ACI Operations Pty Ltd v Berri Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

No. 2088 of Error! No sequence specified.2004

ACI OPERATIONS PTY LTD	Plaintiff
v
BERRI LIMITED	Defendant

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JUDGE:	DODDS-STREETON J.
WHERE HELD:	MELBOURNE
DATE OF HEARING:	11-14 and 18 April 2005
DATE OF JUDGMENT:	9 June 2005
CASE MAY BE CITED AS:	ACI v Berri
MEDIUM NEUTRAL CITATION:	[2005] VSC 201

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CONTRACT – Supply agreement - Customer must purchase all its requirements for defined Products and “products substantially the same as or substitutable for any Products” from supplier save where customer receives bona fide arm’s length third party offer which supplier fails to match – Whether third party offer for “products substantially the same” as Products – Whether third party offer in good faith or for improper purpose of resolving customer’s legal problems by termination of supply agreement – Whether third party offer “arm’s length” where solicited by customer stipulating the products, and its term extended in return for payments by customer representing estimated damages for customer’s repudiation of contract with third party – Held – Products in third party offer “substantially the same” as supply agreement Products – Want of good faith and improper purpose not established - Customer, third party and third party offer not “arm’s length”.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr N. Mukhtar, Q.C. with Mr P. Nicholas	Clayton Utz
For the Defendant	Mr W.T. Houghton, Q.C. with Mr J.J. Gleeson	Corrs, Chambers Westgarth

TABLE OF CONTENTS

INTRODUCTION AND BACKGROUND................................................................................... 2

SUMMARY OF FACTS AND EVIDENCE................................................................................... 2

Terms of the Supply Agreement..................................................................................................... 4

THE PLEADINGS............................................................................................................................ 19

Amended statement of claim.................................................................................................... 19
Amended Defence....................................................................................................................... 21
Amended Reply........................................................................................................................... 22

THE PARTIES’ PRINCIPAL CONTENTIONS......................................................................... 22

(I) The plaintiff’s contentions.................................................................................................... 22
(II) The defendant’s contentions............................................................................................... 25

MEANING OF “PRODUCTS”...................................................................................................... 28

Decision of Habersberger J........................................................................................................ 28
Products........................................................................................................................................ 30

CONSTRUCTION OF CLAUSE 4.8............................................................................................. 31

WHETHER ITEMS INCLUDED IN BRICKWOOD OFFER SUBSTANTIALLY THE SAME AS PRODUCTS....................................................................................................................................... 36

Evidence of Mr Grob.................................................................................................................. 37

Slotted Neck............................................................................................................................. 37
Double sealed cap..................................................................................................................... 37
Batch traceability..................................................................................................................... 38
Vacuum panel differences........................................................................................................ 38
High shoulder or low shoulder................................................................................................. 38
Swing handles.......................................................................................................................... 39
“Eyebrows”.............................................................................................................................. 39
Brimful Volume....................................................................................................................... 39
Weight...................................................................................................................................... 40
Grooves..................................................................................................................................... 40

Evidence of Mr Stephens........................................................................................................... 40
Brickwood bottles substantially the same............................................................................... 41

WHETHER BRICKWOOD OFFER “GOOD FAITH ARM’S LENGTH”............................. 41

Good Faith......................................................................................................................................... 42

Arm’s Length Transaction.............................................................................................................. 48

CONCLUSION................................................................................................................................. 57

HER HONOUR:

INTRODUCTION AND BACKGROUND

In this proceeding, the plaintiff, ACI Operations Ltd (“ACI”) by third amended statement of claim dated 13 April 2005, seeks declaratory and injunctive relief, including an order restraining the defendant, Berri Ltd (“Berri”) from accepting, acting on, or purchasing plastic beverage bottles pursuant to an offer from Brickwood Holdings Ltd (“Brickwood”) dated 16 December 2004 (“the Brickwood offer”) to supply those products.

ACI and Berri are parties to a supply agreement dated 30 May 2001 under which Berri must purchase all of its requirements for defined beverage bottles and bottle tops and products “substantially the same as or substitutable for” any such products, for, inter alia, an initial five year term expiring on 30 May 2006, subject to Berri’s right to accept a third party’s “bona fide arm’s length” offer to supply the products under either clause 4.8 or clause 5.5 of the supply agreement if ACI does not match the third party offer. In the present case, Berri contends that the Brickwood offer complies with clause 4.8 of the supply agreement and that Berri may accept it, as ACI has failed to match the offer within a reasonable time. ACI contends that some of the products included in the Brickwood offer are not “substantially the same as or substitutable for” the specified products under the supply agreement and further, that the Brickwood offer is not ”bona fide arm’s length” as required by clause 4.8. ACI argues that the requirements of clause 4.8 are therefore not satisfied and Berri is not entitled to accept the Brickwood offer.

SUMMARY OF FACTS AND EVIDENCE

ACI is a manufacturer and supplier of plastic beverage bottles and bottle tops (known as “closures”). Berri is a bottler and supplier of fruit juices and other beverages.

By an agreement dated 30 May 2001 (“the supply agreement”) between ACI and Berri, ACI agreed to supply Berri with various plastic bottles and closures (“Products”) specified in Schedule 1 of the supply agreement for an initial five year term from 30 May 2001, that is, until 30 May 2006. Under the supply agreement, Berri agreed to purchase all of its requirements for the Products from ACI. The Products originally comprised 33 bottles and eight closures. The original Products are identified in Schedule 1 to the supply agreement by reference to Product description, material type, weight, Berri’s delivery site and price. Despite the statement in Recital B of the supply agreement that “specifications of the Products” were “set out in Schedule 3”, Schedule 3 was in fact blank. There were no specifications or drawings attached to the supply agreement.

It is undisputed that the parties from time to time modified or amended the range of Products the subject of the supply agreement by adding or deleting a Product or by modifying features of an existing Product so that its specifications and drawings changed.

During the course of the supply agreement, monthly project meetings attended by representatives of ACI and Berri took place. The meetings were attended by persons with technical expertise, including Mr Llewellyn Stephens, Berri’s packaging development manager, and Mr Rolf Grob, ACI’s design engineer. The matters discussed included product development and product enhancement. The proposed changes discussed at the meetings would be implemented by, in the first instance, preparing drawings or revising existing drawings.

During the course of the supply agreement, the parties agreed to vary the list of Products by adding a further 21 bottles and one closure, which are listed in Annexure A to the third amended statement of claim. The supply agreement was also amended in June 2003 by the agreement of the parties to delete a 20 litre Coles handle bottle.

The bottles are typical “supermarket” containers of long life fruit juices, sports drinks, chilled fruit juices, cordials and similar products. They are all made of plastic and are usually either transparent or translucent. Some bottles have a moulded handle forming part of the bottle itself, while other bottles have a swing handle. Some bottles belong to ACI’s stock range, for which ACI owns the tooling and the designs. Other bottles are produced only for Berri.

Terms of the Supply Agreement

The supply agreement is entitled “Heads of Agreement”. Recital B states that the parties had entered the binding agreement “pending the negotiation and execution of definitive documentation”. Clause 2.4 states that the parties would use their best endeavours to enter into a definitive agreement. It is, however, undisputed that no further formal agreement was subsequently executed.

The Supply Agreement also relevantly provides:

Clause 1.Definitions
“Products” means the products listed in Schedule 1.

“Specifications” means the specifications of the Products as set out in Schedule 3.

3. TERM 3.1 Initial Term This agreement shall be in effect for 5 years from the date of execution ('Initial Term'). 3.2 Extension of Term At the expiration of the Initial Term, if the parties agree, this Agreement shall be extended for a further term of five years. 3.3 Right to match on expiry of Term If the Initial Term is not extended and the Customer receives a bona fide arm's length offer from a third party for the supply of Products following the Initial Term but before the date which is 5 years after the expiration of the Initial Term (an 'Offer'), the Supplier will have the right of last refusal to match the terms and conditions set out in the Offer. 4. SALE AND PURCHASE OF PRODUCTS 4.1 Supply of Products The Customer shall purchase from the Supplier all of the Customer's requirements of Products. 4.2 Forecasts and firm orders (a) The Customer will: (i) on 1 July each year, provide the Supplier with a forecast of its requirements for Products for the following 12 months; (ii) on the first business day of each month, provide the Supplier with a rolling revised forecast of its requirements for Products for the following 4 months; (iii) on a weekly basis, provide the Supplier with a rolling 6 week forecast of its requirements for Products. The initial 4 week period of each such rolling forecast will constitute a firm order (a 'Firm Order'); and (iv) on a weekly basis, provide the Supplier with details (and an order number) of its requirements for Products for each day during the immediately following week. (b) The forecasts referred to in clauses 4.2(a)(i) and 4.2(a)(ii) will not be binding. The quantity of Products set out in each Firm Order referred to in clause 4.2(a)(iii) will be binding upon the Customer, although the Customer may vary its weekly drawdown volume in respect of such Products (provided that the full quantity of Products referred to in the relevant Firm Order are taken by the Customer within 2 months from the commencement of the period the subject of the Firm Order). 4.3 Capacity (a) The Supplier will supply to the Customer the Products the subject of a Firm Order to the extent of the most recent forecasts. (b) The Supplier will use its best endeavours to give priority of supply to the Customer and to meet the Customer's requirements for Products in excess of its forecast requirements by ensuring that: (i) any excess capacity in relevant manufacturing facilities of the Supplier is employed to satisfy such requirements of the Customer; and (ii) any excess capacity in relevant manufacturing facilities of the Supplier is employed to satisfy such requirements of the Customer in priority to any other customer of the Supplier whose requirements for Products exceeds the requirements as set out in the firm orders of that other customer. (c) The Supplier will review each of its manufacturing lines on a monthly basis to assess its ability to satisfy the Customer's forecast requirements for Products. In the event that it appears that the Supplier may not be able to meet the Customer's forecast requirements for Products, it will immediately notify the Customer accordingly, and use its best endeavours to meet the Customer's forecast requirements. 4.4 Delivery The Supplier will deliver the Products to the Customer's premises as specified in a Firm Order. 4.5 Title and risk ... 4.6 Specifications. Clause 4.6 specifications. (a) The Products supplied to the customer will conform to the specifications. (b) If Products supplied to the customer do not conform to the specifications, the customer may reject the Products by notifying the supplier of the relevant defect immediately upon its becoming aware of the defect. 4.7 Force majeure ... 4.8 Right to match in respect of the Products If the Customer receives a bona fide arm's length offer from a third party for the supply of products which are substantially the same as or substitutable for any Products ('ACI Product Offer'), the Supplier will have the right of last refusal to match the terms and conditions set out in the ACI Product Offer with the relevant products from the ACI Group. 5. PRICING 5.1 Prices The price payable by the Customer for each Product is set out in Schedule 1. 5.2 GST ... 5.3 Payment ... 5.4 Review of prices (a) The prices for the Products will be reviewed as set out in Schedule 2. (b) At the beginning of each financial year during the Term, representatives of each party will meet to assess the competitiveness of the prices payable by the Customer for Products, and to ensure that the Supplier and the Customer share equally in mutual cost reduction benefits (after the recovery of capital costs). 5.5 Meeting competition If the Customer receives a bona fide arm's length offer from a third party supplier for the supply of all of the Products on the same terms and conditions as those set out in this Agreement, and the overall price which would be payable by the Customer for the Products from the third party is lower than the overall prevailing price of the Products under this Agreement ('Competitive Offer'), the Supplier will have the right of last refusal to match the price set out in the Competitive Offer, failing which the Customer may acquire the Products from the relevant third party. 6. CHANGES TO TECHNOLOGY AND PROCESS The Customer may request the Supplier to implement new technology to improve the quality of the Products or the manner of supply of the Products, or may request that the Supplier manufacture some or all of the Products at the Customer's premises. The Supplier and the Customer will meet and discuss any such request in good faith, with a view to implementing the request."

Schedule 2 to the supply agreement deals with the mechanism by which the prices for Products would be reviewed. The plastic bottles are manufactured from resin. Paragraph 2 states that adjustments to the prices would take account of variations in: "(a) the cost of resin, as nominated by the Customer; and (b) other costs of manufacturing Products, as indicated by changes in the CPI; and (c) currency changes." The cost of resin adjustment requires, inter alia, ACI to advise Berri of the fixed price for resin to be used in the manufacture of Products for periods of three months, six months and twelve months and Berri to nominate which fixed resin price it wished to apply.

The supply agreement does not oblige Berri to order any minimum quantity of Products, or indeed any Products at all. Pursuant to clause 4.1, Berri is required to purchase all of its requirements for Products from ACI. The price for Products is set out in a schedule and is subject to review based largely on the prevailing price of resin. Although it is not expressly stated, by necessary inference, Berri is also obliged to buy “products substantially the same as or substitutable for any Products” only from ACI. Berri’s obligation is subject to the terms of clauses 3.3, 5.5 and 4.8. Clause 3.3 applies in relation to the period after the expiry of the initial term. It provides that if the initial term (of five years) is not extended and the customer receives a bona fide third party offer to supply Products (after the expiry of the initial term, but before the date which is five years from the expiry of the initial term) the supplier will have the right of last refusal to match that offer. Clause 5.5 applies during the initial term. It provides that if Berri receives a bona fide arm’s length third party offer to supply all of the Products, ACI will have a right of last refusal to put a matching offer, failing which it may purchase from the third party. By clause 4.8, during the initial term ACI also has a right to put a matching offer if Berri receives a bona fide arm’s length offer from a third party to supply “products substantially the same as or substitutable for, any Products”. Under the supply agreement, Berri is required to provide annual, monthly and weekly forecasts of its requirements to ACI. ACI undertakes to use its best endeavours to give priority of supply to Berri and to meet its requirements for Products in excess of the forecasts by employing any excess capacity of its manufacturing facilities. ACI must notify Berri if it appears unable to satisfy Berri’s forecast requirements and must deliver the Products to Berri’s premises as specified in a firm order.

The supply agreement is a significant commercial contract, which has resulted in orders to ACI totalling up to approximately $40 million per year.

The supply agreement was executed following a tender process in 1999, in which ACI was the successful bidder. Brickwood was also invited to tender. Brickwood and other parties have continued to supply Berri with products which are not covered by the supply agreement.

In about October 2003 (the third year of the supply agreement) Berri received an offer from Visy, which it put to ACI under the supply agreement. ACI challenged the validity of the Visy offer and Berri did not pursue it.

In December 2003, Berri received two offers from Brickwood. Brickwood was, at the, time, a supplier of other products to Berri. By letter dated 11 December 2003, Brickwood offered to supply products to Berri from the date of acceptance to 29 May 2006 (“first Brickwood offer”) and for the period from 30 May 2006 to 29 May 2013 (“second Brickwood offer”). Berri regarded the first and second Brickwood offers as financially advantageous. It forwarded both offers to ACI, requiring a response to them by 9 January 2004. It put the first Brickwood offer to ACI under clause 5.5 and the second Brickwood offer to ACI under clause 3.3. ACI did not respond.

Rather, ACI disputed that the first and second Brickwood offers were validly put to it pursuant to clauses 5.5 and 3.3. By a proceeding commenced in this Court on 13 January 2004 (“the first proceeding”), ACI sought declarations that the first Brickwood offer was not within clause 5.5 of the supply agreement and that the second Brickwood offer was not within clause 3.3 of the supply agreement.

Despite the challenge to their validity in the first proceeding, Berri accepted the first Brickwood offer, thus concluding a contract dated 27 January 2004 (“the Brickwood contract”). It also accepted the second Brickwood offer. By letter dated 28 January 2004, Berri advised ACI that it had accepted both the first and second Brickwood offers and that Brickwood would, from 27 January 2005, commence to supply Berri with the products it currently supplied to Berri under the supply agreement.

Following Berri’s acceptance of the first Brickwood offer, in early 2004 a group of personnel from both Berri and Brickwood was formed to discuss the transfer of supply to Brickwood, including the improvement of bottle design. It met weekly and a steering committee held monthly meetings. Mr Stephens, Berri’s product packaging manager, was a member of the group.

At trial, Mr Kop, Berri’s Chief Financial Officer and a director, conceded that on Berri’s acceptance of the first and second Brickwood offers, at a time when the outcome of the first proceeding was still unknown, Berri faced the problem of ensuring that the supply of products continued until supply from Brickwood could commence in February 2005. The Brickwood contract had a 12 months lead time before Brickwood could be “geared up” to commence supply.

Mr Kop testified that, prior to the delivery of judgment in the first proceeding, Berri contemplated that in the event of an adverse decision in the litigation, any defects or deficiencies which the court identified in the first Brickwood offer might be addressed by re‑submitting it under an alternative clause of the supply agreement. Mr Kop testified that “that is what I saw as the most likely outcome”. He stated that, at that time, there was no intention immediately to terminate the supply agreement.

The decision of Habersberger J was handed down on 25 June 2004. His Honour concluded that the first Brickwood offer was not within the terms of clause 5.5 and the second Brickwood offer was not within terms of clause 3.3.

In his witness statement, Mr Kop acknowledged that following Habersberger J’s decision in the first proceeding, it became clear to Berri that the first and second Brickwood offers were invalid and it was impossible for Berri lawfully to comply with the terms of both the Brickwood contract and the supply agreement.

Berri took no action in relation to the mutually inconsistent contacts for some months. Both contracts remained on foot until 3 December 2004.

Supply under the Brickwood contract was not scheduled to commence until 27 January 2005. Although ACI continued during this period to supply Berri with all its requirement for Products pursuant to the supply agreement, the relationship between ACI and Berri was not harmonious. By August 2004, Berri expressed complaints about ACI’s performance under the supply agreement. ACI denied that its performance was unsatisfactory. Acrimonious correspondence ensued.

Mr Kop conceded that by September 2004, Berri contemplated the termination of the supply agreement, but it did not take action, because, inter alia, that would mean an immediate cessation of supply, given that Brickwood would not be ready to provide alternative supply until January 2005.

By letter dated 6 October 2004, Berri again put the first Brickwood offer to ACI, but this time under clause 4.8 of the supply agreement, giving ACI 30 days to consider the offer. The resubmission of the first Brickwood offer pursuant to clause 4.8 thus occurred several months after the judgment in the first proceeding. In the intervening period, Berri had changed its legal advisers. Mr Kop testified that Berri sought to “take care” in the process of resubmission.

On 4 November 2004, ACI issued a proceeding challenging the validity of the first Brickwood offer as resubmitted to it pursuant to clause 4.8 (“the second proceeding”).

The relationship between Berri and ACI was, by this stage, further strained. At trial, Mr Kop agreed that at the beginning of December 2004, Berri decided to terminate the Brickwood contract, pursuant to a “corporate stratagem to solicit an offer from Brickwood for a replacement contract”, under clause 4.8. However, Mr Kop denied that Berri set out to devise the products to be included in an invitation to treat in order to ensure that they would fit within clause 4.8. He agreed that Berri was aware that any products would have to comply with clause 4.8, but strongly denied that the features of the products included in the invitation to treat had been developed as a device to make possible an offer under clause 4.8. He testified that, rather, the products contained in the invitation to treat incorporated improvements. They were the outcome of nine or ten months of joint product development by Berri and Brickwood, which had commenced when the Brickwood contract was concluded.

Mr Kop asserted that Berri’s decision to terminate the Brickwood contract was independent of devising the list of products under clause 4.8, which was the subject of the invitation to treat. He stated that “the judgments of the court highlighted there was a mistake with the original offer”.

Ultimately, Mr Kop testified that Berri’s intention in putting the first and second Brickwood offers to ACI was to obtain the competitive pricing to which Berri believed it was entitled under the supply agreement.

Mr Kop conceded that despite the termination of the Brickwood contract, Brickwood continued to gear up and “those wheels hadn’t stopped turning”. He agreed that Brickwood did not have facilities in Western Australia and South Australia, which meant that it was in Berri’s interests to keep ACI “on the hook” to supply those states.

On 3 December 2004, Berri advised Brickwood that it had terminated the Brickwood contract. The letter of Corrs Chambers Westgarth, solicitors for Berri, to Brickwood’s solicitors, Monahan and Rowell, dated 3 December 2004, stated that as a result of the judgment of 3 June 2004 and the current challenge by ACI to the resubmitted offer Berri no longer intended to be bound by its contract with Brickwood. It had decided to bring it to an end. The letter stated that “It may now be open” for Brickwood to claim damages as a result of Berri’s repudiatory conduct. Further, it stated that Brickwood had a duty to endeavour to mitigate any damage that it might suffer as a result of the repudiatory conduct. It stated that Berri would provide to Brickwood that day an invitation to treat, and trusted that Brickwood would respond in good faith expeditiously in exercise of its duty to mitigate properly.

On 3 December 2004, Berri’s Chief Executive officer, Ms Alison Watkins and Mr Alan Buckner, Berri’s Managing Director of Operations, attended a meeting at Brickwood’s premises. The meeting was also attended by Mr William Vautin, Brickwood’s Managing Director, and other Brickwood representatives. Mr Vautin stated that he had just been informed by his solicitor that Berri had terminated the Brickwood contract.

Ms Watkins handed the invitation to treat dated 3 December 2004 to Mr Vautin.

Mr Vautin asked why Berri had terminated the Brickwood contract rather than the supply agreement. Ms Watkins explained that under the court’s determination, Berri had found that it had not had the right to enter the Brickwood contract. She recognised that Berri might have exposure to a damages claim, but said that Berri expected Brickwood to take all reasonable steps to mitigate any loss and had “prepared [the] invitation to treat which sets out one avenue by which Brickwood could act to mitigate”.

The commencement date and supply date for a new contract were discussed. Mr Vautin stated that Brickwood needed time to discuss matters internally. He observed that he was “very disappointed with the way this was handled by Berri”. Among other matters, Ms Watkins said that Berri needed the offer to be open until 30 April 2005 as “we cannot put ourselves in the position of having two supply contracts again”. Mr Vautin said that Brickwood had invested a lot of money in the relationship. It had to have an early start date, in order to get cash flow from the investment as soon as possible.

The invitation to treat provided at the above meeting by Berri to Brickwood referred to the supply agreement with ACI, and to the terms of clause 4.8, which gave ACI a right to match. It stated that Berri invited Brickwood to make an offer for products listed in an attachment to the invitation to treat, on the terms and conditions set out in an attachment (“which may be amended by Brickwood”). It stated that Berri considered the listed products to be “substantially the same or substitutable for any products, within the meaning of clause 4.8”. The invitation to treat required Brickwood to make a written offer which would remain open and unconditional until 1 May 2005 and would not be withdrawn without Berri’s prior consent. It sought that any offer by Brickwood should be received by Berri within 14 days from the date of the invitation to treat. It further provided that, after receipt of an offer, Berri could request Brickwood to discuss it and could request Brickwood to amend and resubmit the offer.

Attachment 1 to the invitation to treat listed 45 bottles, with specified weight, length, depth and height. It gave a description of the relevant bottle, and, in most cases, a reference to attached drawings and Explanatory Notes. There was also a reference to the delivery site.

The Explanatory Notes to the invitation to treat set out “bottle and closure requirements”, which included requirements relevant to the present dispute. For example, the requirements for “warm fill” PET bottles required certain bottle designs to be such that there were no label protection protrusions or indentations on the front and rear bottle label panels; the 1, 1.5, 2.4, 3 and 3.3 litre bottles to be of “high shouldered” design; and the PET bottle design to be such that the bottle contact footprint was maximised, to optimise line stability. Various bottles were required to have bottle necks with slotted threads, a handle design such that the handle did not protrude beyond the footprint, and batch traceability.

The invitation to treat required the agreement to start on the commencement date (defined to mean at Berri’s election by written notice to Brickwood, at any date between 1 February 2005 and 30 April 2005).

On 7 December 2004, a further meeting took place at Brickwood’s premises. It was attended by Mr Buckner and Ms Whiting of Corrs Chambers Westgarth on behalf of Berri and by Mr Vautin, other Brickwood officers and Brickwood’s solicitor, Mr Patrick Monahan of Monahan & Rowell, on behalf of Brickwood. Mr Monahan stated that Brickwood was not happy with the situation. It did not understand why Berri had terminated the Brickwood contract, rather than the supply agreement. Brickwood was very exposed and would be claiming damages. He further stated that if Brickwood could not commence supply on 27 January 2005, it would incur large cash costs. He observed that, although Brickwood had a duty to mitigate, “the invitation to treat is not reasonable”. It gave no certainty that a new contract would be formed. Ms Whiting replied that it was up to Brickwood to determine how it would respond to the invitation to treat. She said that Brickwood could amend clauses in the invitation to treat and Berri would consider them and, if satisfied, would then invoke clause 4.8. Ms Whiting and Mr Buckner then left the room while Brickwood’s representatives discussed the position. When they returned, there as a short discussion of Brickwood’s losses. Ms Whiting asked for a quantification of the losses.

A further meeting between officers of Berri, including Mr Kop, and officers of Brickwood, took place on 8 December 2004. At the meeting, the Brickwood officers stated that Brickwood would not bid to supply Berri in Western Australia. The relevant Western Australian information was deleted, at Brickwood’s request.

The letter of Monahan & Rowell to Corrs Chambers Westgarth dated 8 December 2004, reserved Brickwood’s rights. It required a signed agreement (a working draft of which was attached) before Brickwood would take any further step in the matter.

The attached draft agreement included recitals of: the entry into the Brickwood contract; Brickwood’s considerable expenditure to gear up to commence production under the contract; its consequent substantial borrowing and anticipation of a substantial cashflow to commence on 27 February 2005; Berri’s purported repudiation; Berri’s assertion that Brickwood had a duty to mitigate; the invitation to treat and Berri’s desire (despite the purported repudiation of the contract) that Brickwood would continue to gear up to be able to supply products by a nominated date between 1 February 2005 and 30 April 2005.

The draft agreement further recited that “Berri accepts that by submitting an offer in response to Berri’s Invitation to Treat dated 3 December 2004, Brickwood is performing its obligations under its duty to mitigate its loss flowing from Berri’s repudiatory conduct”.

It further recited that Berri would not, in the future, argue that Brickwood’s continued gearing up did not fall properly within Brickwood’s duty to mitigate. It recited that by submitting an offer, Brickwood would not waive any of its rights flowing from Berri’s repudiatory conduct.

By clause 3, the draft agreement provided that “Berri will pay Brickwood the sum of $476,000 per calendar month commencing 27 February 2005 (and on the 27^th of each month thereafter) to assist Brickwood in meeting its financial obligations pending commencement of any contract”. By clause 4, such payments were to continue until the earlier of the commencement date of a new contract between Berri and Brickwood to supply the products (assuming Berri accepted Brickwood’s offer) or until 27 May 2004. By clause 7, such payments were to be credited against Brickwood’s claim against Berri for loss and damage.

An e-mail of Monahan & Rowell to Janet Whiting of Corrs Chambers Westgarth dated 9 December 2004 gave a break down of the figure of $476,000, and stated “that is a very hurriedly calculated figure, and must not be taken as representing the full amount of the monthly loss which Brickwood will suffer as a result of the repudiation of its contract (assuming that it accepts that repudiation”). The e-mail explained that there were two calculations of such loss. The figure of $476,000 represented the lower figure, which excluded the capital repayments of Brickwood’s loans. It stated that a sum including capital repayments could be argued to be closer to a real reflection of Brickwood’s loss, which would also incorporate its loss of anticipated profit on the contract.

The letter of Corrs Chambers Westgarth to Monahan & Rowell dated 9 December 2004 stated that instructions were being obtained, but Berri accepted that an offer would be consistent with Brickwood performing its obligations to mitigate any loss.

The e-mail of Mr Monahan of Monahan & Rowell to Ben Cowling of Corrs Chambers Westgarth dated 9 December 2004 stated, inter alia, “please ask Janet to ring me AS SOON AS POSSIBLE to discuss the matter – your client is pressing Brickwood to submit its response to the invitation to treat this afternoon and, as has been explained, Brickwood cannot and will not do so until we FIRST have agreement on the issues raised in the side agreement.”

A file note of Corrs Chambers Westgarth dated 9 December 2004 noted, “ … put position – advice is … can’t do an agreement now if B going to respond to I to T we meet that independent of damages … “.

The letter of Monahan & Rowell dated 9 December 2004 enclosed an amended version of the draft agreement.

At a directions hearing before Habersberger J on 10 December 2004, Berri disclosed that it had terminated the Brickwood contract.

The letter of Corrs Chambers Westgarth to Monahan & Rowell dated 10 December 2004 stated that Berri was not prepared to enter into the proposed side agreement.

By letter dated 14 December 2004 to Berri, Brickwood forwarded an offer to Berri.

On 16 December 2004, Brickwood forwarded a second offer to Berri dated 14 December, but in fact received on 16 December 2004 (“the Brickwood offer”) in identical terms to the first offer dated 14 December 2004, save that it recorded an alteration to schedule 2, altering the commencement of the quarter year for price review to 1 April 2005.

The Brickwood offer relevantly stated:

“Invitation to Treat
Brickwood offer
1. Tender Pricing
Pricing effective 1 February 2005 is attached based on the revised pricing protocols.
Acceptance of this Tender must be received in writing by close of business on 21 December 2004.

2. Terms and Conditions
Amendments as per attached.”

Attachment 2 set out terms and conditions. Clause 2 provided that the agreement commences on the commencement date (defined in clause 1 as 1 February 2005) and will expire on 29 May 2006, unless terminated earlier in accordance with clause 11.

Schedule 1, entitled “Specifications, Products and Prices”, set out a table containing numbered items (bottles or closures). The items are described, and bottle weight and dimensions, site, and drawing and Explanatory Note references were set out.

Attached Explanatory Notes amplified the bottle and closure requirements in considerable detail. Attached drawings illustrated particular numbered items. An attached “Pricing for Tender effective to 31^st March 2005” listed items, sites, bottle weights, resin costs, non‑resin costs, tender prices and indicative total units.

An attached “invitation to treat pricing protocols” gave prices of different materials, duty, insurance, freight, total resin cost per kilogram, exchange rate (US$), and wastage rates.

Schedule 2 set out price review, giving a summary of price review, mechanism and price adjustment for resin costs and non‑resin costs and resin price adjustment.

The Brickwood offer received on 16 December 2004 did not provide for payment by Berri of $476,000 per month, as Brickwood had sought. It was not open for the term sought by Berri, but required acceptance by 21 December 2004.

By letter dated 16 December 2004, couriered to ACI on that day, Berri stated that it had that morning received an offer from Brickwood constituted by the letter dated 14 December 2004 received that morning and the facsimile dated 16 December 2004, which it forwarded to ACI pursuant to clause 4.8 of the supply agreement. The letter stated that the Brickwood offer, by its terms, remained open for acceptance until close of business on 21 December 2004, but that Berri would seek to have the time for acceptance extended, and would advise ACI if that occurred. The letter sought ACI’s “urgent advice” on whether it would exercise its right of last refusal in respect of the Brickwood offer.

On 17 December 2004 Habersberger J heard ACI’s application for leave to discontinue the second proceeding on the basis that Berri pay indemnity costs.

On 17 December 2004, Berri served a notice of material breach on ACI, giving it 30 days to rectify the alleged breach. (Berri subsequently did not act upon the notice in order to terminate the supply agreement, although it asserted that there had been a number of significant breaches by ACI.)

The letter of Janet Whiting of Corrs Chambers Westgarth to Patrick Monahan of Monahan & Rowell dated 20 December 2004 stated that the Brickwood offer:

“… provides that acceptance of this tender must be received in writing by close of business on 21 December 2004" Berri's position with respect to the Brickwood Offer can only be explained in the context of the recent history of Brickwood and Berri's commercial relationship.
A brief summary is as follows:
·By a letter from Corrs to your firm dated 3 December 2004, Berri terminated the contract with Brickwood that arose from acceptance of the offer set out in Brickwood's letter dated 11 December 2003 (the Bid I Contract). Later on 3 December 2004, by letter from Berri to Brickwood bearing the same date, Berri invited Brickwood to make an offer to supply Berri with particular products on terms and conditions (the Invitation to Treat).
·On 7 December2004, Brickwood informed Berri that its financiers were likely to be seriously concerned by the termination of the Bid 1 Contract. As such. Brickwood advised that it could not make an offer as set out in the Invitation to Treat due to the stated requirement that the offer remain "open and unconditional until 1 May 2005 or such longer period as Brickwood and Berri agree in writing and may not be withdrawn by Brickwood without the prior consent of Berri. Brickwood held the view that making an offer of this nature would leave it exposed for a significant period of time and this was unacceptable to it.
·Brickwood stated that in order to keep an offer open for the period specified in the Invitation to Treat it would require monthly payments of $476,000. Such payments were to be made conditionally.
The parties could not reach agreement on this matter and ultimately Brickwood submitted the Brickwood Offer on 16 December 2004. The Brickwood Offer remains open for acceptance until close of business on Tuesday 21 December 2004.
·The terms of the Brickwood Offer were acceptable to Berri and have been furnished to ACI pursuant to clause 4.8 of the Berri/ACI contract.

However, our client is concerned that ACI will complain that as the Brickwood Offer is only open for acceptance for such a short time, that ACI is not in a position to respond, either at all or in a substantive way, will assert that ACI is being denied the opportunity to properly exercise its rights under clause 4.8 of the Berri/ACI contract.
For this reason, our client has requested that:
1we ask that your client reconsider its position and extend the time for acceptance of the Brickwood Offer from close of business on 21 December 2004 until the earlier of:
(a) 30 June 2005; or
(b) Berri accepts the Brickwood Offer.

2 Berri would be prepared to agree to the above variation on the following terms:
(a)Berri will pay to Brickwood the sum of $476,000 on 27 February 2005 and on the 27^th day of each month thereafter until the Brickwood Offer is no longer open pursuant to clause 1 hereof;
(b)any amount to be paid by Berri to Brickwood pursuant to this arrangement is in reduction of any loss and damage suffered by Brickwood as a result of Berri's termination of the Bid 1 Contract; and
(c)if Berri pays amounts to Brickwood pursuant to this arrangement that are in excess of any amount that Brickwood would be entitled to claim from Berri as a result of Berri's termination of the Bid 1 Contract, then Brickwood will be required to reimburse Berri such excess amounts.

We note that the above does not seek to vary or extinguish any rights that either your client or our client may have as a result of the termination of the Bid 1 Contract.
In the circumstances, we would ask that you seek your client's instructions in relation to this as a matter of urgency.”

By letter to Corrs Chambers Westgarth dated 21 December 2004, Monahan & Rowell advised that Brickwood would extend the time for acceptance of the Brickwood offer until 30 June 2005 or until acceptance, on the terms offered by Berri.

The letter of Clayton Utz to Corrs Chambers Westgarth dated 21 December 2004, enclosed a statement of claim. It stated that for the reasons set out in the accompanying statement of claim, the Brickwood offer was not an offer within clause 4.8 of the supply agreement. It enclosed a statement of claim dated 21 December 2004.

By letter dated 21 December 2004, Berri advised ACI that the time for acceptance of the offer had been extended to 30 June 2005.

THE PLEADINGS
Amended statement of claim

By a third amended statement of claim dated 13 April 2004 and filed by leave granted on 12 April 2004, the plaintiff alleges that the Brickwood offer is not an offer within terms of clause 4.8 of the supply agreement because the expression “products which are substantially the same as, or substitutable for any Products” referred to products which, while not identical to Products, were different in their “essential characteristics of product description”, including volume, material type and weight.

The plaintiff alleges that ten of the 23 bottles in the Brickwood offer have the same volume, material type and weight as the corresponding ACI Products and that the Brickwood offer thus does not fall within the terms of clause 4.8.

Alternatively, the plaintiff alleges that, on a proper construction, the expression “products which are substantially the same as or substitutable for any Products” means a product which is different in material type, method of manufacture or by reason of some other innovation, but is reasonably interchangeable with an ACI Product.

The plaintiff alleges that all 23 bottles in the Brickwood offer use the same material and the same method of manufacture as the corresponding ACI Product, and contain no innovation. It is alleged that they are therefore not “substitutable for” the ACI Products within the meaning of clause 4.8.

The plaintiff alternatively alleges that the Brickwood offer was not “bona fide arm’s length”, but was instigated by Berri for an extraneous purpose, in circumstances where:

·Berri had forwarded on 12 December 2003 the first Brickwood offer which, if accepted, would result in a binding contract between Brickwood and Berri not operative until 12 months after the date of acceptance. It was expressed to be forwarded pursuant to clause 5.5 of the supply agreement and Berri required ACI to respond by 9 January 2004.
·Berri had forwarded the second Brickwood offer to ACI on 12 December 2003 pursuant to clause 3.3 of the supply agreement and required ACI to respond by 9 January 2004.
·ACI on 13 January 2004 commenced the first proceeding, seeking a declaration that the first Brickwood offer did not comply with clause 5.5 of the supply agreement and the second Brickwood offer did not comply with clause 3.3
·Berri accepted the first Brickwood offer on 27 January 2004, (thereby creating a contract which was to commence on 27 January 2005.)
·Berri also accepted the second Brickwood offer, creating a contract for supply from 20 May 2006 to 29 May 2013.
·Habersberger J, by a judgment given on 25 June 2004 in the first proceeding, declared that the first Brickwood offer did not satisfy clause 5.5 of the supply agreement and the second Brickwood offer did not satisfy clause 3.3
·By letter to Brickwood dated 3 December 2004, Berri stated that it would no longer be bound by the Brickwood contract, and that Brickwood had a duty to endeavour to mitigate damage and Berri would provide Brickwood that day with an invitation to treat to which Brickwood should respond expeditiously, in exercise of its duty to mitigate properly.
·By invitation to treat dated 3 December 2004, Berri invited Brickwood to make an offer in accordance with terms and conditions and bottle designs prepared by Berri, which it asserted to be “substantially the same as or substitutable for any Products” within terms of clause 4.8, and required that any offer remain open and unconditional until 1 May 2005 and not be withdrawn without Berri’s prior consent.
·On 14 December 2004, Brickwood made the Brickwood offer to Berri, which was to remain open for acceptance only until 21 December 2004.
·By an agreement between Berri and Brickwood made on 21 December 2004, Brickwood extended the acceptance date to the earlier of 30 June 2005 or the date when Berri accepted the offer, in consideration of Berri paying Brickwood $476,000 on 27 February 2005 and thereafter on the 27^th of each month until the Brickwood offer was no longer open.

The plaintiff alleges that in order to carry out the extraneous purpose of protecting or extricating itself from its legal difficulties, Berri conceived and prepared the invitation to treat, conceived and stipulated to Brickwood some differences from ACI’s Products sufficient to fall within clause 4.8, invited Brickwood to respond in the exercise of its duty to mitigate and offered to pay Brickwood $476,000 per month to extend the offer.

Amended Defence

By its amended defence, the defendant denies that products “substantially the same as or substitutable for” a Product excludes a product with the “essential characteristics of Product description” including volume, material, weight and type.

The defendant also denies that the Brickwood offer included 10 products identical to ACI’s Products, although of the same volume, material type and weight, and particularises alleged differences.

The defendant further denies the plaintiff’s allegation that the words in clause 4.8 should be considered a “composite expression” meaning “substantially the same as in that they are substitutable for” the Products.

The defendant admits that it requested that Brickwood extend its offer to 30 June 2005, in consideration of the defendant paying Brickwood $476,000 per month, but says that its proposal was:

“due to concern ‘that ACI will complain that, as the Brickwood Offer is only open for acceptance for such a short time, that ACI is not in a position to respond, either at all or in a substantive way, [and that ACI will assert that [it] is being denied the opportunity to properly exercise its rights under clause 4.8 of the Berri/ACI contract.”

The defendant denies that, in issuing the invitation to treat to Brickwood and agreeing the payment to extend the offer, Berri acted for an extraneous purpose or in breach of any implied duty of good faith, or the requirement that the offer be “bona fide arm’s length’.

The defendant does not dispute that under clause 4.8 of the supply agreement, ACI would have a “reasonable time” within which to match any third party offer, but says that, (given that the Brickwood offer was forwarded by Berri to ACI on 16 December 2004), a “reasonable time” for ACI to exercise its right of last refusal would have expired before 11 March 2005, the date on which Berri notified ACI that it had elected not to match the offer.

Amended Reply

By amended reply dated 21 March 2005, the plaintiff admits that the ten bottles incorporate the features particularised by the defendant, but says that such features do not render the products “substantially the same as or substitutable for any Products” where characteristics of volume, weight and material type remain identical.

THE PARTIES’ PRINCIPAL CONTENTIONS
(I) The plaintiff’s contentions

The plaintiff argued that clause 4.8 must be accorded a construction which would uphold the paramountcy of plaintiff’s grant of exclusivity under the supply agreement, in accordance with the parties’ intentions. A construction which legitimised loopholes for avoidance by Berri, or other vitiation or dilution of the plaintiff’s grant, would defeat the basic objects of the supply agreement. In that context, Mr Mukhtar, senior counsel for the plaintiff, contended that the plaintiff had assumed onerous burdens under the supply agreement in order to secure its grant of exclusivity. Further, the supply agreement did not set a market price for the Products or provide for price review on the basis of market price.

The plaintiff’s submissions on the definition of “Product” (on which the construction of clause 4.8 necessarily depends) appeared to shift somewhat during the course of the trial. At one stage, I understood its argument to be that a “Product” was simply an item with the essential characteristics of product description, volume, weight and material type specified in Schedule 1 to the supply agreement, or specified in respect of a later amendment set out in Annexure A.

Ultimately, however, Mr Mukhtar argued that, on close analysis, Habsersberger J did not determine that the technical drawings and specifications of the Products formed part of the supply agreement, but rather, proceeded on the basis (which the plaintiff accepted) that the technical drawings and product specifications constituted extrinsic evidence of the features of the Products.

The plaintiff apparently accepted Habersberger J’s construction of clause 5.5, but questioned the width of the ratio of his decision. It argued, however, that the heading of clause 5.5 (“meeting competition”) pointed to a significant distinction from clause 4.8, which was headed “right to match in respect of the Products”, thus indicating that it was not aimed at meeting competition.

Mr Mukhtar argued that “substantially the same as” must be construed to exclude a merely colourable distinction, because a very slight difference could otherwise undermine ACI’s pivotal exclusivity. At the other extreme, a sufficiently great difference from a Product would mean that an item was not covered by clause 4.8 at all. Between those extremes, the content of the term “substantially the same as” was imprecise and ambiguous. The court, he said, should therefore fix upon the objective determinants of weight, volume and material type in order to exclude from clause 4.8 items with the same weight, volume and material type as the corresponding Products. Put another way, the plaintiff’s primary submission was that a product with the same weight, volume and material type as the corresponding Product would not be “substantially the same”. Applied to the present case, as ten of the 23 bottles in the Brickwood offer have the same weight, volume and material types as the corresponding ACI Products, the plaintiff contended that the Brickwood offer does not come within clause 4.8. That contention assumes that the inclusion of some non‑conforming products in an offer will render the entire offer invalid. Ultimately, the plaintiff appeared to concede that its complaint based on the construction of “substantially the same as” related only to the ten bottles.

Alternatively, the plaintiff argued that the expression “substantially the same as or substitutable for” applied only to products using a different material or method of manufacture from the ACI Products, or included some other innovation, but were reasonably interchangeable. On that secondary construction, only innovative and new commodities would fall within clause 4.8. That construction requires the term “substitutable for” to be read with “substantially the same as” as a composite expression in which the word “or” does not bear its usual meaning, but means “that is to say”. The plaintiff did not contend that the products the subject of the Brickwood offer incorporated novel material, manufacturing methods or other innovations.

The plaintiff conceded that its constructions of clause 4.8 were specialised, but argued that specialised construction was necessary in order to uphold its paramount exclusivity under the supply agreement.

The plaintiff further argued that the Brickwood offer was not “bona fide arm’s length” and hence fell outside clause 4.8 on that basis. In that context, Mr Mukhtar expressly disclaimed any suggestion of dishonesty or “odious” collaboration. Rather, he argued that Berri had used clause 4.8 for the extraneous or improper purpose of extricating itself from the dilemma posed by its simultaneous commitment to two inconsistent contracts by terminating the supply agreement. Further, Berri “conceived and stipulated” the Brickwood offer, not primarily to obtain product improvements, but in order to escape from the legal quagmire into which it had fallen.

The plaintiff did not dispute that genuine bargaining had occurred between Berri and Brickwood in the negotiation of the Brickwood offer. It contended, however, that where the invitation to treat was inextricably linked to Berri’s decision to terminate the Brickwood contract and its assertion that Brickwood’s duty to mitigate required an offer in accordance with the invitation to treat, there were “forced circumstances” which precluded a “bona fide arm’s length” offer.

Finally, the plaintiff contended that if the Brickwood offer were valid, in the absence of a specific time to put a matching offer under clause 4.8, it had a “reasonable time” to do so, which should be measured by the period for which the Brickwood offer was open – that is, until 30 June 2005.

(II) The defendant’s contentions

Mr Houghton, senior counsel for the defendant, contended that the relevant clauses of the supply agreement must be construed in the context of a long term commercial agreement in which the parties had addressed the prospect that price reductions might be achieved over its course by improvements in technology, productivity, economics of scale or other factors. The supply agreement provided an incentive to the supplier to make improvements and achieve cost reductions by rendering ACI vulnerable to the possibility of third part offers which it must match, or lose the business.

Further, Mr Houghton submitted that, practically speaking, there was no scope for introducing extensive or radical differences to Products. Realistically, differences from Products as defined could only be achieved within a very fine compass.

He argued that clause 4.8, construed with the above matters in mind, reconciled the competing interests of ACI and Berri. It effectively extended ACI’s exclusive right of supply to encompass not just Products as defined, but products which were “substantially the same as or substitutable for” them, thus preventing Berri from defeating ACI’s grant by incorporating merely colourable differences. At the same time, it recognised Berri’s entitlement to obtain a cheaper price for any such product, because ACI’s exclusive right to supply was dependent upon its capacity and willingness to match a bona fide third party offer. Berri could thus obtain a cheaper price, whether from the third party or ACI, for any products “substantially the same as or substitutable for” any Products, subject to the requirement for a bona fide arm’s length third party offer.

The defendant contended that Habersberger J correctly construed clause 5.5 as applicable to the entire range of exactly identical Products and correctly recognised that, because it was virtually impossible to satisfy clause 5.5 (given ACI’s ownership of intellectual property), clause 4.8 constituted the only effective brake on what would otherwise be ACI’s exclusive long-term right of supply, with no real prospect of reduced prices for Berri.

The defendant argued that the plaintiff’s specialised construction of “substantially the same as” to exclude products with the same essential characteristics constituted an inversion of its plain meaning to “substantially different from”. As such, it did violence to the language. Nor was the plaintiff’s construction necessary in order to uphold any legitimate commercial objective of the supply agreement. Mr Houghton argued that, on the contrary, the plaintiff’s exclusivity was inherently vulnerable to third party offers under the supply agreement. Its protection lay in the requirement of a bona fide arm’s length third party offer and the commercially valuable right to match any such offer, rather than in a construction of clause 4.8 which distorted the plain meaning of terms.

The defendant contended that the term “Products” was correctly construed by Habersberger J to mean the Products listed in Schedule 1 and subsequently added (or deleted) by agreement, together with the relevant specifications, including the technical drawings. The defendant argued that that construction was supported by clause 4.6 of the supply agreement, which expressly provides that the “Products” must conform to the specifications, including the drawings, or Berri may reject them.

The defendant argued that a Product was a “product which matched the specifications and technical drawings agreed upon by Berri and ACI from time to time”.

In relation to the allegation that the Brickwood offer was not “bona fide arm’s length”, Mr Houghton contended that the fundamental commercial objectives of the supply agreement permitted Berri to secure a cheaper source of supply through competition. Such a purpose was not extraneous and or improper and could not be impugned for a want of bona fides.

Further, Mr Houghton submitted that:

· Berri did not collaborate with Brickwood about the termination of the Brickwood contract. Rather, Brickwood was surprised by the termination.

· The invitation to treat was not in breach of an obligation of good faith. Rather, it was sent out after the termination of the Brickwood contract and was followed by several meetings and further negotiations.

· Berri did not manufacture or devise artificial or merely colourable differences to Products simply to bring the relevant items within the ambit of clause 4.8. Rather, the evidence established that prior to and during the Brickwood contract, Berri and Brickwood discussed the new and different features, in order to work out the best design to achieve legitimate product advantages for particular bottles.

· The Brickwood offer received on 16 December 2004 was different in some important respects from the terms and conditions set out in the invitation to treat. First, the Brickwood offer was open only until 21 December 2004 at Brickwood’s insistence, due to Brickwood’s concern that a breach of covenants with its bankers could occur. Berri, in turn, refused to execute a deed sought by Brickwood. Further, the commencement date was ultimately 1 February 2005, rather than any time between 1 February and 1 April, as requested by Berri.

· In order to keep the Brickwood offer open beyond 21 December 2004 as requested by Berri, Brickwood required payment of $476,000 per month. The prices offered by Brickwood were 15-28 per cent higher than those sought by Berri. Brickwood, however, consented to the price review mechanism sought by Berri in the offer received on 16 December 2004.

· The reference to “a duty to mitigate” in the letter of Corrs Chambers Westgarth to Monahan & Rowell dated 3 December 2004, did not mean that there was a lack of “arm’s length bona fides”, in circumstances where Brickwood had its own legal advisers and there was nothing to prevent it from declining to make any offer at all and suing Berri for damages for breach of the Brickwood contract.

In relation to the plaintiff’s contention that it had a reasonable time (until 30 June 2005) in order to match the Brickwood offer (if valid), the defendant argued that the plaintiff had accepted the risks of challenging the validity of the offer by litigation, and had elected by March 2005 not to put a matching offer. In Berri’s submission, the time for ACI to put a matching offer had expired.

MEANING OF “PRODUCTS”
Decision of Habersberger J

In the first proceeding,[1] Habersberger J considered the questions of “the description or identity of the Products, that is, whether they had to be identical”.[2]
[1]ACI Operations Pty Ltd v Berri Limited [2004] VSC 219.
[2]Ibid at [10].

ACI argued that the first Brickwood offer did not satisfy the terms of clause 5.5 on a number of grounds. First, it submitted that it was not on the same terms and conditions as ACI’s supply, and ACI’s price in 12 months’ time was not known. Secondly, the first Brickwood offer did not include 15 bottles and three closures from the amended list of products. Berri argued that they were either omitted by oversight, or had been notified or deleted as “no longer required”. Thirdly, ACI argued that a further three bottles and closures from the amended list of products were not included in the first Brickwood offer. Berri contended that the first Brickwood offer included items which broadly corresponded to them, arguing that was all that was required for compliance with clause 5.5. The three bottles were described in Schedule 1 to the supply agreement as made from PET/PCR material, whereas the first Brickwood offer contained bottles made from PET only. The four closures were similar, but not identical, to the Schedule 1 Products. (ACI also challenged the validity of the second Brickwood offer on grounds not relevant to the present proceeding.)

In his judgment delivered on 25 June 2004, Habersberger J found, inter alia, that on a proper construction, clause 5.5 required an offer of the entire range of Products, which must identically match the ACI Products in all respects, including any patented technology. A broad similarity or correspondence would not suffice. His Honour rejected Berri’s contention that “near enough was good enough”.[3] He accepted ACI’s submission that a bottle which was identical except for a different closure or a different base was not a Product, albeit the differences were insignificant.
[3]Ibid at [13].

Although he acknowledged that his construction of clause 5.5 would, in practice, render it difficult for valid third party offers to be made under it due to ACI’s ownership of intellectual property associated with the Products, Habersberger J considered that clause 4.8 played an ameliorating role, as it permitted offers of products which were not identical.

His Honour also found that the Product list could be varied by agreement, but not unilaterally. His Honour accepted that Berri could not unilaterally delete a Product from the range and although the parties might agree that it would no longer be required, or that manufacture could cease, failing agreement to delete it, a Product would remain the subject of ACI’s right of exclusive supply.

I agree with and adopt the above conclusions of Habsersberger J.

Habersberger J did not accept that three bottles in the first Brickwood offer (which were to be manufactured only from the material “PET”) were identical to (in the sense required in clause 5.5) or constituted, three otherwise identical bottle Products listed in Schedule 1 of the supply agreement, there designated to be made of “PET/PCR”. His Honour accepted evidence that “PET/PCR” indicated a combination of two material types, namely, PET and PCR. He noted that the evidence in relation to the three bottles established that the relative percentages of “PET” and “PCR” was set out in technical drawings and specifications which had been accepted by Berri. It is not clear from the judgment at what stage those technical drawings and specifications had been accepted by Berri. It is, however, clear that his Honour expressly rejected Berri’s argument that because written product specifications in relation to the three bottles in question were not set out in Schedule 3 of the supply agreement, the product specifications and technical drawings were not part of the supply agreement. Further, as the three bottles did not conform to the required specifications, he considered that they were not Products.[4]
[4]Ibid at [22].

Products

On a fair reading, his Honour’s observations did not depend upon any factors or circumstances unique to the three bottles (such as the correspondence contained in Schedule 4). His analysis applied generally to all Products. His conclusion that the bottles were not the same as the corresponding Products did not depend on the fact that the material, rather than some other feature, was different.

His Honour considered that the terms of the supply agreement would be evidenced, or varied and amended, by specifications and technical drawings agreed on by the parties in relation to Products, whether agreed before or after the making of the supply agreement. Berri was entitled to complain if ACI did not comply with such specifications and drawings.

In my opinion, Habersberger J found that a “Product” was a product which exactly matched the specifications and technical drawings agreed upon by Berri and ACI from time to time. Such specifications, including technical drawings, whether or not part of the supply agreement, would define the Products subject to it. Conformity to the specification was the decisive criterion, not the nature of any different feature. His Honour clearly rejected Berri’s submission that the Products in a clause 5.5 offer could correspond in “a more general way, such as bottles and closures of a particular size and material type, and not requiring that each attribute or feature of each Product be precisely matched in every way, including any patented technology aspect”.[5] Rather, he accepted ACI’s contention that Products under clause 5.5 must be identical in a total and exact sense.
[5]Ibid at [26].

I agree with the analysis of Habersberger J. The identification and definition of Products subject to the supply agreement depend upon the relevant agreed specifications and drawings which, if extant prior to the execution of the supply agreement, would be at least extrinsic evidence admissible to explain the meaning of terms in Schedule 1; and, if agreed upon subsequently, would vary and amend the definition of each relevant “Product”. There is no dispute between the parties as to the specifications and technical drawings which currently apply to a Product in any given case.

To the extent to which it was contended that a “Product” means any item with the same weight, volume and material type as a Product listed in the schedule, I do not accept that submission. It would give an unduly wide reach to the plaintiff’s right of exclusive supply, which would apply to an item of any appearance or configuration, provided that it conformed to those essential requirements.

Further, such a construction would give no content or meaning to the Product Descriptions set out in Schedule I, which refer to items such as “300 MLCSD, 500 ML Kyneton Water, 300 L Swing Carafe, [and] Berri Green Hdle 4H”. It would also be difficult to attribute meaning to the phrase “products substantially the same as or substitutable for” any Products, as Products would constitute a category limited only by reference to weight, volume and material type.

CONSTRUCTION OF CLAUSE 4.8

It is against the “Product” (as currently described and specified in the latest applicable agreed specifications and technical drawings) that the meaning of “all Products” under clause 5.5, and “products substantially the same as or substitutable for ”any Products” in clause 4.8 must be measured.

Mr Mukhtar stressed that the plaintiff’s grant of exclusivity was “omnipotent” and central to the supply agreement, so that its maintenance should govern the construction of clause 4.8. The nature and extent of the grant of exclusivity can, however, be ascertained only by a reading of the supply agreement as a whole.

Berri’s obligation to purchase only from ACI is, in terms, restricted to “Products” as defined, that is, Products which conform precisely to the currently agreed specifications and technical drawings.

The definition of the Products as agreed from time to time governs the ambit of both the right of ACI exclusively to supply Products and Berri’s entitlements founded on the limitations on ACI’s right.

The plaintiff’s primary argument was that “substantially the same as” excludes products with the same essential characteristics (volume, weight and material type) as Products.

Mason, Wilson, Brennan, Deane and Dawson JJ, in their joint judgment in Darlington Futures Ltd v Deko Australia Pty Ltd,[6] recognised that that the usual approach to the construction of a contract is to accord to the language “its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract … “.[7]
[6](1986) 161 CLR 500.
[7]Ibid at 510.

While the above statement was articulated in relation to an exclusion clause, their Honours observed that the principle was of general application to the construction of contracts. Their Honours stated: “And the principle, in the form in which the laws expressed it, does no more than express the general approach to the interpretation of contracts … “.[8]
[8]Ibid.

The term “products substantially the same as Products” in my opinion, excludes identical items because they would, by definition, be Products themselves which, independently of clause 4.8, Berri would be obliged to purchase only from ACI.

Clause 4.8 implicitly extends Berri’s obligation to purchase only from ACI beyond Products, to products “substantially the same as any Products or substitutable for them”. ACI’s concomitant extended right is, again, defeasible by a complying third party offer which ACI fails to match. In contrast to clause 5.5, clause 4.8 does not expressly provide that Berri may purchase from the third party if ACI does not match the offer. That may be because the restriction on Berri in relation to such products is not express, or because a third party offer would not necessarily put an end to the supply agreement, or it may simply be a quirk of drafting. It is implicit that Berri may purchase from a third party if ACI fails to match the offer.

Clause 4.8 constitutes the sole source of the supplier’s rights in relation to items other than Products. Its construction is a double-edged sword for the supplier. A narrow construction of the subject matter of clause 4.8 reduces the customer’s capacity to put a conforming offer, but it correspondingly reduces the scope of the supplier’s extended rights. If the definition of “Products” requires exact conformity to the agreed specifications and technical drawings, the supplier is advantaged by a broader construction of “products substantially the same as or substitutable for any Products” under clause 4.8. The supplier’s extended rights under the clause are necessarily co-extensive with its vulnerability to a third party offer which it must match in order to maintain its right of supply.

In my view, clause 4.8 balances the commercial interests of both parties. It extends ACI’s rights beyond Products as defined, to similar products, so that Berri cannot accept a third party offer for such products without giving ACI the opportunity to match it. Subject to ACI’s right to match, Berri’s right to purchase products “substantially the same as any Products” from a third party is, however, equally fundamental to clause 4.8.

The plaintiff argued that clause 4.8 should be construed so as to restrict Berri to dealing exclusively with ACI in order to secure alterations, improvements or modifications to Products, in accordance with the parties’ established practice.

Such a restriction would effectively deny Berri the opportunity to achieve competitive, improved terms and conditions, including lower prices, for “products substantially the same as or substitutable for any Products”. Berri would be effectively “locked in”, for the term of the supply agreement, to supply by ACI of both existing Products and products substantially the same as or substitutable for them, on terms and price agreeable to ACI. Its capacity to achieve better terms and conditions by requiring ACI to match a conforming offer under clause 4.8 would be rendered largely ineffective.

“Substantially the same”, by its plain and literal meaning, indicates a high degree of similarity in fundamentals, substance and essentials. It contemplates slight or minor differences, which are not matters of substance. On that construction, clause 4.8 bears a coherent relationship to clause 5.5, as construed by Habersberger J in the context of the supply agreement as a whole. If clause 5.5 applies to the entire range of identical Products as Habersberger J found, clause 4.8 has a valid role in its application to an item with a slight or minor difference.

In contrast to clause 5.5, which expressly refers to an offer to supply “all of the Products”, clause 4.8 simply refers to an offer for the supply of products” which are substantially the same as or substitutable for any Products”. Although “Products” is plural, “any” suggests the singular. It would appear that there is no requirement that an offer under clause 4.8 relate to the entire range of Products.

If ACI’s primary construction of clause 4.8 be correct, in the light of Habersberger J’s construction of clause 5.5, ACI would have no rights in relation to items which possessed the same essential Product description, weight, volume and material as Products, but had some less significant differences. On the other hand, ACI would have rights under clause 4.8 in relation to items which had different essential characteristics from Products, but had some other, less essential similarities. That would appear to be an ironic outcome, which would serve no rational or coherent commercial goal.

ACI’s primary construction of clause 4.8 does not accord with the plain language employed, but posits the reverse of it, in indicating that items substantially the same as Products must have differences of an essential nature. While the plaintiff’s primary construction may provide clear criteria for determining what would be excluded from an offer under clause 4.8, it provides no clear guidance on what could be included. The construction depends on the somewhat chimerical concept of an item which is neither identical to a Product nor the same in essential characteristics, but nevertheless has differences which are more than minor.

The construction does not accord with the coherent mutual operation of clauses 5.5 and 4.8. It is underpinned by an overstatement of the plaintiff’s rights under the supply agreement. The supply agreement balances the mutual entitlements of supplier and customer through, inter alia, the interaction of clauses 5.5 and 4.8. ACI’s exclusive right of supply is not absolute. It is conditional upon its matching complying third party offers (which must, however, be bona fide arm’s length).

The plaintiff’s secondary construction of the phrase “substantially the same as or substitutable for” also involves a significant departure from the plain, literal meaning of the language employed. It requires “or “to be read as introducing the subject‑matter, rather than disjunctively. It also requires “substitutable for” to be read as requiring novelty or innovation.

In GPI Leisure Corporation Ld v Yuill,[9] Young J considered whether and in what circumstances the word “and” should be read disjunctively to mean “or”, rather than accorded its ordinary conjunctive meaning. His Honour recognised that, although a “misuse” of language could justify the conclusion that “and” meant “or” in the context of a particular document, such a conclusion would be rare and not lightly reached.[10] It would largely be limited to a case where, if the natural meaning were applied, the result would be so extraordinary as to create virtual unintelligibility (as distinct from commercial inconvenience) or where the word “and” could be plainly seen to refer to a class of alternatives.[11] Young J’s approach is equally relevant to a determination of whether “or” should be construed as “that is to say”.
[9]Unreported, New South Wales Supreme Court, Young J, 6 March 1998.
[10]Ibid at 5-6.
[11]Ibid.

There is, in my opinion, no warrant for reading “or” as introductory of the phrase “substitutable for”, rather than according it the usual, literal, disjunctive meaning. The relevant phrase is not unintelligible if “or” is read disjunctively. Its natural meaning does not produce a commercially inconvenient or otherwise irrational outcome. Equally, there is no basis on which to impose a gloss of novelty or innovation on the term “substitutable for”.

The plaintiff’s secondary construction of clause 4.8 fails to accord with the literal, ordinary meaning of the language employed. It would also mean that the plaintiff’s extended rights of exclusive supply applied only to innovations to Products. As ACI does not contend that the products included in the Brickwood offer incorporate innovation or inventiveness, it could not avail the plaintiff in this case.

In the present case, Mr Kop and Mr Buckner gave evidence of Berri’s aims and motivation. I considered them to be credible witnesses. Mr Kop stated that Berri’s “primary objective has always been to get a competitive supply of our products and that was our number one objective”.

Mr Buckner testified that Berri decided to terminate the Brickwood contract “because we effectively had two contracts on foot. The strategy was also then to gain the improvements that had been designed in bottles and enjoy … the true market price for bottles … The strategy of Berri was to achieve the market value price for bottles and gain the benefits of design. Whether that’s supply from Brickwood or ACI … we would go with either supplier but we wanted those improvements in both price and design and we gave ACI the opportunity to match the Brickwood offer.”

Mr Buckner stated that Berri’s decision to terminate the Brickwood contract, rather than the supply agreement, was based on Habersberger J’s determination in the second proceeding that the Brickwood contract was concluded pursuant to an invalid offer.

He denied that Berri’s strategy was to put an invitation to treat in order to get a replacement contract. It was rather, he said, to put “a replacement offer – we had an obligation to ACI to tender that to ACI … “

Mr Buckner agreed that Berri was aware that the items included in any offer would have to fall within clause 4.8, but testified that the required features had been developed over the preceding twelve months.

The evidence establishes that the relationship of Berri and ACI had become troubled and that Berri desired to terminate it. Following the judgment of Habersberger J Berri perceived the necessity to terminate either the supply agreement or the Brickwood contract. Despite its dissatisfaction with ACI, it terminated the Brickwood contract. Berri saw the conclusion of a new contract with Brickwood pursuant to a valid Brickwood offer, as a means of mitigating damages for breach of the Brickwood contract. The invitation to treat was inextricably linked to the termination of the Brickwood contract. The conclusion of a contract with Brickwood, rather than the continuation of the supply agreement with ACI, was clearly Berri’s preferred outcome. I am not satisfied, however, that Berri devised the invitation to treat and stipulated the features of the products actuated by a purpose of defeating ACI’s entitlement to put a matching offer under the supply agreement. The evidence does not, in my view, establish that Berri manipulated or contrived the timing or terms of the invitation to treat in order to preclude a matching offer, or was guilty of conduct otherwise calculated to deny ACI the opportunity to match an offer based on the invitation to treat.

I am satisfied that the disputed features of the items were improvements which, although not radical or extensive, were developed and genuinely desired by Berri. There is no suggestion that they were selected due to an apprehension that ACI could not match them. Further, Berri put the Brickwood offer to ACI and obtained an extension of time for it to respond.

The plaintiff contends that Berri’s improper purpose was the resolution of its legal problems by the termination of the supply agreement. That goal could only be achieved if ACI ultimately failed to match the offer, thus allowing Berri to conclude a new valid contract with Brickwood. While the evidence establishes that Berri desired that outcome, it does not permit me to conclude that it improperly manipulated the circumstances or terms of the Brickwood offer in such a way as to defeat ACI’s right to put a matching bid, or to otherwise nullify or unreasonably interfere with its enjoyment of benefits conferred by the express contractual terms.

I am therefore not satisfied that the alleged want of good faith is established. As discussed in detail below, however, I am satisfied on the basis of substantially the same facts and circumstances relied upon by the plaintiff to establish a want of bona fides, that the Brickwood offer was not “arm’s length”.

Arm’s Length Transaction

Clause 4.8 provides that “if the customer receives a bona fide arm’s length offer from a third party”, the supplier will have the right of last refusal. Berri contended that the requirement of “arm’s length” directed attention only to the conduct and the motivation of the offeror. The concept of “arm’s length” in my view inherently adverts to the relationship and dealings of the parties, together with the offer itself. The terminology of clause 4.8 fortifies the conclusion that the circumstances surrounding receipt of the offeror, and the interaction of offeror and offeree, are relevant considerations.

Most recent Australian judicial constructions of the term “arm’s length” have applied to that phrase as it appears in various provisions of taxation legislation.

The application of some aspects of those constructions is limited to a particular statutory or revenue law context. The relevant cases nevertheless provide valuable guidance on the construction of the term “good faith arm’s length offer” in the context of clause 4.8 of the supply agreement.

In Granby Pty Ltd v Federal Commissioner of Taxation,[26] Lee J dismissed a taxpayer’s appeal from the decision of the Commissioner of Taxation which disallowed its objection to an assessment of income tax. The taxpayer was a member of a partnership which had purchased the drilling equipment and vehicles it had leased from various financiers at the expiration of the lease, for the residual value.
[26](1995) 129 ALR 503.

The partnership paid the residual value nominated in the leases. There was no negotiation. The taxpayer sold its interest in the partnership for a consideration calculated on a value allocated to the equipment and vehicles which exceeded the prices paid by the partnership and was assessed for a capital gain. The capital gain payable depended, inter alia, on whether the consideration paid by the taxpayer for the items was (with terms of the applicable provision of the Income Tax Assessment Act) greater or lesser than its market value at the time and the vendor and the taxpayer were not “dealing with each other at arm’s length” in connection with the acquisition of the asset.

Lee J stated that:

“The expression ‘dealing with each other at arm’s length’ involves an analysis of the manner in which the parties to a transaction conducted themselves in forming that transaction. What is asked is whether the parties behaved in the manner in which parties at arm’s length would be expected to behave in conducting their affairs. Of course, it is relevant to that inquiry to determine the nature of the relationship between the parties, for if the parties are not parties at arm’s length, the inference may be drawn that they did not deal with each other at arm’s length.” [27]

[27]Ibid at 506.

His Honour referred to authorities which drew a distinction between “dealing with each other at arm’s length” and an arm’s length relationship, and in which it had been acknowledged that, although those concepts did not necessarily coincide, the existence of a relationship might be relevant to the nature of dealing.

He endorsed the view of Hill J in Trustee for the Estate of the late A.W. Furse No. 5 Will Trust v FCT[28] that dealing at arm’s length at least required the parties to act severally and independently in forming their bargains, so that the outcome of their dealing was a matter of real bargaining.
[28](1990) 91 ATC 4007.

Lee J acknowledged that if the parties to the transaction were at arm’s length, it would usually follow that their dealing would also be at arm’s length in the sense that “the separate minds and wills of the parties will be applied to the bargaining process whatever the outcome of the bargaining may be”.[29]
[29](1995) 129 ALR 503 at 507.

He further observed:

“That is not to say, however, that the parties at arm’s length will be dealing with each other at arm’s length in a transaction in which they collude to achieve a particular result, or in which one of the parties submits the exercise of its will to the dictation of the other, perhaps to promote the interests of the other.” [30]

[30]Ibid.

He referred to Minister of National Revenue v Merritt[31] in which, although the parties were at arm’s length, the terms of a loan transaction were dictated by the unilateral decision of one of them, and there was no independent will in the formation of the transaction exercised by the other.[32]
[31]69 DTC 5159.
[32](1995) 129 ALR 503 at 507.

Lee J found that in the case before him “there was no evidence that the lessor corporations and the partnership acted in concert with an ulterior purpose, or that the lessor corporations accepted dictation or instruction from the partnership to the exclusion of the exercise of the independent minds of the corporations, when the partnership acquired the motor vehicles and drilling rigs from the corporations … “.[33]
[33]Ibid.

He found that the lessor corporations set the residual values and in accepting the tendered amount they made decisions which they perceived to serve the interests of their businesses. As such “the independent will of the lessor corporations was not merged in collusive activity with the partnership, nor subjugated to direction from the partnership”.[34]
[34]Ibid.

His Honour concluded that there was no evidence that the parties dealt with each other, other than at arm’s length.[35]
[35]Ibid.

In Australian Trade Commission v WA Meat Exports,[36] the Full Court of the Federal Court held that a consultant under a consultancy agreement with a company in which he had formerly had a large shareholding was “at arm’s length”, as neither party, in negotiating the agreement, had any interest to pay more or receive less than was necessary to secure the consultant’s service, and neither had any claim to the profits or assets of the others business.
[36][1987] 75 ALR 287.

In determining the ordinary meaning of “arm’s length” the Full Court referred to the definition of “arm’s length” in Osborn’s Concise Law Dictionary 6^th ed., p.32 as “The relationship which exists between parties who are strangers to each other, and who bear no special duty, obligation, or relation to each other, vendor and purchaser … “. Further, they referred to the definition in Black’s Law Dictionary 5^th ed., p.100: “Arm’s length transaction; said of a transaction negotiated by unrelated parties, each acting in his or her own self-interest; the basis for a fair market value determination … The standard under which unrelated parties, each acting in his or her own best interest, would carry out a particular transaction – For example, if a corporation sells property to its sole shareholder for $10,000, in testing whether $10,000 is an arm’s length price it must be ascertained for how much the corporation could have sold the property to a disinterested third party in a bargained transaction”.[37]
[37]Ibid at 291.

In Collis v Federal Commissioner of Taxation,[38] taxpayers sold at auction property comprising four parcels of abutting land as a single lot to a purchaser for $1.43million. Three parcels had been owned by the taxpayer for some time, but the remaining parcel had been purchased recently (within 12 months of the sale). Following the auction, the land was transferred by two contracts. The recently‑purchased parcel was sold separately for a price of $200,000. The purchaser inquired about the stamp duty implications of using the two contracts, but was indifferent unless he would be prejudiced by that course.
[38]96 ATC 4831.

Jenkinson J concluded that there was nothing to suggest that the purchaser and the taxpayers were not dealing with each other at arm’s length at the fall of the hammer. It could be inferred, however, that the purchaser was subsequently indifferent as to whether he signed one or two contracts (save for any prejudice to himself) and as such he, “being indifferent, submitted the exercise of his will to the applicants’ wishes in acceding to their request.”[39] His Honour concluded that the purchaser did not deal with the taxpayers at arm’s length in relation to the purchase of the relevant parcel of land.
[39]Ibid at [4837].

In the Trustee for the Estate of the late AW Furse (No. 5) Will Trust v FC of T,[40] Hill J stated that whether the parties to the relevant agreement were dealing with each other at arm’s length was “not to be decided solely by asking whether the parties to the relevant agreement were at arm’s length to each other. The emphasis in the sub‑section is rather upon whether those parties, in relation to the agreement, dealt with each other at arm’s length. This is not to say that the relationship between the parties is irrelevant to the issue to be determined under the sub-section. … What is required in determining whether the parties dealt with each other in respect of a particular dealing at arm’s length is an assessment whether in respect of that dealing they dealt with each other as arm’s length parties would normally do, so that the outcome of the dealings is a matter of real bargaining.”[41]
[40](1990) 91 ATC 4007.
[41]Ibid at 4014-4015.

In Re Haines (deceased); Barnsdall v Federal Commissioner of Taxation,[42] a taxpayer sold some shares to a company in which he was the beneficial owner of all issued shares and chairman of the board of directors. The only other director of the purchaser company was a partner in the vendor’s stockbroking firm.
[42](1988) 81 ALR 173.

Davies J noted that “The term ‘at arm’s length’ was developed in the law of trust with respect to transactions between persons, one of whom, such as a trustee or solicitor, is in a position of special influence with the respect to the other, a beneficiary or client.”[43]
[43]Ibid at 176.

His Honour accepted that an arm’s length relationship was distinct from dealing with each other at arm’s length. He observed that although some Canadian authorities “looked primarily to the relationship between the contracting parties and to influence and control … there may be transactions between related parties in which the parties deal with each other at arm’s length. This may occur notwithstanding a close relationship between the parties or the power of one party to control the other”.[44] An example would be where shares were offered for sale on the stock exchange.
[44]Ibid at 177.

The above authorities indicate that an arm’s length relationship is that of strangers, or parties who are unaffected by existing mutual duties, liabilities, obligations, cross‑ownership of assets, or identity of interests which present a capacity in either party to influence or control the other, or an inducement to serve that common interest, which might operate to modify the terms on which strangers would deal.

The concept of an arm’s length relationship is distinct from that of an arm’s length dealing or transaction, despite the potential overlap. Unrelated parties may collude or otherwise deal with each other in an interested way, so that neither the dealing nor the resultant transaction may properly be considered arm’s length.

Where the parties are not in an arm’s length relationship, it is recognised that the inference may be drawn that they did not deal with each other at arm’s length. [45] It may further be inferred that the resultant transaction is not arm’s length.
[45]Granby Pty Ltd v Federal Commissioner of Taxation (1995) 129 ALR 503 at 506.

Related parties may nevertheless, in some circumstances, demonstrate a dealing which displaces the inference based on their relationship. They may engage in the disinterested bargaining characteristic of strangers, applying independent separate wills. The circumstances of the impugned transaction may be such that, despite the parties’ connection or common interest, the interposition of some independent process (such as the sale of shares on the stock exchange) ensures that the transaction itself is arm’s length, in the sense that it could equally have been concluded by unrelated parties, consulting their own self-interest and uninfluenced by any particular association or interest in common.

In the present case, Brickwood and Berri were not, in my opinion, at arm’s length in relation to the Brickwood offer. From January 2004, they were parties to the Brickwood contract, a significant “rival” contract to the supply agreement. The Brickwood contract created mutual rights and obligations between Berri and Brickwood. Until June 2004, the Brickwood contract was of uncertain legal validity. It was subject to challenge by ACI. From June 2004 to 3 December 2004, although the Brickwood contract had been adjudged invalid, it continued to co‑exist with the supply agreement. It was then clear that only one of those contracts could be maintained and performed. Brickwood and Berri formed a group which worked on the development of product improvements from the date of entry into the Brickwood contract for approximately one year.

On 3 December 2004, Berri terminated the Brickwood contract. The relationship of Berri and Brickwood was transformed to one of potential litigants in relation to Berri’s repudiation of the Brickwood contract. Their mutual legal rights, entitlements, duties and obligations shifted from a context of anticipated performance of the Brickwood contract to one of breach. Brickwood had “geared up” and borrowed significantly from its bankers in relation to the Brickwood contract. The concrete benefit of cash flows anticipated by Brickwood from February 2005 was replaced by a claim to damages. Berri, conversely, was liable to pay damages for its repudiation, that would potentially increase with Brickwood’s losses. Brickwood, as Berri pointed out, had an obligation to mitigate its damages.

Brickwood and Berri thus had a common interest in minimising damages for breach of the Brickwood contract through the conclusion of a replacement contract (which necessarily required an offer which ACI failed to match).

Brickwood did not have prior knowledge of Berri’s termination on 3 December 2004. It is not disputed that real bargaining on the terms of the Brickwood offer occurred between Brickwood and Berri, which were both advised by their own legal representatives. The evidence does not establish that Brickwood acquiesced in, or accepted with indifference, Berri’s dictation of the terms of the offer. Brickwood initially requested payment of $476,000 per month in damages, pursuant to a side deed, which it required as a prerequisite to making an offer. When Berri rejected that proposal, Brickwood did not submit an offer which was open for acceptance for the period requested by Berri. The offer received on 16 December 2004 was open only until 21 December 2004.

Berri requested a variation extending the period for acceptance until 30 June 2005 or acceptance, in return for monthly payments by Berri of $476,000.

The letter of Corrs Chambers Westgarth to Monahan & Rowell dated 20 December 2004 expressly acknowledged that “Berri’s position with respect to the Brickwood offer can only be explained in the context of the recent history of Brickwood and Berri’s commercial relationship”. The letter referred to the termination of the Brickwood contract, the invitation to treat, the concerns of Brickwood’s financiers and Brickwood’s requirement for monthly payments of $476,000 in order to keep the offer open until 1 May 2005 or such later time as the parties agreed.

On 21 December 2004, Brickwood agreed to the extension of the term of the Brickwood offer on the basis that Berri would pay $476,000 per month.

The Brickwood offer is thus not that received on 16 December 2003. Rather, it is that offer as varied by subsequent agreement on 21 December 2004 to extend the period for acceptance, subject to the monthly payment.

The sum of $476,000 per month, when first requested by Brickwood, was characterised as an amount representing the lower calculation of its monthly loss as a result of the repudiation of the Brickwood contract.

As the letter of Corrs Chambers Westgarth dated 20 December 2004 expressly noted, the payments of $476,000 will be deducted from any amount of such loss and damage or would be refunded, if applicable.

Thus, the Brickwood offer as extended provides for a maximum payment to Brickwood of almost $2.5 million representing estimated damages due to Brickwood for breach of the Brickwood contract, in addition to the agreed prices of any products which Brickwood might in future supply to Berri.

Clause 4.8 provides that ACI “will have the right of last refusal to match the terms and conditions set out in the … offer”. That phraseology does not appear to contemplate the situation which has arisen in the present case, where the third party offer, as varied, provides for a substantial payment to the third party offeror, by Berri as offeree. It is not clear what matching the terms and conditions of the Brickwood offer as varied would entail.

The overriding requirement that the third party offer be “arm’s length” is, in my view, incompatible with Berri’s liability to pay a sum of dual character, which is both essential to procure the extended term of the offer and also constitutes the prepayment of estimated damages for an antecedent breach of legal obligation.

In my opinion, Berri and Brickwood commenced and conducted negotiations in relation to the Brickwood offer as parties who shared a common interest in minimising damages for the breach of the Brickwood contract. Berri’s breach of the Brickwood contract, its solicitation of the Brickwood offer, and the making of the Brickwood offer were inter-dependent.

Although “real bargaining” occurred between Berri and Brickwood, their dealings were, throughout, permeated and dominated by the mutual claims arising from the breach of the Brickwood contract. It cannot be said that neither party had any interest to pay more or receive less for the specified products,[46] the prices of which ACI would be obliged to match in order to keep Berri’s business. The evidence of the dealings does not rebut, but rather confirms, the inference that the parties were not dealing arm’s length. An integral element of the resultant Brickwood offer as extended is the provision for a series of payments by Berri to Brickwood which simultaneously secures its extended term and satisfies Brickwood’s estimated damages claim.
[46]Australian Tax Commission v WA Meat Exports [1987] 75 ALR 287 at 291.

The Brickwood offer as extended is not, on analysis, an offer which could be put by a disinterested stranger. It depends upon payments by the offeree to the offeror in relation to a dispute particular to them. The basis of the additional amounts to be paid by Berri to Brickwood under the Brickwood offer as extended is peculiarly within their knowledge. The relationship, if any, of those additional amounts to the prices specified for the products, cannot be ascertained by a stranger to the transaction.

In those circumstances, the bargaining between Berri and Brickwood assumed, rather than excluded, the interaction of special mutual duties and obligations arising from the legal complexities of their pre-existing commercial relationship.

CONCLUSION

In my opinion, the relationship and dealings of Brickwood and Berri in relation to the Brickwood offer, and the terms of the Brickwood offer as extended, are not arm’s length as required by clause 4.8.

It follows that the Brickwood offer is not a valid offer pursuant to clause 4.8 which Berri is entitled to accept under the supply agreement.

It is unnecessary, given the conclusion I have reached, to determine whether and by what date ACI would be entitled to put a matching offer.

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[2005] VSC 201

9 June 2005