Pick n Pay by a manufacturer from a payment Metcash is due to make to that manufacturer and Metcash will pay the amount deducted to Pick n Pay.
4.13 Case Deals
(1) Pick n Pay will negotiate Case Deals with manufacturers directly and advise Metcash of those deals.
(2) In relation to Products purchased pursuant to Case Deals, Pick n Pay will pay to Metcash the Wholesale Price of the Product less the amount agreed pursuant to the Case Deal.
(3) Metcash will claim the amount agreed pursuant to the Case Deal from the manufacturer of the relevant Product.”
17 May 2001 Letter
137 After a meeting between Mr Reitzer and Mr Zelinsky on 17 May 2001, Mr Reitzer wrote to Mr Zelinsky, setting out “the main points that make up our agreed business relationship and supply agreement”. It was identical in all presently relevant respects to a letter ultimately signed by both parties on 24 May 2001, the terms of which I set out below.
24 May 2001 Letter
138 On 24 May 2001, Mr Hunter sent to Mr Zelinsky a letter, on Metcash letterhead, and already signed by Mr Reitzer. Mr Hunter’s covering letter said that the letter signed by Mr Reitzer was one “reflecting recent discussions between yourself and Andrew Reitzer”, and requested that it be signed and returned. The letter included the following:
“Further to our meeting on 16 May, my letter dated 17 May and our meeting on 23 May, I list below the adjusted main points that make up our agreed business relationship and supply agreement. 1. Underlying principles. 1.1 Pick ‘n Pay intend buying about 50 Franklins stores and the 20 Fresco IGA stores.
1.2 Pick ‘n Pay wish to establish a retail supermarket chain in Australia.
1.3 Pick ‘n Pay will be ‘in control of their destiny’ in that they will have the interface with all suppliers and collect all rebate and co-op funds and negotiate all case deals.
1.4 Metcash will effectively be a ‘box mover’.
1.5 Pick ‘n Pay and Metcash wish to build a strong working relationship to compete against the major chains.
1.6 Pick ‘n Pay and Metcash agree to combine all their efforts and strategies in order to maximise their joint buying muscle.
1.7 Pick ‘n Pay recognise Metcash’s need to cover all incremental costs, make an acceptable profit and be in a long term relationship.
1.8 Pick ‘n Pay agree to not compete with Metcash in Australia on a wholesale basis whilst this arrangement is in place and for 3 years after its end.
1.9 Pick ‘n Pay agree to not buy or recruit as a franchise any IGA retailers without Metcash’s written consent.
... 3.0 Pricing Metcash will charge Pick ‘n Pay at Wholesale 5. Wholesale 5 is the current supplier wholesale cost less all trade discounts, warehouse allowances, bulk buy allowances and cash discount. The attached schedule highlights the following items and how they are added to Wholesale 5:
Service fee
Profit margin
And ullage which is to be deducted from Wholesale 5. Each year, the service fee component will be reviewed by the higher of, CPI or any EBA increase that has been granted. Metcash will retain the stock profit realised on any price movements. 4.0 Case Deals Any case deal negotiated and loaded into Metcash’s system by Pick ‘n Pay will be deducted from the Wholesale 5 price. Metcash will claim these monies back from the supplier.”
139 The “attached schedule” referred to in clause 3 said:
Metcash/Pick ‘n Pay Schedule of Charges and Credit Terms Service Ullage Profit Payment Fee1Per Case Margin2 Terms Dry Groceries $0.59c 0.08% 1.5% 18 days3 (excluding Cigarettes) Frozen & Chilled $0.67c 0.08% 1.5% 18 days3 General Merchandise $0.59c NIL 1.5% 18 days3 Slow Movers $0.59c 0.08% 1.5% 18 days3 Cigarettes NIL NIL 1.5% Next Friday4 1. Service Fee is applied at item level on Wholesale 5 less any case deal loaded by Pick ‘n Pay. 2. Profit Margin is applied to Wholesale 5 and increases to 2.0% in year 3. 3. All purchases this week paid in 18 days from the Friday of the same week. 4. All purchases this week paid on Friday of the next week.”
140 The only provision of that letter that dealt with “rebate and co-op funds” was clause 1.3, quoted earlier.
141 It is to be observed that the “underlying principles” stated in this letter differ significantly from the recitals of the 8 May 2001 draft.
142 Concerning this letter in its 17 May 2001 manifestation, the judge, after setting out the “pricing” clause, observed at [113]:
“The notable feature of this letter is that it makes clear that Franklins will be charged ‘at Wholesale 5’, consistently with what appeared in Mr Reitzer’s PowerPoint presentation, and the definition of Wholesale 5 refers to the same specific deductions as appear in the definition of Wholesale Price in clause 1.1 of the Sale Agreement.”
143 This statement of the judge is not entirely right, as the definition of Wholesale 5 in the letter does not refer to distributor allowances, but the definition of Wholesale 5 in clause 1.1 of the Supply Agreement does.
144 The judge recorded (at [114]) Mr Zelinsky’s evidence that he had received the letter of 17 May, read it, forwarded a copy of it to Mr Summers and discussed it with him. Mr Zelinsky said that Mr Summers had instructed him to sign the letter, and he did so. The judge set out the following passage of Mr Zelinsky’s cross- examination:
“Q. Is this where you got to when you read this letter shortly after its receipt on 17 May 2001, that having given consideration to what Mr Reitzer stated the formula of Wholesale 5 to be you personally thought that to be a sufficiently clear and satisfactory statement of the formula? A. In discussion with Summers afterwards, sir. Q. You yourself were still unclear, were you, without speaking to Mr Summers about what the formula meant? A. No, sir. Q. I go back to a question I asked a moment ago, then. When you read this letter and how it described Wholesale 5, you thought the meaning of Mr Reitzer's formula to be perfectly clear, didn’t you? A. Yes, sir. Q. And was that because these terms Mr Reitzer was using – trade discounts, warehouse allowances, bulk buy allowances and cash discount – were terms that, given your long experience in the grocery industry, you were well familiar with? A. Yes, sir. Q. And you understood that all those things were published discounts, allowances and rebates? A. Yes, sir. Q. You spoke to Mr Summers, did you, about this letter?
A. Yes, sir.
... Q. Mr Zelinsky, you said a moment ago that when you read the definition of Wholesale 5 in the 17 May letter you yourself thought you were quite clear about what it meant? A. Yes, sir. Q. And I think you said that you understood that the trade discounts, warehouse allowances, bulk buy allowances and cash discount referred to were the published allowances and discounts; is that right?
A. Yes, sir, that would make up Wholesale 5, yes, sir.
Q. And do I take it that you understood that in addition to the published allowances and discounts there were the confidential allowances and discounts which Metcash would be negotiating but they were not to be deducted from Wholesale 5? A. No, sir. Metcash would be negotiating their own terms for their own volume, and we would be negotiating our own terms for our own volume. So our confidentials related directly to the volume that we did with the suppliers on our volume of sales volume of purchases.
Q. I will try to understand that. Was your understanding that Metcash would be negotiating with suppliers with the added buying strength from the volumes from Franklins? A. Yes, sir. Q. In those negotiations it would be obtaining the published discounts and allowances from suppliers? A. Yes, sir. Q. And it would also be obtaining discounts and allowances within the confidential allowances and discounts categories?
A. On their volume, sir. On their volume of purchases and our volume of purchases, confidentials would come back to us. So all our confidential turnovers would be on our account, on our volume. There are two prices. There is the ‘on invoice’ price, and there is the confidential discount. The confidential discount relates to our own particular volume of supply.” (Trial judge’s underlining.)
145 The judge found (at [115]-[117]):
“In my opinion, this evidence is critical. There are two parts to it. In the first part, Mr Zelinsky is clearly saying that when he read the letter of 17 May 2001 he understood that the price which Franklins would be charged under the Supply Agreement was Metcash’s Wholesale 5, that the calculation of Wholesale 5 deducted only published discounts from the suppliers’ list price, and that the intention of the parties was that confidential discounts on Franklins’ volumes of goods ordered through Metcash would be negotiated directly by Franklins with the suppliers, and would be collected separately by Franklins. However, in the next part of his evidence Mr Zelinsky goes on to say that he understood that any confidential discounts on Franklins’ volumes obtained by Metcash would be for Franklins’ account. It is this second part of Mr Zelinsky’s evidence that I do not accept, for the reasons which I will explain in a moment. Mr Zelinsky’s understanding, as described in the first part of his evidence, was in accordance with the intention of Mr Summers to which I have referred in paragraph 107 above. It is clear that Mr Summers understood that Franklins would be charged under the Supply Agreement at Wholesale 5, and that Wholesale 5 deducted only published discounts from the suppliers’ list price.” (Trial judge’s underlining.) The evidence that the judge refers to as “the second part” starts with the question “And do I take it that you understood that in addition ...”.
146 Concerning the 24 May 2001 letter, the judge found (at [127]):
“For the reasons I have given, I am satisfied that the words ‘all trade discounts, warehouse allowances, bulk buy allowances and cash discount’ appearing in the definition of Wholesale 5 were understood by both parties to mean published discounts.”
147 On this appeal Mr Meagher SC, counsel for Franklins, does not seek to challenge that latter finding.
The Public Announcement
148 On 29 May 2001 Metcash issued a media release that it had signed an agreement “with market newcomer Pick ‘n Pay under which Metcash will be the sole distributor to all Franklins and Fresco stores the company may purchase in Australia.”
Blake Dawson Waldron 31 May 2001 Redraft
149 From at least 30 April 2001, Mr Mark Stanbridge, solicitor of Blake Dawson Waldron, was advising Pick ‘n Pay concerning the proposed acquisition of the Franklins and Fresco stores. At some stage Blake Dawson Waldron also came to be acting for Pick ‘n Pay in connection with the proposed supply agreement. On 31 May 2001, Mr Stanbridge faxed to Mr Reitzer, with copies to Mr Hunter and Mr Zelinsky (Mr Zelinsky’s fax number being shown as an overseas one), what he described as a “hand and typed mark up of the letter you sent to Aubrey Zelinsky”. It continued:
“Please note that Aubrey has not seen the detail of our amendments. I will be faxing these to him at the same time this fax comes to you. After I have spoken to him tonight I will be in touch with you.”
150 Mr Stanbridge’s letter attached a copy of the letter Mr Reitzer had signed on 24 May 2001, to which various handwritten amendments had been made. No amendments had been made to clauses 1.2 to 1.6 inclusive of the“Underlying Principles”. Clause 3 headed “Pricing” was completely crossed out, and replaced by a clause headed “Rider 1”, that said:
“Metcash will charge Pick ‘n Pay its Wholesale 5 price, being – the manufacturer’s wholesale list price less all allowances and discounts provided to Metcash by the manufacturers (such as trade discounts, distributor allowances, warehouse allowances, bulk buy allowances and cash discounts) adjusted as follows: (a) for Products comprising Cigarettes (not subject to OR subject to Case Deals): Wholesale Price OR (Wholesale Price – Case Deal) (b) for Products (except Case Deals): {(Wholesale Price + Service Fee – Profit Margin) – Ullage Allowance} (c) for Products subject to Case Deals: {[(Wholesale Price – Case Deal) + Service Fee + Profit Margin] – Ullage Allowance} The attached schedule highlights how Service Fee and Profit Margin are added to Wholesale 5 price and Ullage Allowance deducted from the Wholesale 5 price. Subject to substantiation by Metcash to Pick ‘n Pay, each year, the labour component of the Service Fee will be reviewed by the lower of, CPI or any EBA increase that has been granted. Metcash will retain the stock profit and bear any stock losses realised on any price movements.”
151 An addition called “Rider 2” was added to clause 4 of the letter:
“Transport Costs, claim for shortfall, Rebates (b) Transport Costs (if applicable) will be added. (c) Claims for shortfall (if applicable) will be deducted (in which case Ullage Allowance will not apply to that order). (d) Rebates negotiated by the Pick ‘n Pay directly with the manufacturers to be paid by manufacturers to the Pick ‘n Pay in relation to the Products ordered by the Pick ‘n Pay through Metcash, in addition to the allowances and discounts provided by the manufacturers to Metcash and already taken into account in the calculation of the Wholesale 5 price may be invoiced by the Pick ‘n Pay to Metcash who will then deduct the money from the manufacturer and pay it to the Pick ‘n Pay.”
152 The judge (at [129]) noted the different account of “Wholesale 5 price” given in this letter to that appearing in Mr Reitzer’s letters of 17 and 24 May, describing the differences as being:
“... importantly by the addition of brackets and the words ‘such as ...etc’, the addition of ‘distributor allowances’, and putting ‘cash discount’ into the plural.”
153 Those words do not capture the potential importance of the changes. The letters of 17 and 24 May said that Wholesale 5 was arrived at by deducting from the current supplier wholesale cost all occurrences of four specific discounts and allowances, namely trade discounts, warehouse allowances, bulk buy allowances and “cash discount”. As a matter of language, Rider 1 can be read as saying that Wholesale 5 is arrived at by deduction from the wholesale list price of “all allowances and discounts provided to Metcash by the manufacturers”. The placing in parenthesis of “such as trade discounts, distributor allowances, warehouse allowances, bulk buy allowances and cash discounts” is capable of having the effect, as a matter of language, of making those five specified types of discounts and allowances merely examples of “all allowances and discounts provided to Metcash by the manufacturers”. Whether those meanings that the language is capable of bearing are the ones that should actually be placed upon it as a matter of construction is a question that will arise later.
154 Concerning the 31 May 2001 redraft, the judge found (at [130]):
“There is nothing in the terms of Mr Stanbridge’s letter or otherwise in the evidence which suggests that the change in wording was the result of any further discussion or of a change in either party’s understanding of Wholesale Price, or was intended to do anything other than more clearly express the parties’ common understanding of the definition of Wholesale 5.”
155 Another of the changes that Mr Stanbridge had proposed, in his redraft of 31 May 2001, was the addition of a final clause reading:
“The parties intend the terms set out in this letter form the basis of a formal supply agreement which will be prepared, negotiated and executed as soon as possible.”
Mr Reitzer’s Letter 4 June 2001
156 On 4 June 2001, Mr Reitzer replied to Mr Stanbridge saying that he was:
“... disappointed that after receiving Sean Summers’ verbal approval to my final draft I then receive your letter with changes to each paragraph. My immediate reaction is to say that my letter was accepted and is final. But in the interests of a long-term relationship, I disagree with the following changes that you make: ...”
He then made objection to various specific changes that Mr Stanbridge had made.
157 The only disagreement he expressed with Rider 1 was:
“... it cannot only be the labour position of the service fee that gets reviewed. What if power escalates? Also the word ‘lower’ must be replaced with ‘higher’.”
In other words, he expressed no disagreement with Mr Stanbridge’s change to the wording concerning what “Wholesale 5” constituted.
158 The letter concluded by saying: “I will be in South Africa from 4 June to 8 June. Please let me have your comments as soon as possible. My assistant Marion, will fax them to me in South Africa. I accepted Sean’s verbal ‘yes’ to my letter and went public on the deal. It is therefore of concern to me that it appears we are still negotiating parts of the deal.”
159 This seems to me to be an acceptance, though a grumbling one, that the negotiation was ongoing.
Mr Stanbridge Replies 7 June 2001
160 Mr Stanbridge replied to Mr Reitzer, with a copy to Mr Hunter, on 7 June 2001. He said he had “now had an opportunity to discuss it with Sean Summers and Aubrey Zelinsky and they have instructed me to respond as follows”. He dealt with Mr Reitzer’s various disagreements with the draft seriatim, saying in relation to Mr Reitzer’s disagreement concerning Rider 1 “Agreed”.
The 14 June 2001 Letter Agreement
161 On 14 June 2001, Mr Reitzer sent to Mr Zelinsky another letter on Metcash letterhead. It opened by saying:
“Further to our meeting on 16 May, my letter of 17 May, our meeting on 23 May, and recent comments from your solicitors, I list below the adjusted main points that make up our agreed business relationship and supply agreement.”
162 The balance of the letter followed the format of the letter of 24 May 2001, but modified the text of that letter in some respects. Clause 1.2 to 1.6 of the earlier letter remained unchanged. Clause 1.7 was altered by adding to the end of the previous text of clause 1.7:
“Metcash recognises Pick ‘n Pay’s need to obtain competitive terms and reliable supplies from suppliers and Metcash.”
163 Clause 3, relating to pricing, was identical to Rider 1 that had been proposed by Mr Hunter on 31 May 2001, save only that its first line ended by saying, “at Wholesale 5 price being”, instead of “its Wholesale 5 price being”.
164 The text that had been Mr Stanbridge’s Rider 2 was adopted verbatim as a new clause 5.
165 Mr Reitzer signed the letter. After Mr Reitzer’s signature, the letter ended with provision for another signing and dating, immediately after the words “Accepted for and on behalf of [Franklins].” Mr Zelinsky signed there, and dated the letter 14/06/2001. 166 The reader will recall that this letter of 14 June 2001 was specifically agreed, by clause 14.2 of the Supply Agreement (para [105] above) to be one of the matters “merged in and superseded by this agreement”.
The 14 June 2001 Meeting
167 On 14 June 2001, there was a meeting between seven representatives of Franklins, and seven representatives of Metcash. The attendees included not only Mr Zelinsky and Mr Reitzer, but also people from both companies who would be involved in implementation of the arrangement between Metcash and Franklins. One such person who attended for Franklins was Mr Roni Perlov, Finance Director of Franklins.
168 After the meeting Mr Perlov’s secretary typed up a file note from notes he had made at the meeting. It included the following:
“A Reitzer gave an overview of the makeup of the invoice cost attributable to purchases ex warehouse. He advised that it is intended that all suppliers be invoiced at the ‘Wholesale 5’ costs price. This cost price is the manufacturers’ list price less:
Trade discount
Bulk discount
Distribution allowance
Confidential discounts
‘Wholesale 5’ is updated each week and price changes are notified by manufacturers with 4 weeks notice. ... In terms of the new Franklins Supply Agreement, we will own all trading relationships with suppliers. It is envisaged that case deals be entered into the Metcash system to enable the costing of such to be deduced off invoice price, all other deals negotiated will be invoiced to Metcash for deduction off remittance from suppliers. Rebates and marketing allowances negotiated by Franklins will be claimed off Metcash remittance. Fees to be negotiated with suppliers directly, given that this issue could create certain pressures between Metcash, Franklins and suppliers it was agreed that during the negotiation of these terms Metcash and Franklins work closely to avoid any conflicts arising between the three parties.” 169 A summary of the “discussion points” in a Metcash document entitled “Pick and Pay Minutes 14/6/01” included the items:
“– Andrew [Reitzer] explained the IGA stock cost process and what is involved in Wholesale 05 price field.
– Andrew [Reitzer] explained the areas of price hosting, Mix and Match pricing and Pay will be wholesale 05 with no case deals, no promotions, no rebate and no marketing.
– Pick and Pay will deal with suppliers for case deals, promos etc.
– Pick and Pay will have access to screens to input deals etc to allow Metcash to claim on suppliers.”
170 There was dispute at the trial about whether Mr Perlov’s note was accurate, insofar as it recorded that Mr Reitzer had said that one of the deductions from manufacturer’s list price to arrive at Wholesale 5 was confidentialdiscounts. The judge (at [142]) did not accept that at the 14 June meeting Mr Reitzer said that confidential discounts would be deducted in ascertaining the wholesale price to be applied to Franklins purchases.
The Pie Chart Meeting – 12 July 2001
Purpose of the Meeting
171 On 12 July 2001, various senior executives of the parties met, including Mr Reitzer and Mr Zelinsky. The meeting arose from a suggestion that Mr Reitzer made to Mr Zelinsky when they had dinner together on 5 July 2001. The judge (at [143]) accepted that at that dinner Mr Reitzer said:
“We should probably prepare a joint document reflecting which discounts and allowances we will be collecting, and which discounts and allowances you are also entitled to negotiate for with suppliers directly for your own account.”
172 The judge also accepted that, shortly after 5 July 2001, Mr Reitzer said to Mr Zelinsky in a telephone conversation:
“As previously discussed, now that the letter agreement has been signed, we are prepared to come to show you on a confidential basis the various buckets of money that we collect from our suppliers. This will give you some feel for the sort of confidential rebates and co-op that you may also be able to try to negotiate for directly with the suppliers for your own benefit. We will also show you the rebates and co-op that we will be continuing to collect. In other words, we will show you the dollar value of every piece of income that we collect that’s not passed through Wholesale 5, and in relation to each piece we will show you what you can also attempt to negotiate for, and we will show you with items we will be continuing to collect for our own account. It is obviously important that your chief buyer attend that meeting.”
173 Mr Reitzer’s unchallenged account in cross examination of why this meeting was needed was:
“... [the] first need was to address or to avoid confusion on the part of suppliers that could lead to any one of the three parties being short-changed or paying too much. The second need was led by a desire on our [Metcash’s] behalf for Franklins to be successful and I knew that they didn’t know how much to collect, what it should come to. And during the course of the previous months on several occasions, starting in April, I had tried to persuade them to allow us to collect the merchandising terms according to our rates, which was rejected repeatedly, and then that’s how the deal was cut.”
174 Mr David Ramsden was the General Manager, Merchandise, for Franklins in the period June 2001 to July 2002. Mr Reitzer was aware that Mr Ramsden “had just arrived a few weeks before that” and was “a bit green”.
The Pie Chart Itself
175 Prior to the meeting of 12 July, Metcash had prepared a single-page document headed “Marketing Income”. It included a list of 16 different types of benefits, some of which were grouped together, as follows:
“Coop Deferred
Coop in Lieu
Coop O & A*
National Rebate
State Rebate*
House Brands*
Central/Redist*
Slow Moving Rebate*
Direct/X-dock/Early pay*
Term Adherence/volume* Ullage
Settlement”.
176 It is to be observed that seven of those benefits or groups of benefits have an asterisk alongside them, while five do not. The asterisk was stated on the chart to mean “Pick ‘n Pay/Franklins will not be able to collect”.
177 On the list of benefits, each type of benefit or group of benefits that appeared on a separate line in the list had a distinctive colour allotted to it.
178 The main feature of the page was a large circle, divided into 12 sectors of various different sizes. Each of those sectors was coloured in one of the range of colours as had been attributed to the various items in the list of benefits. Around the exterior of that circle was written the names of the various individual benefits or groups of benefits that appeared in the list, with a number of dollars attributed to each individual benefit or group of benefits. The place at which the name of any individual benefit or group of benefits was written was immediately adjacent to, or joined by a line to, the sector of the circle that was coloured with the colour appropriate to that particular benefit or group of benefits. The dollar amounts stated in relation to each such benefit or group of benefits were denoted in millions. Thus, for instance, immediately adjacent to the sector of the circle that bore the colour appropriate to the “Coop Deferred” benefit was written “Coop Deferred”, and a number of dollars, and immediately adjacent to the segment of the circle that bore the colour appropriate to “Direct/X-dock/Early pay*” was written “Direct/X-dock/Early pay*” and a number of dollars. In this way, the chart enabled ready comprehension of the amount of marketing income attributable to each of the benefits or groups of benefits, of the relative sizes of the marketing income derived from all of the benefits or group of benefits, and whether any particular benefit or group of benefits was one that “Pick ‘n Pay/Franklins will not be able to collect”.
179 The chart did not purport to do anything other than state the then-present types of benefits collected by Metcash, concerning purchases it then made (ie, not including any purchases intended to be on-sold to Franklins) and the total amounts of money collected by Metcash for those various benefits.
180 While the chart was made available to the Franklins’ representatives at the meeting, they were not permitted to take a copy of it away with them.
Discussion at the Meeting
181 The only contemporaneous note made of what transpired at this meeting is very brief, and for present purposes unhelpful. The oral evidence relating to the meeting was in conflict to a large extent. Notwithstanding his unfavourable view of the evidence given by all witnesses concerning this meeting (referred to at para [117] above), the judge preferred the evidence of Messrs Reitzer and Jablonski concerning at least some aspects of the discussion at this meeting to that of Mr Zelinsky.
182 Mr Reitzer’s evidence about the meeting included:
“At the Pie Chart Meeting, I handed a copy of the Pie Chart to all the participants. A conversation took place in the following words or words to like effect:– I said: ‘Aubrey we have prepared a pie chart that shows every dollar that we collect that is not in the Wholesale 5 price. It is extremely confidential and we are showing this so that you can get a feeling for how much money you should collect when you negotiate your own confidential rebates and marketing money. The national rebate, co-op deferred and co-op in lieu must be negotiated directly between Franklins and the suppliers.’ On the pie chart there are several items marked with an asterisk. In relation to these items, I said the following words or words to like effect at the Pie Chart Meeting: ‘As you will see, there are several items on the pie chart that are marked with the asterisk. As we have noted at the foot of the pie chart, these are items which we collect but which you will not be able to collect. You will not get them either because they represent old David’s style discounts or because they only apply if you operate a warehouse.’”
183 There is a dispute on the appeal about whether the judge was correct in preferring the evidence of Messrs Reitzer and Jablonski concerning this meeting, to which I will need to return later.
184 The judge found (at [153]):
“The parties agreed at the meeting that there should be a document, jointly produced, which, in Mr Reitzer’s words, could be given to suppliers to ‘show them how our relationship works, and what money goes where’.”
185 Though the judge did not make a finding about it, there was some common ground about what was said concerning the term adherence/volume benefit. Mr Reitzer explained what it was, whereupon Mr Zelinsky said it was really just another cash discount, and Franklins should get it. Mr Reitzer agreed that Metcash would issue Franklins with a cheque every six months to pass the term adherence discount on to Franklins. Mr Reitzer did not agree that it was really a cash discount, but none the less agreed that the benefit of it would ultimately flow to Franklins.
The Laminated List 186 Soon after this meeting, Metcash produced a single-page document, the text of which was approved by Franklins. It bore the logos of both Franklins and Metcash, and was headed “Metcash supplier arrangements regarding [Franklins]”. It was ultimately produced in multiple copies, laminated for durability, that were made available to Franklins employees for use in their discussions with suppliers. It was referred to in the evidence as the “Laminated List”. Mr Reitzer gave uncontested evidence that it was not supplied to Mr Hunter. We were not directed to any evidence about whether it was supplied to Franklins’ solicitors.
187 The Laminated List was arranged in two columns, the left hand one of which read:
“[Franklins] to Collect
Co-op
New Line Fees
Advertising Allowance
National Rebate (incl. AAW)
State Rebate
Retail Ullage
Space Management
Over & Aboves”
188 Its right hand column read:
“Metcash Passed on to [Franklins] List $10.00 Less Published Discounts Trade Discount $1.00 Warehouse Allowances $1.00 Quantity Buy Allowance $0.50 Settlement Discount $0.50
Wholesale (5) $7.00 Less Wholesale Ullage $0.01 Metcash retain – not passed on to [Franklins]
Direct / Cross Docking / Early Payment Discount Centralisation / Redistribution Allowance
Slow Moving Rebate”
189 The benefits that were shown on the Laminated List as ones that Metcash would retain were ones whose dollar value, as shown on the Pie Chart, was 4.87% of the total value of the benefits shown on the Pie Chart.
The Diversity of Benefits
The Finding Below Concerning Benefits
190 The trial judge gave specific consideration to what was meant by the particular types of allowance or discount listed in parenthesis in the definition of “Wholesale Price” in the Supply Agreement (set out at para [98] above), namely trade discounts, distributor allowances, warehouse allowances, bulk buy allowances and cash discounts.
191 The judge set out at [64], and evidently accepted, evidence given by Mr Gary Tempany, the Group Manager of Merchandise and Marketing of Metcash, who Metcash called to give evidence of the meaning of terms in the industry:
“● Trade discount: a trade discount is the standard discount given by a supplier to purchasers of their product in the industry.
● Warehouse allowance: a warehouse allowance is a discount that is given to the whole trade by a supplier any time that goods are taken into a warehouse, as distinct from the goods being delivered direct to the retail store.
● Quantity buy allowance: a quantity buy allowance is an allowance that is provided by suppliers to any purchasers that purchase a certain quantity of the supplier’s product.
● Settlement Discount: a settlement discount (sometimes referred to as a cash discount) is a discount given to any purchaser in the trade for payment within certain expressly stated time frames. (Trade discounts, warehouse allowances, Quantity buy allowances and Settlement discounts are usually published by suppliers in their standard price lists to the trade. They are non-confidential discounts provided by suppliers.)”
192 The judge accepted (at [65]) that a “quantity buy allowance” as explained by Mr Tempany had the same meaning as “bulk buy allowances” in the definition of “Wholesale Price”.
193 The judge’s only finding about a “distributor allowance” was at [67], in his recounting of evidence of Mr Dove (a Franklins employee at the time of the trial, who had previously worked for Metcash) that he regarded it as“probably meaning ‘distribution allowance’, which was a published allowance.” The judge accepted that each of the specific types of discount listed in parenthesis in the definition of “Wholesale Price” in the Supply Agreement was understood in the industry to be a published discount, not a confidential discount.
194 In addition to the evidence specifically accepted by the judge, there appears to be a consensus in the evidence that a “trade discount” is a non-specific term, for a discount given by a supplier to purchasers in their industry, and can include more specific benefits such as ullage, quantity buy allowance, warehouse allowance and payment terms. Evidence from Mr Summers, that “trade discount” relates to “all discounts that are available to trade”, whether published or not published, cannot be accepted in light of the judge’s finding that all the types of benefit appearing in parenthesis in the definition of Wholesale Price in the Supply Agreement were published discounts.
Other Types of Benefits
195 Beyond this, the primary judge did not make findings about the nature of the various types of benefit that were mentioned in the evidence. Different witnesses gave accounts of what was meant by these particular benefits, and their accounts did not always coincide. Sometimes the lack of coincidence of the accounts seems to be a mere matter of expression, rather than of substance, but at other times the difference is one of substance. This Court is able to express a view about a benefit that bears a particular name only to the extent that there is a commonality of thought on the topic in the evidence below, or a clear basis exists for rejecting some of it.
196 It is to be observed that none of the particular benefits listed in parenthesis in the definition of “Wholesale Price” in the Supply Agreement appear, under those names, on the Pie Chart.
197 Of the benefits that appear on the Pie Chart marked with an asterisk, “Coop O & A” (in which “O & A” means “overs and aboves”) and “State Rebate” both seem to appear on the Laminated List as something that Franklins is to collect. Two items that are marked with an asterisk on the Pie Chart, namely “House Brands” and “Term Adherence/volume”, do not appear on the Laminated List at all. Further, there are three items on the Laminated List that Franklins is stated to collect, namely “New Line Fees”, “Advertising Allowance” and “Space Management”, that do not appear on the Pie Chart. The item “Ullage” that appears on the Pie Chart is divided, on the Laminated List, into “Retail Ullage” that Franklins is to collect, and “Wholesale Ullage” that appears on the Laminated List as (it seems) a deduction that is made from Wholesale 5. The “Settlement” benefit that is recognised on the Pie Chart seems to be the same as the “Settlement Discount” that is referred to on the Laminated List as one of the items that Metcash passes on to Franklins.
198 Of the discounts noted on the Laminated List as “Metcash Retain – not passed on to [Franklins]”:
(a) A “direct discount” was explained by Mr Reitzer (the only person who gave evidence on this topic) as being a discount in relation to goods delivered to a retail store, and was given in consideration of administrative costs to Metcash in handling the account and the risks assumed by Metcash in paying the supplier for those goods. (b) A “cross-dock discount” occurs when goods are assembled by a supplier and delivered to a warehouse in “store-ready quantities” not taken into inventory at the warehouse, but on-delivered to various stores, perhaps with other goods. It is as though they cross the dock of the warehouse without actually going in. (c) An “early payment discount” is a discount given for payment before the date on which payment is due in accordance with the agreed or usual settlement terms. (d) According to Metcash witnesses, a “central/redistribution allowance” is a benefit given when the supplier delivers goods to one centralised warehouse rather than warehouses in every State, thus imposing on the warehouser the cost and trouble of moving the goods to another State if and when they are needed there. In contrast, the evidence of Mr Perlov is that it is an allowance paid to the operator of a central distribution facility to compensate for the cost of running a warehouse, and is in substance no different to a warehouse allowance. It is neither possible, nor necessary, for this Court to resolve that difference in evidence. (e) The “slow moving rebate” relates to specific lines of slow moving grocery merchandise, that Metcash stocked in a single warehouse in Melbourne and delivered to other States as and when needed. In substance this seems no different to Metcash’s account of what is meant by the “central/redistribution allowance”, save that it relates only to particular lines of goods.
199 Of the various discounts noted on the Laminated List as “[Franklins] to collect”:
(a) “Coop” is short for “cooperative advertising”, and is a payment made for a promotional activity over a particular period. (b) A “new line fee” is paid by a supplier when a wholesaler or retailer agrees to list a new line of the supplier’s goods. (c) The term “advertising allowance” is self explanatory. The purpose of such an allowance is in substance the same as that of a coop allowance, but some evidence suggests that the manner in which the two allowances are paid may differ, with coop allowances being paid as either a flat dollar amount or a percentage, while advertising allowances are paid as a percentage on the total volume of purchases. (d) “National rebate” is paid by suppliers to businesses who operate nationally. The “AAW” that is said in the Laminated List to be included in the national rebate that Franklins is to collect is a reference to the Australian Association of Wholesalers, a collection of State based wholesalers that negotiate rebates as a single entity. There is evidence from Mr Zelinsky that it is a confidential rebate. There is no finding by the judge whether it is, or is not, a published benefit. (e) The meaning of “State rebate” does not emerge clearly from the evidence. As with the national rebate, there is evidence from Mr Zelinsky that it is a confidential rebate, and no finding by the judge whether it is, or is not, a published benefit. (f) The meaning of “ullage” is connected with a supplier providing someone (it is not clear who) with an allowance, to compensate for broken stock that is not returned to the supplier. It is clear that there was a consensus that Metcash would pass on to Franklins some, but not all, of the ullage allowance that it received from manufacturers. It may be that it is this proportion passed on that is referred to on the Laminated List as “wholesale ullage” (though it is not clear that this is so, and it is a matter of inference rather than evidence). It is not clear what “retail ullage” is. (g) “Space management” is an amount paid by a supplier for involvement or preferential treatment in the layout of a retail store. (h) An “Over and above” allowance is a fee paid for one-off promotional activities, that are over and above the co operative promotions already agreed on.
200 On the assumption that “coop deferred” and “coop in lieu” on the Pie Chart are subspecies of co-operative allowance, there are two types of marketing income that are referred to on the Pie Chart that do not appear on the Laminated List:
(a) “Terms adherence/volume” allowance was described by Mr Reitzer as “monies paid on by a handful of suppliers that is a discount inherited from the old Davids”. He said it was for paying as agreed on time and adhering to other agreed terms. I would infer that it was because entitlement to the discount required not only payment on time, but also adhering to terms other than ones involving time of payment, that Mr Reitzer did not accept that it was a cash discount. (b) “House brands” related to house brand products, that Franklins did not intend to stock. Thus, even though part of the marketing income that Metcash derived, that was shown on the Pie Chart, related to house brands, if Franklins did not intend to stock house brands it is no surprise that house brands did not appear on the Laminated List.
201 There was also evidence of some types of benefits whose names did not appear in the definition of Wholesale Price in the Supply Agreement, on the Pie Chart, or on the Laminated List: (a) While Metcash on occasion received something described as a “prompt payment discount”, the evidence does not enable this Court to make a finding about what it is paid for. (b) From April 2002, Metcash negotiated with some of its suppliers a “warehouse efficiency rebate” that Mr Reitzer described as being “to make the life of the particular supplier easier”, or “to save the particular supplier money”. He gave as examples situations where Metcash adjusted the size of the spacing in its warehouse racking to accommodate particular sized pallets of a particular manufacturer, or when Metcash opened a warehouse outside its usual opening hours to suit a supplier’s convenience. (c) A “streamlined logistics efficiency discount” was negotiated by Metcash with one particular supplier, and paid as a percentage discount, the percentage of which increased as the volume of the order increased. Mr Tempany agreed that “the fact that such a discount might be available is a published matter but the extent to which it is payable, the percentage and the scale up to which it goes may be confidential”. That supplier’s practice was to show part of the streamlined logistics efficiency discount on the invoice, but for part of it to be treated as confidential, and not referred to on the invoice. The evidence does not make clear when that supplier first began paying a discount of that type to Metcash, and no inference is available that it began to be paid before the Supply Agreement was executed. (d) Mr Reitzer’s evidence, reproduced at [82] above, also referred to a “growth rebate”, but the evidence did not explain what that was.
Mr Hunter’s 13 July Draft
202 Ms Penny Ho was a solicitor at Blake Dawson Waldron, who came to be acting for Franklins concerning the supply agreement. From at least 12 July 2001, Ms Ho was enquiring of Mr Hunter when she would receive a draft supply agreement. A file note of Mr Hunter dated 12 July 2001 says that he told Ms Ho “draft has been completed and is with Andrew for sign-off before being sent to her”. I infer that “Andrew” is Mr Reitzer.
203 On 13 July 2001 Mr Hunter sent Ms Ho a “draft Supply Agreement for consideration by your client”. It included recitals that bore a close similarity to the “Underlying Principles” stated in the letter agreement of 14 June 2001. It included the following definitions:
“Purchase Price means for each Product the Wholesale Price plus the Service Fee and the Profit Margin less the Ullage Allowance as set out in Schedule 1A; Rebate means the rebate negotiated by Pick n Pay to be paid by manufacturers to Pick ‘n Pay in relation to the Products ordered through Metcash in accordance with this agreement.” “Wholesale Price means ‘Wholesale 5’ for each Product being the current wholesale list price of the manufacturer of the relevant Product applicable as at the date the Product is delivered to Pick ‘n Pay less all allowances and discounts provided to Metcash by manufacturers.”
204 Clause 4.1 provided:
“Purchase Price Except in relation to Case Deals, Pick ‘n Pay will purchase the Products from Metcash at the Purchase Price plus any applicable delivery fee charges.”
205 Other provisions were:
“4.12 Rebates
(a) Pick ‘n Pay will negotiate and collect the Rebate from manufacturers of the Products directly.
(b) If requested by Pick ‘n Pay, Metcash will deduct the Rebate owing to Pick ‘n Pay by a manufacturer from a payment Metcash is due to make to that manufacturer and Metcash will pay the amount deducted to Pick ‘n Pay.
4.13 Case Deals
(a) Pick ‘n Pay will negotiate Case Deals with manufacturers directly and advise Metcash of those deals.
(b) In relation to Products purchased pursuant to Case Deals, Pick ‘n Pay will pay to Metcash the Wholesale Price of the Product less the amount agreed pursuant to the Case Deal. Schedule 1B sets out the manner in which Case Deals are taken into account in calculating the Purchase Price.
(c) Metcash will claim the amount agreed pursuant to the Case Deal from the manufacturer of the relevant Product.”
206 The inference one would ordinarily draw from Mr Hunter’s file note of 12 July 2001 is that it was only after instructions had been obtained from Mr Reitzer concerning the draft that Mr Hunter actually sent it. However, Mr Reitzer gave evidence that around about 12 July he did not see a definition in the terms of the definition of Wholesale 5 in this document. The judge did not say whether he accepted that evidence. Mr Hunter was not called, so could not be asked.
207 On 25 July 2001, Ms Ho emailed Mr Hunter about the proposed supply agreement, saying: “I met with Aubrey Zelinsky and David Robbins, and have incorporated the changes they require to the document and sent it to them for review last week.”
Ms Ho’s 1 August 2001 Draft
208 On 1 August 2001 Ms Ho sent to Mr Hunter, annexed to an email, a draft of the Supply Agreement “containing our amendments”. She said that:
“... the draft is subject to instructions, but in view of timing, we are sending it to you for your consideration before the meeting between the parties next week.”
209 Her redraft proposed amending the definition of “Wholesale Price” to read:
“Wholesale Price for a Product means Metcash’s ‘Wholesale 5’ price for that Product, being the Supplier’s wholesale list price at the time of [Franklins’] order for that Product, less all allowances and discounts (such as trade discounts, distributor allowances, warehouse allowances, bulk buy allowances and cash discounts) provided to Metcash by that Supplier.”
210 It added a new provision to the interpretation provisions in clause 1.2:
“(o) if an example is given of anything (including a right, obligation or concept), such as by saying it includes something else, the example does not limit the scope of that thing ...”
211 While the draft made numerous other amendments, to practically every clause of the agreement, the detail of them is not of present relevance.
Mr Hunter’s 7 August 2001 Reply
212 Mr Hunter replied to Ms Ho on 7 August 2001 saying “I have now taken instructions from Andrew Reitzer on your amendments to the Supply Agreement and attach my comments.”
213 Concerning the definition of “Wholesale Price”, his only comment was:
“The definition of Wholesale Price should be changed to reflect such price at the time of delivery (not order) as this is the way the computerised system operates.”
214 There continued to be detailed negotiation between the solicitors about the precise terms of the agreement, with several drafts being produced as those negotiations progressed. In the course of that negotiation, Ms Ho emailed Mr Hunter on 15 August 2001 saying:
“I was very concerned that I hadn’t had instructions from David/Aubrey since last Friday. I telephoned David a short while ago to learn that they were overwhelmed with paper trying to ‘getting across the line’ with Fresco. David especially asked me to relate to you and Andrew that we will revert in the next few days.”
215 On 12 September 2001, Mr Hunter passed on to Ms Ho Mr Reitzer’s concern that Franklins was “seemingly stepping back from the terms originally agreed”. Ms Ho replied the same day, saying that she had related the contents of the email to Mr Zelinsky, that it “does not seem correct to say that [Franklins] is stepping back from the terms originally agreed. Nor does Aubrey think it’s the case.” By that time, there was no issue of contention concerning the definition of Wholesale Price, though there was contention concerning other aspects of the proposed agreement. I take it that the perceived “stepping back” related to those other aspects.
216 As mentioned earlier, the Supply Agreement in its final form was entered on 14 September 2001.
217 Franklins took over the first of the stores it had acquired on 12 September 2001. It took over other stores progressively until December 2001.
The 4 March 2003 Letter
218 By 4 March 2003, Franklins had become dissatisfied concerning its relationship with Metcash. Mr Summers wrote to Mr Reitzer on 4 March 2003, setting out the history of the relationship, and continuing:
“During the course of subsequent discussions, you finally came to accept that Franklins would have a fundamentally different relationship with Metcash to that of its IGA group of Franchisees. The Supply Agreement was duly entered into. Certain key and fundamental principles were at the foundation of our understanding and I refer you to page 1 of our agreement, ‘Introduction’, and comment as follows, ‘Attachment I’:– 1. Buying – Franklins[’] own buying team would do all of the negotiations with manufacturers for trading terms and inter alia, these included rebates, case discounts, advertising allowances, promotional allowances, listing fees, (i.e. rolled up terms). We would monitor the volumes through our own point of sale system and Metcash would make the relevant deductions on our behalf in regards to deals and terms on the manufacturers, as a lump sum. Detail of these deductions would be provided by Franklins direct to the suppliers in order to maintain the confidentiality of the agreements with them. I refer you to Page 3 of the Agreement ‘Purchase Price’ and ‘Rebates’, ‘Attachment II’:– 2. Service Fee/Cost of ‘Box Moving’ – The cost of providing the logistics of warehousing, packing, picking and sorting would be covered by a fixed cents-per-case charge that would vary on cigarettes, chilled and ambient products. This charge would cover all of the costs incurred by Metcash to provide this function for us. Inter alia, this included the cost of capital and all assets, as well as fixed and variable costs in your operation, ie all expenses incurred by you were covered. I refer you to the Agreement Pages 3 and 4 ‘Service Fee’, ‘Attachment II & III’. ... 5. Wholesale Five – The cost price into Franklins would be Wholesale Five and this is the list price less all published discounts, trade discounts, warehouse allowances, quantity buy allowances and settlement discounts. I refer you to the Agreement, Page 4, ‘Wholesale Price’, ‘Attachment III’.” ... 7. Metcash Profit Margin – We agreed to pay Metcash a margin of profit for providing this service. Being cognizant of a retail industry that achieves a net margin of 3% (Woolworths), we set a remuneration based on 1.5% for the first 24 months of our 36 month contract, escalating to 2% in the second 12 months. This profit margin was pegged on an ad valorem basis, ie a percentage of the value of goods distributed as opposed to a margin on your costs incurred. This was the intended net income that Metcash receives for the service provided. I refer you to the Agreement, Page 12, 4.4(c), ‘Attachment IV’.”
219 The various attachments to this letter were extracts from the Supply Agreement.
220 The judge found that the terms of the 4 March 2003 letter were important in ascertaining what had been the common intention of the parties concerning price at the time they entered the Supply Agreement. He set out (at [118]) the introductory paragraph, and the points numbered 1 and 5 from the letter, that I have set out above. In so doing, he underlined the words “all of the negotiations with manufacturers for trading terms” in the first sentence of point 1, the whole of the sentence beginning “Detail of these deductions ...” in point 1, and the word “published” in point 5 of the letter.
221 The judge set out the following part of Mr Summers’ cross-examination (at [118]):
“Q. You regarded the definition of ‘wholesale price’ in the supply agreement as saying something about published discounts, didn’t you? Didn’t you? A. I have written that paragraph in that way, correct, but that paragraph is inconclusive in that it clearly lays out the supply agreement that we have.
Q. You were seeking in the selection of language that you employed in this letter in relation to Wholesale 5 price to set out as adequately as you could your understanding of what it involved?
A. That’s why I had the attachment, correct, that’s why I had the agreement page 4, wholesale price attachment 3.
Q. Your belief when you wrote the letter to Mr Reitzer on 4 March 2003 was that the discounts described in the definition of wholesale price were the published discounts?
A. No, that’s why I gave the amplification and the attachment. If I believed that had sufficed I wouldn’t have put the agreement in there.”
222 Concerning that evidence, the judge said (at [119]-[121]):
“When it was put to Mr Summers that when he wrote this letter he believed that the discounts included in Wholesale 5 were published discounts, the answers which he gave were quite unconvincing, particularly his statement that what he had written was ‘inconclusive’. He was, for once, visibly discomfited in his ability to deal with a question in cross examination. The answers which he gave were argumentative and simply did not explain why he had described the discounts as ‘published’. I gained the impression from Mr Summers’ demeanour in answering these questions that they posed a difficulty for his case which he had foreseen and that he had worked out the best answer he could give to deal with them – and that was to create a circular argument, referring the issue back to the true construction of the Supply Agreement, which was a question of law to be left to his lawyers for argument. Mr Summers had been very careful and detailed in what he had written in his letter to Mr Reitzer on 4 March 2003. The letter was not the work of a few moments. I am satisfied that when Mr Summers referred to ‘published discounts’ in the calculation of Wholesale 5 he had meant exactly what he said. In reaching the conclusion that I should not accept Mr Summers’ evidence that he did not fully understand at all times that the Wholesale Price definition in the Supply Agreement required deductions from list price only of published discounts, I take into account Mr Zelinsky’s evidence (which I have set out above) that when he saw the 17 May letter from Mr Reitzer and the definition of Wholesale Price by reference to Wholesale 5, he understood that the discounts referred to were published discounts only, that he discussed the letter with Mr Summers and that Mr Summers authorised him to sign it. I cannot accept as possible, let alone probable, that Mr Summers’ understanding of the definition of Wholesale Price was, at this time, different from Mr Zelinsky’s understanding, in the light of what Mr Summers subsequently wrote in the 4 March letter.”
223 I note that the account of Wholesale 5 contained in point 5 of Mr Summers’ letter differs from the definition of Wholesale Price in the Supply Agreement in three respects – the reference to “published” discounts, the reference to “settlement discounts” instead of “cash discounts”, and the total failure to mention “distributor allowances”. However, point 5 of Mr Summers’ letter is totally consistent in its language with the right hand column of the Laminated List.
224 Another topic of dissatisfaction, which Mr Summers dealt with in the letter of 4 March 2003, concerned the retention by Metcash of the “redistribution allowances”. The letter said that these allowances had been:
“... presented to us by you on the basis of being a ‘handful’ of suppliers that amounted to ‘five-eighths of nothing’ who have this agreement with Metcash. Given the relatively insignificant way it was presented to Aubrey, he agreed that you could continue with these arrangements that you had in place. During the course of our discussions, you informed me that redistribution allowances in fact applies to approximately 3 pages of suppliers and that in total, you had deducted approximately $2.1 million. Of this, you believe that only $600,000 was applicable to Franklins, as the balance was subject to negotiations that existed prior to your commencing supplies to Franklins. This amount of money in the first instance certainly does not represent ‘five- eighths of nothing’ and secondly, cuts right across the statement as presented as a ‘handful of suppliers’.”
225 Though not put expressly in that letter, an internal Metcash document of the time shows that it was aware that one of Franklin’s complaints was that “since signing the ... Supply Agreement Metcash have intentionally increased the Redistribution Allowance as a means of earning income on [Franklins’] volume” and that this was “the reason suppliers would not give [Franklins] more income”.
226 That internal Metcash document stated that:
“● The Redistribution Allowance is collected 368 suppliers as at 31/1/03. ● A total of 94 suppliers have been added since [Franklins] started drawing stock. ● Metcash renegotiate suppliers terms annually or as the need arises. In some instances additional income or other income such as Over and Above parties have been rolled into or shown as Redistribution Allowances. ● For the 18 months the Total Redistribution Income earned on [Franklins] volume is $2.3 million ...”. 227 The document recorded Metcash’s response to the allegation of having intentionally increased the redistribution allowance as being:
"Incorrect: this was not done as an intentional strategy – otherwise all 368 suppliers would have been changed/increased. It was only done where it suited Metcash and/or the supplier to show the money in that bucket.”
The 6 March 2003 Meeting
228 On 6 March 2003, the parties met to discuss Franklins’ dissatisfaction. The judge’s findings concerning that meeting are (at [86]):
“What was said at the meeting is disputed but, in summary and in so far as is presently relevant, Franklins asserted in strong terms that Metcash was not entitled under the Supply Agreement to retain the Redistribution Allowance. Metcash asserted precisely the opposite. However, by the conclusion of the meeting Mr Reitzer agreed to refund to Franklins the Redistribution Allowance which had been collected to date in respect of goods ordered from suppliers for on-sale to Franklins. Mr Reitzer confirmed this agreement by a letter to Mr Zelinsky on 7 March 2003. In that letter, Mr Reitzer made it clear that he had agreed to the refund, not because he believed that Franklins was entitled to it under the Supply Agreement, but rather as a concession to preserve the goodwill and continuity of the business relationship between Metcash and Franklins.”
229 As well, it was agreed that Metcash would draft a letter to suppliers advising that the Redistribution Allowance will not apply to Franklins’ volume from 1 May 2003, and that Redistribution Allowance collected on Franklins’ volume up to 30 April 2003 would be reimbursed.
230 The judge held that the consensus reached on 6 March 2003 that Metcash would refund the Redistribution Allowance that had been collected to date did not amount to a variation of the Supply Agreement, because there was no contractual intention to vary the Supply Agreement. He found (at [88]):
“It is quite clear from the undisputed evidence that there was no common intention of the parties on 6 March 2003 to amend the Supply Agreement by whatever agreement had produced the refund to Franklins of the Redistribution Allowance. Franklins’ stated position was that it was already entitled to the Redistribution Allowance under the terms of the Supply Agreement. Metcash’s stated position was that it was making the refund purely as a gesture of goodwill and for no other consideration.”
231 While the evidence does not enable this court to make a finding about what the “central/redistribution allowance” shown on the Pie Chart covered, the Metcash witnesses spoke as though, unlike some of the other items on the Pie Chart that listed together discrete types of benefit, it was just a single type of benefit. If that is so, a very approximate measure of its significance can be gained from the fact that the “central/redist” benefit on the Pie Chart was 3.15% of the total amount of benefits shown on the chart. On that basis, the items other than centralisation/redistribution allowance that were identified on the Laminated List as ones that Metcash would retain were 1.72% of the total amount shown on the Pie Chart.
232 However, this measure of the significance of the benefits is far from reliable, for several reasons. One is that the Pie Chart related to Metcash’s historical data not including its sales to Franklins. Another is that the purchases of particular items that Franklins made might not have been proportionate to the proportions those items bore to each other in the Pie Chart, and different items might have earned confidential benefits at different rates to each other. Another is that the amounts paid for particular benefits might have changed during the time that Franklins was purchasing from Metcash (as appears to have happened with the redistribution allowance). The only conclusion I would draw from the 1.72% figure is that it provides some reason to believe that the benefits that the Laminated List said Metcash could retain, other than the central/redistribution allowance, are not so small that they are insignificant.
Termination
233 In January 2004, Franklins gave Metcash 12 months notice of termination of the Supply Agreement, and 31 January 2005 the Supply Agreement terminated. Franklins started the present litigation within days of the termination.
PART B – CONSTRUCTION OF THE AGREEMENT
234 Though the issue concerning construction of the agreement arises on the cross- appeal rather than the appeal, it is logical to deal with it first. I shall refer to the provision in clause 1.1 of the Supply Agreement commencing“Wholesale Price for a Product means ...” (set out in para [97] above) as the Disputed Words.
The Trial Judge’s Reasoning
235 It was question number seven, of the 21 questions that the parties agreed were appropriate for the judge to address, that raised the construction issue. The particular question posed was:
“Whether upon the true construction of the formal Supply Agreement [Franklins] was obliged to pay a Purchase Price that was calculated by deducting any applicable Case Deals and Ullage Allowances from and adding Profit Margins, Service Fees and any applicable GST to a Wholesale Price being: (a) [Metcash]’s ‘Wholesale 5’ price; (b) the Supplier’s wholesale list price for the Product in the State or Territory in which the Business was located at the time of [Metcash]’s delivery of that Product to [Franklins] less ‘warehouse allowances’ and ‘trade, distributor and cash discounts’ provided to [Metcash] by that Supplier; or (c) the Supplier’s wholesale list price of the Product in the State or Territory in which the Business was located at the time of [Metcash]’s delivery of that Product to [Franklins] less all ‘allowances’ and ‘discounts’ (including rebates) provided to [Metcash] by that Supplier.”
236 The judge held (at [77]) that, on its proper construction, Wholesale Price as defined “requires the deduction from the suppliers’ list price of all allowances and discounts received by Metcash, whether published or confidential.” Thus, he held that the correct answer to question 7 was that found in paragraph 7(c).
237 The formal order of the Court, made on 4 May 2007, answered question 7 by saying:
“The Court answers this question by holding that, upon the true construction of the Supply Agreement, the plaintiff was obliged to pay a Purchase Price that was calculated by deducting any applicable Case Deals and Ullage Allowances and adding profit Margins, Service Fees and any applicable GST to the Wholesale Price being the Supplier’s wholesale list price of the Product in the State or Territory in which the Business was located at the time of the defendant’s delivery of that Product to the plaintiff less all ‘allowances’ and ‘discounts’ (including rebates) provided to the defendant by that Suppler and by further holding that a declaration to that effect should be made. The Court notes that the above holding reflects the construction propounded in sub-par (c) of Question 7.”
238 Metcash contends that the judge was in error in reaching this construction, and ought to have held that the proper construction required Metcash to deduct only:
“... the following published discounts (if available): trade discounts, warehouse allowances, distributor allowances, quantity buy allowances and settlement discounts.”
Ambiguity Necessary Before Using Context in Interpretation?
239 Mr Simpkins SC, counsel for Metcash, submits that construction should not be carried out by a process of considering the Disputed Words alone, nor even by a process of considering the Disputed Words in the context of the entire Supply Agreement. Rather, he submits that the construction should be carried out in light of the context and purpose of the transaction known to both the parties. Further, he submits that it is not necessary for a court to find that the language of a contract is ambiguous before considering the meaning that may be revealed in the context and purpose of the transaction known to both the parties. The forensic point of that last submission is to avoid having to contend with an argument to the following effect:
(1) In its clear ordinary meaning, when the definition of “Wholesale Price for a Product” says that it means “Metcash’s ‘Wholesale 5’ price for that Product, being X”, it is saying that Metcash’s wholesale price for that Product is the same as X. (2) In that definition X is, in the ordinary meaning of the language, the supplier’s wholesale list price, less “all allowances and discounts”, and the natural meaning of that language is “all allowances and discounts whatever”. (3) The words in parenthesis, preceded by “such as” are clearly merely providing an example of what can count as “allowances and discounts”, and do not limit the generality of the expression “all allowances and discounts”. (4) That being the ordinary meaning of the words of the definition, and there being no ambiguity in it, there is no occasion to look to the context to assist in construction.
Assistance from Context – Law
240 The origin in recent decades of reliance on context as an aid to construction is the speech of Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381; [1971] 3 All ER 237 (UKHL), agreed in by all other members of the House who sat on that appeal. His Lordship said, at WLR 1383-4; All ER 239:
“The time has long passed when agreements, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations.”
241 Lord Wilberforce summarised his view in Prenn v Simmonds at WLR 1385; All ER 241:
“... evidence of negotiations, or of the parties’ intentions, and a fortiori of [one party’s] intentions, ought not to be received, and evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the ‘genesis’ and objectively the ‘aim’ of the transaction.”
242 Lord Wilberforce gave some explanation of that latter phrase in Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 at 996; [1976] 3 All ER 570 at 574 (UKHL), saying:
“... when one is speaking of aim, or object, or commercial purpose, one is speaking objectively of what reasonable persons would have in mind in the situation of the parties.” Codelfa
243 In Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337, Mason J (with whom Stephen and Wilson JJ agreed on this issue) discussed the circumstances in which extrinsic evidence may be used to aid construction of a contract. His Honour’s account is in terms that might be read as containing, in different parts of his judgment, some internal tension.
244 In seeking to understand that possible internal tension, it is useful to recall the question that Mason J was addressing in Codelfa. It concerned whether a term should be implied in a building contract to the effect that, if uninterrupted progress of the work were to be inhibited by an injunction, the principal would grant a reasonable extension of time to the builder. An alternative implied term (that Ash J had found should be implied) was that the works could be carried out on a three- shift continuous basis six days per week and without restriction as to Sunday, and that no injunction or other restraint order would or could be granted against the contract in relation to noise or other nuisance arising out of the carrying out of the works on that basis. It was because implication of a term in a contract as an ad hoc implication (rather than because it is a legal incident of a particular class of contract) is itself “an exercise in interpretation, though not an orthodox instance” (per Mason J at 345) that Mason J came to be considering principles of construction of contracts at all.
245 One of the reasons why Codelfa was not an orthodox instance of interpretation was because whether a term is implied into a contract by ad hoc implication is restrained by the tests in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283 (UKPC). The specific question that Mason J was addressing in Codelfa was whether, in the application of those tests, “it is legitimate to take into account the common beliefs of the parties as developed and manifested during their antecedent negotiations” (at 347).
246 Mason J’s discussion commenced, at 347, by referring to:
“... the theory which came to prevail in English legal thinking in the first half of [the twentieth] century that the words of a contract are ordinarily to be given their plain and ordinary meaning. Recourse to extrinsic evidence is then superfluous.”
247 His Honour continued, at 348:
“On the other hand, it has frequently been acknowledged that there is more to the construction of the words of written instruments than merely assigning to them their plain and ordinary meaning – see, for example, the remarks of Knox CJ in Life Insurance Co of Australia Ltd v Phillips [1925] HCA 18; (1925) 36 CLR 60 at p 69. This has led to a recognition that evidence of surrounding circumstances is admissible in aid of the construction of a contract.” 248 The “remarks of Knox CJ” in Life Insurance Co of Australia Ltd v Phillips [1925] HCA 18; (1925) 36 CLR 60 at 69 there referred to are, I take it, the statement that:
“... experience shows that the words of many, if not of most, documents inter partes are reasonably capable of more than one meaning.”
249 Mason J went on to discuss the speech of Lord Wilberforce in Prenn v Simmonds, and the cases on which Lord Wilberforce had relied in that speech. Mason J (at 350) noted a difference in view that had emerged in the House of Lords in Greater Western Railway and Midland Railway v Bristol Corporation (1918) 87 LJ Ch 414. There,
“... Lord Atkinson and Lord Shaw stated that evidence of surrounding circumstances was inadmissible except to resolve an ambiguity, that is, where the words are susceptible of more than one meaning ... Their Lordships took the view that evidence of surrounding circumstances was not admissible to raise an ambiguity for in their opinion that would be to contradict or vary the words of the written document, the assumption being that in the overwhelming majority of cases the written words will have a fixed meaning. Lord Wrenbury thought otherwise, stating that in every case of construction extrinsic evidence is receivable to raise and resolve an ambiguity.” (citations omitted)
250 Mason J, at 350, noted:
“Lord Wilberforce in Prenn did not discuss these competing views, perhaps because the difference between them is more apparent than real.”
251 Mason J went on to refer to the decision of Lord Wilberforce in Reardon Smith that it was legitimate to have regard to surrounding circumstances, and Lord Wilberforce’s statement (at WLR 995-6; All ER 574) that:
“In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.”
252 At 351, Mason J quoted the conclusion of Lord Wilberforce in Reardon Smith at WLR 997; All ER 575, that:
“... what the court must do must be to place itself in thought in the same factual matrix as that in which the parties were.” 253 After quoting further from Reardon Smith, Mason J, at 351 quoted from the joint judgment of Stephen J, himself and Jacobs J in DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423 at 429, that:
“A court may admit evidence of surrounding circumstances in the form of ‘mutually known facts’ ‘to identify the meaning of a descriptive term’ and it may admit evidence of the ‘genesis’ and objectively the ‘aim’ of a transaction to show that the attribution of a strict legal meaning would ‘make the transaction futile’ (Prenn v Simmonds [1971] 1 WLR 1381, at p 1384; [1971] 3 All ER 237, at p 240).”
254 He also went on to refer to his own judgment in Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596 at 605-6, concurred in by other members of the court (Barwick CJ, Gibbs, Stephen and Aickin JJ), and said of it (at 352 of Codelfa):
“Having considered the topic in more detail on this occasion I see no reason to qualify what I then said.”
255 Part of what Mason J there said in Secured Income, at 606, was:
“The respondent also sought to rely on the oral testimony given by officers of the appellant and the respondent as to what was said and done during the course of negotiations leading up to the making of the contract, with a view to demonstrating that the parties had ‘commercial’ leases in mind. This was said to be evidence of surrounding circumstances to which recourse could be had in interpreting the contract. In truth the evidence is not evidence of surrounding circumstances; it is evidence of the antecedent oral negotiations and expectations of the parties and as such it cannot be used for the purpose of construing the words of a written contract intended by the parties to comprehensively record the terms of the agreement which they have made. As Lord Wilberforce said in Prenn v Simmonds [1971] 1 WLR 1381, at p 1385; [1971] 3 All ER 237, at 240: ‘... evidence of negotiations, or of the parties’ intentions ... ought not to be received, and evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the ‘genesis’ and objectively the ‘aim’ of the transaction. As to the circumstances, and the object of the parties, there is no controversy in the present case. The agreement itself, on its face, almost supplies enough, without the necessity to supplement it by outside evidence.’ The comment by his Lordship in the last paragraph which I have quoted has equal application to the present case where the provisions of the contract itself so amply demonstrate that the purpose of the parties was to provide against the possibility that the respondent’s investment return on the purchase price was less than the figure stipulated.” 256 It was only after that discussion that Mason J in Codelfa expressed his conclusion at 352:
“The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed. It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification. Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties’ presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.”
257 The source of the internal tension that might be read in the judgment of Mason J in Codelfa is that he starts out by the approach of Lord Wilberforce in Prenn v Simmonds and Reardon Smith. Lord Wilberforce’s approachpresupposes that, in carrying out the task of interpretation, the court already has before it those facts that enable it to place itself in thought in the same factual matrix as that in which the parties were – ie, the context. The task of construction is then the objective task of ascertaining what reasonable parties, placed in that situation, would be taken to mean by the words they used in their contract. Making a decision about whether the words are ambiguous – that is, that they might have meant something different if used by other parties, in a different factual context, or even that the words have more than one meaning when considered in isolation – is not part of the process. The role given to ambiguity in the statement by Mason J of the “true rule” at 352 is not consistent with Lord Wilberforce’s approach.
258 Another problem in understanding this judgment is that, when Mason J comes to state the “true rule” at 352 he states it in terms of when evidence of surrounding circumstances is admissible. The word “admissible” is itself ambiguous, even when used in a legal context. It can refer to a rule of evidence, under which, if evidence is not admissible, it is neither received nor considered by the court. Alternatively, it can mean that evidence that is not“admissible” is evidence that is not legitimately able to be used by a court in some particular reasoning process. The use by Mason J of the expression “will not be receivable” in the third sentence of his statement of the “true rule” at 352 rather suggests that he had in mind admissibility as a rule of evidence. One would draw the same inference from the fact that he introduced his discussion of whether it was legitimate to take into account “the common beliefs of the parties as developed and manifested during their antecedent negotiations”, at 347, by saying:
“The broad purpose of the parol evidence rule is to exclude extrinsic evidence (except as to surrounding circumstances) including direct statements of intention (except in cases of latent ambiguity) and antecedent negotiations, to subtract from, add to, vary or contradict the language of a written instrument.” (citation omitted)
259 He returned to mention the parol evidence rule in the second of the paragraphs I have quoted at para [256] above.
260 If it is correct that Mason J’s statement of the “true rule” says what evidence may be received by the court at all, then, given that decisions about admissibility need to be made in the course of a trial, usually ex tempore and often before all the available evidence has been received and considered, the decision about whether the language is ambiguous might need to be made before the court has had the opportunity to place itself in thought in the same factual matrix as that in which the parties were.
261 If “admissible” was not intended to refer to the laws of evidence, Mason J’s recognition that “there is more to the construction of the words of written instruments than merely assigning to them their plain and ordinary meaning”, his citation of Knox CJ in Life Insurance Co of Australia Ltd v Phillips at 69, and his tentative view that perhaps the difference between the views of Lords Atkinson and Shaw, on the one hand, and Lord Wrenbury on the other in Greater Western Railway and Midland Railway v Bristol Corporation was “more apparent than real” suggests that he had a readiness to recognise ambiguity in language. His reference to “the theory which came to prevail in English legal thinking in the first half of [the twentieth] century that the words of a contract are ordinarily to be given their plain and ordinary meaning” shows no sign of himself embracing that “theory”. That that“theory” is inconsistent with the law expounded, after the first half of the twentieth century, in England in Prenn v Simmonds and Reardon Smith likewise suggests a readiness to recognise ambiguity in language. However, a readiness to recognise ambiguity in language might result in a lessening of the practical importance of the difference between what is inherent in the views of Lord Wilberforce, and what is inherent in Mason J’s statement of the“true rule”, but does not remove it completely.
Developments in England
262 In England, any doubts as to whether, after Prenn v Simmonds and Reardon Smith, ambiguity was needed before surrounding circumstances could be looked at when interpreting a written contract were dispelled by the decision of the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; [1998] 1 WLR 896 at 912-3; [1997] UKHL 28; [1998] 1 All ER 98 at 114-5. Lord Hoffmann (with whom Lords Goff of Chieveley, Hope of Craighead and Clyde agreed), in what has become a landmark restatement of the principles of contractual interpretation, stated five principles relevant to the construction of a written contract. He commenced his discussion by saying (at WLR 912; All ER 114):
“I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381, 1384–1386 and Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of ‘legal’ interpretation has been discarded.”
263 His Lordship then summarised five principles of contractual interpretation (at WLR 912-13; All ER 114-15), the first of which was:
“(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.”
264 He elaborated further in the fourth and fifth principles:
“(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] UKHL 19; [1997] AC 749. (5) The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191, 201: ‘if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.’ ”
265 The approach to interpretation outlined in the first principle leaves no room for any requirement of a preliminary finding of ambiguity in the words of the document before the surrounding circumstances can be examined. As Arden LJ said in Static Control Components (Europe) Ltd v Egan [2004] EWCA Civ 392; [2004] 2 Lloyd’s Rep 429 at 435 [27], “that passage makes it clear that there are not two possible constructions in any given situation, namely a purely linguistic one and one in the light of the factual background, but only one, the true interpretation.” Lord Hoffmann expressly disavows any suggestion that the meaning of the contract can be examined without reference to the surrounding circumstances in his fourth principle, emphasising that the meaning of a written contract is not the same as the meaning of the words in isolation.
266 This approach to interpretation “by which any serious utterance would be interpreted in ordinary life” was examined by Lord Hoffmann in Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] UKHL 19; [1997] AC 749 (delivered less than a month prior to Investors Compensation). Although that case concerned the construction of a notice to determine a lease, Lord Hoffmann looked more generally at “the way we interpret utterances in everyday life”, saying (at 774D-F):
“It is a matter of constant experience that people can convey their meaning unambiguously although they have used the wrong words. We start with an assumption that people will use words and grammar in a conventional way but quite often it becomes obvious that, for one reason or another, they are not doing so and we adjust our interpretation of what they are saying accordingly. We do so in order to make sense of their utterance: so that the different parts of the sentence fit together in a coherent way and also to enable the sentence to fit the background of facts which plays an indispensable part in the way we interpret what anyone is saying.”
267 He contrasted the “old rule about admissibility of extrinsic evidence to construe legal documents” “that if the words of the document were capable of referring unambiguously to a person or thing, no extrinsic evidence was admissible to show that the author was using them to refer to something or someone else” (at 776), saying, at 778:
“I think that the rule is not merely capricious but also, for reasons which I need not develop at length, incoherent. It is based upon an ancient fallacy which assumes that descriptions and proper names can somehow inherently refer to people or things. In fact, of course, words do not in themselves refer to anything; it is people who use words to refer to things.”
268 He made a similar point in Charter Reinsurance Co Ltd v Fagan [1997] AC 313 at 392, saying “It is artificial to start with an acontextual preconception about the meaning of the words and then see whether that meaning is somehow displaced.”
269 It is notable that in Investors Compensation, Lord Hoffmann did not purport to depart from any earlier principle, or lay down any new principles of contractual construction. Rather, the principles which he summarised were said to have come from the speeches of Lord Wilberforce in Prenn v Simmonds and Reardon Smith. Nevertheless, in England, Investors Compensation has been said to have “made crystal clear that an ambiguity need not be established before the surrounding circumstances may be taken into account” (per Lord Steyn in R (Westminster City Council) v National Asylum Support Service [2002] UKHL 38; [2002] 1 WLR 2956; [2002] 4 All ER 654at [5]). This was recognised by Lord Hoffmann himself in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] AC 1101 at 1119 [37].
270 The formulation of the first principle was confirmed soon after by the House of Lords in Bank of Credit and Commerce International SA v Ali [2001] UKHL 8; [2002] 1 AC 251 at 259 [8] (per Lord Bingham of Cornhill, Lord Browne- Wilkinson agreeing), 265 [26] (per Lord Nicholls of Birkenhead), 269 [39] (per Lord Hoffmann) and 281 [78] (per Lord Clyde). Lord Bingham said:
“... the court reads the terms of the contract as a whole, giving the words used their natural and ordinary meaning in the context of the agreement, the parties’ relationship and all the relevant facts surrounding the transaction so far as known to the parties.”
271 The remaining two principles in Investors Compensation concerned the scope of the admissible background and surrounding circumstances. The third noted the exclusion of the pre-contractual negotiations of the parties (a rule which has been recently confirmed in England by the House of Lords in Chartbrook v Persimmon Homes at 1120-1 [41] per Lord Hoffmann, with whom Lords Hope of Craighead (at 1109 [2]), Walker of Gestingthorpe (at 1136 [97]) and Baroness Hale of Richmond (at 1137 [101]) agreed; and at 1128-9 [69]-[70] per Lord Rodger of Earlsferry) and declarations of their subjective intentions. The second principle stated the scope of the admissible background as follows:
“(2) The background was famously referred to by Lord Wilberforce as the ‘matrix of fact,’ but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception [of previous negotiations of the parties and declarations of their subjective intent], it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.”
272 Lord Hoffmann qualified this statement in BCCI v Ali at 269 [39], saying:
“when ... I said that the admissible background included ‘absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man’, I did not think it necessary to emphasise that I meant anything which a reasonable man would have regarded as relevant. I was merely saying that there is no conceptual limit to what can be regarded as background.” (original emphasis)
273 In terms of new developments in the law relating to the interpretation of contracts in the United Kingdom, Investors Compensation can be said to have decided two points. The first, as acknowledged by Lord Hoffmann inChartbrook v Persimmon Homes at 1119 [37], was “that it was not necessary to find an ‘ambiguity’ before one could have any regard to background” (which emerges from the first principle, and to a lesser extent the fourth and fifth), and the second, as explained in BCCI v Ali at 269 [39], was that the scope of the admissible background or surrounding circumstances included “anything which a reasonable man would have regarded as relevant”, and that “there is no conceptual limit to what can be regarded as background”.
Maggbury
274 In Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181 at 188 [11], Gleeson CJ, Gummow and Hayne JJ (with whom Kirby J at 205 [62] and Callinan J at 212 [89] agreed generally on this point) adopted the first principle in Investors Compensation, saying:
“Interpretation of a written contract involves, as Lord Hoffmann has put it: ‘the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.’ ”
275 A footnote to that passage (fn 11) gives a citation to Investors Compensation and then says:
“See also the remarks of Mason J in Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337 at 350-352, and of Lord Bingham of Cornhill in Bank of Credit and Commerce International SA v Ali [2001] UKHL 8; [2002] 1 AC 251 at 259.”
276 This apparent adoption of the first principle of Investors Compensation would seem to carry with it the rejection of any need to find an ambiguity in the language of the contract before the surrounding circumstances could be looked to. This is confirmed by the citation from the speech of Lord Bingham in BCCI v Ali (set out at para [270] above), which is to the same effect. It is notable that the reference to Codelfa is not just to page 352 and the statement of the “true rule”, but to the wider discussion (commencing with the observations concerning the difference in view in Greater Western Railway and Midland Railway v Bristol Corporation, set out at para [249] above), which includes the quotations from Reardon Smith (set out at paras [251] and [252] above).
Royal Botanic Gardens
277 In Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 76 ALJR 436; 186 ALR 289, the High Court construed a provision for periodical increases in the rent payable under a 50 year lease of the underground stratum that is the site of the Domain parking station and footway in Sydney. The provision in question was to the effect that the rent would be as determined by the lessors, the Trustees of the Royal Botanic Gardens, and that:
“(iv) in making any such determination the Trustees may have regard to additional costs and expenses which they may incur in regard to the surface of the Domain above or in the vicinity of the parking station and the footway and which arise out of the construction operation and maintenance of the parking station by the Lessee.”
278 The questions of interpretation concerned whether in deciding the rent the Trustees could have regard to any matters other than the “additional costs and expenses”, and precisely what those “additional costs and expenses”were additional to. Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ at [9] decided that, in not making clear these matters, the clause in question was ambiguous. It is, with respect, hard to see how the contrary could have been argued, even if one’s attention was confined solely to the language of the clause in dispute. Their Honours said, at [9]-[10]:
“... The resolution of the ambiguity requires the application of settled principles of construction. In Codelfa, Mason J (with whose judgment Stephen J and Wilson J agreed) referred to authorities which indicated that, even in respect of agreements under seal, it is appropriate to have regard to more than internal linguistic considerations and to consider the circumstances with reference to which the words in question were used and, from those circumstances, to discern the objective which the parties had in view. In particular, an appreciation of the commercial purpose of a contract (Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 at 995-6; [1976] 3 All ER 570 at 574): ‘... presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.’ Such statements exemplify the point made by Brennan J in his judgment in Codelfa [1982] HCA 24; (1982) 149 CLR 337 at 401: ‘The meaning of a written contract may be illuminated by evidence of facts to which the writing refers, for the symbols of language convey meaning according to the circumstances in which they are used.’” (some citations omitted)
279 I observe that it was to the principle that Mason J adopted in Codelfa at 350 from Reardon Smith that their Honours turned for a statement of principle, not to his Honour’s statement of the “true rule” at 352. While the High Court in Royal Botanic Gardens held that there was ambiguity in the lease there in question, that needed to be resolved by “settled principles of construction”, they did not say that it was only in circumstances of ambiguity that resort could be had to contextual matters as an aid to construction.
280 However, at [39] their Honours said:
“Two further matters should be noticed. First, reference was made in argument to several decisions of the House of Lords, delivered since Codelfa but without reference to it. Particular reference was made to passages in the speeches of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; [1998] 1 WLR 896 at 912-13; [1997] UKHL 28;[1998] 1 All ER 98 at 114-115 and of Lord Bingham of Cornhill and Lord Hoffmann in Bank of Credit and Commerce International SA v Ali [[2002] 1 AC 251 at 259, 269] cf Melanesian Mission Trust Board v Australian Mutual Provident Society [1997] 1 NZLR 391 at 394-5; Yoshimoto v Canterbury Golf International Ltd [2001] 1 NZLR 523 at 542, in which the principles of contractual construction are discussed. It is unnecessary to determine whether their Lordships there took a broader view of the admissible ‘background’ than was taken in Codelfa or, if so, whether those views should be preferred to those of this Court. Until that determination is made by this Court, other Australian courts, if they discern any inconsistency with Codelfa, should continue to follow Codelfa:Garcia v National Australia Bank Ltd [1998] HCA 48; (1998) 194 CLR 395 at 403 [17].”
281 Their Honours do not there identify any particular part of Codelfa as identifying “the admissible ‘background’”, that Australian courts should follow unless instructed otherwise by the High Court. One open view is that they were referring to the principles that they themselves quoted in para [10] of their judgment, but it cannot be said that the judgment in Royal Botanic Gardens makes it clear that that view is correct.
282 However, it is fairly clear that the note of caution sounded by the High Court in Royal Botanic Gardens at [39] was not against the first aspect of Investors Compensation (confirmed in BCCI v Ali and adopted by the High Court in Maggbury) which rejected a requirement of ambiguity before examining the surrounding circumstances at the time of the execution of the contract. Rather, it seems that the High Court is saying that if there is any conflict between Codelfa and the second principle in Investors Compensation (as explained in BCCI v Ali), Codelfa should be followed (see Lewison, The Interpretation of Contracts, 4th ed (2007) Sweet & Maxwell, at [1.04], p 13).
283 There is reference in the majority judgment in Royal Botanic Gardens to the passage in Codelfa at 352 in two separate places. One is in para [9] in an account of the reasoning of Fitzgerald JA in the Court of Appeal. The other is in para [38], as authority for it being a reason against the implication of a term that “an implied term in the form favoured by the primary judge and urged by the appellant in this court would contradict the express terms of cl 4(b).” Neither of those references expressly endorse Mason J’s statement in Codelfa at 352 that:
“... evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning.”
284 In these circumstances, if one had perceived an internal tension in the reasoning of Mason J in Codelfa, Royal Botanic Gardens would not remove it.
285 A practical example of the sort of contextual matters that can be taken into account in construing a contract is given in Royal Botanic Gardens at [30]:
“... the parties to the transaction were two public authorities, in one of which there had been vested land long dedicated for public recreation; the purpose of their transaction was the provision of a further public facility, in the form of the parking station and the footway, but without disturbing the availability of the surface for continued public recreation and without providing for the obtaining by one public authority of commercial profit at the expense of the other; it was the Lessee which was responsible for the substantial cost of construction of the new facility and the concern of the parties had been to protect the Lessor from financial disadvantage suffered from the transaction, namely additional expense which the Lessor would or might incur immediately or in the future.”
High Court Cases After Royal Botanic Gardens
286 However, later decisions of the High Court have given clear guidance concerning when and how surrounding circumstances may be used as an aid to construction of a contract. In so doing, the High Court has not considered whether there was indeed an internal tension in the judgment of Mason J in Codelfa, nor have the judges stated in so many words that any part of Codelfa is no longer to be followed. Rather, by restatement of principle, the Court has made irrelevant any future consideration of whether there was any internal tension in Mason J’s judgment in Codelfa, or precisely how his Honour’s “true rule” should be applied.
287 In the joint judgment of Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ in Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at 462 [22], their Honours said that the task of construction involved in that case was:
“... to be determined by what a reasonable person in the position of [the contracting party suing on the contract] would have understood them to mean: Gissing v Gissing [1970] UKHL 3; [1971] AC 886at 906; Christopher Hill Ltd v Ashington Piggeries Ltd [1972] AC 441 at 502; ABC v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540. That requires consideration, not only of the text of the documents, but also the surrounding circumstances known to [the contracting parties], and the purpose and object of the transaction: Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; [1998] 1 WLR 896; [1998] 1 All ER 98. In Codelfa Constructions Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 350 (see further Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 76 ALJR 436 at 445 [39]; [2002] HCA 5; 186 ALR 289 at 301), Mason J set out with evident approval the statement by Lord Wilberforce in Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 at 995-996; [1976] 3 All ER 570 at 574: ‘In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.’”
288 The High Court’s statement of principle in Pacific Carriers v PNB Paribas was made using the names of the parties involved in that case, rather than the general expressions with which I have replaced those names in the square brackets in the above quote. However, the Court later made clear its intention to state the principle in general terms, by the joint judgment of Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at 179 [40]:
“It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction: PacificCarriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at 461-462 [22].”
289 A recent example of construction by reference to context appears in the joint judgment of Gummow, Hayne and Kiefel JJ in Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 83 ALJR 196; 251 ALR 322. The question arose concerning a loan agreement that required the borrower to make partial repayments of principal at certain stipulated times, to pay interest at certain stipulated times, and that gave the lender an option to accelerate the obligation to repay the principal “if the Borrower defaults in the due and punctual payment of interest ... or any repayment instalment...”. By a related indemnity agreement, an indemnifier agreed to indemnify the borrower against its liability under the loan agreement in certain circumstances, one of which was that the borrower had “punctually paid” the interest and instalments of principal. In fact the borrower had made some payments of interest and repayments of principal on dates later than the agreed dates, but the lender had accepted the payments and not exercised its option to accelerate repayment of the principal sum. In that context, the borrower argued, and the indemnifier denied, that the precondition for operation of the indemnity agreement had been satisfied. In holding that there had been no punctual payment, Gummow, Hayne and Kiefel JJ at [38] said:
“Further, the loan agreements and the indemnity agreements must be construed in their commercial context. Each was an important constituent document in a publicly marketed investment scheme. It is not readily to be supposed that documents of that kind are to be given meanings other than the meaning ordinarily conveyed by the words used. As Spigelman CJ recorded, (Gardiner v Agricultural and Rural Finance Pty Ltd [2008] Aust Contract Reports ¶ 90-274 (90,335) at [74]–[89]), the availability of the taxation advantages said to attach to investment in the scheme was seen by the promoters of the scheme and the Australian Taxation Office as depending upon such matters as whether those who invested were engaging in a commercial venture attended by risks of the kind ordinarily encountered in business and, in particular, whether the loans could be described as ‘non-recourse’. That being the position, there is even less reason to suppose that the liability of the Borrower to repay money lent should depend upon the unfettered discretion of the Lender. Yet in effect that is the construction urged by the Borrower. It is a construction that should be rejected.”
Ambiguity plays no role in this reasoning.
290 Similarly, in Park v Brothers [2005] HCA 73; (2005) 80 ALJR 317; 222 ALR 421 at [39], a joint judgment of Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ construed a contractual provision by reference to surrounding circumstances without first making a finding of ambiguity in the contractual provision.
291 In International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151 at 160 [8], Gleeson CJ said:
“In giving a commercial contract a business like interpretation, it is necessary to consider the language used by the parties, the circumstances addressed by the contract, and the objects which it is intended to secure: McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at 589 [22]; Lake v Simmons [1927] AC 487 at 509 per Viscount Sumner. An appreciation of the commercial purpose of a contract calls for an understanding of the genesis of the transaction, the background, and the market: Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at 462 [22]; Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 at 995–6; [1976] 3 All ER 570 at 574; Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337 at 350. This is a case in which the court’s general understanding of background and purpose is supplemented by specific information as to the genesis of the transaction. The agreement has a history; and that history is part of the context in which the contract takes its meaning: Singh v The Commonwealth [2004] HCA 43; (2004) 222 CLR 322 at 331–8 [8]–[23]. Before considering that history, it is necessary to explain, by reference to the text, how the issue of construction arises.”
Ambiguity plays no role in that reasoning either.
292 The joint judgment of Gummow, Hayne, Heydon, Crennan and Kiefel JJ in IATA v Ansett at 174 [53] reiterated the principle stated in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd at 179 [40] (quoted at [288] above).
Comparison with Statutory Interpretation
293 Concerning the topic of statutory interpretation, the High Court has made clear that context is a legitimate aid to interpretation, and may be resorted to even before ambiguity in the text is found. In CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408, Brennan CJ, Dawson, Toohey and Gummow JJ said:
“... the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity may be thought to arise...”
294 McHugh J endorsed that passage in Newcastle City Council v GIO General Ltd [1997] HCA 53; (1997) 191 CLR 85 at 112-13. Toohey, Gaudron and Gummow JJ also referred to it at 99 (though to make a different point to one concerning ambiguity), and it has been reiterated by McHugh ACJ, Gummow and Hayne JJ in Network Ten Pty Ltd v TCN Channel Nine Pty Ltd [2004] HCA 14; (2004) 218 CLR 273 at 280-1 [11]. See also K-Generation Pty Ltd v Liquor Licensing Court [2009] HCA 4; (2009) 237 CLR 501 at 521 [52] per French CJ.
295 Similarly, in Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355 at 381 [69], McHugh, Gummow, Kirby and Hayne JJ said:
“The primary object of statutory construction is to construe the relevant provision so that it is consistent with the language and purpose of all the provisions of the statute (see Taylor v Public Service Board (NSW) [1976] HCA 36; (1976) 137 CLR 208 at 213, per Barwick CJ). The meaning of the provision must be determined ‘by reference to the language of the instrument viewed as a whole’:Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation [1981] HCA 26; (1981) 147 CLR 297 at 320, per Mason and Wilson JJ. See also South West Water Authority v Rumble’s[1985] AC 609 at 617, per Lord Scarman, ‘in the context of the legislation read as a whole’. In Commissioner for Railways (NSW) v Agalianos [1955] HCA 27; (1955) 92 CLR 390 at 397, Dixon CJ pointed out that ‘the context, the general purpose and policy of a provision and its consistency and fairness are surer guides to its meaning than the logic with which it is constructed’. Thus, the process of construction must always begin by examining the context of the provision that is being construed: Toronto Suburban Railway Co v Toronto Corporation [1915] AC 590 at 597; Minister for Lands (NSW) v Jeremias [1917] HCA 41; (1917) 23 CLR 322 at 332; K & S Lake City Freighters Pty Ltd v Gordon & Gotch Ltd [1985] HCA 48; (1985) 157 CLR 309 at 312, per Gibbs CJ; at 315, per Mason J; at 321, per Deane J.”
296 These more recent views of the High Court are in accord with those that Mason J had earlier expressed in his dissenting judgment in K & S Lake City Freighters Pty Ltd v Gordon & Gotch Ltd [1985] HCA 48; (1985) 157 CLR 309 at 315 where his Honour said: “... to read the section in isolation from the enactment of which it forms a part is to offend against the cardinal rule of statutory interpretation that requires the words of a statute to be read in their context:Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation [1981] HCA 26; (1981) 147 CLR 297, at pp 304, 319-320; Attorney-General v Prince Ernest Augustus of Hanover[1957] AC 436, at pp 461, 473. Problems of legal interpretation are not solved satisfactorily by ritual incantations which emphasize the clarity of meaning which words have when viewed in isolation, divorced from their context. The modern approach to interpretation insists that the context be considered in the first instance, especially in the case of general words, and not merely at some later stage when ambiguity might be thought to arise. In Prince Ernest Augustus of Hanover, Viscount Simonds said ([1957] AC, at p 461): ‘... words, and particularly general words, cannot be read in isolation: their colour and content are derived from their context. So it is that I conceive it to be my right and duty to examine every word of a statute in its context, and I use ‘context’ in its widest sense ... as including not only other enacting provisions of the same statute, but its preamble, the existing state of the law, other statutes in pari materia, and the mischief which I can, by those and other legitimate means, discern the statute was intended to remedy.’ In Re Bidie [1949] Ch 121 at 130; [1948] 2 All ER 995, at p 998, Lord Greene MR said: ‘In the present case, if I might respectfully make a criticism of the learned judge's method of approach, I think he attributed too much force to what I may call the abstract or unconditioned meaning of the word ‘representation’. ... The real question which we have to decide is: What does the word mean in the context in which we find it here, both in the immediate context of the sub-section in which the word occurs and in the general context of the Act, having regard to the declared intention of the Act and the obvious evil that it is designed to remedy?’”
297 It is noteworthy that, though Mason J was addressing a problem of statutory interpretation, he chose to do so by speaking generally of “Problems of legal interpretation...” and “The modern approach to interpretation...”. The reasoning of Viscount Simonds in Attorney-General v Prince Ernest Augustus of Hanover [1957] AC 436 at 461 that Mason J approved started with a perfectly general proposition about the way in which words derive the meaning. General considerations about how words come to convey meaning apply equally to the interpretation of contracts and of statutes.
Other Recent Authorities on Role of Ambiguity in Contractual Construction
298 Courts lower in the hierarchy than the High Court have been less reticent than the High Court itself in making explicit that since Codelfa there has been a change in the principles in accordance with which surrounding circumstances can be invoked in construction of a document. 299 In Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd [2005] FCA 1812; (2005) 223 ALR 560; 56 ACSR 263 at [78], Finn J held that the
“... controversy as to whether in the interpretation of contracts evidence of surrounding circumstances was admissible only if it first appeared that the language of the contract was ambiguous or whether it is admissible at the outset for the purpose of ascertaining the meaning of contractual language in its context...” had now been “stilled” by Pacific Carriers at 462 [22]. It is apparent that Finn J understood Pacific Carriers at 462 [22], in its statement that the meaning of commercial contracts, construed objectively by reference to what it conveys to a reasonable person, normally “requires consideration not only of the text of the documents, but also the surrounding circumstances known to [the contracting parties] and the purpose and object of the transaction”does not involve any requirement that there should first be seen to be ambiguity before the extrinsic evidence may be considered. Finn J also placed emphasis on the High Court’s citation of Investors Compensation as authority for that proposition.
300 The question at issue in Lion Nathan was the construction of pre-emptive rights in a company’s constitution. While a company’s constitution is a business document and construed accordingly, an important part of the circumstances surrounding its creation is that it is reasonably foreseeable that the constitution will need to be construed and applied in a wide variety of commercial circumstances, for the purpose of ascertaining rights and obligations of people not parties to its original creation, and who might not even be members of the company. Thus, Finn J at [79] recognised:
“... that a tight rein may well need to be kept on what should count as ‘surrounding circumstances’ when construing at least aspects of a company’s constitution. In taking the above approach I am probably doing no more than applying to the construction of articles of association the new understanding of what was conveyed by Mason J in Codelfa ...”
301 The decision of Finn J was affirmed on appeal: Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd [2006] FCAFC 144; (2006) 156 FCR 1. Weinberg J (at 10-12 [45]-[52]), Kenny J (at 22 [100]) and Lander J (at 48 [238]) all said, on the basis of cases including Pacific Carriers v BNP Paribas and Toll v Alphapharm, that it is not the law that there must be ambiguity before recourse can be had to previous negotiations.
302 In Gardiner v Agricultural and Rural Finance [2007] NSWCA 235; [2008] Aust Contract Reports ¶90-274 (90,335) at [11]-[13], Spigelman CJ rejected the need to find ambiguity before resorting to context as an aid to construction. The later reversal of Gardiner in the High Court does not affect the persuasiveness of those paragraphs. 303 In Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603 at 626 [107]- [109], Tobias JA (with whom Mason P and I agreed on this point) said that it was “unexceptionable” for a judge to have approached construction on the basis that:
“... it was not necessary for him to find that the language of a contract was ambiguous before considering its meaning as may be revealed in the context and purpose of the transaction commonly known to its parties”.
304 This Court has reiterated that view, though obiter, in Masterton Homes Pty Ltd v Palm Assets Pty Ltd [2009] NSWCA 234; (2009) 261 ALR 382 at [1]- [3], [113]; Synergy Protection Agency Pty Ltd v North Sydney Leagues’ Club Ltd [2009] NSWCA 140 at [22], and possibly also in Moraitis Fresh Packaging (NSW) Pty Ltd v Fresh Express (Australia) Pty Ltd [2008] NSWCA 327; (2008) 14 BPR 26,339 at [58]–[60]. Spigelman CJ has also expressed this view extrajudicially in “From text to context: contemporary contractual interpretation” (2007) 81 ALJ 322 at 329.
305 It follows that I accept Mr Simpkins’ submission that the contract should be construed bearing in mind those facts that the parties knew, or that it can reasonably be assumed they knew, that can impact upon the meaning of the words of the contract. I also accept his submission that it is not necessary to find ambiguity in words of a written contract, the meaning of which is disputed, before the court can look at surrounding circumstances as an aid to construction.
Subsequent Conduct as an Aid to Construction
306 Mr Simpkins submits that the court should take into account in construction of the Supply Agreement, conduct of Metcash and Franklins that occurred after the Supply Agreement was entered into. The conduct he seeks to invoke is that both Metcash and Franklins in fact conducted business in accordance with the Laminated List in 2001, 2002 and 2003. The judge expressly found (at [159]):
“There is no doubt that the laminated list was used by Franklins as well as by Metcash in the conduct of its business. No one suggested that the laminated list was compiled in order to deceive suppliers as to the true agreement between Metcash and Franklins. It should be accepted that Franklins regarded as accurate the statements in the laminated list as to how published and confidential discounts were to be collected and dealt with pursuant to the terms of the Supply Agreement.”
307 Mr Simpkins submits that in the interpretation of an instrument in which there is ambiguity, evidence may be given of use under it to show the sense in which the parties to it used the language they employed, and their intention in executing the instrument as revealed by the instrument interpreted in that sense. In support of that proposition he relies upon Howard Smith and Co Ltd v Varawa [1907] HCA 38; (1907) 5 CLR 68 at 78; Hart v MacDonald [1910] HCA 13; (1910) 10 CLR 417; Watcham v Attorney-General of East Africa Protectorate [1919] AC 533 at 540; Farmer v Honan [1919] HCA 13; (1919) 26 CLR 183 at 197; Thornley v Tilley [1925] HCA 13; (1925) 36 CLR 1 at 11; Sinclair, Scott & Co v Naughton [1929] HCA 34; (1929) 43 CLR 310 at 327; ET Fisher & Co Pty Ltd v English Scottish and Australian Bank Ltd [1940] HCA 42; (1940) 64 CLR 84 at 102;White v Australian and New Zealand Theatres Ltd [1943] HCA 6; (1943) 67 CLR 266 at 275, 281 and Spunwill Pty Ltd v BAB Pty Ltd (1994) 36 NSWLR 290 at 304-312 He also relies on McMeel, “Prior Negotiations and Subsequent Conduct – The Next Step Forward for Contractual Interpretation?” (2003) 119 LQR 272 and Lord Steyn, “The Intractable Problem of the Interpretation of Legal Texts” (2003) 25 Sydney Law Review 5. Cases he recognises that are to the contrary are Administration of Papua and New Guinea v Daera Guba [1973] HCA 59; (1973) 130 CLR 353 at 446 and Codelfa at 348. He does not pause to explain how it could be that ambiguity is part of the test for the use of subsequent conduct, but not part of the test for the use of surrounding circumstances that occurred or arose before the contract was entered.
308 In relying on these comparatively old High Court cases Mr Simpkins invokes, at least implicitly, the principle that it is for the High Court alone “to determine whether one of its previous decisions is to be departed from or overruled”: Garcia v National Australia Bank Ltd [1998] HCA 48; (1998) 194 CLR 395 at 403 [17].
309 In England the House of Lords has clearly stated that (subject to a possible exception concerning land titles, based on Watcham v Attorney-General of East Africa Protectorate) it is not legitimate to use as an aid in the construction of a contract anything which the parties said or did after it was made: James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 583 at 603; L Schuler AG v Wickman Machine Tool Sales Ltd [1973] UKHL 2; [1974] AC 235 at 252, 260, 261-2, 265-70 and 272.
310 In Administration of Papua and New Guinea v Daera Guba at 446, Gibbs J (with whom Menzies J at 405 and Stephen J at 460 agreed on this point) said that James Miller v Whitworth Street Estates and Schuler v Wickman Machine Tool Sales stated “the general principle of the law”. The instrument in relation to which Gibbs J applied this principle was an Order in Council (made under the Land Ordinance of 1899 of British New Guinea), not a contract. Thus, the adoption of the principle in James Miller v Whitworth Street Estates and Schuler v Wickman Machine Tool Sales has the status of a dictum of the High Court, not ratio decidendi. I point this out not because I have any doubt about the considerable persuasive force that High Court dicta have for lower court judges, but because it may give rise to a problem of whether, in the application of the Garcia principle, concerning precedent, a later High Court dictum should be regarded as trumping an earlier High Court ratio decidendi. 311 That problem would be accentuated by doubts about the proper way of reading Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 at 150-1 [134], 159 [158] and 164 [178]. One reading is to treat it as saying that it is wrong for an intermediate Court of Appeal to depart from “seriously considered dicta” of a majority of the High Court (simpliciter). Another is to treat it as saying that it is wrong for an intermediate Court of Appeal to depart from seriously considered dicta of a majority of the High Court concerning a topic on which there is a long-established line of authority. Another is that the clear finding that this Court had been wrong to depart from views about the first limb of Barnes v Addy (1874) LR 9 Ch App 244 that had been expressed in Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8; (1975) 132 CLR 373 is based on particular facts of the case.
312 In Codelfa at 348, Mason J approved the following statement from the speech of Lord Wilberforce in Schuler v Wickman Machine Tool Sales, at 261:
“The general rule is that extrinsic evidence is not admissible for the construction of a written contract; the parties’ intentions must be ascertained, on legal principles of construction, from the words they have used. It is one and the same principle which excludes evidence of statements, or actions, during negotiations, at the time of the contract, or subsequent to the contract, any of which to the lay mind might at first sight seem to be proper to receive.” (my emphasis)
313 While Codelfa concerned construction of a contract, and the judgment of Mason J was agreed in by Stephen and Wilson JJ concerning construction of the contract, there was no issue in Codelfa concerning whether subsequent conduct should be taken into account. Thus, the portion of the judgment of Mason J concerning subsequent conduct that I have just set out, also has the status of a dictum, not ratio decidendi.
314 In Agricultural and Rural Finance Pty Ltd v Gardiner at [35], Gummow, Hayne and Kiefel JJ said:
“... the questions earlier identified of how the Lender ‘treated’ the payment, and whether the Lender treated payment as ‘punctual’, raise the further question: ‘What is meant by treating a payment as punctual?’ It is an expression evidently intended to convey more than bare acceptance of a payment of money. On its face it is an expression that seeks to attach legal consequences to the fact of receipt. But those consequences were not further identified. In particular, if more is meant than that the payment was received without the Lender exercising the choice it had under the loan agreements of accelerating payment of the balance, the content of that additional element is not explained. In addition, to approach issues of construction in this way would be at odds with the general principle that ‘it is not legitimate to use as an aid in the construction of [a] contract anything which the parties said or did after it was made’: James Miller & Partners Ltd v Whitworth Street Estates Ltd [1970] AC 583 at 603 per Lord Reid, repeated by Gibbs J in Administration of Papua and New Guinea v Daera Guba [1973] HCA 59; (1973) 130 CLR 353 at 446; cf Gibbons Holdings Ltd v Wholesale Distributors Ltd [2008] 1 NZLR 277.”
315 That involves, in my view, adoption of the “general principle” referred to in the last sentence as part of their Honours’ ratio decidendi.
316 Heydon J, at [163] said:
“I agree with all the arguments advanced against the construction urged by the Borrower of the words ‘punctually’ and ‘punctual’, save for the proposition that the Borrower’s construction is at odds with the principle that it is not legitimate to use as an aid in the construction of a contract anything which the parties said or did after it was made.”
317 As I read it, Heydon J was there accepting as a principle “that it is not legitimate to use as an aid in the construction of a contract anything which the parties said or did after it was made”, but differing from the majority judgment in the application of that principle to the facts of the case. Even if I were wrong in reading the judgment of Heydon J in this way, his Honour’s expression of opinion could not overcome the effect, as ratio, of para [35] of the majority judgment.
318 None of Daera Guba, Codelfa, and Agricultural and Rural Finance v Gardiner involved the High Court in giving consideration to the earlier High Court cases upon which Mr Simpkins relies. Even assuming, without examination, that Mr Simpkins is right in saying that those earlier High Court cases provide some support for subsequent conduct being used as an aid to interpretation (as opposed to being used to establish whether a binding contract had been entered into or to identify the subject matter of the contract), in Agricultural and Rural Finance v Gardiner they have been “departed from” by the High Court, within the meaning of Garcia principle, even though they have not been expressly overruled. In those circumstances, my duty is to follow the law as most recently stated by the High Court. Further, the fact that Agricultural and Rural Finance v Gardiner has adopted the“general principle” as part of its ratio decidendi relieves me from deciding whether, prior to Agricultural and Rural Finance v Gardiner, I would have been obliged to follow the dicta in Daera Guba and Codelfa about the impermissibility of using subsequent conduct as an aid to construction.
319 Both Gibbs J in Daera Guba, and the majority in Agricultural and Rural Finance Pty Ltd v Gardiner referred to there being a “general principle” stated in James Miller v Whitworth Street Estates at 603. The expression“general principle” itself calls for explanation. It might mean that it is a principle that applies to all cases, or that it is a principle that usually applies, though perhaps being subject to exceptions. 320 The statement of Lord Reid in James Miller v Whitworth Street Estates at 603, that the majority in Agricultural and Rural Finance v Gardiner endorsed, was:
“I must say that I had thought that it is now well settled that it is not legitimate to use as an aid in the construction of the contract anything which the parties said or did after it was made. Otherwise one might have the result that a contract meant one thing the day it was signed, but by reason of subsequent events meant something different a month or a year later.”
321 That statement is, of course, in quite categorical terms. If taken literally, it would mean that under no circumstances whatsoever can events that occur after the making of a contract be used in construing the contract. However, even categorical statements in judgments need to be read subject to the context in which they occur: Quinn v Leathem [1901] UKHL 2; [1901] AC 495 at 506; Leaway Pty Ltd v Newcastle City Council (No 2) [2005] NSWSC 826; (2005) 220 ALR 757 at [75]- [84] and cases there cited. Lord Reid’s statement immediately follows a paragraph in which he expounds the objective theory of contract. That provides, in my view, an important piece of context in light of which his statement should be understood.
322 The objective theory of contract is now clearly established in Australian contract law: Taylor v Johnson [1983] HCA 5; (1983) 151 CLR 422 at 429; Pacific Carriers v BNP Paribas at 461-2 [22]; Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471 at 483 [34]; Toll v Alphapharm at 179-80 [40]-[44]. I would accept that, at the level of whether as a matter of ordinary human experience one piece of evidence can make more probable the existence or non-existence of some disputed fact in issue, subsequent conduct can sometimes provide a legitimate insight into what were the mutual beliefs of the parties, or the belief of one of the parties, about the scope of the obligations they were undertaking at the earlier time of contracting – it is a particular example of retrospectant evidence. However, under the objective theory of contract such beliefs of the parties at the time of contracting are of no significance to what the terms are of the contract that has been entered. Rather, the terms of the contract depend upon what a reasonable observer would understand from what was said or written at the time of contracting, in the context in which it was said or written. It necessarily follows that subsequent conduct of the parties cannot enter into that exercise.
323 It is important to recognise, though, that this does not mean that in no circumstance is an event that occurred after a contract was entered able to be deployed in court in the course of construing it. The general words used by Lord Reid in James Miller v Whitworth Street Estates at 603 and by the majority in Agricultural and Rural Finance v Gardiner also need to be understood by reference to their context, relevantly the particular problem that the Court was called on to decide. The type of exercise that was forbidden in Agricultural and Rural Finance v Gardiner was use of conduct occurring after a contract is made to show what the parties intended at the time of the contract. In Agricultural and Rural Finance v Gardiner, what was forbidden was the use of subsequent conduct to show what the parties had meant by “punctual”. In James Miller v Whitworth Street Estates what was forbidden was the use of subsequent conduct to show what system of law the parties had intended to be the proper law of their contract. In Schuler v Wickman Tools what was forbidden was the use of subsequent conduct of one party, in letting breaches by the other of a term that the contract said was a “condition” slip by without rescinding, to show that the parties had not meant “condition” to be the sort of term that justified recision for a single breach.
324 It could happen that an event occurring after a contract was made was used as proof of a matter that is relevant to construction of the contract even on the objective theory of contract. If, for example, a contracting party admitted, after the contract had been made, the truth of some fact that was a relevant part of the context in which the contract had been made, I see no reason why that admission could not be used as part of the means of proof of that background fact.
325 Another relevant context in which the speeches in Miller and Schuler, and the judgments in Codelfa and Gardiner were delivered is that the question at issue related to construction of a contract wholly in writing. It is not necessary to decide whether any of those cases should be taken as ruling out the use of subsequent conduct to ascertain the terms of a contract that is oral or partly oral. It may be that the exercise that the court is engaged in in ascertaining the terms of an oral or partly oral agreement is not properly described as “construing” anything – that it is just finding, as a fact, what it was that the parties agreed, and so any question of whether subsequent conduct can be used as an aid to construction does not arise concerning them. There is some authority, the present status of which I need not consider, that subsequent conduct may be used in the course of ascertaining the terms of an oral or partly oral contract: eg County Securities Pty Ltd v Challenger Group Holdings Pty Ltd [2008] NSWCA 193 at [7]- [27], [45] (per Spigelman CJ), and other cases collected in Masterton Homes Pty Ltd v Palm Assets Pty Ltd at [114].
326 Further, in each of Miller, Schuler, Codelfa, and Gardiner there was an undoubted contract, and thus no question arose concerning the use of conduct occurring after the time at which it is alleged a contract was entered to decide whether the contract was in truth entered. As at present advised, I doubt that Gardiner changes the law that conduct occurring after the time at which it is alleged that a contract was entered can be used to decide whether the contract was in truth entered: Kriketos v Livschitz [2009] NSWCA 96; [2009] Aust Contract Reports ¶90-314 (91,344) at [5], [109]; Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 551; Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 at 626-7; GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 at 636-7;Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251 (NSWSC) at 9255-6; B Seppelt & Sons Ltd v Commissioner for Main Roads (1975) 1 BPR 9147 (NSWCA) at 9149, 9155; Allen v Carbone [1975] HCA 14; (1975) 132 CLR 528; Barrier Wharfs Ltd v W Scott Fell & Co Ltd [1908] HCA 88; (1908) 5 CLR 647 at 667.
327 What I take to be established by Gardiner is that the use of subsequent conduct is forbidden to prove any matter that cannot legitimately enter into the construction of a written contract in accordance with the objective theory of contract. In particular, it cannot be used to prove what the parties meant by particular terms that they used in their contract. The opinion I have arrived at accords with the view expressed by F M Douglas QC in “Modern Approaches to the Construction and Interpretation of Contracts” (2009) 32 Australian Bar Review 158 at 167.
328 The Supply Agreement is a contract wholly in writing. The use that Mr Simpkins seeks to make of subsequent conduct is to argue that the fact that both Metcash and Franklins used the Laminated List after the Supply Agreement had been entered shows what they had meant by the provision as to price in the Supply Agreement. To reach the same conclusion, he also relies upon the following evidence of Mr Zelinsky [682]:
“Q. ... Were the buyers in the Franklins buying team who used the laminated list in 2001, 2002 and 2003 ever given a revised version of it that contain a different formula of the Wholesale 5 price? A: No, sir.”
329 Each of these ways of proceeding is forbidden by the principle in Agricultural and Rural Finance v Gardiner.
The Operation of the Law of Precedent Concerning Subsequent Conduct
330 After Agricultural and Rural Finance v Gardiner, it is not necessary to consider the earlier High Court authority relied on by Mr Simpkins, nor the daunting array of decisions of intermediate appellate courts that have considered whether subsequent conduct may be used as an aid to construction, sometimes taking into account the earlier High Court authority and sometimes not. That array includes: B Seppelt & Sons Ltd v Commissioner for Main Roads at 9155 (NSWCA); Seamen’s Union of Australia v Adelaide Steamship Co Ltd (1976) 46 FLR 444 at 445; Jennings Construction Ltd v FR Coyle Pty Ltd (NSWCA, 17 October 1984, unreported) at 12-13;Winks v WH Heck & Sons Pty Ltd [1986] 1 Qd R 226 at 238; Mulroney v Laurence (NSWCA, 28 February 1986, unreported) at 6; Australian Energy Ltd v Lennard Oil NL [1986] 2 Qd R 216 at 237- 8; Cooper v Penman[1987] FCA 356 at [32]; (1987) 22 IR 129 at 149; Australian Estates Ltd v Palmer (NSWCA, 22 December 1989, unreported) at 50; Hide & Skin Trading v Oceanic Meat Traders (1990) 20 NSWLR 310 at 315-6, 326- 8;Modifications Pty Ltd v Doyle [1991] NSWCA 203 (NSWCA, 19 April 1991, unreported) at 6; FAI Traders Insurance Company Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343 at 347-50, 352-3, 353-5; MacIndoe v Parbery(1994) 6 BPR 13,483 at 13,489; [1994] Aust Torts Reports ¶81-290 (61,532) at 61,538 (NSWCA); Smith v Nylex Corporation Ltd (1994) 178 LSJS 216 at 225-6; [1994] Aust Contract Reports ¶90-048 (90,068) at 90,075-6; Ryan v Textile Clothing & Footwear Union Australia [1996] 2 VR 235 at 235-6, 261-2 (sub nom Re Homfray Carpets Pty Ltd and Hycraft Carpets Pty Ltd (1996) 14 ACLC 555 at 557-8, 576-8); Smith v Australia and New Zealand Banking Group Ltd [1996] NSWCA 584 at 9; [1996] NSWSC 86; (1996) 7 BPR 15,069 at 15,075; [1999] NSW ConvR ¶55-844 (56,904) at 56,909; SAAD v TWT Ltd [1998] NSWCA 199 (NSWCA, 29 May 1998, unreported) at 8; Posgold (Big Bell) Pty Ltd v Placer (WA) Pty Ltd [1999] WASCA 217; (1999) 21 WAR 350 at 362- 3 [49]- [52]; Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; (2001) 53 NSWLR 153 at 164 [26], 166 [36]; Winstonu Pty Ltd v Pitson [2001] FCA 541 at [24]; Magill v National Australia Bank Ltd [2001] NSWCA 221; [2001] Aust Contract Reports ¶90-131 (91,601) at [50]-[53]; Walker v Andrew [2002] NSWCA 214; (2002) 20 ACLC 1,476; 116 IR 380 at [39]; Independent Timber Importers (Australia) Pty Ltd v Mercantile Mutual Insurance (Australia) Ltd [2002] NSWCA 304; (2002) 12 ANZ Insurance Cases ¶61-543 (76,364) at [17]-[19]; Thiess Contractors (NZ) Ltd v Howtrac Rentals Pty Ltd [2002] VSCA 195 at [30]; Collins Hill Group Pty Ltd v Trollope Silverwood and Beck Pty Ltd [2002] VSCA 205 at [44]; LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd [2003] NSWCA 74 at [55]- [58]; Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd [2004] NSWCA 114; (2004) 12 BPR 22,879 at [76]; St George Bank Ltd v Trimarchi [2004] NSWCA 120 at [68]; El-Mir v Risk [2005] NSWCA 215; (2005) 22 BCL 16 at [66]; Seven Network (Operations) Ltd v TCN Channel Nine Pty Ltd [2005] FCAFC 144; (2005) 146 FCR 183 at 199 [83]; Johnstone v Knight [2006] QCA 322 at [16]; Taylor v Dexta Corporation Ltd [2006] NSWCA 310; (2006) 14 ANZ Insurance Cases ¶61-712 (75,727) at [69]; Bowesco Pty Ltd v Zohar [2007] FCAFC 1; (2007) 156 FCR 129 at 145 [79]; Ryledar Pty Ltd v Euphoric Pty Ltd at 700 [104]; Victorian WorkCover Authority v Game [2007] VSCA 86; (2007) 16 VR 393 at 407 [62]; Pethybridge v Stedikas Holdings Pty Ltd [2007] NSWCA 154; [2007] Aust Contract Reports ¶90-263 (90,058) at [2], [59]; Morrison v Town of Victoria Park [2007] WASCA 164 at [18]- [23]; Tomko v Palasty [2007] NSWCA 258 at [13], [67]; County Securities Pty Ltd v Challenger Group Holdings Pty Ltd [2008] NSWCA 193 at [18], [161]; Fraser v Irish Restaurant & Bar Co Pty Ltd [2008] QCA 270 at [9]; ACN 074 971 109 v National Mutual Life Association of Australasia Ltd [2008] VSCA 247; (2008) 69 ACSR 118 at [88] (5); Secure Parking (WA) Pty Ltd v Wilson [2008] WASCA 268 at [86]; Symbion Medical Centre Operations Pty Ltd v Thomco (No 2113) Pty Ltd [2009] SASC 65; (2009) 103 SASR 354 at 362-4 [17]- [21], 368 [37], 369 [41]; Kriketos v Livschitz at [109]; Masterton Homes Pty Ltd v Palm Assets Pty Ltd at [114]. A diligent application of the principle in Farah Constructions Pty Ltd v Say-Dee Pty Ltd at 151-2 [135], requiring intermediate appellate courts in Australia to depart from decisions of other intermediate appellate courts on a topic of the non-statutory law only if convinced that that decision is plainly wrong, may well have required, before the decision in Agricultural and Rural v Gardiner, all those cases to be considered. Nor is it necessary to consider the significant first instance judgments of Santow J in Spunwill Pty Ltd v BAB Pty Ltd (1994) 36 NSWLR 290 at 304 ff, of Bryson J in Sports Vision Australia Pty Ltd v Tallglen Pty Ltd (1998) 44 NSWLR 103 or of Allsop J in Evans Deacon Pty Ltd v Sebel Furniture Ltd [2003] FCA 171 at [597], that are themselves considered in some of this array of intermediate appellate court judgments. Nor is necessary to consider the decision of the Supreme Court of New Zealand in Gibbons Holdings Ltd v Wholesale Distributors Ltd [2008] 1 NZLR 277 which held, contrary to the decision of the High Court in Agricultural and Rural Finance v Gardiner, and in a matter evidently disapproved of by the High Court in Agricultural and Rural Finance v Gardiner, that subsequent conduct can be used as an aid to construction.
331 In Australian Mutual Provident Society v Allan (1978) 52 ALJR 407 at 411; sub nom Australian Mutual Provident Society v Chaplin (1978) 18 ALR 385 at 392, the Privy Council on appeal from South Australia followedJames Miller v Whitworth Street Estates and Schuler v Wickman Machine Tool Sales, on the use of subsequent conduct for purpose of construction. In Narich Pty Ltd v Commissioner of Pay-roll Tax (1983) 52 ALJR 30 at 32; 50 ALR 417 at 420; [1983] 2 NSWLR 597 at 600-1 the Privy Council applied the law as stated in AMP v Allan in an appeal from New South Wales concerning contractual construction. The decision of the High Court inAgricultural and Rural Finance v Gardiner makes it unnecessary to consider the present status as precedent of the ratio of a Privy Council decision on appeal from New South Wales if there were an inconsistent prior High Court decision but later consistent High Court dicta.
332 I mention these matters as a practical illustration of the way in which the operation of the system of precedent provides an invaluable service to the effective operation of the law, by enabling a new start to be made from time to time, on the basis of a principle recently adopted by the High Court, that makes unnecessary what would otherwise be time consuming and difficult analysis of case law.
Royal Botanic Gardens Exemplifies Using Post-Contract Conduct?
333 Sometimes, the law can be revealed by the way in which a superior court proceeds in the course of deciding a case, even if it does not make any explicit statement of principle. Mr Simpkins submits that in Royal Botanic Gardens the High Court used the post-contractual conduct of the parties in construing the rent review clause. He draws attention to the statement in para [36] of the majority judgment that “There is nothing to suggest that in the intervening period the parties had conducted themselves on any basis other than that the rent was to be computed in this fashion.”
334 Even if Mr Simpkins were correct in reading Royal Botanic Gardens in this way, my duty would be to follow the later statement of the law in Agricultural and Rural Finance v Gardiner. However, in my view the submission misreads Royal Botanic Gardens. It was an unusual feature of that case that the lease the subject of construction was entered in May 1976, but the term of the lease commenced approximately 18 years before the date of the deed, and the Council had in fact occupied the site of the carparking station and footway, and paid rent for it to the Trust during those 18 years. That rental was paid pursuant to an agreement for lease constituted by correspondence in 1956 (at [26]), that had the status of an agreement falling within the second category in Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353 at 360 (Royal Botanic Gardens at [27]). The “intervening period” referred to in at [36] of Royal Botanic Gardens is the period between an agreement for lease being arrived at in correspondence, and the deed of lease being entered. The part of the sentence on which Mr Simpkins relies was stating that there was no basis for suggesting that, by the time the parties entered the formal agreement, there had been any change to the terms arrived at in the exchange of correspondence. This is not an example of conduct subsequent to the time of entering the agreement in question (ie, the lease) being used to construe an ambiguous term in an agreement.
335 I recognise that the majority judges immediately went on to say:
“Moreover, for the purposes of determining the rights and obligations of the parties to the Lease, cl 4(b) was to be construed as if it had been executed on 1 May 1958 (cl 4(1)).”
It seems to me that that sentence is completely consistent with the High Court having taken the view that, if one did construe the lease as if it had been executed on 1 May 1958, conduct after that date would have been irrelevant anyway.
Unhelpfulness of Subsequent Conduct Re Laminated List
336 Quite apart from the subsequent conduct of the parties in acting in accordance with the Laminated List not being available as a matter of principle to be used in construction of the contract, in my view it would not be of assistance to Metcash even if it could legitimately be used. That is because the evidence provides no basis for believing that, when Franklins acted in accordance with the Laminated List, it had any reason to believe that Metcash was receiving any confidential discounts, other than those specifically nominated on the Laminated List as ones to be retained by Metcash. The judge expressly found, at [176]: “...because Franklins could not obtain these discounts for itself in its own negotiations with suppliers and because it believed the discounts to be of relatively insignificant value – ‘five eighths of nothing’is a phrase referred to by Franklins – it did not consider it worthwhile to endeavour to compel Metcash to account for them.”
For Franklins to forego collecting sums of money that it did not consider worthwhile to endeavour to compel Metcash to account for casts no real light on the meaning of the agreement when it was entered.
Relevant Surrounding Circumstances to This Contact
337 The sort of surrounding circumstances that can be taken into account are ones that enable the meaning of the words used in the document in question to be ascertained as that meaning would appear to a reasonable person who knew the facts concerning those circumstances. Statements by contracting parties about their subjective intentions in entering the agreement do not assist in ascertaining the meaning of the words.
338 Mr Simpkins submits that the following matters are able to be taken into account in construing the contract.
“... Franklins fully understood and accepted Metcash’s ‘Wholesale 5’ price as defined in the 17 May 2001 letter from Metcash to Franklins and the 24 May 2001 letter from Metcash to Franklins. ... there was an unconditional acceptance by Franklins of everything in the 24 May 2001 letter. ... when Zelinsky ... signed the 14 June 2001 letter he understood it to say the same thing about the price as that which had been said in the respective letters of 17 and 24 May 2001. That was also the understanding of Reitzer ...... the Laminated List expressly set out the formula for ‘Wholesale 5’, and Franklins (represented by Zelinsky) understood that in that formula ‘the wholesale list price was used and then from that was a deduction of a published trade discount, a published warehouse allowance, a published quantity buy allowance, and a published settlement discount’. ... Zelinsky expressly admitted that that formula for ‘Wholesale 5’ in the Laminated List accorded with what he understood the ‘Wholesale 5’ formula to be. ... at the time the Supply Agreement was entered into, Zelinsky, who executed the Supply Agreement on behalf of Franklins, believed that it contained the same formula for ‘Wholesale 5’ as was set out in the Laminated List. That was also the understanding and belief of Reitzer who executed the Supply Agreement on behalf of Metcash.” 339 By the time the Supply Agreement was entered, both parties would reasonably be taken to have known the following facts:
(1) Franklins was starting its Australian operations with 76 stores all located in New South Wales, and wished to increase the number of its stores both in New South Wales and elsewhere in Australia. (2) Metcash had warehouses in New South Wales and several other Australian states, while Franklins had no warehouse anywhere. (3) There was a number thrown up by the operation of Metcash’s computer system, that Metcash called “Wholesale 5” in its internal operations, that was a price attributed to a particular item that Metcash had available for sale, and was arrived at by deducting from the wholesale list price of the supplier of that item certain specified published discounts and allowances. (4) Metcash had a price list, updated from time to time, that it referred to as the Wholesale 5 price list, and that showed various items available for purchase from Metcash at that time, and the Wholesale 5 price for that item. (5) It was for practical purposes impossible for Metcash to alter the way in which its computer system operated in arriving at the Wholesale 5 price for an item. (6) It was possible for the Metcash computer and accounting system to produce an invoice for a product sold, that had as its starting point the Wholesale 5 price for that item, and arrived at an ultimate selling price by making additions to or deductions from the Wholesale 5 price for that item. It was also possible for the Metcash computer and accounting system to charge a price that was less than the Wholesale 5 price for that item by producing an invoice based on the Wholesale 5 price, receiving payment of the invoiced price, and then refunding part of the price that had been paid. (7) There was a large variety of discounts and allowances that were sometimes available from a supplier in the supermarket and grocery trade that were not published and needed to be negotiated individually with that supplier. (8) There was a high practical unlikelihood that a purchaser of goods who did not operate a warehouse could obtain some of the discounts and allowances that were available in the industry, because the justification for the supplier paying that particular type of discount or allowance was work done in the course of warehousing the goods, or through use of the warehouse, that that purchaser was not in a position to carry out. (9) Franklins regarded it as essential that it have a direct relationship with suppliers and negotiate discounts and allowances, other than published discounts and allowances, concerning the volume of goods that was purchased and re-sold in its stores. 340 Even bearing those facts in mind, it is still the words of the text that is disputed whose meaning must be decided, in the context of the entire agreement and those surrounding circumstances.
341 Insofar as the matters on which Mr Simpkins relies are matters of the understanding, belief or intention of the relevant executives of Franklins or Metcash, they are not matters that can be taken into account in accordance with the objective theory of contract.
342 They were objective facts, known to both parties, that the letters of 17 May 2001 and 24 May 2001 had been signed by both of them, as had the letter of 14 June 2001, the pricing clause of which was at odds with the pricing clause of the earlier letters. However, the “entire agreement” clause, in clause 14.2 of the Supply Agreement would have the effect that the reasonable observer would conclude that the parties did not intend those documents (or indeed any consensus that they had reached before executing the Supply Agreement) to influence the construction of the Supply Agreement. Thus, I do not accept that the execution of the letters of 17 and 24 May is a matter that actually helps in construction of the Supply Agreement. It is always a question to be decided in the facts of the particular case whether any fact that forms part of the background to the agreement actually assists in deciding what is the meaning of the agreement. Experience teaches that there is often a big difference between a background fact known to both parties being available to be a possible aid to construction, and it actually helping to decide the correct construction.
343 The first thing to observe is that all the provisions of clause 1.1 are ones that clause 1.1 says apply “In this agreement”. They are not provisions of the somewhat weaker kind that are sometimes found in the definition clause of an agreement, that apply “in this agreement, unless the context otherwise requires”. In that respect provisions in clause 1.1 differ from the rules of interpretation contained in clause 1.2 of the Supply Agreement.
344 The Disputed Words state what Wholesale Price for a Product “means”. It is not the weaker type of definition, that merely states what the defined term “includes”.
345 The definiens is not just “Wholesale Price” – rather, it is “Wholesale Price for a Product”. The definition for “Products” defines them so that a necessary characteristic is that they “are specified in Metcash’s ‘Wholesale 5’ price list at the time [Franklins] wishes to purchase the goods”. The notion of a “Product” is a central one, recurring repeatedly in the agreement in contexts other than the definition of “Wholesale Price for a Product”.Through the repeated use of the term “Product” the agreement thus gives a central role to the content of Metcash’s Wholesale 5 price list from time to time, at least insofar as that price list identifies the product lines that are available to purchase from Metcash. In particular, through clause 4.1(d) it is the Metcash Wholesale 5 price list from time to time that marks out the boundaries (subject to narrow exceptions) of Franklins’ exclusive purchasing obligations.
346 The concept of “Wholesale 5” also has other work to do in the agreement, in clause 4.4(c). There, there is a column in which the Profit Margin is expressed as a percent, but Note 1 makes clear that that percent is to be“applied to Wholesale 5, if applicable ...”. The definition of “Purchase Price” makes clear that the Profit Margin in relation to a particular Product must be expressed in dollars and cents, because the Profit Margin is to be added to the Wholesale Price as part of the calculation that ultimately yields the Purchase Price of that particular Product. Thus, “Wholesale 5” in footnote 1 to clause 4.4(c) can work only if it is expressed as itself being a price.
347 By contrast, the Service Fee in clause 4.4(c) is expressed as a number of cents per case. Application of the indexation formula in the definition in clause 1.1 of Service Fee will still result, in later years, in the Service Fee being expressed as a number of cents per case. Footnote 2 to clause 4.4(c) says that the Service Fee “is applied at item level on Wholesale 5”. In this usage, “Wholesale 5” seems to be a reference to the price list, that has various“items” on it, not to a price.
348 Though the Disputed Words appear in a part of the agreement headed “Definitions”, the parties have agreed, in clause 1.2, that the headings and boldings are for convenience only and do not affect the interpretation of the agreement. Thus, the Disputed Words must be understood without assistance from that heading.
349 Usually, a definition in an agreement is a statement by the parties of what meanings they attribute to certain words or expressions for the purpose of that agreement. Insofar as the Disputed Words state what “Wholesale Price for a Product” means, they conform to that usual usage. However, insofar as the Disputed Words then go on to include a phrase commencing “being”, it is most unusual for a definition.
350 As used in the Disputed Words, the word “being” has the force of “which is”, or (particularly in the context where the definition of “Products” contemplates that Metcash’s Wholesale 5 price list may change from time to time) “which will be”. So regarded, the Disputed Words are a definition insofar as they state that “Wholesale Price for a Product” means Metcash’s “Wholesale 5” price for that Product, but seem to be somewhat like a warranty insofar as they state that Metcash’s Wholesale 5 price for a product is or will be in accordance with the words that follow “being” in the Disputed Words.
351 However, the fact that the phrase commencing “being” appears as part of the Disputed Words gives it a different effect to the one it would have if clause 1.1 had simply said, “Wholesale Price for a Product means Metcash’s ‘Wholesale 5’ price for that Product” and there had been a separate warranty in the agreement that Metcash’s wholesale price for a Product had and would continue to have the attributes that follow the word “being”. In that situation, Franklins would have been obliged to pay whatever amounts Metcash might choose to nominate as their Wholesale 5 price for a product from time to time, and Franklins would have had an action for damages for breach of warranty if Metcash’s wholesale price at any time did not have the attributes that follow the word “being”. The effect of the phrase commencing “being” appearing as part of the Disputed Words is that it applies, in accordance with the opening words of clause 1.1, throughout the agreement. Thus, the phrase is an exhaustive definition of what, for the purposes of the agreement, is Metcash’s “Wholesale 5” price for that Product. That meaning feeds, in particular, into the calculation of the profit margin pursuant to clause 4.4(c).
352 The words “all allowances and discounts”, considered on their own, are inherently relational, and raise the questions “allowances concerning what, and discounts from what”? The text of the definition of Wholesale Price for a Product provides the context that answers those questions in the present case, namely that the words mean all allowances concerning the wholesale list price of the Product in question, and all discounts from the wholesale list price concerning that Product.
353 The meaning of the words “all allowances and discounts”, when used in relation to the price for a product would ordinarily be taken as meaning all allowances and discounts whatever concerning the purchase of that product, unless there was some reason in the context to read it otherwise. In the present case, there is support in the textual context for reading the phrase literally. It comes from the words in parenthesis commencing “such as”, which would ordinarily be taken as providing a non-exhaustive list of examples of some more general thing. That that is the correct sense to give to the phrase in parenthesis is reinforced by the terms of clause 1.2(o) of the Supply Agreement.
354 Reading the definition of “Wholesale Price for a Product” in this way is also supported by some other contextual matters. The “Wholesale 5” price for any particular product, being an output of the Metcash computer system, was a matter that lay within Metcash’s control. Even though at the date of the agreement Metcash had a practice of basing its price to franchisees and other people who purchased from it on the Wholesale 5 price, it had no obligation to maintain that practice throughout the Term of the Supply Agreement. The Term had the potential for continuing for many years. Franklins bound itself exclusively to purchase from Metcash, with very small exceptions. There was a great diversity of allowances and discounts available in the market, and there was a potential that during the Term of the Supply Agreement other allowances and discounts might come to be introduced, or the name of some allowance or discount might come in market usage to change. There was clear commercial sense in Franklins wanting the price at which it agreed to purchase the goods to be ascertained in a way that was objective, not a way that was dependent on any decision of Metcash. While a reasonable observer of the contracting parties would appreciate that Metcash was entering the agreement as a matter of business, with a view to making a profit, there was specific provision for Franklins to pay both a profit margin, and a service fee. As well, the terms on which Franklins was required to pay its debts to Metcash were such that Metcash would not need to tie up working capital in having goods in its warehouse for the purpose of on-supply to Franklins.
355 There is no evidence of any trade usage whereby “allowances” or “discounts” refers only to published benefits. Indeed there is evidence to opposite effects. In his statement in reply Mr Reitzer referred to the pie chart as disclosing “the dollar amount of the various allowances that Metcash was then collecting”. Likewise the word “discounts” is, in the industry, not confined to published discounts. Mr Reitzer, in his statement in chief (para 53), refers to “the difference between published discounts – that is discounts that were on the invoice – on the one hand, and confidential discounts – that is discounts that were off the invoice – on the other hand.” He referred (in para 66) to at least some of the items marked with an asterisk on the pie chart as “old David’s style discounts”. He specifically identified the term adherence/volume as a “discount”. Likewise he named as “discounts” the cross-docking discount, direct discount, and early payment discount, all of which were confidential benefits.
356 All those matters support, in my view, giving a literal meaning to “all allowances and discounts” in the definition of Wholesale Price.
357 This reading is also consistent with the use of the words “all allowance, or discount” and “all allowance, discount” in Clause 4.3(b) of the Supply Agreement (para [101] above).
358 Even though Franklins was aware, by the time it entered the Supply Agreement, that Metcash was receiving some discounts and allowances that Franklins would in practice be highly unlikely to receive, if it asked for the supplier to pay such a discount to Franklins directly, because Franklins did not have a warehouse, or because the discount was paid only because of a historical quirk concerning the relationship between the supplier and Metcash’s predecessor in business, there is no obvious unlikelihood about Metcash agreeing to pass on that discount and allowance when it was being paid expressly a service fee, presumably for its work in connection with the warehousing and making available for collection of the goods.
Uncommerciality of the Trial Judge’s Construction?
359 Mr Simpkins submits that “if detailed semantic and syntactical analysis of words in a commercial contract ... lead[s] to a conclusion that flouts business commonsense, it must be made to yield to business commonsense”:Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201 per Lord Diplock, with whom all other Law Lords sitting agreed; quoted with approval by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society at WLR 913; All ER 115 (with whom Lords Goff of Chieveley, Hope of Craighead and Clyde agreed). Any cloud that might remain, in Australia, over Lord Hoffmann’s speech in Investors Compensation Scheme Ltd v West Bromwich Building Society as a result of the High Court’s decision in Royal Botanic Gardens does not apply to this particular statement of principle, which was expressly approved by Gleeson CJ, Gummow and Hayne JJ in Maggbury Pty Ltd v Hafele Australia Pty Ltd at 198 [43]. However, as their Honours there noted:
“Of course, what in respect of a particular contract comprises ‘business commonsense’, as an apparently objectively ascertained matter, may itself be a topic upon which minds may differ and in respect of which an imputed consensus is impossible.”
360 Other High Court authority to the effect that a contract should be read in a way which will result in a commercially sensible and business like meaning is found in IATA v Ansett at 159 [8]; Zhu v Treasurer of NSW [2004] HCA 56; (2004) 218 CLR 530 at 559 [82]; McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579 at 589 [22]; Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99 at 109-10; Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429 at 437; Cohen & Co v Ockerby & Co Ltd [1917] HCA 58; (1917) 24 CLR 288 at 300.
361 There is a close connection between the requirement to construe commercial agreements in a way that does not flout business commonsense, and the principles by reference to which surrounding circumstances are admissible as an aid to construction. The connection is illustrated in the joint judgment of Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ in Zhu v Treasurer of NSW at 559 [82] where their Honours said that it was necessary to construe the instrument there in question:
“...so as to avoid it making commercial nonsense or working commercial inconvenience: Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at 313-314, per Kirby P. Its commercial purpose — the purpose of reasonable persons in the position of [the parties to the contract] — was relevant: Codelfa Construction Pty Ltd v State Rail Authority of (NSW) [1982] HCA 24;(1982) 149 CLR 337 at 351, per Mason J. That, in turn, required attention to ‘the genesis of the transaction, the background, the context, the market’ in which the parties were operating, as known to both parties: Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337 at 350, per Mason J, quoting Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989 at 995–996; [1976] 3 All ER 570 at 574, per Lord Wilberforce.”
362 That there is this close connection must necessarily be so, because the only way the court can come to know what amounts to “business commonsense” concerning a particular contract is by taking into account matters extrinsic to the contract capable of affecting its construction.
363 Mr Simpkins submits that there is uncontested evidence that Metcash receives certain confidential discounts, allowances and rebates because it incurs specific costs, and does specific work, that is of benefit to the supplier. He gives as examples the cross-docking discount (given in circumstances where Metcash incurs extra costs in handling the cross-docked goods), the direct discount (given in circumstances where Metcash incurs extra administrative costs and undertakes a credit risk), early payment discounts (given in circumstances where Metcash uses its own capital to pay a supplier’s invoice early), the slow moving rebate (given because Metcash has a specific warehouse in which it is prepared to move slow moving lines, and where it incurs the cost of redistribution from that warehouse to whatever location in Australia the goods might ultimately be needed at), the centralisation rebate and the redistribution allowance (concerning which the same matters apply). He also points to the costs incurred by Metcash in earning the warehouse efficiency rebate, involving Metcash in costs both for the initial modification of its warehouse racking to meet the supplier’s specifications, and in paying staff to be present and working at hours when they would not ordinarily be present and working. He submits it would have been entirely uncommercial for Metcash to have agreed to pass on these confidential discounts, allowances and rebates to Franklins, and the judge was wrong to construe the agreement in a way that required them to be passed on.
364 I am not persuaded that the conclusion should be drawn that passing on these confidential discounts, allowances and rebates would be so uncommercial that the parties were unlikely to have agreed to it. The price that Franklins agreed to pay Metcash for goods supplied by Metcash involved the addition to the Wholesale Price, as defined in clause 1.1 of the Supply Agreement, of a service fee and a profit margin. As well, the Wholesale Price, as defined in clause 1.1, was based on the Supplier’s list price at the time that Metcash delivers the Product to Franklins, and thus permitted Metcash to make a profit (referred to as its “stock profit”) if the Supplier’s list price increased between the time Metcash purchased those goods and the time they were delivered to Franklins. The service fee is calculated on a per-case basis, and is indexed while the agreement is on foot, on a basis that appears to be connected to the labour costs of running a warehouse. So far as the evidence discloses, Franklins was never given any explanation of what costs Metcash incurred in running its warehouses, or of how the costs it incurred in running the warehouses justified the particular number of cents per case that was to be charged as a service fee. By recital D of the Supply Agreement, Franklins expressly recognised Metcash’s need to “cover all incremental costs”, so the reasonable bystander would be entitled to conclude that, one way or another, the remuneration that Metcash would receive would cover all incremental costs.
365 Further, the profit margin on turnover would itself provide a significant gross income to Metcash. The profit is charged as a percentage of “Wholesale 5”. If one bears in mind that the rationale for the parties’ agreement on payment terms was that Metcash would not be involved in using its own capital to finance stock that was in its warehouse and was on-sold to Franklins, and that stock remained in its warehouse for on average 14 days before moving out (para [122] above), charging a profit margin of initially 1.5%, then 2.0% on the “Wholesale 5” price would have the effect that Metcash would earn that profit margin, on average every 14 days, on the total amount of goods it sold to Franklins during that 14 days. That in itself would generate significant income for Metcash.
366 It is not apparent that the combination of the profit margin, service fee per case and stock profit would not be sufficient to enable Metcash to meet its stated objective of covering all incremental costs and making an acceptable profit if it were to pass on to Franklins the benefit of the various confidential discounts and allowances that Mr Simpkins identifies.
The Significance of Clause 4.4(a)
367 It will be recalled that clause 4.4(a) (set out at para [101] above) includes what purports to be a specification of what is “Wholesale Price”. It starts with the “Wholesale 5” price. Whatever might be the outcome of argument about the meaning of the Disputed Words, it is at least clear that Wholesale Price, as ascertained in accordance with the Disputed Words, involves starting from a Supplier’s Wholesale List Price for the Product in question, and deducting from it any trade discounts, distributor allowances, warehouse allowances, bulk buy allowances and cash discounts that might be available. The area of dispute in the present case concerns whether anything other than those items should be deducted.
368 The purported account of “Wholesale Price” contained in clause 4.4(a) starts with the Wholesale 5 price, and then deducts from it warehouse allowances and trade, distributor and cash allowances. If the account of Wholesale Price in clause 4.4(a) were to be applied literally (and whether “Wholesale 5” was regarded as being simply the price that appeared in Metcash’s price list from time to time, or, as in my view is correct, as having the conventional meaning agreed in the Disputed Words), the result would be that warehouse allowances, trade discounts and cash discounts were deducted twice from the supplier’s list price. If the “distributor discount” was a different thing to the “distributor allowance” it would be deducted in addition to the “distributor allowance”; if the “distributor discount” was the same as the “distributor allowance” it would be deducted twice. 369 The trial judge held (at [54]):
“Purely as a matter of construction, I do not think that there is any necessary and intractable inconsistency in the definitions of ‘Wholesale Price’ in clause 1.1 and clause 4.4(a). Clause 4.4(a) states that there are to be deductions from Wholesale 5 (which already deducts published discounts and allowances). Clause 4.4(a) can be regarded as contemplating further deductions from Wholesale 5, i.e., discounts and allowances which are not published. Such a reading of clause 4.4(a) would be consistent with a reading of the clause 1.1 definition which gives to the phrase ‘all allowances and discounts’ a meaning which includes all allowances and discounts, whether published or confidential.”
370 Mr Simpkins submits that regarding clause 4.4(a) in this way was incorrect, as the judge found (at [63]) that all the benefits listed in parenthesis in the Disputed Words were understood by Messrs Reitzer, Summers and Zelinsky as relating to published discounts and allowances, and indeed (at [70]) that all of those discounts and allowances are understood in the industry to be published, not confidential.
371 I have difficulty in seeing how clause 4.4(a) contemplates the deduction of allowances that are not published. Construing, as seems to be right, the Disputed Words as requiring the deduction of all discounts and allowances whatever from a supplier’s list price, clause 4.4(a) does not, in the words in parenthesis, contemplate the deduction of any non-published discounts or allowances at all.
372 In my view there is an intractable contradiction between clause 4.4(a) and the Disputed Words. It is to be resolved by reading out the words in parenthesis commencing “ie” in clause 4.4(a). That course should be adopted for the following reasons.
373 First, it is clause 4.3(a) that sets out Franklins’ basic obligation concerning payment. The “Purchase Price” referred to in clause 4.3(a) would be ascertained in accordance with the definition in clause 1.1, for the purpose of which the account of “Wholesale Price” given by the Disputed Words would be adopted.
374 Second, when clause 4.4(a) says “PURCHASE PRICE =” it purports to provide a formula by which the Purchase Price is to be stated on the invoice. Yet the result of application of that formula is not the Purchase Price as it has been defined. It is hardly to be supposed that the parties would have agreed to the rendering of invoices that would never accurately state the Purchase Price for the Product in question.
375 Third, clause 4.4(a), dealing as it does with invoicing is purely a machinery provision. It covers ground that is also covered by the definition of “Purchase Price” in clause 1.1. 376 Fourth, there is some textual incoherence in clause 4.4(a). The words in parenthesis end with the words “by that Supplier”, but there is nothing in the clause to identify who “that Supplier” is. While a fairly clear inference is available that the relevant “Supplier” is the supplier of the Product in question, that clause 4.4(a) operates only by using that inference tends against it having primacy to the Disputed Words.
377 Fifth, there is an element of unexplained irrationality in deducting the warehouse allowances, trade distributor and cash discounts from Wholesale 5, when at least some of those items have already been deducted from the supplier’s list price to arrive at Wholesale 5.
378 It was the words in parenthesis in clause 4.4(a) that was the basis of Metcash’s submission that it was only four specified types of discount or allowance that were to be deducting in ascertaining the Wholesale Price, namely the four that were listed in the words in parenthesis in clause 4.4(a), rather than the five types of discount or allowance identified in the Disputed Words. I should state in fairness that this submission was not strongly pressed. However, when on its proper construction the words in parenthesis in clause 4.4(a) are read out of the agreement, that particular submission cannot succeed.
Use of Recitals – Principles
379 There is a common and long-standing practice of including in a deed or agreement certain introductory words, traditionally called recitals, that are written in the document before words such as “Now this deed witnesses...” or“It is agreed...” that state the operative content of the deed. Recitals can be of various kinds – including statements of the factual background to the transaction, statements of the intention or object of the parties in entering the transaction, or statements that the parties (or one or other of them) have agreed to do or will do certain acts.
380 Because of this variety of recitals, and because the task of the court is to interpret the particular document that is in dispute, statements in cases to the effect that recitals should always be treated in some particular way in construction of an agreement should be treated with caution, and as subject to the context in which they were uttered. In particular, relevant types of context could be the type of recital that was being considered in the particular case, the type of operative provision the recital is sought to be used as an aid to construction of, and whether other assistance can be derived from other operative provisions of the document in construing the provision that is in question. Subject to that caveat, there are some principles that emerge from the case law, which might at least constitute guidelines as to how recitals can be used in construction of an operative provision. (1) The recitals are a part of the agreement, and can be used as an aid to construction of an operative provision in an agreement: Lee v Alexander (1883) 8 App Cas 853 at 870; Orr v Mitchell [1893] AC 238 at 252-3, 254; Inland Revenue Commissioners v Raphael [1935] AC 96 at 143. (2) Nevertheless, there is a distinction between the operative terms of a contract and the recitals. Although the recitals can assist in the construction of a contract, they are not themselves operative terms:Bath and Mountague’s Case (1693) 3 Chan Cas 55 at 101; [1685] EngR 4120; 22 ER 963 at 991; Young v Smith (1865) LR 1 Eq 180 at 183; IRC v Raphael at 135, 144. (3) There is a great deal of authority from the 19th and early 20th Century to the effect that the manner in which the recital can be used depends upon whether either the recital or the operative provision is “ambiguous”: eg, Ex parte Dawes, In re Moon (1886) 17 QBD 275 at 286; In re Michell’s Trusts (1878) 9 Ch D 5 at 9; Young v Smith at 183-4; Orr v Mitchell at 254; Morrison & Goolden, Norton on Deeds, 2nd ed (1928) Sweet & Maxwell, at p 197 ff. These authorities take the view that recitals can be used to determine the meaning of an ambiguous operative provision, but cannot cut down operative words that are clear and unambiguous, even if the recital is also clear and unambiguous and is contrary to the operative provision: Ex parte Dawes, In re Moon at 286; see also Walsh v Trevanion (1850) 15 QB 733 at 751; 117 ER 636 at 642 and Mackenzie v Duke of Devonshire [1896] AC 400 at 405-6, 407, 408. These authorities have been applied by intermediate courts of appeal in Australia:O’Loughlin v Mount [1998] SASC 7151; (1998) 71 SASR 206 at 217-19; Chacmol Holdings Pty Ltd v Handberg [2005] FCAFC 40; (2005) 215 ALR 748 at [38]- [50], [105]; Harpur v Levy [2007] VSCA 128; (2007) 16 VR 587 at 601 [63]; Ellis v Dariush- Far [2007] QCA 398; (2007) 242 ALR 635 at [18], and by Isaacs J in dissent in Bebarfald & Co Ltd v Macintosh [1911] HCA 8; (1911) 12 CLR 139 at 161-3. (4) There are also more recent authorities which state that recitals can provide a means of proving background facts that are themselves legitimate aids to construction: Rutter (Inspector of Taxes) v Charles Sharpe & Co Ltd [1979] 1 WLR 1429 at 1433D; Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd [2004] NSWCA 114; (2004) 12 BPR 22,879 at [77]-[78]; Square Mile Partnership Limited v Fitzmaurice McCall Limited [2006] EWCA Civ 1690; [2007] 2 BCLC 23 at [52], see also section 53(2)(a) Conveyancing Act 1919. They can be at the least an admission by the party to the deed of the truth of the matter stated, under the general law concerning evidence. In some circumstances they could give rise to an estoppel by deed, or an estoppel by convention, that prevented a party to the document asserting the contrary of the fact stated in the recital: Greer v Kettle [1938] AC 156 at 170-1; Cousens v Grayridge Pty Ltd [2000] VSCA 96 at [57]; Caboche v Ramsay (1993) 119 ALR 215 at 236-7; 27 ATR 479 at 499 (FCAFC); Eslea Holdings Ltd v Butts (1986) 6 NSWLR 175 at 188. (5) Recitals which state that parties, or one or other of them, will carry out a particular action can be used to support an implied term in the agreement Ansett Transport Industries (Operations) Pty Ltd v Commonwealth [1977] HCA 71; (1977) 139 CLR 54 at 72; Aspdin v Austin (1844) 5 QB 671 at 683-5; [1844] EngR 129; 114 ER 1402 at 1407-8, but not recitals which merely set out the objects of the parties: Ansett Transport Industries (Operations) Pty Ltd v Commonwealth at 62-3, 73, 85-6. There is no occasion to make the implication if the document contains an express covenant relating to the same subject matter: Dawes v Tredwell (1881) 18 Ch D 354 at 359 cited in O’Loughlin v Mount at 217.
381 An illustration of how their status might merely be that of guidelines is found in Tom Elvin Pty Ltd v Knell [2003] ACTSC 36 at [19], where Crispin J said:
“Despite the apparently unequivocal statements in some of the authorities cited that case I am not persuaded that operative parts of a deed, even if otherwise apparently clear and unambiguous, could never be read down by reference to the recitals. I am inclined to think that there may be cases in which the recitals may so clearly spell out the scope of the intended transaction that it would be an affront to common sense not to treat them as providing a context within which operative provisions in the deed should be construed”.
382 I also note the leaving open of the question by Maxwell P in his dissenting judgment in Harpur v Levy at 592 [17].
383 Although much of the older English authority on the subject of recitals seems to insist upon a preliminary finding of “ambiguity” in the operative provisions of a contract before the recitals can be used as an aid to interpretation, it appears that this was simply part of the wider requirement insisted upon at the time that unambiguous words be interpreted without any extrinsic aids. This seems evident from the explanation of “ambiguity” in the speech of Lord Macnaghten in Orr v Mitchell at 254:
“When the words in the dispositive or operative part of a deed of conveyance are clear and unambiguous they cannot be corrected by reference to other parts of the instrument. When those words are susceptible of two constructions the context may properly be referred to for the purpose of determining which of the two constructions is the true meaning. In order to justify a reference to the context for this purpose, it is not necessary that the language of the dispositive or operative clause should be ambiguous in the sense that without some help you cannot tell which of two meanings should be taken. The rule applies though one of the two meanings is the more obvious one, and would necessarily be preferred if no light could be derived from the rest of the deed. For the purpose of construing the dispositive or operative clause, the whole of the instrument may be referred to though the introductory narrative or recitals leading up to that clause are, perhaps, more likely to furnish the key to its true construction than the subsidiary clauses of the deed.” (emphasis added)
384 It seems likely from this passage that the requirement of ambiguity did not exist as a special rule relevant to the use of recitals, but rather as part of the general rule relating to context. However, Lord Macnaghten clearly contemplates, in the final sentence, that recitals can be used to interpret the operative provisions of a contract.
385 The way in which a perceived need to find ambiguity before one could go outside the operative provisions of a document for assistance in construing that document was the nineteenth century view also appears in the statement in Lee v Alexander at 869-70 of when recitals could be an aid to construction. Lord Blackburn (in construing a dispositive clause in a deed of conveyance) explained how recitals (narrative) could be used:
“I take the canon of construction to be that where the description of the premises assigned is clear and unambiguous, effect must be given to it by the Court, even though convinced from other parts of the deed that it was not what the parties meant to say. But general words following a specific description rarely, if ever, clearly and unambiguously express that everything which may come within that general description is to pass. They may, and more commonly do, mean that if there is anything which virtually and in substance is part of the thing described, though it may be not perfectly described, that shall pass; and consequently I think it is legitimate to look at the narrative in the deed, and still more at the dispositive words used, in order to see whether there appears on the face of the conveyance a sufficient indication that it was intended to restrict those general words, secundum subjectam materiem.”
(As to the last phrase, see further Leaway Pty Ltd v Newcastle City Council (No 2) at [75]-[84].)
386 Similarly, in IRC v Raphael at 142-3, Lord Wright (with whom Lord Thankerton agreed), before commencing to examine the authorities relating to the use of recitals, said:
“It must be remembered at the outset that the Court, while it seeks to give effect to the intention of the parties, must give effect to that intention as expressed, that is, it must ascertain the meaning of the words actually used. ... The words actually used must no doubt be construed with reference to the facts known to the parties and in contemplation of which the parties must be deemed to have used them: such facts may be proved by extrinsic evidence or appear in recitals ...” 387 However, after examining the authorities, his Lordship felt constrained by the earlier authority of Mackenzie v Duke of Devonshire, particularly the forceful words of Lord Halsbury LC at 406:
“... I never in my life heard of the language of a deed which contained a perfectly unambiguous provision being twisted from the natural ordinary meaning of the words by a preliminary statement of what the maker of the deed intended should be the effect and purpose of the whole deed when made.”
388 This reasoning, which proceeds on the basis that it is possible to interpret an operative provision in a contract in an acontextual manner, cannot stand with the High Court’s statements that interpretation necessarily involves a consideration of the words of the contract in their context: Maggbury at 188 [11], Pacific Carriers at 462 [22], Toll v Alphapharm at 179 [40], IATA v Ansett at 160 [8], 174 [53]. The criticisms of Lord Hoffmann in Charter Reinsurance v Fagan and Mannai, and the triumph of the “common sense principles by which any serious utterance would be interpreted in ordinary life” over “the old intellectual baggage of ‘legal’ interpretation” which occurred in Investors Compensation means that, insofar as these earlier decisions require a finding of “ambiguity”, and proceed on the basis that it is possible to read the operative provisions without the aid of context, those decisions should not be followed. It would follow then that the recitals in a deed can be looked at as part of the surrounding circumstances of the contract without a need to find ambiguity in the operative provisions of the contract.
389 However, it should be emphasised that (at least for recitals not saying that one or other party will carry out a particular action) the recital is merely a means by which the surrounding circumstances and purpose of the transaction can be ascertained. Where recitals purport to record the surrounding circumstances and purpose of a transaction, it is those surrounding circumstances or purposes “as can be got from the language of the recital in the deed itself” that are used to construe the contract (Rutter v Charles Sharpe at 1433D; see also Peppers Hotel Management v Hotel Capital Partners at [77]-[78] (per McColl JA); Square Mile Partnership at [52]; Lewison,The Interpretation of Contracts, at [10.11], p 396-7). As Lord Wright put it in IRC v Raphael at 144: “The nature of recitals as statements of facts which are in the contemplation of the parties, is illustrated by the Scotch term ‘narrative.’ ”
390 That a recital can be looked at as part of the surrounding circumstances of the contract still leaves room for the rule (accepted by intermediate courts of appeal in Australia and by Isaacs J in Bebarfald & Co Ltd v Macintosh) that where the recital is in conflict with the true interpretation of an operative provision (according to the modern standards of interpretation), the operative provision prevails. Strictly speaking, that is not so much a rule of construction as a reflection of the fact that recitals are not operative provisions in a contract. Use of Recitals – Application
391 In the Supply Agreement, recitals B and C are statements of the joint wish of the parties. They are in the nature of objects of the agreement. Recitals D and E take the form of a “recognition” by one party of a “need” of the other. It would be appropriate to interpret the agreement, consistently with its operative terms, in a way that enabled those needs to be met.
392 Recitals F and G are in the form of statements of what will happen under the agreement. There are examples, beyond the one relied on by Mason J in Ansett, of cases that have recited that it had been agreed that a certain thing should happen, where no express covenant to do that thing was contained in the deed, where the court construed the recital as giving rise to an implied covenant that the thing should be carried out: Sampson v Easterby[1829] EngR 488; (1829) 9 B & C 505; 109 ER 188, affirmed in the Exchequer Chamber Easterby v Sampson [1830] EngR 668; (1830) 6 Bing 644; 130 ER 1429; Mackenzie v Childers (1889) 43 Ch D 265. After discussing these cases, Lewison, op cit, at [10.15], p 404 says:
“But the court will in any case be cautious in spelling a covenant out of a recital, because that is not the part of the deed in which covenants are usually expressed: Farrall v Hilditch [1859] EngR 331;(1859) 5 CB NS 840 [144 ER 337]. The court must be satisfied that the language does not merely show that the parties contemplated that the thing might be done, but it must amount to a binding agreement upon them that the thing shall be done: James v Cochrane (1852) 7 Exch 170 [155 ER 903] ... It is of course difficult as a matter of language to construe a recital (‘whereas A has agreed’) as meaning ‘A hereby agrees’.”
393 A footnote to that last sentence is apposite to the present case:
“A recital is cast in the form of a statement of fact (usually past fact) whereas a promise is a matter of present obligation. A promise unlike a statement of fact is a ‘performative utterance’ (ie something of which it cannot be said that it is true or false; it creates the obligation merely by being uttered): see JL Austin, How to Do Things With Words.”
394 The use of the future tense in recitals F and G may have meant that the words created a contractual obligation if those words had appeared after the statement “it is agreed” – though the imprecision of at least some aspects of what is said “will” happen might have created its own problems of construction or perhaps even uncertainty. It is unnecessary to decide whether they also create a contractual obligation in their own right when they appear under the heading “Introduction”. It suffices that the parties have, at the least, expressed objects that, in at least the respect dealt with in Recital F, is fairly specific. The Recitals F and G are consistent with the definition of “Wholesale Price” being construed so that all allowances and discounts of whatsoever kind that Metcash received from the supplier are deducted from the wholesale list price. Construing the definition in that way is consistent with Franklins having “the interface with all Suppliers”. The use of the definite article, in a context where the parties clearly recognised that Metcash would continue to have an ongoing relationship with suppliers, in that it would be the purchaser and would need to take delivery of and store the goods, means, when given a commercial construction, the sort of interface that is relevant to Franklins’ destiny. That is consistent with it being Franklins that would negotiate non-public terms.
395 The recital goes on to say that Franklins will “collect all rebate and coop funds”. It does not say that Franklins will “collect all the rebate and coop funds that it is able to negotiate for itself”. The word “collect” is well capable of meaning “ultimately receive”, and is not restricted to “receive directly from the supplier”.
396 If Metcash were free to conduct secret negotiations with suppliers, to obtain for its own benefit discounts, rebates or allowances on the volume of goods purchased for on-sale to Franklins, this would inevitably inhibit Franklins’ ability to negotiate with suppliers for benefits on its own volume. It would result in Metcash being in a situation where it stood to do more than “cover all incremental costs [and] make an acceptable profit”. It had already stipulated its profit margin, in clause 4.4(c), and clause 1.1 defined “Profit Margin” as meaning the profit margin arising from clause 4.4(c). For Metcash to receive such benefits, at least in any significant way, would involve it moving outside the role of being “principally the ‘box mover’”.
397 In the present case the significance of the recitals is underlined by clause 2.1 of the Supply Agreement which says: “Each party agrees that the recitals to this agreement as they relate directly to it are true.”
398 Having regard to the recitals makes no difference to the construction of the definition of Wholesale Price that I have arrived at, independently of the recitals.
Conclusion Concerning Construction
399 For the above reasons, in my view the trial judge was right in the construction he gave to the definition of Wholesale Price.
PART C – RECTIFICATION
Metcash’s Pleaded Case
400 At the trial, Metcash’s rectification claim was ultimately formulated in an Amended Cross-Claim dated 8 September 2006. The hearing began on 11 September 2006. 401 In its pleading Metcash’s allegations concerning rectification were put in the alternative to its allegations concerning the contractual agreement between the parties. It alleged that there was a succession of agreements starting with one on 24 May 2001, that replaced each other as the negotiation advanced. The Agreement (as defined) was alleged to be in the terms of the 24 May 2001 letter (para [138] above), and provided, so far as price was concerned:
“Metcash will charge Pick n’ Pay at Wholesale 5.
Wholesale 5 is the current supplier wholesale cost less all trade discounts, warehouse allowances, bulk buy allowances and cash discount.”
402 Metcash alleged that there was then a Revised Agreement entered on 14 June 2001 namely the letter of that date (para [161] above). Notwithstanding what that document said about price (a matter that, understandably in its own interests, Metcash did not expressly state in its pleading) Metcash alleged that it was (then) the common intention that Franklins would pay the price stated in the 24 May 2001 letter.
403 The next step in the pleading was an allegation that on about 12 July 2001 there was an agreement that:
“(a) Although the ‘Wholesale 5’ price the subject of the Agreement did not include the ‘Terms Adherence’ discount, [Metcash] would nevertheless account to [Franklins] for such discount in respect of [Franklins’] volumes every 6 months; (b) The ‘Wholesale 5’ price the subject of the Agreement did not include the discounts, allowances and rebates described as:-
(1) ‘Coop Deferred’;
(2) ‘Coop in Lieu’;
(3) ‘State Rebate’;
(4) ‘House Brands’;
(5) ‘Central/Redist’;
(6) ‘Slow Moving Rebate’; (7) ‘Direct/X-dock/Early Pay’;
(8) ‘Coop O&A’; and
(9) ‘National Rebate’ and [Metcash] would not account to [Franklins] for any of them; (c) If [Metcash] obtained a discount for making a payment to a Supplier sooner than required by that Supplier’s normal terms of trade, [Metcash] would retain such benefit but not take such early payment into account in calculating the ‘Payment Terms’ for the purposes of the Revised Agreement (‘the First Clarification/Variation’).”
This agreement was particularised as having been made at the Pie Chart Meeting.
404 Alternatively, the pleading alleged that in or about July 2001 it was agreed that:
“(a) The ‘Wholesale 5’ price the subject of the Revised Agreement would only include published discounts described as:- (1) ‘Trade Discount’;
(2) ‘Warehouse Allowances’;
(3) ‘Quantity Buy Allowance’; and (4) ‘Settlement Discount’; (b) [Metcash] would retain and not pass on to [Franklins] the discounts, allowances and rebates described as:- (1) ‘Central/Redist’; (2) ‘Slow Moving Rebate’; and (3) ‘Direct/X-dock/Early Pay’; regardless of whether they were calculated by reference to [Franklins’] volume or not (“the Second Clarification/Variation”);”
This agreement was particularised as arising from the circumstances of production of the Laminated List, and its use thereafter by both parties.
405 The way in which the common intention was pleaded was:
“It was the common intention of [Franklins] and [Metcash] at the time of entry into the Supply Agreement that it more formally record the arrangements then in place between [Franklins] and [Metcash] being those contained in the Revised Agreement as clarified or varied by the First Clarification/Variation and/or the Second Clarification/Variation (including the arrangement that the price was that stipulated for in the Agreement).”
406 There was also an alternative pleading of rectification founded upon the intention of Metcash alone, that was known to Franklins. However, that way of putting the case was not found by the judge, and was not pressed on appeal. The Agreed Issue
407 The agreed issue that the judge addressed concerning rectification was simply:
Whether the formal Supply Agreement ought to be rectified and, if so, in what manner.
Metcash’s Submissions Below on Rectification
408 In Metcash’s closing written submission at the trial it stated:
“Metcash contends that it was only obliged to give Franklins the benefit of published discounts and allowances being trade discounts, distributor allowances, warehouse allowances, bulk buy allowances and settlement discounts (otherwise known as cash discounts). In other words, Metcash contends that the agreement was that it would charge [Franklins] its (that is, Metcash’s) ‘Wholesale 5’ price (the Metcash meaning).”
409 It stated that a principal issue requiring determination was:
“... if the agreement bears the Franklins meaning, can it be rectified to give effect to the Metcash meaning[?]”
410 Metcash’s supplementary outline of submissions in reply at the trial, para 84, said:
“Accordingly, the evidence clearly establishes that the common continuing intention of the parties as at 14 September 2001 was that Franklins agreed to pay Metcash’s ‘Wholesale 5’ price – namely, the supplier’s list price less the following published discounts (if available): trade discounts, warehouse allowances, distributor allowances, quantity buy allowances and settlement discounts.”
The Judge’s Findings Concerning Rectification
411 I have earlier set out at para [144] Mr Zelinsky’s cross-examination concerning Mr Reitzer’s letter of 17 May 2001, and the judge’s findings concerning it. That cross-examination was directed to Mr Zelinsky’s understanding, as at 17 May 2001, of what the Supply Agreement would ultimately contain concerning price. The judge went on to set out Mr Summers’ letter of 4 March 2003, and the cross-examination concerning it that I have quoted at para [221]. He then made the findings that I have set out at para [222] above. While those findings started with findings concerning the letter of 4 March 2003, they conclude with a rejection of evidence that Mr Summers gave concerning his understanding of Wholesale Price in the agreement as ultimately executed. 412 Part of the judge’s finding concerning the meeting of 14 June 2001 bears upon his ultimate conclusion concerning rectification. He found (at [138]) that that meeting:
“... was not a meeting for the purpose of negotiating the basic terms of the Supply Agreement. Those terms had been settled by 17 May. Rather, it was a meeting of fourteen people comprising the senior management executives of the parties, as well as Messrs Reitzer and Zelinsky, and it dealt essentially with issues as to how the agreement between the parties would work out.”
413 He made the following findings concerning the Pie Chart Meeting:
“148 Mr Zelinsky’s evidence in his witness statement was as follows:
‘During the meeting held on 12 July 2001, I said words to the effect: The purpose of this meeting is to clarify which discounts and rebates Franklins should retain and which discounts and rebates Metcash should retain, in order to resolve conflict between the Franklins buyers and the Metcash buyers and to allay suppliers’ concerns that they are being double-dipped.
I do not specifically recall Reitzer saying words to the effect:
Aubrey we have prepared a pie chart that shows every dollar that we collect that is not in the wholesale 5 price.
My understanding was that the Pie Chart showed the various confidential discounts negotiated by Metcash on its volume;’
149 It is significant that in this evidence Mr Zelinsky refers to discounts and rebates being collected by Franklins and others being retained by Metcash. This evidence is consistent with Metcash’s assertion that Wholesale Price in the Supply Agreement did not require Metcash to account to Franklins for all discounts and allowances, whether published or confidential. 150 However, Mr Zelinsky gave this evidence:
‘At some stage during the meeting held on 12 July 2001, I said words to the effect:
Any discounts or rebates on Metcash volume is for Metcash’s account. Any discounts or rebates referable to Franklins’ volume is for our account. Metcash gets paid a pick fee and a service fee for the work it will be doing for Franklins; that is the extent of Metcash’s income insofar as Franklins’ volumes are concerned.’
151 In his witness statement, Mr Ramsden supports Mr Zelinsky’s evidence and, in particular, he says that Mr Zelinsky said words to the effect: ‘Any discounts or rebates Metcash is able to negotiate on Franklins’ volume is for Franklins’ account’. Mr Jablonski’s evidence supports Mr Reitzer’s evidence, particularly as to statements by Mr Reitzer that Metcash would be collecting and retaining discounts referable to Franklins’ volumes which Franklins would not be able to collect for itself.” (Trial judge’s emphasis)
414 Franklins had submitted to the judge that the Laminated List supported its assertion that the Pie Chart Meeting had agreed that confidential discounts negotiated by Franklins on its own volumes of goods ordered from suppliers would be retained by it, and that all confidential discounts which Metcash raised in respect of Franklins’ volumes would also be passed on to Franklins, by deduction from the Wholesale Price. The judge’s reason for rejecting the evidence of the Franklins witnesses concerning what was said at the Pie Chart Meeting, and preferring the evidence of Messrs Reitzer and Jablonski concerning that meeting, was (at [156]-[158]):
“The laminated list makes as clear as possible by way of a worked example how Franklins is to be charged under the Supply Agreement: list price less published discounts – in other words, Metcash’s Wholesale 5 price. In addition, Franklins is to negotiate and collect its own confidential discounts on its volumes. But there are certain additional discounts – clearly, referable to volumes including Franklins’ volumes otherwise they would be irrelevant to all parties concerned – which Metcash is to obtain but is not to pass on to Franklins. That this last category of discounts comprised discounts for which Franklins would not be eligible and that they would be retained by Metcash was revealed in the ‘pie chart’ presented to Franklins’ executives at the 12 July meeting. The pie chart noted with an asterisk certain discounts received by Metcash and explained: ‘Franklins will not be able to collect’. Mr Reitzer explained at the 12 July meeting why Franklins would not be able to claim such discounts, for example, because it did not have a warehouse facility. If it had been agreed at the 12 July meeting that these additional confidential discounts would be passed on to Franklins even though it could not have otherwise obtained them, there would not have appeared on the laminated list the items under the heading ‘Metcash retain – not passed on to [Franklins]’.”
415 After accepting “that Franklins regarded as accurate the statements in the laminated list as to how published and confidential discounts were to be collected and dealt with pursuant to the terms of the Supply Agreement”, the judge continued (at [160]):
“I conclude that the laminated list strongly corroborates the evidence given by Messrs Reitzer and Jablonski as to what transpired at the 12 July meeting. In addition, it strongly supports Metcash’s case as to what the parties understood and agreed was to be comprised in the calculation of Wholesale Price under the Supply Agreement.” 416 While the judge noted the change in definition of Wholesale Price in Mr Hunter’s 13 July 2001 draft Supply Agreement, and gave an incomplete account of the changes, his only comment (at [163]) concerning those changes is:
“There is no evidence explaining why, in this draft, Mr Hunter changed the wording of the definition of “Wholesale Price” which had appeared in the 14 June letter.”
417 The judge found (at [171]):
“Franklins’ understanding that the calculation of Wholesale Price as defined in the Supply Agreement deducted only published discounts did not change from the time of Mr Reitzer’s letter of 17 May to the time of execution of the Supply Agreement: that proposition is demonstrated by what Mr Summers wrote about the definition of Wholesale Price in his letter of 4 March 2003.”
418 His Honour also set out (at [174]) the following portion of Mr Summers’ letter of 4 March 2003 (see para [218] above), that he regarded as setting out “the real basis of Franklins’ complaint”.
“Following the commencement of our trading with you, certain issues became contentious and the first one concerned payment terms. ... The second major area of contention has been the issue of ‘redistribution allowances’. Likewise, this manifested itself post the contract being drawn and was presented to us by you on the basis of being a ‘handful’ of suppliers that amounted to ‘five eighths of nothing’ who have this agreement with Metcash. Given the relatively insignificant way it was presented to Aubrey, he agreed that you could continue with these arrangements that you had in place. During the course of our discussions, you informed me that redistribution allowances in fact applied to approximately 3 pages of suppliers and that in total, you had deducted approximately $2.1 million. Of this, you believe that only $600,000.00 was applicable to Franklins, as the balance was subject to negotiations that existed prior to your commencing supplies to Franklins. This amount of money in the first instance certainly does not represent ‘five eighths of nothing’ and secondly, cuts right across the statement as presented as a ‘handful of suppliers’. When we have raised this with your executives individually, they have told us to come forward with any evidence that we may have and they will assess it on a case by case basis. If Metcash have deducted, we will be reimbursed. I certainly do not believe that our understanding ever was on a ‘catch us if you can’ basis and we believe that we are entitled to a full list and disclosure of suppliers where redistribution allowances have been deducted. The current status quo, therefore, leaves us with three main issues to be dealt with:- – ... Redistribution Allowance
We need to establish precisely what Metcash has deducted in terms of redistribution allowances and have discussion as to the reason for the exclusion of this allowance in Wholesale Five. The significance of the amounts of money involved demand this. Once we have established these principles, we then need to establish repayment of these funds to Franklins, as it was clearly never the intention that the profit margin enjoyed by Metcash would be in excess of 1.5% as agreed by us. This practice has been tantamount to ‘double dipping’ as a source of remuneration on our volumes.” (Emphasis added in the judgment below).
419 The judge continued, at [175]-[176]:
“175 The last paragraph is particularly revealing. In view of the large amount of money involved in the Redistribution Allowance, Mr Summers wishes to explore ‘the reason for the exclusion of this allowance from Wholesale 5’. In other words, Mr Summers acknowledges that the Redistribution Allowance, being a confidential discount, was not a discount to be deducted in calculating the Wholesale Price under the Supply Agreement, but he wishes to revisit that state of affairs in further negotiations because his real complaint is that Metcash is making more profit out of the Supply Agreement than Franklins had anticipated. 176 In the light of the evidence which I have discussed, I make the following findings and draw the following inferences:
– as at the date of execution of the Supply Agreement the parties had agreed that Franklins would be charged for its volumes at Metcash’s Wholesale 5, which deducted from suppliers’ list prices only published discounts and allowances and this was the sense in which both parties understood Wholesale Price in the clause 1.1 definition in the Supply Agreement;
– the parties had agreed that Franklins would negotiate and collect from suppliers its own confidential discounts on its own volumes of goods;
– the parties had agreed that Metcash would negotiate for and retain confidential discounts on the combined volumes ordered for itself and Franklins but only in respect of the kinds of discounts that Franklins would not be able itself to obtain from suppliers because, for example, those discounts depended on the purchaser having warehouse facilities or redistribution facilities, which Metcash had but Franklins did not have;
– because Franklins could not obtain these discounts for itself in its own negotiations with suppliers and because it believed the discounts to be of relatively insignificant value – ‘five eighths of nothing’ is a phrase referred to by Franklins – it did not consider it worthwhile to endeavour to compel Metcash to account for them; – after the Supply Agreement had been executed, Franklins came to believe that the ‘five eighths of nothing’ confidential discounts which Metcash was retaining were in fact worth a considerable sum of money. When Mr Zelinsky and Mr Summers confronted Mr Reitzer with this fact and Mr Summers threatened to bring the parties’ business relationship to an end, Mr Reitzer, to keep the relationship on foot, agreed to refund the Redistribution Allowance;
– it was only later that Franklins, aggrieved by the fact that Metcash was retaining other confidential allowances on Franklins’ volumes of goods which Franklins was not able to obtain for itself, realized that the words of the definition of Wholesale Price in the Supply Agreement – ‘all discounts and allowances’ – were, if read literally, wide enough to include all confidential discounts, as well as all published discounts. Hence Mr Summers’ evidence in his witness statement: ‘the definition of ‘Wholesale 5’ price that I recall Reitzer using ... was as per the definition of ‘Wholesale Price’ in the Supply Agreement’: ... Hence, the unconvincing explanation which Mr Summers gave to the question why he had referred in his 4 March 2003 letter to Wholesale Price as deducting only published discounts: ...
177 For the reasons I have given, I am satisfied by proof which I regard as clear and convincing that, although the definition of Wholesale Price in the Supply Agreement does not, as a matter of construction, require only published discounts to be deducted from the suppliers’ list prices, nevertheless this was the actual agreement and intention of the parties at the time that they executed the agreement.”
420 The expression “five-eights of nothing” that the judge adopted comes from evidence of Mr Zelinsky, that a short time after 12 July 2001 he found out that Metcash was retaining redistribution allowances on goods in Franklins volume. Mr Zelinsky said that he discussed this matter at a meeting at which Messrs Reitzer, Jablonski and Ramsden were also present, and that Mr Jablonski told him not to worry about it because the discounts“amount [to] five-eights of nothing”. Mr Reitzer said that he accepted that assurance and did not press for the redistribution allowance to be paid to Franklins. Mr Reitzer and Mr Jablonski each denied ever having been present at any such meeting. The judge made no finding about whether the statement had actually been made at that time (as opposed to later asserted in Mr Summers’ letter of 4 March 2003). This court is not in a position to be affirmatively satisfied that any such statement was made.
421 The judge explained the nature of the mistake the parties had made (at [180]):
“The parties did not make a mistake in the drafting of the words of the definition by omitting the word ‘published’ by some oversight or typographical error. Rather, I infer that the omission was due to the fact that both regarded the word as inherently implicit in the definition, so that the qualification ‘published’ went without saying. The parties did not appreciate that, looked at later through the eyes of lawyers, the words of the definition of Wholesale Price did not have the meaning which they intended them to have. It was in this sense that the parties’ intentions miscarried by mistake, ie for want of proper expression.”
422 He dealt with a submission that the failure of Metcash to call Mr Hunter to explain how that mistake occurred should be the basis for a Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 inference against Metcash. He rejected that submission (at [182]):
“However, as I have said, I do not think that the mistake was one susceptible of explanation by the person who drafted the document. I infer that the lack of proper expression of the parties’ common intention became apparent only when Franklins subsequently realised that the words of the definition of Wholesale Price, read literally, did not mean what the parties thought they had meant. The failure of Metcash to call Mr Hunter is, therefore, in my view, of no significance where there is otherwise clear and convincing proof of what the parties’ relevant intention was at the time of execution of the Supply Agreement.”
423 The judge concluded, at [183], that the appropriate amendment to make to the Supply Agreement to effect its rectification:
“... is simply to insert the word ‘published’ before ‘allowances’ in the phrase ‘less all allowances and deductions’ in the clause 1.1 definition of Wholesale Price.”
424 In Judgment 2, the trial judge gave answers to those of the 21 questions that he thought appropriate to answer, and held that the Supply Agreement should be rectified by:
“(a) the insertion of the word ‘published’ before the word ‘allowances’ in the phrase ‘less all allowances and discounts’ in the definition of ‘Wholesale Price’ set forth in Clause 1.1 thereof; and (b) the deletion of the words ‘less warehouse allowances and trade, distributor and cash discounts provided to Metcash by that supplier’ which appear after the words ‘in which the Business is located’ in Clause 4.4(a) thereof.”
425 Later, Metcash sought some additional orders that amounted to an invitation to the judge to revise orders that he had earlier made. One of the additional orders sought was:
“The Court answers question 8 (in relation to the rectified Supply Agreement) by holding that only the following published allowances and discounts (if available) were included in the calculation of the defendant’s ‘Wholesale 5’ price on the proper construction of that term: trade discounts, warehouse allowances, distributor allowances, quantity buy allowances and settlement discounts.” 426 In Judgment 4, the trial judge declined to make any such order. His reasons included (at [11]):
“What are published discounts and what are not published discounts is a question of fact. There was some conflicting evidence at the trial as to what was a published discount and what was not a published discount, but that was basically ... concerned with questions of terminology, not whether some particular discount, however described, was or was not ‘published’, ie known to persons other than the particular supplier to Metcash and Metcash itself.”
427 Thus, it is apparent that, in the common continuing intention that he found, there was a potential for the “published allowances and discounts” to extend beyond the five named types of discounts and allowances that appear in parenthesis in the definition of “Wholesale Price” in the Supply Agreement.
Metcash’s Evidence on Subjective Intention
428 Mr Reitzer’s evidence in chief on this topic was:
“I caused Franklins [sic] to sign the supply agreement on 14 September 2001 on the understanding that that agreement reflected the arrangements expressly recorded and agreed to in the laminated list. I would not have allowed Metcash to sign the agreement had Zelinsky or Summers, or anyone else on behalf of Franklins, asserted that the agreement was in some way inconsistent with the arrangements expressly recorded in the laminated list. The laminated list had been especially prepared for the very purpose of utilising during the term of the supply arrangement between Metcash and Franklins.”
429 The judge made no finding that he accepted this evidence. I observe that the evidence does not purport to be a statement of what Mr Reitzer understood to be all, and only, the discounts and allowances that could be deducted in the course of the agreement from a supplier’s list price to ascertain the price at which goods would be sold to Franklins. While the Laminated List sets out the manner in which the figure called Wholesale 5 in the Metcash computer system is derived (namely list price less the four itemised types of published discounts), it does not deal with the way in which Franklins is to “collect” those benefits the Laminated List states that Franklins is to“collect”. While the Laminated List is clear in its statement concerning certain particular benefits that Metcash is to retain and not pass on to Franklins, it does not say anything about what is to happen if any benefits, of a kind not appearing on the Laminated List, were to arise in the future.
Test for Appellate Alteration of a Rectification Order
430 The judge’s finding concerning the common continuing intention of the parties is a mixed finding of fact and law. The legal element of it concerns what sort of thing counts as a common continuing intention: eg Ryledar v Euphoric at 657 [267] ff. The factual element concerns what was the subjective intention of the various people who were the relevant contracting minds, and whether those subjective intentions have been disclosed by each to the other in such circumstances that their subjective intentions are not only identical in content, but known, and known to be known, to each other. An appellate court is justified in rejecting the factual element of a trial judge’s finding of common intention only in circumstances where “incontrovertible facts or uncontested testimony will demonstrate that the trial judge’s conclusions are erroneous, even when they appear to be, or are stated to be, based on credibility findings” (Fox v Percy [2003] HCA 22; (2003) 214 CLR 118 at 128 [28]), or if the decision at trial is glaringly improbable or contrary to compelling inferences (ibid at 128 [29]). The present is not a case where the judge’s conclusion on common intention was an inference drawn from facts which are undisputed or which, having been disputed, are established by the findings of a trial judge (in which type of case the appellate court is in as good a position as the trial judge to decide on the proper inference: Warren v Coombes [1979] HCA 9; (1979) 142 CLR 531 at 551).
Correctness of the Judge’s Common Intention Finding?
431 A striking feature of the order for rectification made in the court below is that it amends the written terms of the Supply Agreement in a way for which neither party contended at the hearing below, and which neither party supports on the appeal. For a remedy that is supposed to give effect to the common intention of the parties to be said by both parties to be erroneous is not a sufficient reason to overturn the order, but is sufficient to make one consider carefully the reasoning that led to the order.
432 The judge’s finding, at [177] was that the “actual agreement and intention of the parties” was that “only published discounts [were] to be deducted from the suppliers’ list prices”. This finding was influenced by the judge’s view of witnesses who he saw, and this Court did not. Even so, the finding is wrong in two separate ways, each of which alone is sufficient to warrant its reversal consistently with Fox v Percy.
433 The first way is that the parties had agreed at the Pie Chart Meeting that the term adherence allowance, which was not a published discount, would be collected by Metcash and passed on to Franklins. That agreement never altered. It is inconsistent with the judge’s finding of common intention.
434 The second way that the judge’s finding at [177] is erroneous emerges from some findings about the outcome of the Pie Chart Meeting that he made at [176], and that I here repeat. “– the parties had agreed that Metcash would negotiate for and retain confidential discounts on the combined volumes ordered for itself and Franklins but only in respect of the kinds of discounts that Franklins would not be able itself to obtain from suppliers because, for example, those discounts depended on the purchaser having warehouse facilities or redistribution facilities, which Metcash had but Franklins did not have; – because Franklins could not obtain these discounts for itself in its own negotiations with suppliers and because it believed the discounts to be of relatively insignificant value – ‘five eighths of nothing’ is a phrase referred to by Franklins – it did not consider it worthwhile to endeavour to compel Metcash to account for them”.
435 Mr Meagher submits that there are two flaws in the first of these findings. One is that the judge identifies the agreement that the parties had reached at too high a level of generality. The parties did not agree that Metcash could retain the kind of benefit “that Franklins would not be able itself to obtain from suppliers because, for example, those discounts depended on the purchaser having warehouse facilities or redistribution facilities, which Metcash had but Franklins did not have”. Rather, they reached agreement about Metcash being able to retain certain identified and specific types of benefit, namely those identified under the heading “Metcash retain – not passed on to [Franklins]” in the Laminated List. The second flaw is that there was a confidential discount, which Franklins would not be able itself to obtain from suppliers, that it was agreed Metcash would pass on to Franklins, namely the term adherence allowance.
436 As will later appear, I agree that the finding is flawed in those two respects. However those flaws do not detract from the central notion of the first finding, that the agreement of the parties at the Pie Chart Meeting about the kinds of confidential discounts for which Metcash could negotiate concerning Franklins’ volumes of goods was limited in extent and did not extend to the full range of potential confidential discounts. After modification to remove the two identified flaws, the judge’s finding about the limited scope of agreement on the confidential discounts that it was mutually understood Metcash could retain is correct.
437 It was only concerning those specific confidential benefits that the parties had a common understanding that Metcash was entitled to keep confidential benefits. The judge’s finding at [177] that the common intention was that “only published discounts were to be deducted” has implicit in it that the parties had turned their attention to the full range of possible discounts, and had reached the common understanding that it was only the published discounts that were to be deducted. Such a common intention would have as a corollary that the common intention was that Metcash was free to deduct the full range of confidential discounts. For Metcash to be free in that way is inconsistent with the judge’s finding about the agreement being only that Metcash was to be free to retain a limited range of confidential benefits (with nothing agreed about any other confidential benefits that there might be).
438 The judge’s finding that the common intention was that “only published discounts were to be deducted” is significantly different to the intention that the parties clearly had, that the itemised types of discounts that were shown in the Laminated List as being deductions from the list price should actually be deducted, coupled with the common knowledge of the parties that those itemised types of discounts were published ones. A finding in terms that there was a common intention that “only published discounts were to be deducted” has implicit in it that the parties had considered the full range of discounts, and reached a common understanding on which of them should be deducted and which should not. In contrast, a finding that they had a common intention that certain specified discounts, which happened to be published, should be deducted involves no such implication that the parties have surveyed the entire field of potential discounts and divided it up.
439 Thus, in summary the rectification order that the judge made had the effect that the only deductions that were made from the supplier’s list price in calculating the Wholesale Price were “all published allowances and discounts”. That order:
(a) did not give effect to the common intention of the parties that the term adherence/volume discount would be deducted from the price that Franklins paid, and (b) left Metcash at liberty to negotiate for and keep confidential benefits, concerning goods that were on-sold to Franklins, that went beyond the specific types of confidential benefits that the parties, through the negotiation at the Pie Chart Meeting that resulted in the Laminated List, agreed Metcash could collect and retain.
In these respects the trial judge’s order failed to alter the Supply Agreement to no greater extent than was necessary for it to state the common intention of the parties. For these reasons, the rectification order should be set aside.
Scope of Reconsideration of Rectification
440 That leaves a question, though, about what different rectification order should be made, if any. Franklins’ primary position is that there should be no rectification order because the court cannot be satisfied, to the requisite standard, that the parties had a particular common intention that differs from the written terms of the contract. Its fallback position is that any rectification order should be one that excepted from the benefits that Metcash was required to pass on only confidential ones that were small in value, and of a type or character which meant that they were unable to be earned by Franklins directly from suppliers under any circumstances. 441 Metcash contends that the rectification order should be one that deducted from the supplier’s list price only the five itemised types of benefit listed in the definition of Wholesale Price, or alternatively the four itemised types of benefit listed in clause 4.4(a) of the Supply Agreement, or alternatively the four itemised types of benefit shown as deductions from the list price in the Laminated List.
442 Those differing contentions will require me to consider for myself what I can conclude about the common intention of the parties, in the sense that matters for rectification. That consideration will involve some examination of other arguments the parties have relied on to attack the judge’s rectification finding. If that consideration satisfies me, in accordance with the appropriate standard of proof, that the Supply Agreement should be rectified in a way different from the ways the parties contend, I should rectify it in accordance with my own conclusion.
Principles Concerning Rectification
443 Attention needs to be paid to the rationale of rectification in deciding whether a Court of Equity should rectify a particular written contract.
444 In considering whether to grant rectification of a written contract, equity does not use any of its own principles to decide what the terms of the contract are, or how they are construed – those matters are decided solely by the common law. Rather, equity focuses on what it is unconscientious for a party to assert about the contract. The rationale is that it is unconscientious for a party to a contract to seek to apply the contract inconsistently with what he or she knows to be the common intention of the parties at the time that the written contract was entered. In other words, when a plaintiff succeeds in a claim for rectification, the plaintiff is found to have been justified in in effect saying to the defendant “you and I both knew, when we entered this contract, what our intention was concerning it, and you cannot in conscience now try to enforce the contract in accordance with its terms in a way that is inconsistent with our common intention.”
445 Before that rationale can apply there has to actually be an intention of both contracting parties concerning the subject matter of the terms in which it is submitted the contract should be rectified. If the matter that has come to be the subject of debate is a matter that was not addressed during the negotiations, and/or was not otherwise shared by the parties (Ryledar v Euphoric at 660 [281]) so that there was no subjective common intention concerning it, then there is no room for rectification.
446 The remedy that is granted is, as with all equity’s remedies, one that will seek to undo, so far as is in practice possible, the departure, that the litigation has shown to exist, from equity’s standards of conscientious behaviour. The way this is achieved, when a remedy of rectification is granted, is by rewriting the contract so that it is no longer departs from the common intention of the parties. The rewriting is done in a quite literal sense – the proper form of order identifies the precise words of the contract that are to be struck out, the precise words that are to be inserted, and where those words are to be inserted: Seton’s Judgments and Orders, 7th ed (1912) vol 2, p 1638–43. As well the order usually (but not always – eg, Wilson v Registrar-General of NSW [2004] NSWSC 1220; (2004) 12 BPR 22,667 at [13]-[14]) involves calling in the original document and actually endorsing the order on the instrument that is to be rectified: Seton’s Judgments and Orders at 1644-5; Re Jay-O-Bees Pty Ltd (in liq); Rosseau Pty Ltd (in liq) v Jay- O-Bees Pty Ltd (in liq) [2004] NSWSC 818; (2004) 50 ACSR 565 at [74]; Stock v Vining [1858] EngR 178; (1858) 25 Beav 235; 53 ER 626 at 627; Malmesbury v Malmesbury (sub nom Phillipson v Turner) [1862] EngR 952; (1862) 31 Beav 407 at 419; [1862] EngR 952; 54 ER 1196 at 1201; Johnson v Bragge [1901] 1 Ch 28 at 37. In that way the executed contractual document is no longer able to be a potential source of error and confusion, by appearing to state legal relations that in truth are not as the document says.
447 That this is the type of remedy that is granted has an effect on the sort of “common intention” that is relevant for rectification. The common intention of the parties has to relate to what the mutual rights and obligations of the parties will be, and has to be sufficiently well-defined and clear to be able to be stated in words that can be incorporated in a contract.
448 The rewriting should not do anything more than rewrite the contract to the minimum extent that is necessary for it to no longer fail to express the common subjective intention the parties had when the contract was entered. Thus, to the extent that the words of the contract cover some situation concerning which the parties had no common subjective intention, the words of the contract continue to govern that situation.
449 Subjective intentions of people are almost always formed within a universe of discourse. Matters that are outside the scope of that universe of discourse are not part of the common subjective intention of the parties in entering it. Thus in the present case the scope of the subjective intention of Franklins concerning the deduction of benefits needs to be considered bearing in mind Franklins’ understanding of what possible benefits there could be.
450 Crafting a remedy in rectification involves close attention to the words of the document. However, in the prior step of making a finding about a common intention, for the purpose of a rectification order, it is important that the court not confine itself to a narrow focus on particular words of the document. It is the document as a whole that is rectified, and the point of the exercise is that, once rectified, the document will not be contrary to the common intention of the parties to the document. Thus if a particular change to some words will result in some other words of the document operating in a different way, rectification will be justified only if that different operation of those other words is shown to be in accordance with the common intention of the parties.
The Standard of Proof for Rectification
451 It is elementary that rectification is granted only upon “clear and convincing proof” or “convincing proof”: Ryledar v Euphoric at 638-9 [161]-[165]; Energy World Corporation Ltd v Maurice Hayes and Associates Pty Ltd [2007] FCAFC 34; (2007) 239 ALR 457 at [13]; Australian Hardboards Ltd v Hudson Investment Group Ltd [2006] NSWCA 146 at [73]; Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) [2002] FCAFC 285 at [172]Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329 at 336F, 345C; Johnson Matthey Ltd v AC Rochester Overseas Corporation (1990) 23 NSWLR 190 at 195G-6A; Maks v Maks (1986) 6 NSWLR 34 at 36E; Pukallus v Cameron [1982] HCA 63; (1982) 180 CLR 447 at 452; Australian Gypsum Ltd v Hume Steel Ltd [1930] HCA 38; (1930) 45 CLR 54 at 64. What needs to be proved in accordance with that standard is not only that the written document does not correctly record the common intention of the parties, but what the common intention of the parties actually was: Slee v Warke [1949] HCA 57; (1949) 86 CLR 271 at 281 (per Rich, Dixon and Williams JJ); Club Cape Schanck Resort Co Ltd v Cape Country Club Pty Ltd [2001] VSCA 2; (2001) 3 VR 526 at 531 [14]; Ryledar v Euphoric at 632 [138], 655 [259].
452 A short phrase like “clear and convincing proof” can fail to draw attention to why the cases have repeatedly stated expressly that it is an essential requirement for rectification. A reader uninformed by the history and policy of the law concerning rectification might well be puzzled by it, and enquire “So when do you expect a court to act on dubious or unconvincing proof?”
453 In Henkle v Royal Exchange Assurance Co [1749] EngR 153; (1749) 1 Ves Sen 317 at 319; [1749] EngR 153; 27 ER 1055 at 1056; [1558-1774] All ER Rep 450 at 451-2, Lord Hardwicke LC said (though admittedly concerning a contract that the plaintiff alleged had been mistakenly written down not just once but twice) “there ought to be the strongest proof possible”. In Fowler v Fowler [1859] EngR 598; (1859) 4 De G & J 250 at 264-5;[1859] EngR 598; 45 ER 97 at 103, Lord Chelmsford LC said:
“The power which the court possesses of reforming written agreements where there has been an omission or insertion of stipulations contrary to the intention of the parties and under a mutual mistake is one which has been frequently and most usefully exercised. But it is also one which should be used with extreme care and caution. To substitute a new agreement for one which the parties have deliberately subscribed ought only be permitted upon evidence of a different intention of the clearest and most satisfactory description. Lord Thurlow’s language is a very strong on this subject; he says, ‘the evidence which goes to prove that the words taken down in writing were contrary to the concurrent intention of all parties must be strong, irrefragable evidence;’ Lady Shelburne v Lord Inchiquin[(1784) [1784] EngR 38; 1 Bro CC 338 at 341; [1784] EngR 38; 28 ER 1166 at 1168]. And this expression of Lord Thurlow is mentioned by Lord Eldon in the Marquis of Townshend v Stangroom[(1801) 6 Ves 328 at 334; 31 ER 1079; [1775-1802] All ER Rep 145 at 148-9] without disapprobation. If, however, Lord Thurlow used the word ‘irrefragable’ in its ordinary meaning, to describe evidence which cannot be refuted or overthrown, his language would require some qualification; but it is probable that he only meant that the mistake must be proved by something more than the highest degree of probability, and that it must be such as to leave no fair and reasonable doubt upon the mind that the deed does not embody the final intention of the parties.”
This passage was quoted with apparent approval by A H Simpson CJ in Eq in Australia Hotel Company, Ltd v Moore (1899) 20 NSWLR (Eq) 155 at 161-2.
454 In Mortimer v Shortall (1842) 2 Dr & War 363 at 371; 59 RR 730 at 736 (Ch (Ir)), Sir Edward Sugden LC said:
“I must be certain that there has been a mistake, and that the mistake is such as ought to be corrected. I do not mean to say, that the evidence must be all one way, or that there must not be any conflict: there must, however, be such a preponderance, as will satisfy my mind.”
455 And at Dr & War 373; RR 737: “... the Court cannot act except upon the very clearest evidence.”
456 In Australia Hotel Co v Moore at 162, A H Simpson CJ in Eq also said:
“Where it is sought to upset a document, the Court is very chary of acting on the testimony of a single witness, especially where he comes to swear himself into a decree.”
457 In Joscelyn v Nissen [1970] 2 QB 86 at 98 the English Court of Appeal referred to the level of proof required as “convincing proof”.
458 Whether there is proof of a common intention justifying the grant of rectification is a matter concerning which, like all other matters in issue in civil proceedings, “the court must find the case of a party proved if it is satisfied that the case has been proved on the balance of probabilities”: section 140(1) Evidence Act 1995 (see also Thomas Bates and Son Ltd v Wyndham’s (Lingerie) Ltd [1980] EWCA Civ 3; [1981] 1 WLR 505 at 521;[1980] EWCA Civ 3; [1981] 1 All ER 1077 at 1090 per Brightman LJ). However, section 140(2) Evidence Act goes on to provide: “(2) Without limiting the matters that the court may take into account in deciding whether it is so satisfied, it is to take into account: (a) the nature of the cause of action or defence, and
(b) the nature of the subject-matter of the proceeding, and
(c) the gravity of the matters alleged.”
459 There are reasons of policy for requiring great care in making the factual findings of common intention that ground a rectification order. First, both the social institution of making contracts in writing, and the practical importance associated with it, of people ordinarily being able to rely upon a document, that is apparently regular, meaning what it says, contribute to the need for care in granting rectification. (Sometimes if there is a real prospect that third parties might have been misled by the apparent regularity of a document that can also provide a discretionary reason for refusing the remedy). Second, there is a “danger of imposing on a party a contract which he did not make”: Bank of Montreal v Vancouver Professional Soccer Ltd (1987) 15 BCLR (2d) 34 at 36 per McLachlin JA.
460 There is also a reason more closely tied to the facts of some individual cases why a claim by a person who has signed a written document that it does not embody what he or she really intended is the type of claim that, of its nature, needs to be looked at with care. It is connected with what is involved in making the factual finding that a common intention has been misrecorded. When an agreement is one tailored to the particular case it deals with rather than being a standard form, has been reduced to writing through a process of negotiation between solicitors over a period of months, and is clearly a matter of great commercial significance to the parties, that situation in itself is a factor that tends to make it less likely that the parties have recorded their common intention incorrectly. As Simonds J (as his Lordship then was) said in Crane v Hegeman-Harris Co Inc, a 1939 decision reported at[1971] 1 WLR 1390 at 1391, the court’s jurisdiction to award rectification:
“... is a jurisdiction which is to be exercised only upon convincing proof that the concluded instrument does not represent the common intention of the parties. That is particularly the case where you find prolonged negotiations between the parties eventually assuming the shape of a formal instrument in which they have been advised by their respective skilled legal advisors. The assumption is very strong in such a case that the instrument does represent their real intention ...”
(The alternative report of this case at [1939] 1 All ER 662 is, as Lord Wilberforce pointed out in Prenn v Simmonds at WLR 1389; All ER 244-5, incomplete.) 461 To conclude that the parties have misrecorded their common intention in that sort of situation involves the solicitors on both sides of the transaction having each failed to grasp and express the intention of his or her own client. In other words, each of the solicitors has been mistaken, and, furthermore, mistaken in the same way. There is a measure of inherent unlikelihood in such an event happening. If the words of which rectification are sought are clear in meaning on their face, that unlikelihood is compounded – one would not ordinarily expect two lawyers, each professional dealers in language, to make the same mistake about the meaning of words that are clear on their face. However, we know that sometimes even experienced solicitors take or are given inadequate instructions, or misunderstand their instructions, and in consequence misrecord their client’s intention, so these matters are no more than reasons for caution in making the factual findings upon which a rectification order is based.
Reconsideration of the Facts
462 There is a creeping expansion in contemporaneous documents, as the negotiation between Franklins and Metcash advanced, of the particular deductions that were said to be made from a supplier’s list price to generate the price called “Wholesale 5” in Metcash’s computer system. Both the PowerPoint presentation of 1 May and the draft of 8 May defined Wholesale 5 by deducting from the wholesale list price only “all warehouse allowances and cash discounts” (paras [111] and [135] above). The letters of 17 and 24 May identified the deductions as being “all trade discounts, warehouse allowances, bulk buy allowances and cash discount” (paras [137] and [138] above). Mr Stanbridge’s letter of 31 May added to the list of deductions “distributor allowances”, and altered the expression “cash discount” to “cash discounts” (para [150] above). However Franklins has not challenged the judge’s finding, at [63], that “Messrs Reitzer, Summers and Zelinsky all understood that the specific examples of discounts and allowances included in the definition of Wholesale Price were in fact published discounts and allowances.”
463 One can go further, and accept that from a fairly early stage in the negotiating process Messrs Summers and Zelinsky understood that the items deducted by Metcash’s computer system in calculating what it called Wholesale 5 consisted only of published benefits.
464 One can also accept that in the initial stages of the negotiation (relevantly, up to the time of signing of the 24 May letter) Messrs Summers and Zelinsky were in principle prepared to pay a price that was Metcash’s Wholesale 5 price (adjusted for service fee, profit margin and ullage). They were well aware that in their line of business it was commonplace for suppliers to offer confidential benefits in addition to published benefits. However, they were prepared to pay Wholesale 5 (adjusted for service fee, profit margin and ullage) because they were of the view that it would be Franklins who would be doing all negotiation for confidential benefits concerning Franklins’ volume of goods. The topic of Metcash collecting confidential benefits on Franklins’ volume of goods had never been raised in the negotiation up to that stage. The constant theme of Franklins’ stated requirements for its relationship with Metcash was that it would not be a “super franchisee”, it would “own” the relationship with suppliers, it would use its own buyers to negotiate its trading terms and discounts, and Metcash would be principally a “box mover”. Metcash gave every indication of accepting that situation. It is stated in the “Underlying Principles” of the PowerPoint presentation of 1 May, and in the item headed “Promotions/Rebate/Marketing Income” in that presentation (para [111] above). The breadth of the expression “Marketing Income” in that heading is illustrated by the fact that the heading of the Pie Chart (which, it will be recalled, covered all of the types of confidential money that Metcash received) was “Marketing Income” (para [175] above). Mr Simpkins (correctly) accepted in argument that this heading in the PowerPoint presentation covered all confidential monies; he also accepted, concerning the expression “rebates”, that “in the trade it means effectively the confidential monies.”
465 This theme about it being Franklins that would have the connection with the suppliers is reiterated in recitals to the draft supply agreement of 8 May, in the “Underlying principles” of the letters of 17 May and 24 May, and continues through drafts of the Supply Agreement thereafter. Underlying principle 1.3 of the letters of 17 and 24 May expresses the matter most clearly:
“[Franklins] will be ‘in control of their destiny’ in that they will have the interface with all suppliers and collect all rebate and co-op funds and negotiate all case deals.”
That underlying principle needs to be read in the light of the wide general meaning that “rebate” is conceded to have.
466 It was accurate to say that Metcash would be principally (rather than exclusively) a “box mover” because the role envisaged for Metcash included receiving orders from Franklins and being responsible for having stock on hand to satisfy those orders, invoicing Franklins, and (to the extent to which Franklins might choose to avail itself of the service) acting as a collector from suppliers of rebates and case deals negotiated by Franklins.
The Finding about Mr Zelinsky’s Understanding of the Letter of 17 May
467 I have set out at paras [144]-[145] above, paras [114]-[117] of the judgment below, in which the judge dealt with Mr Zelinsky’s evidence about the letter of 17 May 2001. As the judge said, he regarded that evidence as“critical”.
468 In my respectful view there is an important respect in which the judge has misunderstood Mr Zelinsky’s evidence. The judge said that the second part of Mr Zelinsky’s evidence involved Mr Zelinsky saying “that he understood that any confidential discounts on Franklins’ volumes obtained by Metcash would be for Franklins’ account.” That is not what Mr Zelinsky was saying. Rather, Mr Zelinsky was saying:
(a) it is incorrect to say that there were confidential allowances and discounts that Metcash would be negotiating for that were not deducted in arriving at Wholesale 5; (b) rather, Metcash would be negotiating its own (confidential) terms for its own volume, and Franklins would be negotiating its own (confidential) terms for its own volume; and (c) the confidential discounts that Franklins negotiated on Franklins’ volume would come back to Franklins.
469 Thus, Mr Zelinsky was not saying that as at 17 May he thought that any confidential discounts on Franklins’ volumes obtained by Metcash would be for Franklins’ account – he was saying there would not be any confidential discounts obtained by Metcash on Franklins’ volumes. Mr Zelinsky’s understanding on that topic changed later, at the Pie Chart Meeting, but that does not affect what his understanding was as at 17 May 2001.
470 Mr Zelinsky does not deal in the evidence that the judge quotes with the mechanism by which “confidentials would come to us”. It was envisaged, at that time, that through the mechanism of rebates and case deals Metcash might have a role to play in collecting the confidential discounts on Franklins’ volume of goods, and passing those rebates and case deals on to Franklins. However, it is inconsistent with what Mr Zelinsky is saying that, at least at that time, Franklins was of the view that Metcash would be negotiating any confidential discounts on Franklins’ volumes at all. This is made clear within the next couple of pages of transcript of Mr Zelinsky’s evidence, where he said:
“Q. And you understood, didn’t you, that as an aspect of what Metcash was proposing it would do for Franklins, it would perform certain activities relating to the warehouse functions or the distributor functions; is that right? A. Yes, sir. Q. And that those activities, namely those associated with warehouse functions or distributor functions, were activities that from time to time suppliers would give confidential discounts, allowances and rebates for?
A. No, sir. In negotiating our own trading terms our confidentials would be on our volume. Metcash’s trading terms, their confidentials, would be on their volume. You couldn’t double dip. We couldn’t both be negotiating for the same rebates.” 471 It well may be that at that time the full complexities of how it would in practice be possible for Franklins to negotiate for and receive all the confidential benefits that arose from its volume of goods had not been thought through, but that does not alter what Mr Zelinsky intended, at least at that time. There was no occasion for the judge to reject what he called “this second part of Mr Zelinsky’s evidence”.
Mr Summers’ Evidence
472 The judge drew support, at [117], for the proposition that “Mr Summers understood that Franklins would be charged under the Supply Agreement at Wholesale 5, and that Wholesale 5 deducted only published discounts from the suppliers’ list price” from the terms of Mr Summers’ letter of 4 March 2003.
473 The judge’s view of Mr Summers’ evidence concerning his letter of 4 March 2003 needs to be considered in the context that, before Mr Summers was cross- examined concerning the letter of 4 March 2003 he was cross-examined about events that occurred immediately before 4 March 2003. Mr Summers had returned to South Africa in the latter part of May 2001, and in particular was not involved in the Pie Chart Meeting or in the production of the Laminated List. He came back to Australia in early 2003 to deal with Metcash about what he regarded as the unsatisfactory way in which the Supply Agreement had operated. His evidence was that the Laminated List was something he first became aware of “some days after” a meeting he had with Mr Reitzer on 27 February 2003. Para 5 of Mr Summers’ letter, headed “Wholesale Five”, stated the cost price into Franklins in terms that matched exactly those of the Laminated List, and did not match those of the actual definition of Wholesale Price in the Supply Agreement. The discomfiture that the judge observed might as easily have been explained by Mr Summers’ recognition of the lack of match between the Laminated List and the definition of Wholesale Price in the Supply Agreement, as by the hypothesis that the judge accepted (which had not been put to Mr Summers). However, I do not rely, as a reason for differing from the judge’s conclusion about common intention, on the judge’s having stated a speculative hypothesis about the reason for what he observed in Mr Summers’ behaviour.
474 Mr Summers was aware, when he wrote the letter of 4 March 2003, that the Metcash computer system deducted published benefits in arriving at Wholesale 5. It can even be accepted that it was Mr Summers’ intention, at the time that the Supply Agreement was entered, that Metcash would charge Franklins a price derived from that computer output. But that intention of Mr Summers was formed in a context where he had made clear from the outset that it would be Franklins who would be negotiating for confidential benefits concerning its goods. That context was an important part of his subjective intention. To rewrite the Supply Agreement in the way in which the judge did involves altering the manner in which it operated concerning confidential benefits in a way that was not consistent with the intention of the Franklins negotiators.
475 It had not been put to Mr Summers or Mr Zelinsky what their respective intentions had been at the time of entering the Supply Agreement concerning any confidential benefits that Metcash negotiated and that did not appear on the Laminated List. There was no basis of evidence, or of inference, for concluding that either of them intended that Metcash would be free to keep the full range of confidential discounts it might negotiate on Franklins’ volumes. There is no basis for concluding that Mr Summers had an intention that was more extensive than that of Mr Zelinsky about the confidential benefits that Metcash could keep, and no basis for concluding that Mr Zelinsky’s intention was other than that Metcash could keep the confidential benefits identified on the Laminated List as ones for Metcash to retain.
The 31 May 2001 Change to “Wholesale Price”
476 The changes that Mr Stanbridge introduced to the definition of Wholesale Price in his draft of 31 May 2001 are changes one can readily understand a careful solicitor acting for Franklins introducing. One effect that they have is to include in the agreement a failsafe mechanism for the understanding that Mr Zelinsky had expressed, that Metcash would not be negotiating any confidential benefits on Franklins own volume. It would have been possible to achieve that objective by a covenant that Metcash would not collect such benefits, but how would Franklins be in a position to know if the covenant had been breached? And, if such a covenant were breached, would Franklins’ damages be equal to the amount of benefit that Metcash, by its breach, collected? The change that Mr Stanbridge proposed to the definition of Wholesale Price would have the same effect as performance of such a covenant, particularly when coupled with the inspection of records provisions. The inspection of records provision that ultimately became clause 2.6 was first introduced by Ms Ho into a draft on 1 August 2001, and the inspection of records provision that ultimately became clause 4.3(b) was introduced into a draft that Mr Hunter produced on 29 August 2001.
477 It is hardly surprising that none of the negotiating businessmen on either side saw Mr Stanbridge’s changes on 31 May to the definition of Wholesale Price as a change of substance, because in the universe of discourse in which they had been working, in which Metcash did not negotiate for any confidential benefits on Franklins volumes, Mr Stanbridge’s altered definition would work in exactly the same way as if there had been an agreement for Franklins to pay a price based on the output of the Metcash computer system called Wholesale 5.
Mr Perlov’s Evidence 478 On the appeal, Franklins challenged the judge’s failure to find that Mr Perlov was right in recording that at the 14 June 2001 meeting he was told that the process of arriving at Wholesale 5 involved the deduction of confidential discounts. While it is correct that in this case a contemporaneous document is likely to be of greater weight than anyone’s oral evidence based on recollection, Mr Perlov’s file note does not meet the standard required by Fox v Percy for overturning a trial judge’s findings of fact. Indeed, it seems to me that a powerful factor that makes it inherently unlikely that Mr Perlov’s note records accurately what was said is that he is purporting to record what Mr Reitzer said about how Metcash calculated its Wholesale 5, and in fact in the Metcash computer system confidential benefits were not deducted in arriving at the price that Metcash called Wholesale 5.
The Pie Chart Meeting
479 Though the judge did not make detailed findings about the events of the Pie Chart Meeting, there was a consensus in the evidence that the asterisked items shown in the Pie Chart were gone through sequentially and there was agreement reached on who could keep which of them.
480 Mr Meagher accepts:
“... that Mr Zelinsky made concessions about Metcash recovering some confidentials on Franklins’ volumes which were regarded as insignificant or a few suppliers, low volume, which was a practical concession.”
481 Mr Zelinsky agreed in cross-examination that at the Pie Chart Meeting he “agreed that Metcash could, in relation to the Franklins’ volume, collect the slow moving rebate and not pass it on”. He accepted that, at the Pie Chart Meeting, other items that were agreed Metcash could claim on Franklins’ volume and not pass on were those relating to direct, cross-docking, house brands, state rebate, and co-op over and above.
482 His explanation for agreeing to allow Metcash to retain the direct rebate was:
“... we would be opening our own accounts with about 20 per cent of our suppliers. They would not be gained through the warehouse. That would be a direct negotiation between us and the supplier and they would deliver direct to our back door. So we would automatically get the rebates relating to all the direct suppliers. It would have nothing to do with Metcash.”
483 His explanation in relation to why he allowed Metcash to keep cross-docking benefit was: “We were not going to use that facility” (tp 654). 484 His explanation concerning both state rebate and national rebate was that “we would do our own negotiation direct with the supplier”, and thus those benefits would not produce any dollars for Metcash “on our volume”.
485 Concerning the co-operative over and above allowance, he said it is:
“... a negotiation directly with the supplier for study tours and for ad hoc monies that are negotiated having nothing to do with the volume of goods going through the warehouse, and we would negotiate our own and Metcash would negotiate their own.”
486 His explanation as to why he agreed that Metcash could retain the central redistribution allowance was that “It didn’t apply to all our volume. It only applied to a handful of suppliers”.
487 His reason for permitting Metcash to retain the early payment discounts was twofold – “we were assured at that time by Mr Reitzer that Metcash were conserving cash and they would not be taking advantage of early payment terms”, and as well if Metcash paid even earlier than the trade supplier terms required, and obtained an extra discount for so doing, “We were not being disadvantaged”.
488 As mentioned earlier, there was significant disagreement in the evidence about many aspects of what was said at the Pie Chart Meeting. I have referred specifically to Mr Zelinsky’s evidence for two reasons. One is that, by that time, he was the relevant negotiator on Franklins’ behalf. The other is that, to the extent that his evidence on this topic involves an admission that he agreed that Metcash could retain certain identified confidential benefits, it is an admission that is contrary to Franklins’ contention, both at trial and on appeal, that no rectification order should be made. It is also, to that extent, consistent with evidence from the Metcash witnesses, and with the production soon after the Pie Chart Meeting of the Laminated List.
489 A Metcash officer, Mr Anthony Abdallah gave affidavit evidence on which he was not cross-examined that at the Pie Chart Meeting Mr Reitzer said:
“We should have a single sheet which we should laminate which has both of our logos on and which shows how we will be doing business. That sheet should clearly show what Metcash will be passing on to you – namely the Wholesale 5 price less an ullage allowance; and it should also show those allowances we spoke about that will be retained by Metcash and not passed on to Pick ‘n Pay, and it should also show those allowances etc that you yourselves will be entitled to try to negotiate, for your own benefit, directly with suppliers. That single sheet can sit on the respective desks of Metcash’s and Franklins’ buyers for discussions with suppliers, to eliminate any confusion. Zelinsky or Ramsden said words to the effect: ‘It’s a good idea.’ ”
490 That provides confirmation that the Laminated List was intended to divide up what was thought to be a known universe of confidential benefits then being received by Metcash.
491 Mr Ramsden’s evidence concerning the Pie Chart Meeting, and the items marked with an asterisk, differed to some extent from that of Mr Zelinsky. Mr Ramsden’s view of the items marked with an asterisk was that, to the extent they were capable of being collected, they would be collected by Metcash. He continued:
“Q. And being collected by Metcash would not be passed on to Franklins? A. I believe so. Q. And what you have a recollection of doing is some calculation during the course of the meeting to try to work out what that might mean the amount of money was that Metcash might earn on the Franklins volume but not pass on? A. Yes, sir.”
492 Mr Ramsden’s evidence concerning the Pie Chart Meeting also included:
“HIS HONOUR: Q. I’m not clear about that. Your understanding is that the items collected by Metcash and, as you said, retained by Metcash, would [be] as it were profit retained by Metcash and not reflected in any way in the wholesale price that was collected by Franklins. Is that what you are saying?
A. My recollection is that any moneys that had to do with the pure moving side of it would be retained by Metcash. So I recall Mike Jablonski discussing – I was familiar with the term ‘cross docking’ and he explained to me what the local meaning of cross docking was, and I did understand that because it was a function that Metcash were performing they would retain that income.
Q. Was this just to your understanding confined to cross-docking or any sorts of allowances or discounts?
A. It was my understanding of all of these that were put together as ‘Franklins not to collect’.
Q. Can you just remind me, where did you get that understanding? A. At this meeting, you Honour.”
That suggests that all, not merely some, of the items marked with an asterisk on the Pie Chart would be collected and retained by Metcash. The judge made no finding that accepted that evidence. When the evidence is contrary to that of Mr Zelinsky, and (as will later appear) not consistent with the Laminated List, I would not be justified in acting on it.
493 Mr Ramsden’s evidence about the Pie Chart Meeting also included:
“Q. And you understood that what Metcash was intending during the course of this meeting was that each of these items that were being marked with an asterisk were things that Metcash would be retaining which might be calculated on the Franklins’ volume but would not be passed on to Franklins; is that right? A. Yes. Q. You understood that because that was the substance or the effect of what was being said to you by Mr Reitzer or Mr Jablonski?
A. Yes, my understanding of it was that a number of those items were very, very small and negligible, in any event, and they were leftovers from the Campbells Cash & Carry/Davids day.”
494 His evidence went on, however, to say that Mr Zelinsky had said words to the effect of “Any discount or rebate that Metcash is able to negotiate on the basis of Franklins’ volume is for Franklins’ account.” The judge rejected that aspect of his evidence. There is no occasion to question the judge’s decision to do so.
495 The judge made findings concerning the conflict of evidence relating to the Pie Chart Meeting, at [152]:
“... I think that the evidence of Messrs Reitzer and Jablonski is more reliable. It is consistent with what appears in the ‘pie chart’, with the document which resulted from the meeting (the ‘laminated list’) and with Mr Summers’ own structure of the agreement of the parties as recounted in his letter of 4 March 2003.”
496 In light of the judge’s remarks about the unsatisfactory nature of all witnesses evidence concerning that meeting, I do not take that to be an endorsement of every word of their evidence. However it does involve rejection of Mr Zelinsky’s evidence to the effect that he specifically said that the only income Metcash would receive concerning Franklins’ volumes was its pick fee and service fee. To the extent to which the judge preferred the evidence of Metcash witnesses concerning the Pie Chart Meeting, no matters have been pointed to that would justify reversal of that finding consistent with Fox v Percy.
Error Re Meaning of Asterisk in Pie Chart?
497 I have set out, at para [413] above, the judge’s findings at [148]-[151] of his judgment. Mr Meagher submitted that the judge had misunderstood the effect of the asterisk in the Pie Chart, and that that misunderstanding fed into the judge’s finding at [151]. Mr Meagher says, correctly, that the Pie Chart showed figures that were purely historical ones. They were the various amounts of confidential benefits that Metcash collected on the purchases itwas then making, thus necessarily not including confidential benefits on goods purchased for on-sale to Franklins.
498 Mr Meagher submits that insofar as there was a statement in the Pie Chart about the discounts that Franklins “would not be able to collect”, that was a statement about the practical ability of Franklins to persuade a supplierto give it that sort of benefit, not a statement about who would be ultimately entitled to any benefit of that kind. This, he submits, is clearly shown by the fact that two of the benefits, the Co-op O & A and the State Rebate, which the Pie Chart showed marked with an asterisk (meaning “Franklins will not be able to collect”), were shown on the Laminated List under the heading “[Franklins] to Collect”. As well, “Term Adherence/Volume” was a benefit shown on the Pie Chart as one that “Franklins will not be able to collect”, but nonetheless there was specific agreement that Metcash would pass it on to Franklins. Thus, he submits that what was said in the Pie Chart was not a representation about how the agreement between Metcash and Franklins would operate.
499 In this respect, Mr Meagher submits, the Laminated List was different, because it had a connection with how the agreement between Metcash and Franklins would operate. The main point of the Laminated List was to make clear to suppliers that there was no “double dipping” going on between Metcash and Franklins when each of them negotiated benefits of various kinds concerning the volume of product that went to Franklins. In so doing it also went into the topic of who would ultimately, as between Metcash and Franklins, be entitled to keep particular kinds of benefits. But, he submits, the Laminated List is not exhaustive of all possible discounts and allowances.
500 Mr Simpkins tends to brush aside whether the judge misunderstood the Pie Chart, saying that, whatever the Pie Chart meant, it was overtaken by the actual discussion at the meeting. In my view, if there was a misunderstanding of the Pie Chart that actually influenced the judge’s reasoning, it cannot be dealt with so easily.
501 Mr Meagher is right in saying there are two different senses in which the Pie Chart and the Laminated List talk of Franklins “collecting” a particular benefit. That difference is recognised in Mr Reitzer’s cross-examination:
“Q. The meaning was that these were things – that is those marked with an asterisk – that Franklins would not be able to, if I use can the word ‘physically’ to try to make the point, to collect from the supplier? A. Yes. Q. Not to signify that there were allowances or benefits which could not come to Franklins by way of benefit ultimately? A. Some of them could come from Franklins by way of benefit ultimately.
Q. One way for that to occur was if Franklins itself, for example, negotiated some of these things directly with suppliers? A. That’s correct. Q. You don’t contest the proposition that if that happened Franklins were entitled to the benefit of whatever they had negotiated? A. That’s correct. Q. Another would be that some of these might come to Franklins via Metcash even though they had not been negotiated by Franklins directly with suppliers? A. That’s correct. Q. The asterisk does not signify on this document items to which Franklin’s have no, what I might call, ‘entitlement’? A. That’s correct.”
502 Mr Reitzer, when asked to identify which of the benefits listed on the Pie Chart Franklins could not “earn for themselves by direct negotiations with suppliers” nominated “Settlement and ullage, term adherence, cross dock, early payment, slow moving rebate, centralisation/redistribution”. His reason for settlement discount not being able to be negotiated separately by Franklins was because it was one of the items that Metcash deducted in calculating Wholesale 5, and his reason for the rejection of the ullage allowance was because it was an allowance paid for breakages in the warehouse. However, those answers left the possibility of Franklins being able to secure for themselves, through negotiation with suppliers, Coop, O & A, State Rebate, and House Brands, of the items marked with an asterisk in the Pie Chart.
503 Mr Reitzer also said, concerning the Pie Chart Meeting:
“Q. And you did refer to the items that had been asterisked as items that Franklins could not collect; didn’t you? A. Yes. Q. But you did not say that they were items which or that all of them were items which Franklins could not get the benefit of, depending on what arrangements were struck; did you? A. I did not say that. That’s correct.”
504 In re-examination, Mr Reitzer was reminded of that evidence, and asked:
“Q. And which particular asterisk, allowances or benefit shown on the pie chart did you contemplate would come to Franklins via Metcash even though they had not been negotiated by Franklins directly with suppliers? A. An example would be direct discounts, so-- Q. I want you to tell me each of those items marked with an asterisk on the pie chart ... which are benefits, allowances that you thought Franklins might be able to [receive] via Metcash, even though they had not been negotiated with Franklins directly; do you follow?
A. I am trying to recall the evidence. The problem that I am having is not negotiated by Franklins directly, because co-op over and above state rebate, house brands, are things that they could negotiate directly and they would get that money, or ask us to collect it on their behalf.
Q. Are there any items marked with an asterisk that you contemplated could go to Franklins via Metcash if not negotiated by Franklins? A. No.”
505 But how useful is it, for Mr Meagher’s ultimate forensic purpose, to have shown this difference in what the Pie Chart and the Laminated List respectively meant by “collect”? Though there was some diffuseness in the submission, I had understood one submission Mr Meagher was making to be to the effect that the trial judge had misapprehended the evidence about the Pie Chart Meeting, and at [151] of the judgment treated it as proceeding on a basis that Metcash would be collecting and retaining all discounts referable to Franklins’ volumes which Franklins would not be able to collect for itself.
506 If the judge had been intending to say that, then in my view he would have been incorrect. Rather, as the situation concerning the term adherence/volume benefit showed, there were some benefits that Franklins would not be able to collect (in the sense of persuade a supplier to pay directly to it), but that Franklins would collect (in the sense of having an entitlement vis-a-vis Metcash to be paid that sort of benefit). As well, there had been no discussion at all about who would be entitled if there were to be a confidential benefit of a type that did not appear on the Pie Chart.
507 When there are reasons besides this one for reversing the judge’s rectification finding, it is unnecessary finally to decide what the judge meant at [151] by saying “Metcash would be collecting and retaining discounts referable to Franklins’ volumes which Franklins would not be able to collect for itself”. However, it seems to me that the focus in para [151] is on the difference in evidence about whether anyone from the Franklins side said that all benefits on Franklins’ volume were to be for Franklins account. It seems to me that the thrust of para [151] is to decide that no such statement had been made, because the judge accepted the evidence of Mr Reitzer and Mr Jablonski, to the effect that Mr Reitzer had said that Metcash would be collecting and retaining (some) confidential benefits paid on Franklins’ volume. If that is the correct reading, the judge has not made the error that I took Mr Meagher to be submitting had been made.
508 Mr Meagher submits that the judge erred in concluding, at [160], that the Laminated List “strongly corroborates Metcash’s case as to what the parties understood and agreed was to be comprised in the calculation of Wholesale Price under the Supply Agreement”. Mr Meagher submits that the Laminated List does not address all the discounts and allowances that might be provided to Metcash – it only addresses the published and confidential discounts either to be negotiated by Franklins, or able to be retained by Metcash because of Franklins’ concession relating to the particular types of benefit listed under the heading “Metcash retain – not passed on to [Franklins]”. I accept that submission.
Pie Chart Meeting and Laminated List Not a Basis for Rectification?
509 Mr Meagher submits that there was a limited purpose to the Pie Chart meeting, namely to inform Franklins about the types of benefits Metcash was then collecting, so that Franklins would be put into a position to do its own negotiation about those confidential discounts it would be able to obtain from suppliers. As it eventuated, it also turned into a meeting at which the types of confidential benefits that Metcash was then receiving would be divided between Franklins and Metcash. Mr Meagher submits that it was not a meeting whose purpose was concerned with the full potential ambit of the parties’ relationship, over the entire term and entire potential geographical scope of the Supply Agreement. He correctly points out that the Supply Agreement had the capacity to endure for many years, and, though initially it would operate only in relation to Franklins stores in New South Wales, it might come to cover stores in the whole of Australia. Rather, he submits, the Pie Chart Meeting was a meeting whose concern was with practical matters of the parties’ relationship in the immediate future. He submits that that prevents it from showing, in a positive way, what the intention of the parties was about how the Supply Agreement would operate throughout Australia and throughout its entire term.
510 I do not agree that discussion in the Pie Chart meeting that identified the confidential benefits that Metcash could retain on Franklins volumes was limited either temporally or geographically. The evidence that the judge accepted about what Mr Reitzer told Mr Zelinsky about the purpose of the meeting (para [171]- [173] above) makes no reference to the purpose of the meeting being to make arrangements that would be in any way limited in time or geographical scope. Mr Zelinsky’s evidence about the terms in which he agreed that Metcash could retain particular types of benefits was not cast in terms of Metcash retaining them for the time being, or until Franklins decided otherwise, or concerning purchases for NSW stores. Nor was the evidence of any of the other witnesses about what transpired at the Pie Chart meeting limited in that way. The Laminated List, which recorded the outcome of the meeting, said nothing about the arrangements it recorded being only temporary ones, or locally limited. Franklins was aware that suppliers with whom Metcash dealt included suppliers who operated in more than one state – the existence of the “national rebate”, and of the centralisation/redistribution benefit, showed as much. Even though the agreement had the potential to last much longer than the initial three-year term, it would only last longer than the three-year term if both parties so wished – there were periodic opportunities for termination. In my view, the discussion at the Pie Chart meeting involved the parties in coming to a common understanding that identified the specific benefits that Metcash would be able to earn on Franklins volumes, and retain, in the course of the operation of the agreement.
511 If rectification of a contract is to be granted, a common intention of the parties concerning their rights and obligations relating to the subject matter of that contract must continue up to the time of execution of the contract in question: Fowler v Fowler De G & J at 265; ER 103 (per Lord Chelmsford LC); Australian Gypsum v Hume Steel at 64 (per Rich, Starke and Dixon JJ); Slee v Warke at 281 (per Rich, Dixon and Williams JJ); Maralinga Pty Ltd v Major Enterprises Pty Ltd [1973] HCA 23; (1973) 128 CLR 336 at 349 (per Mason J, Menzies J agreeing); Pukallus v Cameron at 457 (per Brennan J); Carlenka at 331-2 (per Mahoney AP), 340 (per Sheller JA, Mahoney AP and McLelland AJA agreeing); Club Cape Schanck Resort v Cape Country Club at 531 [14] (per Tadgell JA); Ryledar v Euphoric at 655 [259]; D Browne, Ashburner’s Principles of Equity, 2nd ed, (1933) Butterworth & Co at p 277.
512 In the present case, the common intention that Metcash would be entitled to the particular confidential benefits listed on the Laminated List under the heading “Metcash Retain – not passed on to [Franklins]” continued not only up to the time of execution of the Supply Agreement, but much later. That is eloquently demonstrated by the conduct of Franklins and Metcash buyers in actually using the Laminated List in the course of their respective dealings with suppliers, after the Supply Agreement had been entered.
Rectification Limited to Metcash Keeping Small-Value Benefits?
513 I have earlier, at para [480] above, set out Mr Meagher’s acceptance that Mr Zelinsky made concessions about Metcash recovering some confidential benefits on Franklins’ volumes which were regarded as insignificant or earned on a low volume of goods or given by only a few suppliers. If that acceptance is to find expression in a rectification order, it would be necessary to find that there was a common intention that the benefits that Franklins agreed Metcash could retain were benefits that were small in value or given by only a few suppliers or earned on a low volume of goods. I am not satisfied that there was any such common intention. There were numerous disputes about what was said about particular benefits at the meeting, and the judge did not resolve the disputes. Further, even if Mr Zelinsky's evidence were accepted, that the reason why he agreed that certain particular benefits could be retained by Metcash was that he thought that they were small in value or given by only a few suppliers or earned on a low volume of goods, nonetheless his intention, communicated to Metcash, was that Metcash would be able to retain those particular benefits. His intention was not that they could retain those particular benefits for as long as, or provided that, they were small in value or given by only a few suppliers or earned on a low volume of goods.
514 There is an additional reason why a rectification order that gave effect to Metcash’s entitlement to keep the confidential benefits appearing on the Laminated List under the heading “Metcash retain – not passed on to [Franklins]” should not be limited by any requirement along the lines of the benefits being small in value or given by only a few suppliers or earned on a low volume of goods. Mr Meagher prudently did not attempt to formulate the form of a rectification order that would reflect his submission that the benefits that Franklins conceded Metcash could keep were “small in value”, &c. Because rectification takes the form of a (literal) rewriting of the written contract, a term that is added by rectification has to have sufficient certainty to be contractually enforceable. This is a separate requirement to the need for clear and convincing proof of a common intention. Even if a court were quite satisfied that parties had communicated to each other in particular terms about what their contractual arrangement would be, and by mistake wrote those terms down wrongly, the court would not grant rectification if including in the contract the terms the parties had agreed on would convert the instrument, in the respect in which it was rectified, into one that was void for uncertainty. That arises from equity’s disinclination to engage in futilities. (Whether there was a remedy other than rectification in that situation may be another matter.) It seems to me that any rectified term of the Supply Contract that imposed a limitation on Metcash’s ability to keep any particular confidential benefit, and that expressed the thought that Metcash could keep the benefit only if it was small in value, or given by only a few suppliers or earned on a low volume of goods would be likely to be void for uncertainty. However, it is not possible to express a concluded view on that topic without a specific draft to consider, which we have not been provided with.
Metcash’s Case on Rectification
515 Mr Simpkins submitted that the broad thrust of the judge’s finding, that the common intention was that only published benefits be deducted, was correct; but that the finding required clarification to identify the particular published benefits that could be deducted. He put his oral case on rectification in substance as follows (appeal tp 88-89, as later elaborated):
1. Metcash and Franklins agreed that Franklins would pay Metcash’s Wholesale 5 price (adjusted for profit, service fee and ullage). 2. Metcash’s Wholesale 5 price did not deduct confidential rebates and allowances. 3. Both Metcash and Franklins knew that confidential rebates and allowances were commonly given by suppliers of the types of goods they proposed to deal in, and could be negotiated for in dealing with suppliers. 4. They discussed with each other how confidential rebates and allowances would work in the course of their dealings, given the desire on the part of Franklins to establish a relationship of its own with suppliers. 5. Those discussions about confidential rebates and allowances (in particular, the Pie Chart Meeting, and the process through which the terms of the Laminated List came to be agreed) were not discussions about the price, which was always clearly intended to be Metcash’s Wholesale 5 price. 6. Metcash has deducted every single confidential rebate that it agreed it would deduct in the course of the discussions. 7. Even if, contrary to Metcash’s submission, the discussions about rebates were unclear, or those discussions contemplated some different course of conduct from that which came to pass, that has no significance because (a) any lack of clarity about the rebates or allowances did not affect the agreement on price, and (b) any failure to account for rebates and allowances according to some understanding about how the parties would divide those rebates and allowances was not a breach of the price agreement.
516 In the course of argument Mr Simpkins said, concerning the July discussion:
“But, accepting that the parties felt the need to have that discussion so that they did not tread on each others’ toes, as it were, when they were negotiating with suppliers, is not the same thing [as] accepting that, for the purposes of trying to work out the meaning of the pricing mechanism, that we have to descend into some attempt to establish whether there was, beyond the written word of the agreement, some other consensus about how the rebates would be dealt with. If we do, then we would say that consensus was reflected in the laminated list; that is, what the parties intended ought to happen with the confidential moneys. But it was never part of our case below and we don’t, with respect, accept it as part of our case that we have to run on this appeal, that we show that there was some complete consensus in relation to confidential moneys at all. We contend for the position where we need to demonstrate what the parties’ understanding was as to price, not to how the rebates would be dealt with. And we say that the evidence demonstrated with abundant clarity, poorly implemented in the actual wording of the agreement, the price was always intended to be the Wholesale 5 price that Metcash had in its system, which it had spoken about at a number of these earlier meetings.”
517 The first thing to say about this submission is that I did not understand Mr Simpkins, by his talk of “confidential rebates”, to be confining himself to discussing rebates in the particular and narrow sense in which it is defined in the Supply Agreement. Rebates, as defined by the Supply Agreement, are always negotiated by Franklins with suppliers, and are payable by those suppliers to Franklins (though Clause 4.5(b) contained a mechanism by which Metcash might act as a collection agent for those rebates). Had Mr Simpkins been so confining himself, he would not have been addressing the real issue, which concerned what if any order for rectification should be made, taking into account the common intention of the parties concerning the whole topic of confidential benefits that might come to be payable on volumes of goods that Metcash purchased and on- sold to Franklins. Rather, he was using “rebates” in the broad sense to which I have referred (para [464] above).
Segregate the Pricing and Benefits Aspects, and Rectify Only the Price Clauses?
518 Mr Simpkins drew our attention to a passage in Mr Zelinsky’s cross- examination:
“Q. Now, you knew, didn’t you, from your experience in South Africa over a lengthy period of time and from what you had been ascertaining about the Australian grocery marketplace that there were confidential discounts, allowances and rebates that could be negotiated for activities relating to warehousing and distribution? A. Yes, sir. Q. You knew that unless you had some special arrangement with Metcash, Franklins would not be able to negotiate those kinds of confidential discounts, allowances and rebates with suppliers?
A. No, sir. On our volume, it was always the understanding that our volume – that the rebates would come back to us. It wasn’t in the Wholesale 5; the volume would refer to our rebates.”
519 He drew from that answer (and in particular the statement “It wasn’t in the Wholesale 5”) support for the proposition that any dispute that there was did not concern the pricing mechanism, but rather concerned the manner in which rebates (in the wider sense) were dealt with.
520 The comfort that Mr Simpkins can obtain from that evidence is limited, because Mr Zelinsky’s answer seems to involve Mr Zelinsky recognising that the confidential benefits negotiated for activities relating to warehousing and distribution were not allowed for in the Wholesale 5 price, but nonetheless would flow back to Franklins.
521 However, there is a more fundamental problem. I do not accept that, for the purposes of deciding whether to rectify an agreement that bears the construction that I have held it to bear, one can segregate the parties’ intentions about the pricing mechanism, and the parties’ intentions about which of the parties will be entitled to which confidential benefits. Clearly, both matters were of importance to Franklins, because they would both affect the ultimate cost to it of goods taken into its stores. If Metcash were to receive confidential benefits from some particular supplier concerning goods destined for Franklins, that would inevitably limit the ability of Franklins to receive confidential benefits from the same supplier on the same goods. Clearly, likewise, both matters were of importance to Metcash, because they would both affect the profits it might earn from its arrangement with Franklins. When equity looks at parties’ subjective intention in entering a contract, it does so as a matter of substance, and in commercial substance the topics of the pricing mechanism, and the way confidential benefits would be negotiated for and accounted for in the course of the relationship, were intimately connected.
522 If the definition of Wholesale Price were to be rectified in the way that Metcash seeks, it would have the effect that Metcash was entitled to receive and retain confidential benefits of kinds different to those that were actually identified before the Supply Agreement was entered as being ones that Metcash could keep.
523 The understanding of the Franklins negotiators was formed on the basis of Metcash’s representation that the only benefits that Metcash was presently collecting, and would in future collect, were those discussed at the Pie Chart Meeting. Even when evidence of the Franklins witnesses that they intended, and told Metcash, that they wanted all confidential benefits that Metcash might collect on Franklins’ volumes to come to Franklins was put to one side, Franklins is not shown to have had any relevant subjective intention concerning any other type of benefit than those discussed at the Pie Chart meeting. For Franklins now to assert an entitlement to confidential benefits of a type that were not discussed at the Pie Chart Meeting does not involve Franklins departing from its subjective intention, and hence is not unconscientious.
524 If it matters, the evidence shows that there are some confidential benefits, namely the warehouse efficiency rebate and the streamlined logistics efficiency discount, that Metcash has received, and that were not discussed between the parties before the Supply Agreement was entered. Because of the dispute about whether Franklins had a right to inspect Metcash’s documents, Franklins was not in a position at the trial to put forward evidence that related to the full range of types of confidential benefit that Metcash had received that were not discussed between the parties before the Supply Agreement was entered.
Rectify to Deduct Only Particular Identified Published Benefits?
525 Metcash relies upon the process of negotiation of the Laminated List through the Pie Chart meeting for its contention that the common intention of the parties was that only the four particular types of published benefits listed in the Laminated List would be deducted from the supplier’s list price. It is quite clear that the parties had a common intention that the four types of published benefits appearing in the Laminated List should be deducted. What is not shown (clearly or otherwise) is that they had a common intention that, if there were to be published benefits other than those listed types of benefit, they would not be deducted.
526 Mr Stanbridge had added “distributor allowances” to the list of specific types of deducted benefits on 31 May 2001 (para [150] above), and that addition was never queried. There was no discussion at the Pie Chart meeting, on anyone’s account, to the effect that even though Mr Stanbridge’s draft had already included “distributor allowances” in the list of deducted benefits, there was a reason why that sort of allowance ought not be deducted from the supplier’s list price. Indeed, there is no reason to believe that the discussion at the Pie Chart meeting proceeded with any reference at all being made to the drafts that the lawyers were in the course of producing. That fact is underlined by the way that, in relation even to the type of published benefits that the Laminated List includes, the terminology of some is different to the terminology actually used in the evolving drafts of the Supply Agreement.
527 Indeed, there was no topic of discussion at the Pie Chart Meeting concerning what benefits were deducted from the supplier’s list price to produce (Metcash’s computer output called) Wholesale 5.
528 The rationale for rectification is to prevent a party to an agreement from enforcing it in a way that is inconsistent with what the common intention of the parties was at the time of execution of the written contract. I am not persuaded that there was a common intention that the only types of published benefits deducted would be the four listed in the Laminated List, or the five identified in parenthesis in the definition of Wholesale Price in the Supply Agreement.
529 Mr Simpkins submits that the general thrust of the judge’s finding about the parties intending that only published benefits be deducted is supported by clear admissions by Mr Zelinsky. One such passage relied upon is the passage of Mr Zelinsky’s cross-examination on the 17 May 2001 letter that the judge set out, and partly rejected, and that I have set out at paras [144]-[146] above.
530 Importantly for Mr Simpkins’ submission, Mr Zelinsky said that, as far as he understood, the letter of 14 June 2001 “said the same thing about price that you read in the letters of 17 and 24 May”.
531 When cross-examined about the Laminated List, Mr Zelinsky agreed that he understood “Wholesale 5” there appearing “to be a reference to the Wholesale 5 price that was to be charged by Metcash to Franklins”, that the list set out “what the formula was that you applied to get to a Wholesale 5 price”, that the formula operated by taking the wholesale list price “and then from that was a deduction of the published trade discount, the published warehouse allowance, the published quantity buy allowance and the published settlement discount”. Furthermore, he agreed that that accorded, by the time he approved the Laminated List, with what he understood the Wholesale 5 formula to be.
532 I would accept that these passages show that Mr Zelinsky understood how Metcash’s computer calculated what it called Wholesale 5. What I do not accept is that they show that the judge’s rectification of the Supply Agreement was correct, or that Mr Simpkins’ alternative methods of rectification would be correct. That is for the reasons I have given earlier.
Failure to Call Mr Hunter
533 Both below, and on appeal, Franklins submitted that a Jones v Dunkel inference should be drawn from Metcash’s failure to call Mr Hunter. Even though the first departure from the pricing terms set out in the letter of 24 May originated from the Franklins side, in Mr Stanbridge’s draft of 31 May, the fact remains that Mr Hunter accepted Mr Stanbridge’s changes. Mr Hunter’s own draft agreement of 13 July contains a definition of Wholesale Price that provides for the deduction from the list price of “all allowances and discounts provided to Metcash by manufacturers”. Defining Wholesale Price in that way is completely at odds with Metcash’s present position.
534 When an agreement of obvious commercial importance is being arrived at by a process of exchange of drafts between solicitors, the ordinary inference one would draw is that in proposing any changes or accepting any changes, each solicitor was acting on instructions. There are some indications in the evidence that that was Mr Hunter’s usual method of operation. On 29 June 2001, he sent an email to other Metcash employees saying he was:
“... working on drafting the Supply Agreement which will be based on the Letter Agreement signed by Andrew on 14 June 2001 ... Timing is probably: have draft agreed internally within next 1 week ...”
535 His file note of 12 July 2001 (para [202] above), and his reply to Ms Ho on 7 August 2001 (para [212] above) likewise show him going through the conventional process of seeking instructions on drafts before submitting them to the other side.
536 Similarly, Franklins’ lawyers proceeded in the usual way, by regularly seeking instructions from their clients. Even though Mr Stanbridge’s change to the definition of Wholesale Price, that he sent to Mr Hunter on 31 May, was sent on the express basis that Mr Zelinsky “has not seen the detail of our amendments” that leaves unstated anything about the extent to which Mr Zelinsky knew their principle. In any event, Mr Stanbridge’s letter to Mr Reitzer and Mr Hunter of 7 June 2001 made clear that he had discussed Mr Reitzer’s facsimile of 4 June 2001 with Mr Summers and Mr Zelinsky. It will be recalled that Mr Reitzer’s facsimile of 4 June 2001 (para [156] above) made one amendment only to the “Rider 1”, by which Mr Stanbridge had proposed to change the definition of Wholesale Price on 31 May. When Mr Stanbridge replied on 7 June 2001 (para [160] above), expressly on instructions, agreeing with that definition, the ordinary inference would be that the substance of the definition (not just Mr Reitzer’s proposed change) had been discussed with Mr Summers and Mr Zelinsky.
537 Similarly, Ms Ho’s email to Mr Hunter of 25 July 2001 (para [207] above) shows her taking instructions from clients about changes to the agreement. By contrast, when Ms Ho sent a further draft on 1 August 2001 to Mr Hunter she expressly stated that the draft “is subject to instructions” (para [208] above). The process of ongoing consultation is illustrated when yet another draft was sent by Ms Ho to Mr Hunter on 11 September 2001, under cover of an email saying:
“I have conferred with Aubrey Zelinsky since were spoke this morning. I told him that we had made provisional arrangements to meet (with him and Andrew Reitzer also) at BDW on Thursday morning. Unfortunately, the meeting time will not be convenient for Aubrey. However, with the view to the parties meeting each other half way on the terms of the Agreement, he has instructed me to amend the document on most of the issues.”
538 In my view, the failure of Metcash to call Mr Hunter to explain why he permitted Metcash to execute a Supply Agreement that contained the definition of Wholesale Price that this one contains provides support for concluding that the Metcash negotiating parties understood that Franklins was proceeding on the basis that Metcash would not retain any confidential benefits on Franklins volume of purchases. When it is the undisputed evidence of Mr Reitzer that Mr Hunter was not given a copy of the Laminated List, and in any event that that list was designed to be a tool for use by buyers of both Metcash and Franklins, there is no oddity in Mr Hunter having not altered the definition to accommodate the extent to which Franklins had conceded, at the Pie Chart meeting, that Metcash could retain confidential benefits on its volume.
Rectify Clause 4.4(a)?
539 I have reached the conclusion at [372]-[378] that on its proper construction clause 4.4(a) should be read as though the words in parenthesis commencing “ie” were read out. Even though one can arrive by a process of construction at a meaning for clause 4.4(a), I would still make an order rectifying clause 4.4(a) to make that meaning clear on the face of the document. Even if a mistake in the expression of a document is able to be read in the correct (ie, the intended) sense as a matter of construction, nevertheless rectification can be granted ex abundanti cautela: Standard Portland Cement Co Pty Ltd v Good [1982] 2 NSWLR 668 at 672-3; (1982) 57 ALJR 151 at 154; 47 ALR 107 at 112 per Lord Templeman; Sipad Holding ddpo v Popovic (1995) 61 FCR 205 at 213 per Lehane J; L E Stewart Investments Pty Ltd v F C & M Legge Building Contractors & Developers [2003] NSWSC 193; (2003) 11 BPR 21,053; [2004] NSW Conv R ¶56-070 (58,925) at [25] per Barrett J. Analogously, it is possible for rectification of an unclear clause in a will to be granted ex abundanti cautela, where rectification makes clear the testator’s intention, even if the clause which the testator actually executed, on its proper construction, means the same as the clause as rectified: Re Application of Spooner; Estate of Davis (NSWSC, Hodgson J, 28 July 1995, unreported) at 3-4; Estate of Cross (NSWSC, McLelland CJ in Eq, 9 May 1996, unreported) at 11; Estate of Bray (NSWSC, Powell J, 25 October 1991, unreported) at 7. Particularly when there is one clause in an agreement that must be rectified, I think it better to make clear another clause that is puzzling on its face, and that one party to the contract is asserting has a meaning different to its correct and originally intended one.
540 In my view the Supply Agreement should be rectified by:
(a) inserting into the definition of Wholesale Price in Clause 1.1 immediately after the words “provided to Metcash by that Supplier” the words “other than any allowance or discount that is a direct, cross docking, early payment discount, centralisation/redistribution allowance, or slow moving rebate”; and (b) deleting the words beginning “(ie ‘Wholesale 5’” and ending “to Metcash by that Supplier)” immediately following “Wholesale Price” in clause 4.4(a) thereof.
PART D – ESTOPPEL
541 Metcash raised an estoppel allegation in the court below, against the possibility that its argument about construction was not accepted.
Metcash’s Estoppel Pleading
542 In the course of its estoppel pleading, Metcash had followed the same pattern as it followed in its rectification pleading (para [401] ff above) of alleging a succession of agreements between the parties, each of which replaced and modified the earlier ones. There was also an allegation of a representation that Franklins made, by silence, in not informing Metcash that:
“(a) [Franklins] was not prepared to purchase products from [Metcash] at the ‘Wholesale 5’ price; (b) [Franklins] required [Metcash] to account to [Franklins] for any discounts, allowances or rebates not included in the ‘Wholesale 5’ price other than the ‘Terms Adherence’ discount; (c) The revised pricing wording was intended by [Franklins] to effect a change of substance; (d) The revised pricing wording was intended by [Franklins] to have the effect that [Franklins] would pay a price other than the ‘Wholesale 5’ price; (e) The revised pricing wording was intended by [Franklins] to have the effect that [Franklins] would be entitled to require [Metcash] to account to [Franklins] for discounts, allowances or rebates not included in the ‘Wholesale 5’ price.”
543 This was then pleaded as a representation that Franklins made by conduct that:
“(a) [Franklins] intended to and would purchase products from [Metcash] at the ‘Wholesale 5’ price; (b) [Franklins] did not require [Metcash] to account to [Franklins] for any discounts, allowances or rebates not included in the ‘Wholesale 5’ price other than the ‘Terms Adherence’ Discount; (c) The revised pricing wording required [Franklins] to pay the ‘Wholesale 5’ price; (d) The revised pricing wording did not entitle [Franklins] to require [Metcash] to account to [Franklins] for discounts, allowances and rebates not included in the ‘Wholesale 5’ price; (e) The business of [Franklins] and [Metcash] would be conducted in accordance with the Laminated List.”
544 Metcash alleged it had relied upon the representations in entering into the Revised Agreement and the Supply Agreement. Alternatively, it alleged that the parties had, to the knowledge of each other, acted in their dealings on a common assumption that:
“(a) [Franklins] was obliged to pay [Metcash] the ‘Wholesale 5’ price for products supplied by it to [Franklins]; (b) [Metcash] was entitled to the benefit of any discounts, allowances or rebates described as:– (i) ‘Centralisation Rebate’;
(ii) ‘Warehouse Efficiency Rebate’;
(iii) ‘New Line Fees’;
(iv) ‘Over and Above Allowance’;
(v) ‘Incentive Targets’;
(vi) ‘Early Payment Discount’ or ‘Prompt Payment Discount’; (c) The business of [Franklins] and [Metcash] was to be conducted in accordance with the Laminated List.”
545 The matters that Franklins was alleged to be estopped from contending were that the Revised Agreement and the Supply Agreement:
“(a) required [Franklins] to pay anything other than the ‘Wholesale 5’ price; (b) entitles [Franklins] to require [Metcash] to account to it for any amounts received by way of discounts, allowances or rebates described as:– (i) ‘Centralisation Rebate’;
(ii) ‘Warehouse Efficiency Rebate’;
(iii) ‘New Line Fees’;
(iv) ‘Over and Above Allowance’;
(v) ‘Incentive Targets’;
(vi) ‘Early Payment Discount’ or ‘Prompt Payment Discount’.”
The Judgment Below on Estoppel
546 The judge summarised the estoppel pleading, in my view accurately, as follows (at [91]):
“It will be seen that by these pleadings Metcash: – traces the whole history of negotiations and discussions antecedent to the execution of the Supply Agreement; – says that prior to the execution of the Supply Agreement a binding agreement was reached between the parties and that the Supply Agreement merely ‘formalised’ that earlier agreement; – asserts that the prior agreement defined Wholesale Price in a manner inconsistent with the meaning subsequently expressed in the definition in the Supply Agreement, on its true construction; – importantly, does not assert that prior to the execution of the Supply Agreement, Franklins explicitly represented to Metcash that anything in the Supply Agreement, especially the definition of Wholesale Price, did not mean what it said or that, whatever the Supply Agreement provided, the ‘real definition’ of Wholesale Price was as had been previously agreed; – asserts that the representations alleged in paragraph 29 of its Amended Defence arose by inference from Franklins’ failure to inform Metcash that Franklins’ understanding of Wholesale Price was not the same as Metcash’s, and that Franklins understood and intended that the Supply Agreement provide that all discounts and allowances be deducted from the suppliers’ list price; – claims that in reliance upon such representations, Metcash entered into the Supply Agreement whereby Franklins is estopped from relying upon its construction of the definition of Wholesale Price in the Supply Agreement.”
547 The judge observed (at [92]):
“Although Metcash’s claim for an estoppel is said to found upon ‘representations’, in my view, on the facts pleaded, it is in truth founded on the alleged existence of an agreement between the parties made prior to the Supply Agreement in terms which are said to be inconsistent with the Supply Agreement.”
548 The judge then went on to refer, at [93], to the “entire agreement clause” in clause 14.2 (para [105] above). In [94]-[95], his Honour set out the well-known passage from the judgment of McLelland J in Johnson Matthey Ltd v AC Rochester Overseas Corp (1990) 23 NSWLR 190 at 195, in which McLelland J held that the parol evidence rule excluded evidence of an estoppel by convention alleged to arise from pre-contract negotiations. He referred to the endorsement of that passage by Miles CJ in Skywest Aviation Pty Ltd v Commonwealth of Australia (1995) 126 FLR 61 at 104-5 (ACTSC), by Bryson J in Australian Co- operative Foods Ltd v Norco Co-operative Ltd [1999] NSWSC 274; (1999) 46 NSWLR 267 at 279 [52], and by Young CJ in Eq in CG Mal Pty Ltd v Sanyo Office Machines Pty Ltd [2001] NSWSC 445 at [54], and in Arnot v Hill- Douglas [2006] NSWSC 429 at [78]- [80], [87].
549 His Honour then said, at [96]-[97]:
“[96] The primacy of a formal and written contract over understanding or agreements reached between parties in the course of prior discussions or negotiations is emphasised in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [[2004] HCA 55; (2004) 218 CLR 271 at 483-4 [33]-[35]]:
‘The respondents each having executed a loan agreement, each is bound by it. Having executed the document, and not having been induced to do so by fraud, mistake, or misrepresentation, the respondents cannot now be heard to say that they are not bound by the agreement recorded in it. The parol evidence rule, the limited operation of the defence of non est factum and the development of the equitable remedy of rectification, all proceed from the premise that a party executing a written agreement is bound by it. Yet fundamental to the respondents’ case that the operative agreements between the parties were wholly oral, and reached earlier than the execution of the written agreements, was the proposition that the written agreements subsequently executed not only may be ignored, they must be. That is not so. Having executed the agreement, each respondent is bound by it unless able to rely on a defence of non est factum, or able to have it rectified. The respondents attempted neither.
There are reasons why the law adopts this position. First, it accords with the ‘general test of objectivity [that] is of pervasive influence in the law of contract’. The legal rights and obligations of the parties turn upon what their words and conduct would be reasonably understood to convey, not upon actual beliefs or intentions.
Secondly, in the nature of things, oral agreements will sometimes be disputable. Resolving such disputation is commonly difficult, time-consuming, expensive and problematic. Where parties enter into a written agreement, the Court will generally hold them to the obligations which they have assumed by that agreement. At least, it will do so unless relief is afforded by the operation of statute or some other legal or equitable principle applicable to the case. Different questions may arise where the execution of the written agreement is contested; but that is not the case here. In a time of growing international trade with parties in legal systems having the same or even stronger deference to the obligations of written agreements (and frequently communicating in different languages and from the standpoint of different cultures) this is not a time to ignore the rules of the common law upholding obligations undertaken in written agreements. It is a time to maintain those rules. They are not unbending. They allow for exceptions. But the exceptions must be proved according to established categories. The obligations of written agreements between parties cannot simply be ignored or brushed aside.’ [footnotes omitted, Trial judge’s underlining.]
[97] These authorities make it clear that the Courts discountenance claims to prevent enforcement of a contract according to its terms founded upon an alleged estoppel arising during the course of antecedent negotiations. But this policy against interference with the certainty of what is written in a contract does not stand in the way of a claim for rectification. If a party can, by clear and convincing proof, show that the contract fails to record accurately the true agreement of the parties, then by the remedy of rectification this Court is merely removing uncertainty from the bargain made between the parties. ...”
550 His Honour then turned to a detailed review of the facts, and concluded that the Supply Agreement should be rectified. At [178], he returned to the topic of estoppel, saying:
“The discrepancy between the Supply Agreement as a matter of construction and the true agreement of the parties should not be remedied by recourse to principles of estoppel, in accordance with the authorities to which I have referred in paragraphs 94 to 96 above. Rather, the proper remedy is rectification of the Supply Agreement.” The Question and Answer
551 The question asked concerning estoppel was, in substance, whether the matters raised in Metcash’s pleading estopped Franklins from relying on what I have held to be the correct construction of the definition of “Wholesale Price”.
552 The answer that the judge gave, by the court’s formal order, to that question was “No”.
Equitable Estoppel?
553 On the appeal, Metcash submitted that, in the period prior to the entering of the Supply Agreement, Franklins made various representations to Metcash about Franklins’ understanding and intention concerning the pricing arrangement between them, and that Metcash acted in reliance on those representations in entering into the Supply Agreement. Metcash puts this, as I understand it, as a form of equitable estoppel.
554 I would accept that an entire agreement clause, even one that, like clause 14.2, specifically denies efficacy to all previous negotiations and representations, could not overcome an equitable estoppel, once established. An“entire agreement clause” might create a factual difficulty in the way of proof of the elements of equitable estoppel, most obviously, proof of inducement or reliance, and I would not want to rule out the possibility that it might be relevant to any precise remedy granted (though I cannot at present think of an example of when that might occur). However, it does not create an insuperable obstacle of principle. Consistently with the equitable principle that it will not allow a contract to be an instrument of fraud, equity would not permit an entire agreement clause to stultify the operation of its doctrines.
555 Metcash submits that each of the elements of an equitable estoppel, as described by Brennan J in Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7; (1988) 164 CLR 387 at 428-9 has been established. It translates them to the facts of the present case as:
“(1) Metcash assumed or expected that a particular legal relationship then existed between it and Franklins, and that Franklins was not free to assert that the Supply Agreement had a meaning different to that contained in the jointly produced Laminated List; (2) Franklins induced Metcash to adopt that assumption or expectation (see below); (3) Metcash acted in reliance on the assumption or expectation; (4) Franklins knew that Metcash was doing so, or intended it to do so; (5) Detriment will be suffered by Metcash if the assumption or expectation is not fulfilled; and (6) Franklins has failed to act to avoid that detriment whether by fulfilling the assumption or expectation or otherwise.”
556 The judge did not make specific factual findings that these (or any other) elements of an equitable estoppel were satisfied.
557 I do not accept that Metcash has accurately translated the first of the elements identified by Brennan J in Waltons Stores at 428-9 to the facts of this case. The relevant passage in Brennan J’s judgment starts:
“In my opinion, to establish an equitable estoppel, it is necessary for a plaintiff to prove that (1) the plaintiff assumed that a particular legal relationship then existed between the plaintiff and the defendant or expected that a particular legal relationship would exist between them and, in the latter case, that the defendant would not be free to withdraw from the expected legal relationship”.
558 As Brennan J states the principle, the relevant assumption relates to a particular legal relationship with the defendant that already exists at the time of the events from which the estoppel is alleged to arise. The relevantexpectation is that, at the time of the events alleged to give rise to the estoppel, the plaintiff expected that a particular legal relationship would in future exist with the defendant and, at that time, the plaintiff also expected that the defendant would not be free to withdraw from the expected legal relationship. On the facts involved in Waltons Stores, the “particular legal relationship” in question was that the parties were, respectively, lessor and lessee of certain premise that the plaintiff (Mr Maher) owned. The proposal that the parties were discussing was that Mr Maher would demolish an existing building on the site, and build a new one for occupation by Waltons as lessee. The factual conclusion that Brennan J reached at 429 was:
“As Waltons (by its solicitor) knew that Mr Maher (by his solicitor) had said that he would commence the work only if an agreement was concluded, Waltons must have known that Mr Maher either assumed that the contract had been made or expected that it would be made and that Waltons was not free to withdraw.”
559 An accurate translation of Brennan J’s first requirement to the facts of the present case would be:
Metcash assumed that it and Franklins were then bound by an agreement in the terms of the Laminated List, or expected that it and Franklins would be bound by an agreement in terms of the Laminated List and that Franklins would not be free to withdraw from becoming so bound.
560 I see no basis in the facts of the present case for assuming that the “expected” alternative ever applied. It could only have applied in the period before execution of the Supply Agreement. Once the Supply Agreement was executed, both parties must have known that they were in whatever legal relations there would be between them about supply of goods. In Waltons Stores at 423, Brennan J said:
“Parties who are negotiating a contract may proceed in the expectation that the terms will be agreed and a contract made but, so long as both parties recognize that either party is at liberty to withdraw from the negotiations at any time before the contract is made, it cannot be unconscionable for one party to do so. Of course, the freedom to withdraw may be fettered or extinguished by agreement but, in the absence of agreement, either party ordinarily retains his freedom to withdraw. It is only if a party induces the other party to believe that he, the former party, is already bound and his freedom to withdraw has gone that it could be unconscionable for him subsequently to assert that he is legally free to withdraw.”
561 In the present case, there is no basis for concluding that, before the Supply Agreement was entered into, Metcash expected that Franklins would enter an agreement to purchase goods on terms that reflected all and only the terms of the Laminated List (so far as price was concerned) and that Franklins would not be free to withdraw from entering such an agreement.
562 In Waltons Stores v Maher, the terms of the lease had all been negotiated between the solicitors for the respective sides, the final form of the document had been engrossed, executed by Mr Maher, and sent to the solicitor for Waltons “by way of exchange”. Further, Mr Maher, to the knowledge of Waltons, began demolishing a building on the site, an action he had made clear he would not engage in “until it was clear that there were no problems with the lease” (at 390). It was that combination of circumstances that led to Mr Maher’s expectation that Waltons would not be free to withdraw from the expected lease.
563 By contrast, in the present case, negotiations between the solicitors were ongoing concerning the drafting of the Supply Agreement. There was no express evidence that anyone relevant from Metcash expected that Franklins would not be free to withdraw from the negotiations. (Whether they expected that Franklins would not in fact withdraw, or were unlikely to withdraw, is a different thing.) Nor would I infer that anyone relevant from Metcash had such an expectation. No argument was put on the appeal that before execution of the Supply Agreement there was a binding agreement, of one of the types recognised in Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353 at 360 as supplemented by Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 at 628. However, I note that the last document that the parties had signed was the 14 June 2001 letter agreement, the pricing clause of which required Metcash to deduct all allowances and discounts whatsoever. In these circumstances the “expected” mode of establishing an equitable estoppel, in accordance with Brennan J’s criteria inWaltons Stores could not be made out in the period before execution of the Supply Agreement. Clearly, once the Supply Agreement had been executed, the “expectation” mode of satisfying the criteria would not apply. Thus, I will consider the availability of an equitable estoppel only concerning the “assumed” mode of establishing it.
564 I am not prepared to find that the first of the elements is satisfied, namely that Metcash assumed that Franklins was bound to purchase goods at a price that reflected all, and only, the terms of the Laminated List. When Mr Reitzer was being cross-examined about the Laminated List he said:
“Q. You never thought of it as something that would operate and overcome what the contract said, did you? A. No. Q. It wasn’t prepared for the purpose of dealing with any contract, was it, as between you and Franklins?
A. It was one of the means of putting the contract into practice.
Q. It was prepared, I suggest, for the purpose of allaying supplier’s fears about double dipping? A. That was one of the purposes.”
565 Even if the first element had been satisfied, I would not be persuaded that the second element (inducement by Franklins) is satisfied. Prior to the Pie Chart Meeting, the latest formal expression of the parties’ intention was the letter of 14 June 2001, the pricing clause of which was not consistent with the Laminated List. For a little over two months after the date of the Pie Chart Meeting, the solicitors of the respective parties were diligently working on a formal Supply Agreement that on its face was not consistent with the Laminated List. The Laminated List was intended to be a practical aid to buyers in their daily work, while the Supply Agreement was a complex, formal, professionally drafted contract. It contained the entire agreement clause that expressly negatived prior representations.
566 I shall assume, without deciding, that if the first element had been made out the third element of the estoppel (reliance by Metcash) would also be made out.
567 I am not satisfied that the fourth element of the estoppel is made out. If one spells out the internal references, in the statement of the fourth element, to preceding elements, it reads: “Franklins knew that Metcash was acting in reliance on Metcash’s assumption ... that Franklins was bound to purchase goods at a price that differed in no respect from” the Laminated List. I see no basis in the evidence for concluding that Franklins knew any such thing. The extent of Franklins’ knowledge of the basis upon which Metcash was acting is as wide as, and no wider than, the common intention that I have held the parties to have at the time of entering the Supply Agreement. 568 It is not submitted that there was any event after execution of the Supply Agreement that showed that the parties were proceeding on a basis any different to that on which they entered the Supply Agreement. While it is true that both parties used the Laminated List in their dealings with suppliers after execution of the Supply Agreement, at least so far as Franklins is concerned that is not shown to have resulted from the making of any assumption about the parties’ legal relations that differs from what I have held to be the common intention with which the contract was entered.
569 These are sufficient reasons for rejecting the submission of an equitable estoppel arising from pre-contractual representations.
570 I also mention that, in support of its contention that the second element of the equitable estoppel was fulfilled, Metcash placed reliance (indicated by the “see below” in its statement of the second element) upon an explanation of Brennan J in Waltons Stores at 429. His Honour said that for the purpose of the second element:
“... a defendant who has not actively induced the plaintiff to adopt an assumption or expectation will nevertheless be held to have done so if the assumption or expectation can be fulfilled only by a transfer of the defendant’s property, a diminution of his rights or an increase in his obligations and he, knowing that the plaintiff’s reliance on the assumption or expectation may cause detriment to the plaintiff if it is not fulfilled, fails to deny to the plaintiff the correctness of the assumption or expectation on which the plaintiff is conducting his affairs.”
571 Before that principle can operate, it is first necessary for the defendant to know that the plaintiff was relying on the assumption or expectation – ie, the fourth element must be fulfilled. That has not occurred in the present case.
Estoppel By Convention?
572 Metcash also sought to rely upon an estoppel by convention arising from a common assumption of the parties:
“... that Franklins was obliged to pay Metcash Metcash’s ‘Wholesale 5’ price for products supplied by it to Franklins, and that the respective businesses of the parties were to be conducted in accordance with the Laminated List.”
573 In Ryledar v Euphoric at 645 [200], Tobias JA (with whom Mason P and I agreed) adopted the statement of Brereton J in Moratic Pty Ltd v Gordon [2007] NSWSC 5; (2007) 13 BPR 24,713; [2007] NSW ConvR ¶56-172 (56,205); [2007] Aust Contract Reports ¶90-255 (89,904) at [32] of the matters necessary to establish estoppel by convention. They are: “(1) that [the plaintiff] has adopted an assumption as to the terms of its legal relationship with the defendant; (2) that the defendant has adopted the same assumption; (3) that both parties have conducted their relationship on the basis of that mutual assumption; (4) that each party knew or intended that the other act on that basis; and (5) that departure from the assumption will occasion detriment to the plaintiff”.
574 The need for the one assumption to be adopted by both parties, and for it to be the conventional basis of their relationship, is established by High Court authority: Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 at 244 (per Gibbs CJ, Mason, Wilson, Brennan and Dawson JJ); Grundt v Great Boulder Pty Gould Mines Ltd [1937] HCA 58; (1937) 59 CLR 641 at 676-7 (per Dixon J, McTiernan J agreeing); Dabbs v Seaman [1925] HCA 26; (1925) 36 CLR 538 at 549-50 (per Isaacs J); Ferrier v Stewart [1912] HCA 47; (1912) 15 CLR 32 at 44-5, 46 (per Isaacs J).
575 For the reasons I have already given concerning the rectification remedy, the common assumption of the parties about the terms of their relationship was no wider than what I have held their common intention to be. That is a sufficient reason for rejecting the existence of a conventional estoppel that would interfere in any way with the terms of the Supply Agreement, in its rectified form.
576 Metcash’s contention that Franklins is estopped from contending that the price obligation between them is exactly as stated in the Laminated List is not made out.
Follow Johnson Matthey?
577 The question of whether an estoppel by convention can arise from pre- contractual negotiations is not settled. While the decision of McLelland J in Johnson Matthey has been followed in the various cases to which I have referred at para [548] above, there are some expressions of doubt. The authorities are conveniently collected by Allsop J (as his Honour then was) in Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833; (2001) 117 FCR 424 (FC) at [444]- [449]. It may be that in considering the correctness of Johnson Matthey closer attention should be paid to whether estoppel by convention is a doctrine of the common law rather than of equity:Legione v Hateley [1983] HCA 11; (1983) 152 CLR 406 at 430; Waltons Stores v Maher at 402-3; Reed v Sheehan (1982) 39 ALR 257 at 275; [1982] FCA 1; 56 FLR 206 at 228 (FCAFC); Heggies Bulkhaul Ltd v Global Minerals Australia Pty Ltd [2003] NSWSC 851; (2003) 59 NSWLR 312 at 348 [147]; MK & JA Roche Pty Ltd v Metro Edgley Pty Ltd [2005] NSWCA 39 at [69]- [70]; Waterman v Gerling Australia Insurance Co Pty Ltd[2005] NSWSC 1066; (2005) 65 NSWLR 300 at 320 [75]- [76], 322 [83]; Vella v Wah Lai Investment (Australia) Pty Ltd [2006] NSWCA 18 at [22]–[23]; Forrest v Appleyard [2006] NSWSC 281 at [96]; Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2006] QCA 194 at [117]; Moratic v Gordon at [30]-[33]; Greenwood v Kingston Properties Pty Ltd [2007] NSWSC 1108; (2007) 13 BPR 24,943 at [49]; Equuscorp Pty Ltd v Wilmoth Field Warne [2007] VSCA 280; (2007) 18 VR 250 at 270 [78]; Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) [2008] WASC 239; (2008) 225 FLR 1; 70 ACSR 1 at [3515]; Rebenta Pty Ltd v Wise [2009] NSWCA 212; [2009] Aust Contract Reports ¶90-323 (91,557) at [65]. This examination might be helpful because it seems more in accord with principle that a common law doctrine like the parol evidence rule should restrict the operation of estoppel by convention if estoppel by convention were itself solely a common law doctrine. However, in light of the conclusions I have come to about the application of the principles of estoppel by convention to the facts of the case, it is unnecessary to consider this question any further. I do not need to either follow or reject Johnson Matthey.
Equuscorp Rules Out Estoppel from Pre-Contractual Events?
578 Mr Meagher, like the trial judge, placed reliance on the portion of para [33] of the High Court’s decision in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd that the trial judge underlined (quoted at [549] above).
579 The underlined portion is not part of the ratio decidendi of the case. Reading Equuscorp as a whole, one has a real doubt about whether the underlined portion was intended by their Honours to be an exhaustive statement of the circumstances in which someone who has executed an agreement can fail to be bound by it. In para [32], their Honours seem to have contemplated ways, other than rectification or non est factum, in which a person who has executed an agreement might fail to be bound by it. At 482-3 [32], their Honours said:
“Yet it was not said that the written agreement should be rectified. It was not said that a defence of non est factum was available. It was not said that the written agreement was executed by mistake, or that its execution was procured by misrepresentation as to its contents or effect. (The misrepresentation alleged was as to what had been said in the conversations, not what the document was or provided.)”
580 Later, at 483 [35], their Honours speak more generally than they did in the portion underlined from para [33], when they say:
“Where parties enter into a written agreement, the Court will generally hold them to the obligations which they have assumed by that agreement. At least, it will do so unless relief is afforded by the operation of statute or some other legal or equitable principle applicable to the case.” Their Honours also spoke more generally, at 483-4 [35], “... the exceptions must be proved according to established categories”.
581 It would be surprising, and a major departure from the law as previously understood, if the words that the judge underlined at the end of para [33] were intended to bear the implication that a party who executed a written agreement under the influence of a fraudulent misrepresentation as to a fundamental matter was nonetheless bound by the agreement.
582 I have referred earlier (para [311] above) to the statements in Farah Constructions Pty Ltd v Say-Dee Pty Ltd about the obligation of an intermediate court of appeal concerning “seriously considered dicta” of a majority of the High Court. It is hard to know how one ascertains whether dicta are “seriously considered” without either attempting mind reading, or engaging in an evaluation of the adequacy of the reasoning process of the High Court majority that produced the dicta. Each of these ways of proceeding has its problems. In all the circumstances, I will leave undecided whether the words the judge underlined in para [33] of Equuscorp provide a separate reason for rejecting the estoppel argument.
Franklins’ Estoppel Concession
583 Mr Meagher said, in the course of argument:
“We have to concede that in the course of this discussion on 12 July we agreed that Metcash could retain some confidential discounts earned on our volumes because we were told that they only involved a handful of suppliers or because we were told that there were very small volumes involved. So we have to accept if the agreement is construed as we contend and not rectified there would be I expect some form of conventional estoppel which would arise in relation to those three or so items which might be subject to a qualification that they answer a description as represented to us by Metcash on 12 July.”
584 When the agreement is to be rectified, the occasion for acting on that concession does not arise.
585 In any event, given the propensity of the witnesses in this case to disagree with each other over the detail of practically every conversation, and the lack of findings by the trial judge, this court is not in a position to make positive findings that representations of the type which Mr Meagher refers – along the lines of the conceded confidential benefits being low in either number of suppliers involved or monetary value involved – were made. The closest the judge comes to such a finding is at [176] where he says of the confidential benefits that Franklins agreed Metcash could keep, that Franklins “believed the discounts to be of relatively insignificant value”. That is not a finding of the sort of clear and unequivocal representation that is needed to found an estoppel: Legione v Hateley [1983] HCA 11; (1983) 152 CLR 406 at 435-9.
PART E – FRANKLINS’ RIGHTS OF INSPECTION
586 The proceedings below began when Franklins sought court orders to require Metcash to make available records and give an accounting concerning its dealings with suppliers relating to goods that Metcash had purchased for on-supply to Franklins, and damages or restitution concerning certain specified benefits that it alleged Metcash had received but failed to pass on to Franklins.
Question 19
587 At the hearing, question 19 that was submitted to the judge was:
“Upon the true construction of the formal Supply Agreement and, in particular, Clauses 2.6 and 4.3 thereof, as at the commencement of these proceedings, what rights did [Franklins] have to inspect and take copies of the business books and records of [Metcash], in particular those documents relating to or evidencing discounts, allowances and rebates received by [Metcash] in respect of goods purchased for on-sale to [Franklins].”
588 The judge set out the terms of clauses 2.6, 4.3 and 10.5 of the Supply Agreement. The judge found that Franklins had made a request for inspection of records to Metcash, and that that request had been refused. He noted, at [193], that Metcash “does not dispute that Franklins’ rights of inspection under clause 2.6 have survived termination of the Supply Agreement”.
589 The judge’s reasoning on the topic of inspection was (at [194]-[199]):
“The documents which Franklins seeks to inspect would encompass those disclosing: – how the published discounts passed on to Franklins under the definition of Wholesale Price in the Supply Agreement were calculated; – how any confidential discounts and rebates negotiated by Franklins directly and deducted under clause 4.5 and 4.6 were calculated; – how confidential discounts negotiated by Metcash, which it was entitled to retain, were deducted. Reduced to its essentials: – Franklins’ submission is that all three categories of documents fall within the description in clause 2.6 ‘records of all transactions relating to [Franklins]’; – Metcash’s submission is that the third category of documents does not deal with transactions ‘relating to’ Franklins because the benefit of those transactions is not to be accounted for to Franklins. The issue depends on the scope of the phrase ‘relating to’. It is a phrase of the broadest compass. It very often gives rise not only to problems of construction but to problems of application, for example, whether those words in a subpoena, by reason of their width, place an oppressive burden on a stranger to litigation. In my opinion, in this case as in many other contexts, the scope of the phrase ‘relating to’ must be ascertained by reference to the purpose of the provision in which it is found. Clause 2.6, and clause 4.3, are clearly intended to provide a means whereby Franklins can vouch and verify for itself that it has received from Metcash all that it is entitled to receive by way of deductions and allowances. A transaction with a supplier giving rise to a deduction or an allowance which Franklins is not entitled to receive under the Supply Agreement is not, in my opinion, a transaction ‘relating to’ Franklins. I suspect that in some, perhaps many, cases it might be difficult to separate information about a purchase order into neat compartments for inspection purposes, namely, information relating to discounts to be passed on to Franklins and information relating to discounts to be retained by Metcash. However, this difficulty is a practical difficulty, not a difficulty in the construction of the clause itself. In my opinion, Metcash’s construction of the scope of clause 2.6 is correct. Which particular documents demanded by Franklins’ letter of 4 February 2005 fall within the scope of the clause and which do not is something which I am unable to determine on the present state of the evidence.”
590 The answer that the judge gave to question 19 in the order he made on 4 May 2007, was:
“The Court answers this question by holding that, upon the true construction of the Supply Agreement, the plaintiff is entitled to have produced to it, to inspect and to make copies of all records of transactions which relate to those allowances, discounts and rebates to the benefit of which the plaintiff is entitled under the Supply Agreement and being records which it might reasonably require in order to satisfy itself that all such allowances, discounts and rebates have been allowed or paid when due and by further holding that a declaration to that effect should be made.”
591 Franklins’ Notice of Appeal did not challenge any aspect of the judge’s decision concerning the extent of its right of inspection.
592 By its Notice of Cross-Appeal, Metcash contends that the answer to question 19 should be that any right of inspection: “(a) is limited to a right of inspection under clause 2.6(b) of the Supply Agreement; (b) is limited to purchase records in respect of goods sold to Franklins.”
593 Metcash submits that the trial judge was wrong in (it says) holding that there was an ongoing right of inspection under clause 4.3, as opposed to under clause 2.6(b). The basis for that submission was that the Supply Agreement had been terminated before the proceedings began, and clause 10.5(b) made express provision that clause 2.6 would survive termination of the agreement, but made no express provision for clause 4.3(b) to survive termination. Further, clause 2.6(a) on its face applied only “During the Term”, so Franklins’ only right of inspection after termination was the one under clause 2.6(b).
594 I do not accept that the judge’s reasons involve any decision that there is, or was at the commencement of proceedings, any presently exercisable right of inspection under clause 4.3. His only reference to clause 4.3 concerning inspection is in a single remark about the scope of the phrase “relating to”. His only finding is a finding concerning the construction of clause 2.6. Mr Meagher tells us that Franklins had not contended below that it had any right of inspection under clause 4.3(b). In those circumstances, there was no live issue before the judge of the type raised by para (a) of the relevant part of Metcash’s Notice of Cross-Appeal.
595 The question posed by question 19 related to both clauses 2.6 and 4.3, and to rights at the commencement of the proceedings. The answer contained in the formal orders concerning question 19 (which, in fairness to the judge, I should say had been drafted by Franklins) uses terminology that is derived in part from clause 4.3. Further, it appears to be speaking as at the time of the making of the orders, not as at the commencement of the proceedings. For those reasons, some amendment to the answer to question 19 is desirable, to reflect more precisely the wording of clause 2.6(b). I turn to consider argument about what type of rights of inspection Franklins has.
596 Metcash’s argument concerning para (b) of the relevant part in its Notice of Cross-Appeal asserted that the only documents to which Franklins had a right of inspection were documents that evidenced the transactions through which Metcash sold goods to Franklins. In particular, it did not extend to documents that showed the confidential benefits that Metcash had received from any supplier.
597 Mr Simpkins submitted, correctly, that the scope of the records concerning which Metcash has a right under clause 2.6(b) depends upon the construction of clause 2.6(a). He says that the words “Products, volume, price and date of purchase” in clause 2.6(a) shows that the relevant Products are those that have been sold to Franklins, and the relevant volume, price and date of purchase are those of the sale from Metcash to Franklins, and in consequence the only documents Franklins can inspect are ones that evidenced the transactions through which Metcash sold goods to Franklins. 598 I do not accept that construction. The records that Metcash is obliged to keep under clause 2.6(a), and make available to Franklins under clause 2.6(b), are records “of all transactions relating to [Franklins] and its related bodies corporate”. When it goes on to say “including Products, volume, price and date of purchase”, clause 2.6(a) is merely giving instances of the sorts of records “of all transactions relating to [Franklins] and its related bodies corporate” that Metcash is required to keep. Those instances do not limit the generality of the “of all transactions ...” phrase.
599 There is ample authority that an expression in the form “A relating to B” is capable, as a matter of language, of indicating any sort of relationship that there might be between A and B, and that it is the context and purpose of the instrument in which the particular instance of the expression that falls to be construed occurs that determines whether a particular type of relationship is within the scope of that particular instance of the expression: Joye v Beach Petroleum NL (1996) 67 FCR 275 at 285 (FC); PMT Partners Pty Ltd (in liq) v Australian National Parks and Wildlife Service [1995] HCA 36; (1995) 184 CLR 301 at 313, 331; Bull v The Queen [2000] HCA 24;(2000) 201 CLR 443 at 462 [65]- [66].
600 Under the present agreement, Metcash agrees to sell goods to Franklins at a price that includes as an element allowances and discounts provided to Metcash by a particular supplier. In that context there is in my view the relevant type of relationship, for the purpose of clause 2.6(a), between any transaction that Metcash enters that affects or evidences the nature or amount of any allowance or discount that Metcash receives from a supplier concerning goods that Metcash later sells to Franklins, provided that the allowance or discount in question is one that is required to be deducted from the supplier’s list price by the definition of Wholesale Price. The documents required to be made available under clause 2.6(b) would include not only documents of the particular transactions under which Metcash purchased goods that it later on-sold to Franklins. As well, for instance, it would include any general agreement that fixed the benefits that Metcash would receive from a particular supplier, provided that those benefits included one that Metcash was obliged by the definition of “Wholesale Price” to deduct. If any such benefits came to Metcash by a payment from or allowance of credit by the supplier rather than a deduction from an invoice price, documents relating to those benefits would be disclosable. These examples might not exhaust the scope of documents properly disclosable.
601 Mr Simpkins submits that it is clause 4.3(b) that provides the means by which the parties intended Franklins would obtain confirmation that it had received all the allowances and discounts to which it was entitled. I take it to be implicit in his argument that, even if Franklins is not claiming any present entitlement to inspect documents pursuant to clause 4.3(b), clause 4.3(b) has, as a matter of proper analysis, not survived termination of the contract, but the fact that clause 4.3(b) was once an operative provision of the contract provides a reason for reading down the scope of the obligation under clause 2.6(b).
602 I do not accept that clause 10.5 is intended to be an exhaustive statement of the clauses that survive termination and the clauses that do not survive termination. Clause 10.5 does not say so in express terms. As well, there are some provisions of the agreement, which are not listed in clause 10.5, that the giving of a sensible business operation to the agreement would suggest should survive termination. These include the recitals and definitions in clause 1.1 (which would continue to be relevant to any enforcement after termination of rights that had accrued before termination), clause 11 (which sets out an agreed procedure for mediation of disputes), and clause 12 (which relates to the working through of GST obligations, including a provision requiring Metcash to create an adjustment note or apply to the Commissioner of Taxation for a refund of, and refund to Franklins, any overpayment by Franklins of GST). The entire agreement clause (14.2) may well survive termination also.
603 No argument was addressed by either side to the principles of the common law for identifying the provisions of an agreement that survive termination. I will not explore that topic unaided.
604 Even if clause 4.3(b) were not to survive termination, I would not regard that as a reason for limiting the scope of the obligations of Metcash under clause 2.6(b). One reason relates to giving the agreement a sensible commercial construction. For Franklins to exercise its rights under clause 4.3(b) takes time. It is not commercially sensible that the parties should have intended that, if Franklins had not exercised rights under clause 4.3(b) at the time termination had occurred, it should be limited (short of engaging in litigation and obtaining discovery in that litigation) in its opportunity to find out whether Metcash had charged it the correct price for particular goods that had been sold to it just before the termination.
605 If that is the situation concerning goods sold just before the termination, the clause cannot mean a different thing concerning goods sold a longer time before the termination.
606 The second reason is that the Supply Agreement contains some instances of the drafting falling short of the highest standards. There is the contradiction between the definition of Wholesale Price and Clause 4.4(a). The meaning of the terms “stock profits” and “stock losses” in clause 4.7 is not apparent to a reader (though their meaning is ascertainable from contextual matters). In clause 10.5, subparas (b) and (c) do not flow on from the chapeau of the clause. I have not tried to list all the shortcomings. There is clear evidence that the agreement is the product of piecemeal addition and alteration over months by the respective solicitors, not the product of a single mind. In those circumstances it is not surprising that there is some overlap between clause 2.6 and clause 4.3(b). 607 Though I have given some explanation of the scope of clause 2.6(b), it would be wrong to answer question 19 in a way that tried exhaustively to state a paraphrase of the meaning of the clause. The parties’ rights are those given by the words of the clause itself, not of a paraphrase of the words. Thus an answer to question 19 should deal with the meaning of the clause by stating its meaning in an inclusive fashion, not an exhaustive fashion.
608 In my view a preferable answer to question 19 would be:
The Court answers this question by holding that, subject to the proviso that follows, upon the true construction of the formal Supply Agreement as at the commencement of these proceedings the plaintiff had the rights hereinafter stated, that would endure for the longer of 10 years after the date of termination of the Supply Agreement or, if any tax investigation or other legal proceedings are instituted during the period, until such investigation and any ensuing legal action or other legal proceedings and appeals are concluded. The said rights are that the defendant must continue to make available to the plaintiff, and allow the plaintiff to make copies of, accurate records of all transactions that the defendant entered prior to the termination of the Supply Agreement with any person relating to the plaintiff and its bodies corporate. Those records include ones relating to the Products purchased by the plaintiff and its related bodies corporate, ones relating to the volume of those Products purchased, ones relating to the price of those Products purchased, and ones relating to the date of purchase of those Products. Those records include ones that affect or evidence the nature or amount of any allowance or discount that the defendant receives from a supplier concerning goods that the defendant later sells to the plaintiff. The proviso earlier referred to is that insofar as any such document affects or evidences the nature or amount of any allowance or discount that the defendant receives from a supplier of such goods the allowance or discount in question must be one that is required to be deducted from the supplier’s list price by the definition of Wholesale Price of a Product in the formal Supply Agreement.
Question 21
609 Question 21 of the questions posed to the judge was:
“Whether [Franklins] is estopped from exercising any rights to inspect [Metcash]’s books and records which it may have had under the formal Supply Agreement by reason of the facts, matters and circumstances pleaded in par 34 of the Amended Defence.”
610 In the orders of 4 May 2007, question 21 was answered “No”.
611 Another ground in Metcash’s Notice of Cross-Appeal is that the judge should have held that any right of inspection: “... must be conducted by an independent auditor subject to confidentiality undertakings given by that auditor to Metcash.”
612 One of the allegations in para [34] of the Amended Defence was that there was an oral agreement in April or May 2001 that Franklins would not have any right of inspection in respect of confidential discounts allowance or rebates, and that any inspection of documents relating to the Wholesale 5 price would be carried out by an independent auditor approved of by both parties. That agreement is alleged to have arisen at either or both of the meeting of 20 April 2001, or the meeting of 1 May 2001. Alternatively, it is alleged that at those same meetings Franklins’ representatives made representations to the same effect as the alleged agreement. Para [34] of the Amended Defence alleges that at all times until 31 January 2005 the parties conducted themselves in accordance with that agreement (or representation), that Franklins at no time prior to entry of the “Revised Agreement” or the Supply Agreement informed Metcash that it had changed its mind about those matters, and alleges that Franklins by its conduct represented to Metcash in the same terms as the alleged agreement and representation of April/May 2001. Metcash alleges that in reliance upon that representation it entered the Revised Agreement and the Supply Agreement. The matter is also pleaded, in the alternative, as an estoppel by convention.
613 The judge dealt with question 21 by saying (at [202]-[203]):
“In view of the construction which I place on clause 2.6 of the Supply Agreement, I do not think that that issue now requires determination. However, I am of the opinion that, if any such agreement was made in April 2001 as alleged, it was superseded by execution of the Supply Agreement and that no estoppel can now be founded upon it, for the reasons explained in paragraphs 94 to 96 above.”
614 Those paragraphs of the judgment ([94]-[96]) are the ones in which the judge deals with Johnson Matthey and Equuscorp, and are referred to at paras [548]- [549] above.
615 Metcash submits that each of the matters alleged in paragraph [34] of the Amended Defence was established at trial. No oral argument was advanced for this proposition. Metcash’s written submissions support the proposition by a series of references to the appeal books, without further argument. Those references do not make out the submission.
616 The first of those references (tp 432, lines 9-16) is totally misconceived – read in context, that evidence concerns the content of a discussion between Mr Summers and Mr Zelinsky, at a time when the Pie Chart Meeting was in prospect. 617 An internal discussion between Franklins’ executives, at a later time to the time of the discussions from which the estoppel is alleged to have arisen, could not possibly help to make it out.
618 The next reference is to a statement of Mr Reitzer concerning the 20 April 2001 meeting, in which he attributes to Mr Summers the statements:
“... As for merchandising terms, it is vital that manufacturers know that Metcash and Franklins are not working together. I will be negotiating my own merchandising terms. All manufacturers need to know that our respective terms are treated as completely confidential.” and
“The rebates and co-op monies negotiated with our suppliers will have nothing to do with you. They will be strictly confidential between us and our suppliers.” and
“... long term we want to own the relationship with our suppliers. So we will be collecting our own rebates and co-op and we will be owning the relationship. So it is absolutely essential that our trading terms with our suppliers are totally and completely confidential and separate to Metcash’s trading terms. If a manufacturer thought that we were comparing trading terms or that we were speaking to each other about trading terms it would be the end of our relationship. They must be completely confidential. I am absolutely non negotiable on this issue.”
619 Mr Summers’ statement denied that that conversation had occurred in the terms to which Mr Reitzer deposed. The judge made no finding that it had occurred. He found that the meeting of 20 April was “a very preliminary discussion”, and a “very introductory meeting” (at [98], [100]). I have referred earlier to the judge’s remarks about the generally unsatisfactory nature of the oral evidence. There is some improbability about the detail of the relationship being gone into in depth at the very first meeting, on the very day when Metcash found out for the first time that Franklins would be acquiring the stores from Dairy Farm. There is an available inference that Franklins communicated its desires about the relationship in the sort of detail that appears in the PowerPoint presentation document, but that document does not say anything about confidentiality of trading terms or inspection of Metcash’s records. I am not prepared to find that the statements were made.
620 Another portion of Mr Reitzer’s evidence upon which Metcash relies is Mr Reitzer’s account of the meeting of 1 May 2001 where he attributes part of a conversation to himself, concerning the page of the PowerPoint presentation headed “Pricing – NSW only”. He says that in the course of explaining the Wholesale 5 price he said:
“On a confidential basis you could send an independent person – like an auditor – over to check it out any time you had a query. What we will do, once we have an agreement, on an extremely confidential basis, is to show you at a summary level everything that goes into Wholesale 5 price, and everything that is excluded from Wholesale 5. We will show you all the ‘buckets’ that we collect that make up merchandising terms. You will then have an understanding as to how this works. We can only do this on a confidential basis once an agreement has been signed.”
621 The judge set out that evidence at [103]. Mr Summers took issue with many aspects of Mr Reitzer’s account of the meeting of 1 May. In particular, he denied that Mr Reitzer had said the words that I have set out commencing “What we will do ...” ending “... once an agreement has been signed”. The judge set out Mr Summers’ denial at [104]. The only finding that the judge made about the meeting of 1 May was at [109] (which I have set out at [133] above). There is nothing in the “script” of the PowerPoint presentation along the lines of the passage of Mr Reitzer’s evidence that Metcash relies on for present purposes. We were not referred to any piece of evidence in which anyone from the Franklins side assented to Metcash’s offer that Franklins could “send an independent person – like an auditor – over to check it out”. The terms of the Supply Agreement concerning inspection impose no limitation on the means by which information in Metcash’s records will be made available to Franklins. Indeed, clause 4.3(b) says that Metcash will:
“... allow access by [Franklins’] officers to such of Metcash’s records as they reasonably require (including taking copies) to satisfy themselves that all allowance, discount, payment when due, has been provided or made.”
622 The final passage that Metcash relies upon in support of the allegations in para [34] of its Amended Defence is in a statement of Mr Reitzer concerning the Pie Chart Meeting, when he attributes to himself the words:
“... this is not the type of information that we would normally share. As previously discussed, our respective trading terms are to be treated as highly confidential. Obviously, we would like you to return this pie chart to us at the end of the meeting today.”
623 Mr Zelinsky’s response to Mr Reitzer’s statement did not take issue with that statement. There is inherent plausibility in Mr Reitzer having said something about the confidentiality of the Pie Chart. But even his own account of what he said at the Pie Chart Meeting on that topic goes nowhere near providing a factual basis for the estoppel that is pleaded in para [34] of the Amended Defence. 624 We were referred to no evidence of reliance by Metcash on any alleged representations of the type referred to in para [34] of the Amended Defence. The entering into of the Supply Agreement, containing the rights of inspection in clause 2.6 and 4.3(b) does not sit well with there ever having been a representation of the type pleaded.
625 Metcash has not made out either of the estoppels pleaded in para [34] of its Amended Defence.
626 The judge’s answer to question 21 was right.
627 If Franklins were to seek a court order to enforce its rights of inspection under clause 2.6 it might be arguable that in granting such an order the judge should, as a matter of discretion in the crafting of the order, impose a limitation of the kind for which Metcash contends. In like fashion, if Franklins were to seek discovery, or an order for preliminary discovery and inspection under the court’s ordinary procedures concerning conduct of litigation, it might be arguable that if such an order were to be made a similar limitation should be imposed on it. I say nothing about whether any judge who might in future be asked to make such an order should impose such a limitation.
PART F – TRADE PRACTICES ACT 1974
628 An alternative way in which Metcash put its case below was by alleging that Franklins had engaged in misleading and deceptive conduct, contrary to section 52 Trade Practices Act , or unconscionable conduct within the meaning of the unwritten law of the States and Territories, contrary to section 51AA Trade Practices Act. In its Amended Cross-Claim, Metcash alleged that Franklins by its conduct had represented:
“(a) the Agreement and the Supply Agreement:-
(1) required [Franklins] to pay the ‘Wholesale 5’ price;
(2) did not entitle [Franklins] to require [Metcash] to account to it for any amounts received by way of discounts, allowances or rebates described as:-
(A) ‘Centralisation Rebate’; (B) ‘Warehouse Efficiency Rebate’; (C) ‘New Line Fees’; (D) ‘Over and Above Allowance’; (E) ‘Incentive Targets’;
(F) ‘Early Payment Discount’ or ‘Prompt Payment Discount’. (b) [Franklins] intended to and would purchase products from [Metcash] at the ‘Wholesale 5’ price; (c) [Franklins] would not require [Metcash] to account to [Franklins] for any discounts, allowances or rebates not included in the ‘Wholesale 5’ price other than the ‘Terms Adherence’ Discount; (d) The revised pricing wording required [Franklins] to pay the ‘Wholesale 5’ price; (e) The revised pricing wording did not entitle [Franklins] to require [Metcash] to account to [Franklins] for discounts, allowances and rebates not included in the ‘Wholesale 5’ price; (f) The business of [Franklins] and [Metcash] would be conducted in accordance with the Laminated List.”
629 These representations were alleged to be misleading and deceptive, and to have caused Metcash to suffer loss and damage in that it:
“(1) Entered into the Supply Agreement without any modification of its terms; (2) Permitted the Supply Agreement to continue until 31 January 2005.”
630 There was an alternative pleading under section 51AA. Each of these alleged contraventions was the basis for claiming a variation of the Supply Agreement under section 87 Trade Practices Act, in the same manner as Metcash had sought rectification, or alternatively damages under section 82.
631 The questions posed for the judge were:
“Whether [Franklins] contravened Section 51AA of the Trade Practises Act 1974 in the manner contended for in par. C30 of the Amended Cross Claim and, if so, whether the formal Supply Agreement ought to be varied and, if so, in what manner and/or whether damages should be paid by [Franklins] to [Metcash] by reason of such contravention” and:
“If the formal Supply Agreement is unable to be so rectified or varied, whether [Franklins] engaged in misleading and deceptive conduct within the meaning of Section 52 Trade Practices Act in respect of the meaning and intended operation of the formal Supply Agreement in the manner contended for in par. C29 of the Amended Cross Claim.”
632 The judge answered those:
“Because the supply agreement is to be rectified, this question does not arise.” 633 Metcash’s written submission in the appeal concerning the Trade Practices Act was that Metcash’s Trade Practices Act case had been based on the same factual material as its estoppel case, which the judge rejected on the basis of the Johnson Matthey line of cases. Metcash submits that a private agreement cannot oust the operation of the statutory remedy under the Trade Practices Act.
634 Metcash’s oral submission scarcely mentioned its Trade Practices Act claims.
635 I have rejected Metcash’s estoppel arguments for reasons not dependent upon the Johnson Matthey line of cases. I am not persuaded that the Trade Practices Act provides Metcash with any remedy.
PART G – ORDERS AND PROCEDURAL MATTERS
4 May Declarations and Orders
636 On 4 May 2007, the judge made orders that not only gave answers (or expressly declined to give answers) to the 21 questions posed, but also made a declaration about the rights of the parties “upon the true construction of the Supply Agreement (in its unrectified form)”. That declaration immediately followed the order for rectification that his Honour made concerning the Supply Agreement.
637 In judgment 2, his Honour explained why he had taken that step:
“Franklins has appealed against the rectification order which I have made. Metcash may cross-appeal against the answers to the separate questions concerned with the construction of the unrectified Supply Agreement. The making of the declarations as sought will enable the Court of Appeal to find in one convenient place the construction which I have placed on the relevant clauses of the Supply Agreement, in its unrectified form. If Franklins’ appeal against the rectification order succeeds and there is no cross-appeal by Metcash, or if Metcash’s cross-appeal fails, the declarations as to the construction of the unrectified Supply Agreement will facilitate the determination of the remaining issues in the proceedings, which depend upon ascertainment of the terms of the Supply Agreement. Accordingly, the declarations have utility and tend to promote the just, quick and cheap resolution of the issues in the proceedings.”
638 His Honour made that declaration after receiving written submissions 17 pages in length from Metcash opposing its making, and written submissions 14 pages in length from Franklins supporting its making.
639 By the time the judge came to make his orders, the procedures of the Court were governed by the Uniform Civil Procedure Rules 2005 (“UCPR”). UCPR 28.3 and 28.4 provided: “28.3 Record of decision If any question is decided under this Part, the court must, subject to rule 28.4, either: (a) cause the decision to be recorded, or
(b) give or make such judgment or order as the nature of the case requires.
28.4 Dismissal of proceedings (1) This rule applies if the decision of a question under this Division:
(a) substantially disposes of the proceedings or of the whole or any part of any claim for relief in the proceedings, or
(b) renders unnecessary any trial or further trial in the proceedings or on the whole or any part of any claim for relief in the proceedings.
(2) In the circumstances referred to in subrule (1), the court may, as the nature of the case requires:
(a) dismiss the proceedings or the whole or any part of any claim for relief in the proceedings, or
(b) give any judgment, or
(c) make any other order.”
640 While no formal order for separate determination of the 21 questions had been made, the parties and the court were clearly proceeding as though such an order had been made.
641 Metcash makes particular complaint about the following declaration that was made concerning the construction of the Supply Agreement (in its unrectified form):
“6. The plaintiff was and is entitled to have produced to it, to inspect and to make copies of all records of transactions which relate to those allowances, discounts and rebates to the benefit of which the plaintiff is entitled under the Supply Agreement and being records which it might reasonably require in order to satisfy itself that all such allowances, discounts and rebates have been allowed or paid when due.”
642 Like the answer to question 19 (para [590] above), the wording of that declaration is drawn at least in part from clause 4.3(b) of the Supply Agreement. The wording of the declaration related not only to past rights, but present rights of Franklins. Metcash points out that the judge had not made any decision that, even under the unrectified Supply Agreement, Franklins would have had any present rights of inspection under clause 4.3(b). Metcash contends that the making of a declaration that Franklins had a present entitlement to have documents produced to it, to inspect them and to make copies of them, foreclosed the sort of argument to which I have adverted in para [627] about the basis upon which any inspection should take place.
643 I do not accept that that is so. However, there is a different problem with the declarations in question.
644 An order of the court for rectification, once made, relates back so that the rights of the parties are treated as having always been in accordance with the contract as so rectified: Malmesbury v Malmesbury at Beav 418; ER 1200; Craddock Brothers v Hunt [1923] 2 Ch 136 at 151, 160; Bosaid v Andry [1963] VR 465 at 468, 473; Issa v Berisha [1981] 1 NSWLR 261 at 265; Wongala Holdings Pty Ltd v Mulinglebar Pty Ltd (1994) 6 BPR 13,527 at 13,533–4; [1995] ANZ ConvR 29 at 31-2; [1994] NSW ConvR ¶55-920 (60,145) at 60,151; Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374 at 387- 8; Spathis v Hanave Investment Co Pty Ltd [2002] NSWSC 304 at [107]– [111]; Re Jay-O-Bees at [93].
645 When the judge made that declaration he had already ordered that the Supply Agreement should be rectified. Thus, a declaration about the true construction of the Supply Agreement in its unrectified form involved the court formally pronouncing upon rights that no person then had, or had ever had. For that reason I would set aside the declaration. Declarations should be made only for the purpose of solving live controversies. When the judge, quite reasonably, took the view that the Court of Appeal might possibly be assisted by his views about what the agreement in its unrectified form meant, that could just as easily have been stated in a paragraph of reasons for judgment.
646 Various of the answers that the judge gave to questions concerning the agreement in its unrectified form ended with the words “and there should be a declaration accordingly”. The orders included such declarations. For the same reasons, I would delete those concluding words from the relevant answers, and set aside the declarations that were made.
647 I would add, however, that I do not see how the making of the declarations has actually done anyone the slightest harm, or caused any confusion.
Orders and Declarations Concerning Supply Agreement in its Rectified Form?
648 On 29 July 2005, Bergin J had ordered: “Pursuant to part 31 of the Supreme Court Rules there be determined separately from any other question, and before any further trial in the proceedings, all matters of liability between the parties leaving only any questions of breach and the existence and quantification of any loss and damage to be determined in the event that any liability is established by either party.”
649 Her Honour made other interlocutory directions on the same day, including:
“8. The parties are to attempt to reach agreement in relation to a Statement of Issues by 2 December 2005. 9. The proceedings be stood over for further directions on 9 December 2005”
650 Her Honour annexed to the Short Minutes of Order two proposed lists of questions for determination at a separate trial – one proposed by Metcash’s solicitors, the other proposed by Franklins’ solicitors. The Short Minutes conclude:
“Her Honour noted that she had been advised the parties are close to settling the proposed questions, and that pursuant to order 8 above the parties should be ready by 9 December 2005 to provide to the Court the settled questions, or to request the Court to settle any differences.”
651 By the time the trial began the parties had neither agreed on a specific list of questions, nor asked the court to settle their differences about the questions.
652 At the start of the second day of the hearing counsel for Franklins, Mr LG Foster SC (as his Honour then was) handed the judge a list of questions that counsel were still discussing. The following exchange occurred:
SIMPKINS: I flag one difficulty that we are currently grappling with; the original existing order for separate determination made by the court on 29 July, we would prefer to leave that order in place and have the current document as the parties’ identification of the issues necessary to resolve.
...
HIS HONOUR: What I am principally interested in is whether the parties have agreed upon the questions I should answer.
SIMPKINS: Mr Foster and I are agreed that the questions which your Honour will answer, regardless of precise formulations, are the ones on that document. The only current point of difficulty is whether those separate issues are issues that your Honour notes as the parties’ agreement as to whether your Honour wants to make a separate order for determination.
... FOSTER: I am just not sure what my friend is on about. The order her Honour made has no content. Her Honour made an order that there be, in general terms, a determination of all issues other than breach and damage. She sent the parties away to agree on specific questions.
HIS HONOUR: That’s what they have done.
FOSTER: Precisely. To make it clear there should be no tension whatsoever between what happened last year and what is now happening. My client doesn’t want a circumstance to arise whereby somebody says, well, I know they were the issues that were before Palmer J, but the thing we rely on is the order last year and there is a gap between them and your issue is estopped, or whatever. The critical matter from our point of view is that there is no room for an argument that what your Honour was deciding was anything other than what’s in that document. In our submission, given the way her Honour dealt with the matter, which was not to put any content into that order. It was a general order with the parties directed to go away and agree on something, which they never did. This is the proper way to regularise the matter.
HIS HONOUR: I don’t know whether people are being unnecessarily apprehensive, but as I understand the order which her Honour made it was that the parties, in effect, should define within the broad parameters outlined by her Honour the issues for separate determination.
FOSTER: I would accept that.
HIS HONOUR: Her Honour made an order for separate determination hiving off a broad area for later determination and said within the area to be determined at trial you will go away and agree upon the issues which I apprehend this document is about to do. When the document is finally approved by both sides it will be in fulfilment of her Honour’s order and these will be the questions to be answered pursuant to her Honour’s direction for separate trial.
FOSTER: As long as there is no misunderstanding. HIS HONOUR: Is that your understanding of the position?
SIMPKINS: Yes, your Honour. What your Honour is saying, the order of separate determination remains, but the document provides the questions your Honour has to address. We agree with that.
HIS HONOUR: It is on record, you don’t have to get apprehensive.”
653 At the start of the fourth day of the hearing Mr Foster told the judge: “Your Honour, it has now been agreed between the parties that your Honour should proceed by consent upon the basis that the questions for determination at this hearing are those set out in the document that I handed up to your Honour on Tuesday morning and that the adumbration of those questions in that document gives content to the order made by her Honour Justice Bergin in, I think June or July last year.”
654 Mr Simpkins did not dissent from that statement. The judge marked the agreed facts and questions as “MFI 2”. The case thereafter proceeded by reference to that list of questions, and the judgment likewise was given by reference to that list of questions.
655 The questions that the parties agreed the judge should answer defined the expression “the formal Supply Agreement” as meaning, in effect, the document the parties executed on 14 September 2001, in its unrectified form. Many of the questions were posed by reference to “the formal Supply Agreement”.
656 The list of questions for determination concluded with notes. One of them was that certain contentions of the plaintiff (in, presumably, its Amended Summons) were reserved for subsequent hearing and determination by the court if necessary in the light of the determination of the questions. There was also a note that said:
“Irrespective of the outcome of this separate determination, there will remain for determination a question of liability concerning inconsistencies between the description or classification of discounts, allowances and rebates in trading terms between the defendant and its suppliers during the term of the Supply Agreement and the benefit or service provided by the defendant to its supplier which triggered the defendant’s entitlement to receive those discounts, allowances and rebates, further details of which are set out in the letter from Blake Dawson Waldron, solicitors for the plaintiff, to Freehills, solicitors for the Defendant, dated 30 June 2005.”
657 The letter from Blake Dawson Waldron to Freehills dated 30 June 2005 stated some concerns that Blake Dawson Waldron continued to have about the procedure of separate questions. One of those concerns was:
“... even if [Metcash] succeeds at the hearing of the separate question, it will still be necessary for there to be a further hearing in respect of, inter alia, whether there is an inconsistency between the description or classification of discounts on the face of the trading terms between [Metcash] and a particular supplier and the actual benefit or service provided by [Metcash] to the supplier which triggered [Metcash’s] entitlement to receive the discount from that particular supplier (“the classification issue”). The classification issue was the subject of evidence of Mr Hugo Loneragan of Deloitte before the Court last Friday, and in respect of which [Metcash] has raised concerns about alleged breach of the confidential undertakings. ... the position taken by [Metcash] in respect of confidentiality (both in relation to Mr Loneragan’s affidavit and generally) has prevented [Franklins] from fully agitating the classification issue. [Franklins] fully reserves its rights in respect of the classification issue.”
658 Mr Loneragan, referred to in that letter, is an accountant who Blake Dawson Waldron had engaged to inspect certain records of Metcash relating to, at first, 14 suppliers, then an additional 19 suppliers. To preserve confidentiality, he referred to particular suppliers, and the rate at which benefits were provided to Metcash by that supplier, in code. An affidavit he made gave an example of a supplier, identified only as “B”, whose trading terms included a note:
“Please note: ‘DD’% settlement discount is not costed into price as per Agreement dated 6/7/99. This is treated as Prompt Payment for 14 days.”
659 According to the Laminated List, a “settlement discount” was one of the types of benefit that Metcash was obliged to pass on to Franklins. Mr Loneragan said that that:
“... raises a question as to whether the ‘Settlement Discount’ provided by supplier ‘B’ was, as suggested by the note, actually ‘treated’ by the parties as a ‘Prompt Payment’ discount, in which case [Metcash] ... did not pass on the discount to [Franklins].”
660 His affidavit also reported on comparing the trading terms of a particular supplier, and the terms in which that supplier issued invoices to Metcash. There was a discrepancy between the way in which the discount was referred to in the trading terms and on the invoice. He concluded:
“(a) There is a strong possibility that in respect of at least some of the suppliers, there is an inconsistency between the description or classification of the discount on the face of the trading terms as between [Metcash] and a particular supplier and the actual benefit or service provided by [Metcash] to the supplier which triggers [Metcash’s] entitlement to receive the discount from that particular supplier. (b) There would appear to be no uniform practice in relation to the description or recording of the types of discounts negotiated between [Metcash] and particular suppliers.”
661 On 18 April 2007, Metcash filed a Notice of Motion (the “Metcash Motion”) that sought, inter alia:
“1. A Declaration that the ‘published allowances and discounts’ referred to in the clause 1.1 definition of ‘Wholesale Price’ in the Supply Agreement executed by [Franklins] and [Metcash] on or about 14 September 2001 means the following published discounts and allowances (if available): trade discounts, warehouse allowances, distributor allowances, quantity buy allowances, and settlement discounts. 2. An order that judgment be granted in favour of [Metcash] against [Franklins] .”
662 Metcash later filed written submissions in support of that Notice of Motion, and in support of what it claimed were additional orders and declarations “required in the light of the orders and declarations made on 4 May 2007”.
663 The additional orders sought were ones that would require enumeration of which particular benefits were, and which particular benefits were not, to be deducted from the supplier’s list price in ascertaining the Wholesale Price.
664 Broadly, Metcash’s contention was that all the particular types of benefit that Franklins was complaining about not having received were confidential benefits and, even taking into account the rectification that the judge had ordered should be made, the evidence before the judge should enable him to conclude that the only published discounts and allowances that Metcash had received were the specific types it had enumerated in para [1] of the Metcash Motion. Further, Metcash contended that the judge ought be able to conclude, on the basis of the evidence before him, that Metcash had actually paid to Franklins every cent it had received from suppliers, so far as those particular benefits were concerned. It submitted that the judge should answer certain of the questions that had been submitted to him to state what the rights of the parties were under the agreement as the judge had rectified it. Further, once the judge came to the conclusion that Franklins had been given every benefit it was entitled to, the proceedings should be dismissed, with costs.
665 The judge declined to proceed in the way Metcash invited him. He said (Judgment 3, at [5]-[8]):
“Franklins says that there are indeed inconsistencies between descriptions of discounts and allowances used by various suppliers so that it is not clear that Metcash has correctly deducted all published discounts in calculating prices under the Supply Agreement. It refers to some evidence in this regard given by Mr Loneragan in an affidavit of 21 June 2005. The precise identification and classification of discounts allowed by various suppliers was not an issue directly for determination by me in the proceedings thus far. I do not propose to accept Metcash’s invitation to determine it now by revisiting the evidence and drawing inferences. The identification and classification of discounts is a matter to be determined in the next stage of these proceedings as indicated in my reasons for judgment. It will then be a matter for determination as to whether that identification reveals whether or not Metcash has committed a breach of the Supply Agreement in calculating the prices. It is not appropriate for this Court to engage in the exercise of ascertaining which various discounts and allowances provided by various suppliers fall within the description published discounts or outside that description. I think that is a matter really for the application of some expertise. It is a matter ripe for determination by a referee and I think that an order for reference out should be made. I say that, not only for the reason that I have given, that is that it is really a question which would benefit from the application of some expert knowledge, but also because the exercise is likely to be protracted and convoluted. Every other issue in this proceedings fits that description.”
666 I am not persuaded that, even on the basis of the rectification order that the judge had decided was appropriate, he was in error in taking that course.
667 Now that it is in my view appropriate to make a different rectification order to that which the judge made, it is quite apparent that further proceedings will be necessary.
668 Metcash has expressed its concern that such a course means that the original intent of the order of Bergin J has not come to fruition. That is so. However, the proceedings in the court below proceeded on the basis, by consent, that the judge’s task was to answer specific identified questions, and he has done so. If the effect is that the original intent of Bergin J in ordering separate determination has not been fully carried through, and the answers to the questions do not determine all matters in dispute in the proceedings, that is a risk always inherent in the procedure of having determination of specific questions.
669 The argument on this topic has drawn attention to the fact that the answers to some of the questions were framed in terms of “the Supply Agreement” rather than “the formal Supply Agreement”. While I have no doubt what the judge meant, it would be preferable for the court’s orders to state unambiguously that the answer relates to the formal Supply Agreement.
Franklins’ Application for Leave to Amend
670 In para [8] of its Amended Summons, Franklins alleged there were implied terms in the Supply Agreement that:
(a) [Metcash] would do all things reasonable and necessary to give [Franklins] the benefit of the Agreement; and/or (b) [Metcash] would act in good faith in its dealings with [Franklins] under the Agreement.”
Those terms were particularised as “implied by law”. 671 The Amended Summons defined the term “Discounts” as:
“payment to be made by the Supplier to [Metcash], or deductions or credits to be allowed by the Supplier to [Metcash] by way of discounts, allowances or rebates from or in respect of that supplier’s wholesale list price for its Product or Products ...”
672 A subcategory of Discounts was “Volume Discounts”, which were defined as being Discounts “referable to the volume of Product acquired by [Metcash] from the Suppliers which were on-supplied by [Metcash] to [Franklins].”
673 The Amended Summons alleged:
14. During the term of the Agreement [Metcash] failed to deduct the value of all Discounts, or alternatively the Volume Discounts, which it received from the Suppliers in calculating the Wholesale Price payable by [Franklins] under the Agreement. 15. By reason of paragraph 14 above, [Metcash] has: ...
(b) failed to give [Franklins] the benefit of the Agreement in breach of the term of the Agreement referred to in paragraph 8(a) above [para [670] above].
(c) failed to act in good faith towards [Franklins] under the Agreement in breach of the term of the Agreement referred to in paragraph 8(b) above [para [670] above].”
674 By its letter of 30 June 2005 (referred to at para [657] above), Franklins had flagged its desire to run a case that it was entitled to receive what were in substance benefits of a type that, under the Supply Agreement it was entitled to receive, even if Metcash and a supplier had applied a different name to that particular benefit.
675 Among the questions that the parties agreed the judge should answer were questions 17 and 18:
“17. Whether it was an implied term of the formal Supply Agreement that:
(a) [Metcash] would do all things necessary to give to [Franklins] the benefit of the formal Supply Agreement; and/or
(b) [Metcash] would act in good faith in its dealings with [Franklins] under the formal Supply Agreement.
18. If Question 17 is answered yes, whether such implied terms (or either of them) obliged [Metcash] to deduct the Discounts or Volume Discounts (both as defined in the Amended Summons) in the calculation of the price payable by [Franklins] to it under the formal Supply Agreement.”
676 The answer the judge stated to each of those questions in his reasons for judgment was:
“Because the Supply Agreement is to be rectified, this question does not arise.”
677 The Court’s formal order concerning each of questions 17 and 18 was simply “This question does not arise”.
678 Franklins did not include in its Notice of Appeal any ground relating to the answers the judge gave to questions 17 and 18. On the final day of argument of the appeal Mr Meagher mentioned to us the matters I have just set out. He said:
“It seems that the trial judge has taken the view that the question only addressed the formal supply agreement as distinct from the rectified supply agreement and, on that basis, has not answered the question.”
679 Mr Meagher’s supposition about the judge’s reasoning for not answering the questions seems to me to be clearly right. The question was, in its terms, addressed to the “formal Supply Agreement” and so obviously would not arise if the formal Supply Agreement was to be rectified. Some of the questions that the judge had earlier answered were similarly cast in terminology involving the “formal Supply Agreement”. For example, question 7 asked the court to choose between three alternatives for the manner of calculating the Purchase Price “upon the true construction of the formal Supply Agreement”. Deciding the construction of the document, in the form the parties had executed it, was necessary – if the document was not rectified, the answer to that question of construction would govern the price that was payable by Franklins – and as a necessary part of deciding whether the document should be rectified the court would need to ascertain the true construction of the document, to see whether, and if so in what ways, the true construction was inconsistent with the common intention of the parties.
680 Mr Meagher explained to us his reason for raising the matter so late in the appeal:
“As I understand it, my friend seeks to argue the answer ‘doesn’t arise’ precludes us arguing for the implied term forever. If we need a notice of appeal to have that order reversed or changed, then we would ask for that but I must say I had assumed if this Court dealt with the matter in that way – I suppose if this Court dealt with the matter by saying the trial judge was right – then we would still have to go back and have an argument with the trial judge about this implied term because it has not been dealt with; and, if this Court says his Honour was wrong about rectification or wrong about construction, then the matter would go back and his Honour would have to deal with this implied term question.”
681 As protection against such an argument being raised if the matter were remitted to the court below, Mr Meagher seeks leave to amend the Notice of Appeal to appeal against the orders the trial judge made in response to questions 17 and 18.
682 Mr Meagher was granted leave to file a Notice of Motion seeking that amendment, and the parties were granted leave to make written submissions concerning it, on the basis that the Court would deal with the application for leave to amend in its reasons.
683 I have already rejected at [664]-[666] above Metcash’s argument that the questions posed to the trial judge were ones that, once he had granted rectification of the Supply Agreement, he should then have answered by reference to the Supply Agreement as so rectified. Any of the questions to which the judge addressed himself that were framed in terms of “the formal Supply Agreement” related to the Supply Agreement in its unrectified form. The answers that the judge gave to questions 17 and 18 were right, and will not preclude Franklins from arguing, on remission of this matter, that the Supply Agreement as rectified contains implied terms of the kind it has pleaded, or that those terms (if found to exist) have been breached. For that reason, I would dismiss Franklins’ Notice of Motion seeking leave to amend its Notice of Appeal.
684 As the Notice of Motion was responsive to an argument of Metcash that has failed, Metcash should pay the costs of the Notice of Motion.
Costs
685 The orders that I propose to make involve what looks at first glance to be major surgery to the orders of the judge below. However, in substance Franklins has succeeded on the appeal. If a plaintiff sues for breach of contract and obtains an award of nominal damages, that empty victory usually does not bring with it an entitlement to costs, as the plaintiff usually is not to be regarded as the successful party in the action: Anglo-Cyprian Trade Agencies Ltd v Paphos Wine Industries Ltd [1951] 1 All ER 873 at 874; Alltrans Express Ltd v CVA Holdings Ltd [1984] 1 WLR 394; [1984] 1 All ER 685; Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 at 98 [70] per McHugh J; Ng v Chong [2005] NSWSC 385; Mid-City Skin Cancer & Laser Centre v Zahedi-Anarak [2006] NSWSC 1149 at [47]- [52]. In my view, in substance Metcash has not succeeded on any issue. For that reason it should pay the costs of the appeal and of its cross- appeal.
Orders 686 I propose the following orders:
In proceedings 40253/07:
(1) Appeal allowed.
(2) Vary the order made in the court below on 4 May 2007 by:
(a) deleting from the answers to each of questions 6, 7, 10, and 11 the words “the Supply Agreement” wherever occurring, and replacing them with “the formal Supply Agreement”; (b) deleting from the answers to each of questions 7, 10 and 11 the words “and by further holding that a declaration to that effect should be made.” (c) substituting for the answer to question 14: “The Court answers this question: “Yes”. The Court holds that the formal Supply Agreement ought to be rectified in the manner provided for in order 2 below.”
(d) substituting for the answer to question 19:
“The Court answers this question by holding that, subject to the proviso that follows, upon the true construction of the formal Supply Agreement as at the commencement of these proceedings the plaintiff had the rights hereinafter stated, that would endure for the longer of 10 years after the date of termination of the Supply Agreement, or if any tax investigation or other legal proceedings are instituted during the period, until such investigation and any ensuing legal action or other legal proceedings and appeals are concluded. The said rights are that the defendant must continue to make available to the plaintiff, and allow the plaintiff to make copies of, accurate records of all transactions that the defendant entered prior to the termination of the Supply Agreement with any person relating to the plaintiff and its bodies corporate. Those records include ones relating to the Products purchased by the plaintiff and its related bodies corporate, ones relating to the volume of those Products purchased, ones relating to the price of those Products purchased, and ones relating to the date of purchase of those Products. Those records include ones that affect or evidence the nature or amount of any allowance or discount that the defendant receives from a supplier concerning goods that the defendant later sells to the plaintiff. The proviso earlier referred to is that insofar as any such document affects or evidences the nature or amount of any allowance or discount that the defendant receives from a supplier of such goods the allowance or discount in question must be one that is required to be deducted from the supplier’s list price by the definition of Wholesale Price of a Product in the formal Supply Agreement.”
(e) deleting order 2 and in lieu thereof substituting: “Order that the formal Supply Agreement dated 14 September 2001 entered into between the plaintiff and the defendant be rectified by:
(a) inserting into the definition of Wholesale Price for a Product in Clause 1.1 immediately after the words “provided to Metcash by that Supplier” the words “other than any allowance or discount that is a direct, cross docking, early payment discount, centralisation/redistribution allowance, or slow moving rebate”; and
(b) deleting the words beginning “(ie ‘Wholesale 5’” and ending “to Metcash by that Supplier)” immediately following “Wholesale Price” in clause 4.4(a) thereof.”
(f) setting aside each of the declarations made in paras 3-6 of those orders.
(3) Remit the proceedings to the court below.
(4) Dismiss the Notice of Motion of the Appellant seeking leave to amend its Notice of Appeal. (5) Respondent to pay costs of the Appellant of the appeal, and of the said Notice of Motion.
In proceedings 40348/07 (the Cross-appeal):
(1) Save to the extent provided for in Order 2 of proceedings 40253/07, dismiss the Cross-appeal. (2) Cross-appellant to pay costs of the Cross-respondent of the Cross-appeal.
Postscript
687 Having read the reasons of Allsop P and Giles JA, I should explain what I meant in para [627] when I referred to discretion in the crafting of an order to enforce the contractual rights of inspection. An order enforcing the contractual rights of inspection is in the nature of an equitable order for specific enforcement of that contractual right. Any equitable order is discretionary, in the sense that the judge must craft the precise order that will rectify, in so far as is practicable, the particular departure from the requirements of equitable principle that have been shown to have occurred in the instant case, but go no further. Specific enforcement of contractual rights is granted only in those circumstances where damages are not an adequate remedy. Concerning such a contractual right, the departure from equitable principle that the order seeks to remedy is failure to perform the contract. The relevant discretion concerns how, in the circumstances of any particular breach that might have been proved, the objective of obtaining as close as is practicable to proper contractual performance is to be achieved. In at least some cases, it also concerns whether there is any recognised discretionary defence to the granting of the equitable relief, and on what (if any) terms (themselves derived in accordance with equitable principle) the equitable order should be granted. **********
LAST UPDATED: 16 December 2009