Ansett Australia Limited v Diners Club Pty Ltd

conSet

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION
COMMERCIAL LIST

No. 2017 of 2004

F5739

ANSETT AUSTRALIA LIMITED (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) (ACN 004 209 410)	Plaintiff
V
DINERS CLUB PTY LIMITED (ACN 004 343 051)	Defendant

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JUDGE:	HARGRAVE J
WHERE HELD:	Melbourne
DATE OF HEARING:	6 - 8, 12 - 15, 19 - 22 February 2007
DATE OF JUDGMENT:	30 April 2007
CASE MAY BE CITED AS:	Ansett Australia Ltd v Diners Club Pty Ltd
MEDIUM NEUTRAL CITATION:	[2007] VSC 102

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Contract – Interpretation – Implied terms – Modification of right to terminate for breach – Whether breach capable of remedy – Principles discussed.

Unjust enrichment – Whether total failure of consideration justifying recovery of payments made under a contract.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr M Garner	Corrs Chambers Westgarth
For the Defendant	Mr P Hayes QC and Dr M Collins	Mallesons Stephen Jaques

TABLE OF CONTENTS

I Introduction

II Facts

III Participation Agreement

IV Summary of Issues

V Interpretation and Implied Terms

VI Surrounding Circumstances

VII Commercial Purpose

VIII First Alleged Term: Obligation to Operate Global Rewards

A Express Term

B Implied Term

IX Second Alleged Term: Conditional Payment Obligation

A Express Term

B Implied Term

X Third Alleged Term: Unredeemable Points Payment

XI Conclusion on Alleged Terms

XII Entitlement to Terminate for Breach

A Was a notice to remedy required?

B Was any breach capable of remedy?

XIII Indemnity Claim

XIV Unjust Enrichment

XV Conclusion

HIS HONOUR:

I Introduction

The plaintiff, Ansett Australia Ltd, operated a commercial airline throughout Australia from 1936 until 14 September 2001. Two days prior, on 12 September 2001, Ansett was placed in voluntary administration under Part 5.3A of the Corporations Act 2001 (Cth). It was hopelessly insolvent at the time and that position continues. There is no chance of any unsecured creditor, other than employees, receiving any payment.

From 1991 until its collapse, Ansett operated a frequent flyer program known at material times as the “Global Rewards” program. The Global Rewards program was suspended on 14 September 2001 and has never been reinstated. Under the Global Rewards program, its members could “earn” Global Reward points in, relevantly, two ways. First, by flying with Ansett or one of its “Star Alliance” airline partners. Second, by members making purchases on charge or credit cards issued by two financiers who were, by agreement with Ansett, participants in the Global Rewards program. Diners was one of these financiers.

The Global Rewards points were, subject to the terms and conditions of the Global Rewards program, able to be exchanged for travel on Ansett or Star Alliance partner airline flights. In this sense, they can be described as “frequent flyer points”, although the Global Rewards program also provided for points to be exchanged for other rewards.

The defendant, Diners Club Pty Ltd, was a participant in the Global Rewards program from its inception in 1991. The 1991 participation agreement between Ansett and Diners was re-negotiated in 1998 and became effective on 5 January 1999. It was to operate for a period of five years until 4 January 2004 or until it was terminated in accordance with its terms.

By the participation agreement, Ansett agreed to credit Diners cardholders who were also members of its Global Rewards program with 1.5 Global Rewards points for each dollar spent on their Diners card and paid for within Diners’ terms of trading. In consideration for Ansett crediting Global Rewards points to Diners cardholders, Diners agreed to pay Ansett an agreed amount for each point credited to a cardholder’s Global Rewards account.

At all relevant times, no other issuer of charge or credit cards in the Australian market had an arrangement with a major airline under which there was an unqualified entitlement to 1.5 frequent flyer points for every dollar spent on their card.[1] Under these competing arrangements, cardholders of other charge or credit cards were entitled to only one frequent flyer point per dollar spent on their card. In particular, Diners’ principal competitor, American Express, had arrangements with Ansett’s principal competitor, Qantas, under which its cardholders who were members of the Qantas frequent flyer program received only one point for each dollar spent on their American Express card.
[1]Some special arrangements aside, such as for bonus point issues and the like.

The 1.5 point arrangement between Diners and Ansett was beneficial to both of them in building their businesses and client loyalty. Marketing by Diners and Ansett focussed on this advantage over their competitors, American Express and Qantas.

In this proceeding, Ansett claims amounts which it alleges are due to it by Diners under the participation agreement and under a separate “Master Merchant Agreement.”

Under the terms of the participation agreement, Diners was required to pay Ansett for Global Rewards points credited to the accounts of its cardholders within 30 days of invoice by Ansett. Invoices totalling $9,632,793 remain unpaid. The invoices relate to points credited in July, August and September 2001. Ansett claims this amount from Diners, together with interest.

Under the Master Merchant Agreement, Ansett agreed to allow Diners cardholders to use their Diners card to purchase airline tickets. The unpaid amounts allegedly owing by Diners to Ansett for these purchases is $20,507,410. Ansett’s claim against Diners in this regard has been stayed and an arbitration is proceeding in New York in respect of it.

Diners disputes any obligation to pay the moneys claimed by Ansett. In the event that any money is owing by it, Diners contends that it is entitled to set-off against Ansett’s claims an amount of at least $46 million in respect of alleged breaches of the participation agreement by Ansett. Further, Diners raises counterclaims for this amount.

Diners principal defence is based on the allegation that it was a term of the participation agreement that Ansett would continue to operate the Global Rewards program during the period of the participation agreement. Diners alleges that the suspension of the Global Rewards program was in breach of this alleged term and was a fundamental breach of the participation agreement, entitling it to terminate the participation agreement and claim loss of bargain damages from Ansett.

Diners alleges that the collapse of Ansett had a significant effect upon its business. Although Diners entered into arrangements to participate in the Qantas frequent flyer program soon after Ansett’s collapse, it was only able to negotiate an arrangement under which its cardholders received one Qantas frequent flyer point for each dollar spent on their Diners card. As a result, Diners lost the competitive advantage which it had previously enjoyed over American Express and other card issuers. Over time, Diners cardholders reduced their expenditure on their Diners cards, or cancelled their Diners cards altogether. Diners alleges that this was caused by Ansett’s collapse and consequent suspension of the Global Rewards program.

II Facts

Prior to the collapse of Ansett, Ansett and Qantas were Australia’s two major domestic airlines and were direct competitors.

Diners and American Express are and were at all relevant times the two major issuers of charge cards in the Australian market, and are and were direct competitors.

Charge cards differ from credit cards. There is no option to pay a portion only of the amount charged and to finance the balance, as is the case with credit cards. The holder of a charge card is required to pay the full amount charged to the card within a specified period.

Credit cards are more widely issued in the marketplace than charge cards. In general, the holders of charge cards are wealthier and travel more often than the general population, for both business and pleasure.

Typically, a charge card holder will also hold one or more credit cards. Many traders will not accept charge cards, as the fees or commissions they are charged by the issuer will usually be significantly higher than those charged by the issuers of credit cards. Further or alternatively, some traders will seek to extract all or part of the fees or commissions from their charge card customers.

In 1974, Ansett purchased 50 per cent of the issued shares in Diners. This shareholding was increased in October 1991 to 68.2 per cent. Ansett maintained this shareholding in Diners until 5 January 1999. As a result, Ansett was represented on the board of directors of Diners during this period.

In or shortly after January 1991, Ansett launched its initial frequent flyer program.

On 14 January 1991, Ansett and Diners entered into a participation agreement under which Diners agreed to participate in the Ansett frequent flyer program.

The 1991 participation agreement contains the following recitals:

A.Ansett is proposing to conduct a frequent flyer award programme (the “Programme”) under which those people (“Members”) who join the Programme will accrue points based on their consumption of goods and services supplied by Ansett, the Participant and other participants and can then exchange those points for specified goods, services and other benefits (“Awards”).
B.In consideration for Ansett conducting the Programme, the Participant has agreed to pay Ansett 0.75% (the “Defined Percentage”) of all amount billed to Members by the Participant except fees, liquidated damages and amounts received as a result of the Diners Club merchandising business, which business includes the Diners Club insurance business, sale of diaries and merchandise products.

The 1991 participation agreement does not make express provision for Ansett to credit frequent flyer points to Diners cardholders. The only obligation upon Ansett to credit frequent flyer points in respect of purchases on Diners cards was contained in the rules and conditions of the frequent flyer program. From the inception of the Ansett frequent flyer program, the Ansett frequent flyer program rules and conditions contained specific reference to the circumstances in which Ansett frequent flyers could “earn” frequent flyer points by using their Diners card for purchases.

The terms of the 1991 participation agreement reveal that the relationship thereby established between Ansett and Diners was intended to promote their respective businesses. There was to be sharing of confidential information relating to the identities of members of the frequent flyer program and their flying habits, and as to the identity of Diners cardholders and their spending habits. Each party agreed to keep the confidential information of the other confidential at all times. Further, the parties agreed upon joint promotions of their respective businesses, using the confidential information. Finally, it is relevant to note that the 1991 participation agreement imposed an obligation on Ansett that it would not enter into any similar participation agreement with any other charge card issuer in respect of Ansett’s frequent flyer program. There was no restriction upon Diners participating in other frequent flyer programs.

Further, from inception, the Ansett frequent flyer program rules and conditions gave Ansett an unqualified right, without notice and in Ansett’s absolute discretion, to suspend or terminate the program at any time, to cancel a membership at any time, to restrict the availability of awards or to withdraw or change the awards which were available at any time and to vary the program rules and conditions. These rules and conditions, with immaterial variations, continued to apply throughout the period of the 1991 participation agreement and the re-negotiated participation agreement which came into effect on 5 January 1999.

The rules and conditions of the Ansett frequent flyer program were re-issued from time to time. Diners admits that it was aware of them, and was also aware of the terms and conditions of the Global Rewards program which replaced the Ansett frequent flyer program, at all relevant times.

In 1997 Ansett informed Diners of its decision to sell its 68.2 per cent shareholding in Diners. With this potential sale in prospect, Ansett and Diners commenced negotiations towards concluding a new participation agreement. A new participation agreement was agreed to and executed by Ansett and Diners in October 1998, but was not dated. The executed document was then held in escrow until completion of the sale of Ansett’s shares in Diners. As a result, the participation agreement was dated 5 January 1999 and came into effect on that date.

At the time of the negotiation and entry into the 1999 participation agreement which is the subject of this proceeding, the terms and conditions of the Global Rewards program contained a number of provisions giving Ansett the ability to vary, suspend or terminate the Global Rewards program at any time in its absolute discretion. For example:

1.2These terms and conditions may be changed or varied at any time without notice by Ansett Australia in its absolute discretion.
1.3Ansett Australia may in its absolute discretion suspend or terminate Global Rewards at any time.
...
2.12Ansett Australia may in its absolute discretion suspend, cancel or terminate a membership at any time, and may in its absolute discretion cancel all or any of a Member’s accumulated Points. The Global Rewards membership fee paid by that Member is not refundable to the Member.
...
2.14All Points awarded (including any Points represented on Reward Certificates) but not exchanged for Rewards are cancelled upon a person ceasing to be a Member.
...
4.5All Rewards are subject to availability and suppliers’ restrictions. Blackout periods (in which no Rewards will be available) may be imposed from time to time by Ansett Australia and participating Program Partners. Domestic and International Flight Rewards may not be available at peak travel times. Ansett Australia may withdraw, replace or substitute Rewards at any time without notice.
4.6Ansett Australia may at any time without notice alter the number of Points required to obtain a particular Reward, withdraw a Reward supplied or impose additional restrictions on a Reward or conditions of obtaining it.

Further, at the time of negotiation and entry into the participation agreement, there had been numerous joint marketing activities conducted by Diners and Ansett. The advertisements were in both print and electronic form. They focussed heavily upon the provision of free Ansett and Star Alliance flights for Diners Club members who used their Diners card for purchases. In marketing and advertising materials provided by Diners to prospective applicants for a Diners card in the period prior to entry into the participation agreement, Diners stated “Global Rewards is a reward program for frequent air travellers... Ansett Australia may vary or terminate the Program at any time, without notice.”

This proceeding concerns the proper interpretation of the participation agreement. The material terms of the participation agreement are set out below. It is sufficient to note for the purposes of this factual narrative that the participation agreement is more detailed than its 1991 predecessor; is for a fixed period of five years; contains detailed provisions as to the circumstances in which either party may terminate it within that five year period; makes some provision for the consequences of an early termination; and provides that both parties are subject to exclusivity restrictions.

In June 2000, Air New Zealand became the sole shareholder in Ansett. On 8 or 9 September 2001, Air New Zealand withdrew a letter of comfort that it had provided to support Ansett and its related companies. This was in circumstances where Ansett had been losing business.

The withdrawal by Air New Zealand of its letter of comfort exposed the insolvency of Ansett. On 12 September 2001, Ansett’s directors resolved to place it in voluntary administration.

At the time administrators were appointed to Ansett, Ansett had issued invoices to Diners for Global Rewards points credited to the Global Rewards accounts of Diners cardholders, in respect of purchases on their Diners cards in the period 1 July 2001 to 25 August 2001. These invoices have not been paid.

At 2 am on 14 September 2001, Ansett’s administrators suspended Ansett’s operations and grounded its aircraft. As part of this general suspension of its operations, Ansett’s Global Rewards program was suspended.

On 17 September 2001, Ansett’s initial administrators resigned and Mark Korda and Mark Mentha were appointed voluntary administrators of Ansett and other companies in the Ansett group in their place.

Also on 17 September 2001, Ansett staff processed the final credits of Global Rewards points to the accounts of Diners cardholders. These points related to purchases on Diners cards in the period 25 August to 11 September 2001.

Shortly after their appointment, Mr Korda and Mr Mentha decided that the Global Rewards program should remain suspended and not be terminated. They wished to investigate and pursue various options in relation to the Global Rewards program, including the possibility that the Global Rewards program could be reinstated as part of the sale of Ansett’s airline business. As a result, the Global Rewards program remained suspended during attempts by the administrators to sell Ansett’s airline business. These attempts were ultimately unsuccessful. Notwithstanding this, the Global Rewards program has never been formally terminated. It remains in indefinite suspension.

At the time of appointment of the administrators and the suspension of Ansett’s operations, including the Global Rewards program, Diners had for some time been considering the possibility of establishing its own rewards program. In this regard, it had already held discussions with Qantas, with a view to a possible participation agreement with it. In the months leading up to the collapse of Ansett, Ansett and Diners had been conducting negotiations with a view to releasing each other from their respective exclusivity obligations under the participation agreement. In these circumstances, Diners was well placed to act quickly when Ansett collapsed. By 23 October 2001 it had reached agreement with Qantas as to the terms upon which it could participate in the Qantas frequent flyer program.

By letter dated 23 October 2001, Diners gave notice to Ansett that it terminated the participation agreement with immediate effect. The termination notice was given pursuant to cl. 9(c)(ii) of the participation agreement. That is a provision which entitles either party to terminate the participation agreement upon the occurrence of an insolvency event relating to the other party. No breach of the participation agreement is required as a condition of serving such a notice. At the time it terminated the participation agreement, Diners had made no assertion that Ansett was in breach of the participation agreement in any way, and had not called upon Ansett to continue to operate the Global Rewards program.

As I have said, at the time of this termination, and to this day, the Global Rewards program was suspended only. It has never been terminated. Diners recognised this at the time it terminated the participation agreement. For example, it issued a press release the day before it terminated the participation agreement, which stated:

The Ansett Administrators confirm that Ansett has responsibility for the [Global Rewards] program. The Administrators also confirm that Global Rewards points and services have been suspended while options are explored.

Diners Club will notify members if the suspension is lifted.

Further, at the time Diners terminated the participation agreement, it was the intention of the administrators to sell Ansett’s airline business and to seek to have the purchaser either reinstate the Global Rewards program or accord some recognition to the accumulated Points of Global Rewards members.

At the time of termination, there were four parties who had expressed an interest in purchasing Ansett’s airline business, including Singapore Airlines (a Star Alliance member) and Tesna Pty Ltd. No agreement, conditional or otherwise had been reached with any of them. In the result, only Tesna made an offer. After acceptance of that offer, there were discussions between the administrators and representatives of Tesna as to the form of the new frequent flyer program to be introduced by Tesna. The form of the frequent flyer program proposed by Tesna did not involve reinstatement of the Global Rewards program or any automatic recognition of accrued Global Rewards Points. The only way in which any recognition was to be afforded to accrued Points was if a Global Rewards member purchased airline tickets and flew with Tesna.

The proposed sale of Ansett’s airline business to Tesna did not proceed. Accordingly, the administrators closed down all of Ansett’s airline operations.

It was not until 19 May 2004 that Ansett issued its final invoice to Diners in respect of Global Rewards points credited to Diners cardholders on 17 September 2001, in respect of purchases on their Diners cards in the period 25 August to 11 September 2001.

Further, as I have said, Ansett also makes claims of approximately $20 million against Diners under the terms of the Master Merchant Agreement between Ansett and Diners. That aspect of the proceeding has been stayed. There is an arbitration in respect of it in New York. Counsel for the parties informed me that progress in the arbitration is on hold pending the outcome of this proceeding, and that Diners contends that approximately $17 million of the $20 million claim relates to airline tickets purchased by its cardholders using their Diners card which were not honoured by Ansett because it had ceased operations.

III Participation Agreement

In order to understand the issues in the proceeding it is necessary to refer to the terms of the participation agreement in some detail. In the participation agreement, Diners is referred to throughout as “the Participant.”

Recital A to the participation agreement states:

A.Ansett conducts a frequent flyer award program called Global Rewards (“GR”) under which Members accrue points (“Points”) based on their consumption of goods and services supplied by Ansett and participants in GR and can then exchange those Points for Awards.

The references in Recital A to “GR” and “Points” are not definitive but merely descriptive for the purposes of the recitals. Clause 1 of the participation agreement contains a number of defined terms, including “GR” and “Points”. These definitions are central to understanding the operative terms of the participation agreement and the contentions made by Diners in this proceeding.

Relevantly, cl. 1 of the participation agreement contains the following definitions:
“Awards” means the specified goods, services and other benefits for which Points accrued by members can be exchanged.
...
“Defined Percentage” means 0.6% or any other percentage figure which is notified by Ansett from time to time, provided that the percentage will not be increased by more than the equivalent of the increase in the CPI since the Defined Percentage was last adjusted or the commencement of this Agreement, whichever is the later.
“GR” means Global Rewards, being any loyalty or frequent flyer program offering rewards or points for airline travel in Australia or overseas:
(a)which is operated by Ansett or a holding company or a subsidiary of Ansett; or
(b)which is established as a result of the Alliance between Ansett, Air New Zealand Limited and Singapore Airlines Limited as a successor or substitute to the program operated by Ansett on the date of this Agreement.
“Member” means a member of GR.
“Points” means GR Points accrued by Members based on their consumption of goods and services supplied by Ansett and participants in GR.
“Qualifying Purchase” means a purchase charged to a charge card issued to a Member by the Participant and billed on the Member’s monthly statement of account, excluding fees, liquidated charges, credit balances and government taxes, provided that the payment for the amount charged for the month is received in full by the Participant within payment terms applicable.
Clause 3 of the participation agreement provides that Diners agrees “to participate in GR in accordance with this Agreement”.[2] As will appear, Diners relies heavily upon the emphasised words.
[2]Emphasis added.

Clause 4 of the participation agreement provides that the term of the participation agreement is five years from 5 January 1999.

Clause 5(a) of the participation agreement contains reciprocal obligations of Ansett and Diners. First, it provides that Ansett will credit Points to Global Rewards members at the rate of 1.5 points for each dollar spent on their Diners cards in respect of Qualifying Purchases. Second, it provides that Diners will pay Ansett the Defined Percentage (0.6%) for each point credited.

Clause 5(a) is in the following terms:

5. Payment for Points
(a)For every Qualifying Purchase, Ansett will credit the Member with one and a half Points per dollar spent and the Participant will pay Ansett the Defined Percentage for each Point credited in respect of the amount of every Qualifying Purchase.

Clause 5(a) unambiguously provides that the consideration from Ansett to Diners is the act of crediting points, and the consideration from Diners to Ansett is the payment of the Defined Percentage for each Point credited. Accordingly, the liability of Diners to pay the Defined Percentage arises on the crediting of the Points.

Clause 5(c) of the participation agreement contains machinery provisions for payment by Diners of its liability to pay for points which are credited under cl. 5(a). Clause 5(c)(i) provides for the provision by Diners to Ansett of data relating to Qualifying Purchases on a weekly basis. Clause 5(c)(ii) provides for Ansett to invoice Diners monthly for Points credited to Global Rewards accounts of Diners cardholders, and provides that Diners will pay Ansett within 30 days after the date of the invoice.

The claim by Ansett is a straightforward one under the terms of cl. 5(a) of the participation agreement. Based on the data provided by Diners up to 11 September 2001, Ansett credited Diners cardholders with Points for Qualifying Purchases in the period 1 July 2001 to 11 September 2001.[3] Ansett then invoiced Diners for the Defined Percentage in respect of these Points. Diners has not paid the amounts due on these invoices, totalling $9,632,793.
[3]The evidence established that the last batch of data transmitted by Diners to Ansett was in respect of Qualifying Purchases in the period 25 August to 11 September 2001. Points were credited for these purchases on 17 September 2001.

Clause 6 of the participation agreement provides for cross-indemnities by Ansett and Diners. Relevantly, cl. 6(c)(iii) provides that Ansett will indemnify Diners in respect of “all liability, losses, damages, costs, expenses, actions and claims incurred by or brought against [Diners] which may result from or arise in any manner out of... any changes to GR caused by Ansett.” I will refer to cl. 6 in more detail when considering Diners’ defence and counterclaim based upon it.

By cl. 7 of the participation agreement, Diners acknowledges that it will acquire confidential information relating to the Global Rewards program, including information relating to the identity and spending patterns of Global Reward members. Ansett makes a similar acknowledgement in respect of access by it to confidential information relating to Diners.

By cl. 8 of the participation agreement, the parties agreed to consult as to their respective marketing efforts relating to the Global Rewards program. Further, they agreed to exchange relevant management information unless that exchange would be in breach of the law, including privacy legislation.

Clause 9 of the participation agreement is central to the principal issues in the proceeding. It is necessary to set it out in full:

9. Termination
(a)(i) Subject to clause 9(a)(ii), either party may terminate this Agreement by giving the other party ninety days’ prior written notice of termination, such notice to take effect on the date being the last day of the initial term of this Agreement.
(ii)If this Agreement is extended in accordance with clause 4(b), either party may terminate this Agreement by giving the other party ninety days prior written notice of termination, such notice to take effect on the date being the last day of the extended term of this Agreement.

(b)Ansett may terminate this Agreement by giving one month’s notice that it is ceasing to operate or participate in GR.
(c)Either party may terminate this Agreement immediately by notice to the other party if:
(i)the other party commits a material breach of this Agreement and the breach is capable of being remedied and if the other party fails to remedy the breach within thirty days after being required in writing to do so;
(ii)the other party be wound up (other than a voluntary winding up for the purpose of reconstruction or amalgamation) or the other party is placed under some form of external management or enters into a compromise or other arrangement with its creditors or a receiver or a receiver and manager is appointed to carry on its business for the benefit of its creditors or any of them.

(d)Termination of this Agreement does not affect any obligation incurred by the parties as at the date of termination, including without limitation any obligation with respect to transactions effected by Members on or before the date of termination. In particular the Participant acknowledges that Members have a right to claim Points under GR up to six months after a transaction takes place and that Ansett may take a further one month to process any claim. The Participant will honour Awards issued in accordance with clause 6 for a period not exceeding twelve months following termination of this Agreement.

Clause 11 of the participation agreement contains mutual covenants as to exclusivity. Ansett agrees that it will not, with one specified exception, enter into a participation agreement with any other issuer of charge or credit cards in relation to the Global Rewards program. Diners agrees that it will not participate in any other loyalty or frequent flyer program during the term of the participation agreement.

Clause 15 of the participation agreement relates to assignment of a party’s rights and obligations under the participation agreement. By cl. 15(a), Diners is prohibited from doing so. By cl. 15(b), Ansett may assign or transfer its rights and obligations to certain persons, as follows:

Assignment
…
(b)Ansett may assign or transfer all or any of its rights and obligations under this Agreement at any time to:
(i)a holding company or a subsidiary of Ansett provided that Ansett unconditionally guarantees to the Participant the performance by the assignee of its obligations under this Agreement; and
(ii)a company or entity established as a result of the Alliance between Ansett, Air New Zealand Limited and Singapore Airlines Limited to operate a program which is a successor or substitute to the program operated by Ansett on the date of this Agreement.

The definition of “GR” in cl. 1 extends to include a program which continues after an assignment which is permitted by cl. 15(b). Accordingly, it appears that any assignment under cl. 15(b) will not involve Ansett ceasing to operate or participate in the Global Rewards program within the meaning of cl. 9(b). The significance of this is discussed later in these reasons.

Clause 16 imposes obligations on the parties where there are changes to the structure, ownership or operation of the Global Rewards program, including but not limited to those which are expressly permitted under cl. 15(b) and which are contemplated by the extended definition of “GR” in cl. 1. Clause 16 provides:

16. Enduring relationship
(a)Each of Ansett and the Participant must use its best endeavours to ensure that if changes to the structure, ownership or operation of GR occur:
(i)that the relationship established by this Agreement is maintained;
(ii)that to the maximum extent possible the parties derive the same benefit under the new arrangement; and
(iii)that the new arrangement is documented, to the maximum extent possible, in the same or similar terms and conditions to those contained in this Agreement.

(b)Nothing in this clause 16 will restrict Ansett assigning its rights and obligations under this Agreement in accordance with the terms of clause 15(b), but Ansett will remain bound by this clause 16 in respect of the ongoing relationship between the Participant and the assignee.
(c)Without limiting the generality of clauses 16(a) and 16(b), if GR is to become part of or be replaced by a substitute or successor loyalty program operated by an alliance, joint venture or other entity then Ansett must use its best endeavours to ensure that the exclusivity obligations under clause 11(a) of this Agreement are observed in respect of the Australian operation of that program.

IV Summary of Issues

Diners’ defence and counterclaim is based on a number of contentions.

First, Diners contends that it was an express term of the participation agreement that Ansett would, subject to its express right to terminate the participation agreement under cl. 9(b), conduct the Global Rewards program throughout the term of the participation agreement. Alternatively, Diners contends that this term should be implied in the participation agreement.

Second, Diners contends that, on a proper construction of cl. 5(a) of the participation agreement, Ansett’s right to payment for points which have not been exchanged for Awards (“unexchanged points”) is, subject to Ansett’s right to terminate the participation agreement under cl. 9(b), conditional on Ansett continuing to conduct the Global Rewards program at the time payment is due. Alternatively, Diners contends that this term should be implied in the participation agreement.

Third, Diners contends that it was an implied term of the participation agreement that if by reason of the acts or omissions of Ansett (other than by Ansett terminating the participation agreement under cl. 9(b) and then honouring its obligations under cl. 9(d)) it became impossible for Diners cardholders to exchange their Global Rewards points for awards then:

(1)Diners’ obligations under cl. 5(a) to make payments to Ansett in respect of unexchanged points would cease; and
(2)Ansett will repay amounts paid by Diners to Ansett pursuant to cl. 5(a) in respect of points credited to Diners cardholders which cannot be exchanged for Awards (“unredeemable points”).

Fourth, Diners contends that the terms which it has alleged were breached by Ansett when it suspended the Global Rewards program.

Fifth, Diners alleges that Ansett’s breaches constituted a fundamental breach of the participation agreement and that, as a result:

(1)Ansett is not entitled to be paid for those points which form the subject of its claim based on the unpaid invoices “insofar as they relate to unexchanged points”;[4]
(2)Ansett is obliged to repay amounts received by it from Diners for unredeemable points. Diners has conveniently referred to this counterclaim by it as one for the “unredeemable points payment”; and
(3)Further or alternatively, Ansett is liable to Diners for its loss of the bargain constituted by the participation agreement.

[4]There was evidence that some of the points to which the unpaid invoices relate were exchanged for awards which were enjoyed by Diners club members prior to Ansett ceasing operations.

Sixth, Diners contends that if it is liable to Ansett for the amount claimed under cl. 5(a) it is nevertheless entitled to set-off against that amount so much of the amount of the unredeemable points payment and the amount of its loss and damage as is necessary to extinguish Ansett’s claim. There is no issue that if Diners is successful on any aspect of its counterclaim that it is able to set that amount off against any amount for which Ansett succeeds on its claim.

Seventh, Diners contends that it is entitled to recover the amount of the unredeemable points payment, and is not obliged to make any payment to Ansett under cl. 5 in respect of unexchanged points, because there has been a total failure of consideration for such payments. In this regard, Diners relies upon principles of unjust enrichment.

Eighth, Diners contends that it is entitled to be indemnified by Ansett under cl. 6(c)(iii) of the participation agreement for all losses, costs and expenses incurred by it as a result of “changes” made by Ansett to the Global Rewards program. This argument is based on the proposition that the suspension of the Global Rewards program constituted a “change” to the program.

The whole of the Diners defence and counterclaim is in issue. Ansett contends that:

(1)none of the express and implied terms relied upon by Diners form part of the participation agreement;
(2)Diners is in any event not entitled to loss of bargain damages, because at the time Diners terminated the participation agreement in reliance upon cl. 9(c)(ii) it had not complied with cl. 9(c)(i) and thus had no entitlement to terminate the participation agreement for breach;
(3)Diners has received consideration in respect of the unexchanged points which are the subject of its claim;
(4)the indemnity provisions in cl. 6(c)(iii) have no application to a direct claim by Diners for loss suffered by it and, in any event, there has been no “change” to the Global Rewards program.

V Interpretation and Implied Terms

It is necessary to construe the relevant provisions of the participation agreement in accordance with general principles of contractual interpretation. This requires the Court to consider what reasonable persons in the position of the parties would have understood the words to mean, by reference to the text of the agreement, the surrounding circumstances known to the parties and the purpose or object of the transaction.[5] In interpreting the words and resolving any ambiguity, the Court should proceed in a common sense and non-technical way and give the agreement a commercially sensible construction.[6] The Court should have regard to all of the words used in the agreement “so as to render them all harmonious with one another.”[7]
[5]Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, [40].
[6]Hillas & Co Ltd v Arcos Ltd [1932] All ER 494, 499, 503-4; Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429, 437; Di Dio Nominees Pty Ltd, v Brian Mark Real Estate Pty Ltd [1992] 2 VR 732, 740; MLW Technology Pty Ltd v May [2005] VSCA 29, [76]-[81]; Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, 770-1.
[7]ABC v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109.

In order to imply a term in a contract, the Court must be satisfied of a number of conditions. In Codelfa Construction Pty Ltd v State Rail Authority of NSW[8] Mason J (as he then was) stated:

The conditions necessary to ground the implication of a term were summarized by the majority in B.P. Refinery (Westernport) Pty. Ltd. v. Hastings Shire Council: “(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract”.[9]

[8](1982) 149 CLR 337.

[9]Ibid, 347 (citations omitted).

In considering whether or not a suggested term should be implied, the Court is “no more confined than it is when it construes the contract”[10] in relation to the matters which it may take into account. Thus, the Court should have regard to the surrounding circumstances, and the purpose or object of the transaction.
[10]Ibid, 353.

In determining whether a suggested implied term is so obvious that “it goes without saying”, it is not enough that this would have been the position of one of the parties if the matter had been raised. In order to imply a term, the suggested term must be so obvious that both parties would clearly have agreed to its inclusion in the contract had they directed their minds to it at the time they concluded their bargain.[11]
[11]Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226, 241-2.

Further, in order to satisfy the requirement for the implication of a term that it is “necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it”, it is important to keep in mind that it is not sufficient that the suggested term would make the contract work more sensibly, or more beneficially, from the standpoint of the party seeking its implication.[12] If the contract is capable of sensible operation in the absence of a suggested implied term, the implied term is not necessary to give the contract business efficacy.
[12]Ibid.

VI Surrounding Circumstances

The parties agree that there were surrounding circumstances known to both parties at the time of entry into the participation agreement which the Court may take into account in interpreting the participation agreement, and in determining whether the implied terms relied upon by Diners should be implied into the participation agreement. These circumstances are set out below.

First, it is agreed that the Court may have regard to the terms and conditions of the 1991 participation agreement.

Second, it is agreed that the Court may have regard to the terms and conditions of the Global Rewards program which was in existence at the time of negotiation and entry into the participation agreement.

Third, it is agreed that the Court may have regard to the fact that agreements like the participation agreement were common in the marketplace between issuers of credit and charge cards on the one hand and airlines on the other. In particular, the general nature of the relationship between American Express and Qantas (one Qantas frequent flyer point per dollar spent) was known to both parties. In addition, Diners’ counsel submitted that frequent flyer programs had, by the time of the participation agreement, become an indispensable part of the operation of a full service airline, in order to compete in the airline industry. I accept that this was the case and that it must have been known to both Ansett and Diners. Further, both parties should be taken to have known that a relationship with a full service airline was essential for Diners to compete with American Express. Although the evidence may not establish this, it is obviously so.

Fourth, it is agreed that the Court may have regard to the fact that the arrangement between Diners and Ansett was unique in the marketplace, because there was no other charge or credit card which had an arrangement with a full service airline to credit 1.5 frequent flyer points for each dollar spent on their card to the cardholder’s frequent flyer account. In particular, the arrangement between American Express and Qantas was for the crediting of one point per dollar spent.

Fifth, it is agreed that regard may be had to the fact that Ansett had separate participation agreements with other suppliers of goods and services, including a car rental company, hotel chains and a credit card issuer.

Sixth, it is agreed that the Court may have regard to some of the marketing activities undertaken by each party which were approved by the other. I have summarised some of these above. Diners relies upon the fact that the focus of these advertisements was to the effect that use of a Diners’ charge card would result in the cardholder obtaining a free flight with Ansett or one of its Star Alliance partners. Ansett acknowledged that this was the substance of the advertisements made or approved by it, but emphasised that these advertisements were placed on the basis of Ansett continuing as a going concern. Further, Ansett drew attention to the fact that some of these advertisements expressly refer to the rights of Ansett under the Global Rewards terms and conditions to suspend or cancel the Global Rewards program at any time.

In final submissions, Diners’ counsel submitted that there were further surrounding circumstances which the Court should take into account in interpreting the participation agreement. However, properly understood, the matters relied upon were not surrounding circumstances known to the parties. They are a mixture of: (1) terms of the Global Rewards program or the participation agreement; (2) submissions as to the effect of the terms of the Global Rewards program and the participation agreement; (3) evidence of uncommunicated subjective intention or understanding; and (4) statements as to the commercial purpose or object of the participation agreement. There is one exception which I will mention.

It is not necessary to set out the terms of the Global Rewards program and the participation agreement, or their effect, relied upon as surrounding circumstances.[13] The matters relied upon form part of Diners’ submissions and are taken into account in considering those submissions.
[13]See paras 4(d) and 4(e) as to part, 4(f) and 4(g) of Diners’ written closing submissions on liability.

The evidence of uncommunicated subjective understanding or intention which was relied upon by Diners was to the following effect. It was submitted that the evidence established that the payments made by Diners to Ansett under the participation agreement in respect of frequent flyer points credited by Ansett to the accounts of Diners’ cardholders were not just payments for the crediting of those frequent flyer points, but were understood and intended to be payments for “seats on flights” for Diners’ cardholders. Reliance was placed upon the following evidence:

(1)Gregory Edye was an employee of Ansett in the period May 1996 to December 2001. He was not involved in the negotiation or preparation of the participation agreement. In cross-examination, Mr Edye said that he understood Points to “represent parts of seats” and agreed with the proposition that Points “accumulate into a seat”. Further, Mr Edye agreed with the proposition that the payments by Diners for Points assisted Ansett to internally “fund” the provision of frequent flyer seats to Global Rewards members. However, Mr Edye emphasised that the amount paid by Diners for Points, the Defined Percentage, did not allow Ansett to “fund adequately seat availability.”
(2)Rachel Cobb was employed by Ansett from 1996 in its airport operations and commercials divisions. In March or April 2001, Ms Cobb was appointed manager, loyalty programs of Ansett and Air New Zealand. Mr Edye reported directly to her. Ms Cobb was not involved in the negotiation or preparation of the participation agreement. Ms Cobb gave evidence about negotiations between Ansett and Diners in 2001 for amendments to the participation agreement. At the time of these negotiations, Ms Cobb said that:
Ansett’s frequent flyer philosophy at that time (which was revealed to Diners in the course of the repositioning negotiations) was that if a frequent flyer program was to work effectively and give real value to its members, then those members should be guaranteed seats on flights of their choice when they redeemed their points. In order for this to occur, the price for points paid by participants in the frequent flyer program had to be sufficiently high to “pay for” the price of a guaranteed ticket. The price payable by Diners under the participation agreement was far too low for this. As set out above, one of Ansett’s objectives in the repositioning negotiations with Diners was to increase the price per point to a price in line with that payable by Westpac under its (then) recently renegotiated participation agreement with Ansett (namely, $0.01 per point).[14]
Further, in cross-examination, Ms Cobb agreed with the proposition that Diners’ payments under the participation agreement became, through accumulation of Points, payments for seats on flights.[15]
(3)Mr Korda gave evidence that, for the purposes of meetings of Ansett’s creditors, the administrators treated Global Rewards members as creditors. Mr Korda also gave evidence as to his understanding of why Global Rewards members were so upset at losing their Global Rewards points, to the effect that Global Rewards members “feel like they lost their family holiday.”
(4)Bryan Ericson was employed by Diners in a range of executive positions over the period 1989 to April 1999. He was familiar with the initial Ansett frequent flyer program and the subsequent Global Rewards program. He was involved in the negotiation of the participation agreement. He gave evidence that, in its advertising seeking new cardholders and seeking to encourage existing cardholders to use their Diners cards more often, Diners promoted its link with Ansett under the participation agreement as “selling seats” or providing “free flights”. Further, Mr Ericson said that, in his mind, Diners’ payments under cl. 5(a) of the participation agreement were for the purpose of “accelerating our members [to] get flights. That’s what they wanted, that is what they saw in the program”
(5)James Atkins commenced employment with Diners after the participation agreement was entered into. He is now the general manager, consumer and marketing, of Diners. He gave evidence that Diners was concerned about the collapse of Ansett and the suspension of the frequent flyer program “because our view was that we had paid for points that were able to be redeemed for flights by members.”

[14]Cobb witness statement, para 9.

[15]Transcript 303.

This evidence is not admissible as evidence of surrounding circumstances known to both parties. It is evidence of the understanding of persons who were not involved in the negotiation or entry into the participation agreement (Edye, Cobb, Atkins and Korda) or is evidence of the uncommunicated subjective understanding or intention of the only person who was (Ericson). In any event, the evidence is clearly directed towards different circumstances than the events in question. It involves the subjective understanding and intentions of the witnesses that are based on the assumption that Ansett continues in business as a going concern. The beliefs of Global Rewards members at the time of Ansett’s collapse are not capable of constituting an admissible surrounding circumstance for the purposes of interpreting the participation agreement.

Diners sought to rely upon evidence that the participation agreement was regarded as having “immense value” to both Ansett and Diners. Although there may be no express evidence to this effect, I accept that this was the case. The evidence as a whole, and commercial common sense, shows that the participation agreement was a very important commercial contract upon which both parties placed much reliance in the conduct of their respective businesses.

Diners also sought to rely upon evidence of Ms Cobb that it was “inconceivable” that Ansett would ever terminate either the Global Rewards program or its relationship with Diners. However, there is no evidence of these private thoughts being shared with any representative of Diners. The words were suggested to Ms Cobb in cross-examination and do not form part of the admissible surrounding circumstances for the purposes of interpreting the participation agreement. Further, the evidence relied upon should in any event be understood in the context of Ansett continuing as a going concern.

The remaining matters relied upon by Diners as surrounding circumstances are better characterised as submissions as to the commercial purpose or object of the participation agreement.

VII Commercial Purpose

There is no dispute as to the general nature of the underlying commercial reasons why the parties entered into the participation agreement.

For Diners’ part, its overriding purpose was to increase the number of people holding its card and to maximise the amount which its cardholders charged to their cards. This would increase the amount of the interchange commissions which it earned. There is no dispute that interchange commissions constitute the principal source of Diners’ revenue.

For Ansett’s part, it was seeking to increase its ticket sales, the major source of its revenue, by making its frequent flyer program (Global Rewards) more attractive than the Qantas frequent flyer program. Of course, it made no commercial sense for Ansett to simply give away Global Rewards points. Accordingly, Diners was required to pay for the points which were credited to the Global Rewards accounts of its cardholders. The purpose of those payments was to assist Ansett to fund the operation of the Global Rewards program.

In order to achieve these aims, each party no doubt wished to use the participation agreement, and marketing based upon it, to maintain and build its customer base and promote customer loyalty. As I have said, Ansett and Diners each gained access to the data of the other under the terms of the participation agreement. It was common ground that this data was valuable in their respective marketing campaigns.

Although these commercial purposes were acknowledged by Diners, Diners’ counsel submitted that it was important not to blur the distinction between why Diners paid Ansett for frequent flyer points and what Diners was paying for under the terms of the participation agreement. In this regard, Diners submitted repeatedly that Diners was paying Ansett “for seats on flights to its members” and was not paying only for the crediting of Points to the Global Rewards accounts of its cardholders.

VIII First Alleged Term: Obligation to Operate Global Rewards

The first alleged term upon which Diners relies is that Ansett would, subject to its express right to terminate the participation agreement under cl. 9(b), conduct the Global Rewards program throughout the term of the participation agreement. As I have said, Diners contends that this term arises upon a proper construction of the participation agreement, or alternatively as an implied term.

AExpress Term

Diners concedes that a term in these words is not stated in the participation agreement. However, Diners contends that this term arises upon a proper interpretation of the participation agreement as a whole, and in particular from the terms of Recital A, cl. 3 and cl. 9(b) of the participation agreement.

Recital A contains an acknowledgement that Ansett is conducting the Global Rewards program and gives a brief description of it. It is in the following terms:

A.Ansett conducts a frequent flyer award program called Global Rewards (“GR”) under which Members accrue points (“Points”) based on their consumption of goods and services supplied by Ansett and participants in GR and can then exchange those Points for Awards.

It was submitted that this acknowledgement should be construed as an agreement by Ansett that it would continue to conduct the Global Rewards program during the term of the participation agreement, subject only to Ansett’s right to terminate the Global Rewards program strictly in accordance with cl. 9(b). It was also submitted that Recital A, when read together with the definition of “Awards” in cl. 1, has the effect that, for the purposes of the participation agreement, the Global Rewards program means a program under which members of the program can exchange “Points” for “Awards”, not might be able to exchange subject to the terms and conditions of the program.

Under cl. 3 of the participation agreement, Diners agreed “to participate in GR in accordance with this agreement.”[16] Under cl. 9(b), Ansett had the right to “terminate this agreement by giving one month’s notice that it is ceasing to operate or participate in GR.”[17] It was submitted on behalf of Diners that the emphasised words in these clauses make it clear that it is the participation agreement, and not the terms and conditions of the Global Rewards program, which govern the relationship between Ansett and Diners. Accordingly, to the extent of any inconsistency, the terms and conditions of the participation agreement prevail over any rights which Ansett has under the Global Rewards program terms and conditions.
[16]Emphasis added.
[17]Emphasis added.

It was submitted that Ansett’s unfettered right to suspend or terminate the Global Rewards program without notice under cl. 1.3 of the program terms and conditions was inconsistent with the terms of the participation agreement in two relevant respects. First, because cl. 9(b) provides, upon its proper interpretation, that Ansett will not terminate the Global Rewards program unless it first gives one month’s notice to Diners. Second, because there is no right to suspend the operation of the participation agreement.

It was submitted that the result of these inconsistencies is that Ansett’s unfettered rights under cl. 1.3 of the Global Rewards program terms and conditions became the subject of a fetter, contained in cl. 9(b) of the participation agreement. It was submitted that the extent and effect of the fetter is that Ansett agreed with Diners that it would not exercise its right to suspend or terminate the Global Rewards program unless it first gave Diners the notice specified in cl. 9(b) of the participation agreement.

I accept that the foundation of the participation agreement is the continuation of the Global Rewards program, or a substitute or successor program. After all, that is what Diners agreed to participate in under the terms of the participation agreement. It follows that the parties must have contemplated that continuance of the participation agreement was dependent upon continuance of such a program; because absent a program to which the participation agreement applies there is nothing to participate in.

However, I do not accept that it is an express term of the participation agreement that Ansett will conduct the Global Rewards program throughout the five year term of the participation agreement, unless Ansett first gives one month’s notice under cl. 9(b). Nor do I accept that the parties agreed that the Global Rewards program referred to in the participation agreement is anything other than the program which in fact exists from time to time.

First, the participation agreement does not contain such a term. There is no promissory language used in Recital A, or elsewhere in the participation agreement, which is capable of being interpreted as a promise by Ansett to conduct the Global Rewards program. In contrast, Recital B to the 1991 participation agreement stated expressly that Diners’ obligation to pay the Defined Percentage for points credited by Ansett to the frequent flyer accounts of Diners cardholders was in consideration for Ansett conducting the initial frequent flyer program.

B. In consideration for Ansett conducting the Programme, the Participant has agreed to pay Ansett 0.75% (“the Defined Percentage”) ...

Second, Recital A merely describes the Global Rewards program for the purposes of identification. It does not define the program as something other than what it in fact is. Nor does the definition of “GR” in cl. 1. Clause 1 defines “GR” as that program:

(a)which is operated by Ansett or a holding company or a subsidiary of Ansett; or
(b)which is established as a result of the Alliance between Ansett, Air New Zealand Limited and Singapore Airlines Limited as a successor or substitute to the program operated by Ansett on the date of this Agreement.[18]

[18]Emphasis added.

When the definition is read as a whole and in the context of the participation agreement, “GR” must mean the Global Rewards program which was operated by Ansett on the date of the participation agreement, or which is thereafter conducted by a holding company or subsidiary of Ansett, or by any entity of the kind described in (b) of the definition which conducts a successor or substitute program.

The only way in which the Global Rewards program, or a successor or substitute program, is capable of being conducted is under its own terms and conditions. The program cannot exist independently of those terms and conditions. The Global Rewards terms and conditions included an unfettered right to suspend or terminate the program without notice to members in Ansett’s absolute discretion. It was expressly conceded by Diners that it “well knew and understood”[19] the provisions of the Global Rewards terms and conditions at the time the participation agreement was negotiated and concluded.
[19]Based on this concession, a number of witnesses who had provided witness statements directed to this issue were not called to give evidence. The case was thereafter conducted on the basis of this admission.

Third, although I accept that the right to suspend or terminate the Global Rewards program at any time appears to be inconsistent with a five year participation agreement in relation to that program, this apparent inconsistency does not support the first alleged term. This is because the parties made express provision in the participation agreement to deal with the circumstance that Ansett ceases to operate or participate in the Global Rewards program.

The parties addressed this issue in cll. 9(b), 15 and 16 of the participation agreement. In none of these clauses is any obligation imposed upon Ansett to conduct the Global Rewards program at all times during the continuance of the participation agreement.

Clause 9(b) is concerned with Ansett’s right to terminate the participation agreement. It is not concerned with Ansett’s right to suspend or terminate the GR program. In the event that Ansett wishes to cease to operate or participate in the Global Rewards program, Ansett may, not must, give notice of termination of the participation agreement.

The terms of cll. 15 and 16 indicate why Ansett is given an option to terminate the participation agreement in circumstances where it intends to cease to operate or participate in the Global Rewards program. Clauses 15 and 16 show that the parties contemplated a number of different factual scenarios, other than Ansett exercising its right to suspend or terminate the Global Rewards program under cl. 1.3 of the Global Rewards terms and conditions, in which Ansett may intend to cease to conduct or participate in the Global Rewards program.

It appears that an assignment or transfer under cl. 15(b) was not intended to be the subject of cl. 9(b), even though it may involve Ansett ceasing to operate the Global Rewards program. In such circumstances, the program would then be conducted by an Ansett holding or subsidiary company, as permitted by cl. 15(b)(i), or by the company or entity described in cl. 15(b)(ii). However, the extended definition of “GR” and cl. 15(b) indicate that the parties intended that such an assignment or transfer would give rise to a novation of the participation agreement on exactly the same terms, with the new operator being substituted for Ansett as a party to the novated participation agreement. In these circumstances, the parties could not have intended that Ansett should have a right to terminate the very agreement which it had “assigned”.

Clause 9(b) is capable of applying in the circumstances contemplated by cl. 16(a), which are not limited to assignments under cl. 15(b). Instead of Ansett exercising its rights under cl. 15(b), Ansett may wish to enter into another arrangement under which there will be changes to the structure, ownership or operation of the Global Rewards program. These changes may involve Ansett ceasing to operate the Global Rewards program. For example, Ansett could establish an alliance with an airline or airlines other than Air New Zealand and Singapore Airlines, and could commence participating in the frequent flyer program operated by that airline or those airlines. In these circumstances, Ansett may wish to cease operating the Global Rewards program but not wish to terminate the participation agreement, and instead work with Diners to agree upon a new arrangement as contemplated by cl. 16(a).

What did the parties intend if Ansett ceased to operate or participate in the Global Rewards program in circumstances where Ansett did not, or did not intend to, commence operating or participating in a different frequent flyer program, as contemplated by cl. 16(a) of the participation agreement? It is likely that, short of the insolvency of Ansett and consequent cessation of its business, as happened here, the parties did not contemplate such a situation occurring. Clause 9(c)(ii) records the intention of the parties in the event that Ansett, or Diners, became insolvent. In such event, either party may terminate the participation agreement.

Did the parties intend that cl. 9(b) would govern the rights and obligations of the parties in such a situation? I think not. It is likely that if such an issue arose in negotiations and was considered worthy of providing for, the parties would have agreed some other arrangement than cl. 9(b) to cover the situation, such as a term that the participation agreement would terminate automatically or that either party could terminate it, as in the case of insolvency. Any other arrangement would lead to the uncommercial and obviously unintended result that termination of the participation agreement would depend upon the service by Ansett of a one month notice under cl. 9(b) and the expiry of that notice period. If no notice is served, or until expiry of a notice which is served, each of Ansett and Diners would remain bound by its exclusivity covenant contained in cl. 11 of the participation agreement. The parties could not have intended this. In these circumstances, a term should be implied in the participation agreement. For example, a term that if Ansett ceases to operate or participate in any frequent flyer program, either party may terminate the participation agreement. Such an implied term would satisfy each of the essential conditions to ground the implication of a term.

However, no such implied term has been put forward by the parties and it is unnecessary to decide whether such an implied term exists. This is because, in any event, such an implied term would not assist Diners. It would only serve to give Diners another “no fault” basis to terminate the participation agreement, in addition to the right which it in fact exercised under cl. 9(c)(ii) on 23 October 2001. A termination pursuant to such an implied term would give Diners no basis to claim loss of bargain damages.

Fourth, I reject the attempt by Diners to support the first alleged term by reference to the decision in Easterby v Sampson.[20] In that case, there were two separate agreements made between the owner of an undivided third part of certain mines and a builder. The first agreement was made between the owner of the undivided third, the owners of the other two thirds and the builder for the demolition of an old smelting mill and the construction of another mill of larger dimensions.
[20](1830) 6 Bing 644; 130 ER 1429.

The second agreement was a lease agreement between the owner of the undivided third (the lessor) and the builder (the lessee). Under the lease, the lessor agreed to lease an undivided third of the mines to the builder/lessee. The lease contained a covenant for the builder/lessee to keep the new mill in repair and leave it in good condition at the expiration of the term. However, the lease did not contain a covenant to build the new mill.

The lease recited that the builder/lessee had taken down the old smelting mill with the permission of the owners of the land and had engaged, under the first agreement, to erect a new smelting mill at the lessee’s expense.

Following the execution of the lease, the lessor assigned his interest in the undivided third of the mines to another person, who in turn assigned it to the plaintiffs. The plaintiffs, who were not parties to the first agreement, could not sue upon that agreement. The plaintiffs brought proceedings under the lease, alleging that the builder/lessee had impliedly covenanted to them, as assignees of the reversion, to build the new mill.

The plaintiffs were successful. At first instance, Lord Tenterden CJ said:

It appears evidently to have been the intention of the parties that the building should be erected; and as no precise form of words is necessary to make a covenant, we think the recital of the agreement that the building should be erected, followed by the express covenants to maintain and leave it, do amount to a covenant in law to erect the building.[21]

[21](1830) 9 B&C 505; 109 ER 188.

On appeal, the decision was affirmed. Alexander CB said:

we are all of the opinion that in this demise there is a distinct covenant on the part of the Defendant below to erect a smelting mill. Any words in a deed which show an agreement to do a thing amount to a covenant ... and it is here recited that the Defendant and others had, with the permission of [the owners of the mill], taken down a smelting mill, and did engage to erect at their own expense a smelting mill of larger dimensions.[22]

[22](1830) 6 Bing 644, 650.

Easterby v Sampson does not support the first alleged term. The first agreement in that case was one which obliged the builder/lessee to construct the new mill. Under the first agreement, the builder/lessee did not have any discretion as to whether he would do so. In contrast, the Global Rewards program referred to in Recital A contains terms which allow Ansett to cease operating the program at any time in its absolute discretion.

Further, although not decisive in Easterby v Sampson, the first agreement in that case was between the builder/lessee and the lessor’s predecessor in title. In contrast, the Global Rewards program is not an agreement between Ansett and Diners. It is an agreement between Ansett and all of its Global Rewards members.

Fifth, I reject the attempt by Diners to support the first alleged term by reference to the decision of the New South Wales Court of Appeal in Roadshow Entertainment Pty Ltd v CEL Home Video Pty Ltd.[23] The case concerned an exclusive supply and distribution agreement for a fixed term. There was no express term requiring the supplier to continue its business. However, the supplier agreed to pay a minimum distribution fee to the distributor, and the contractual mechanism for recovery of the minimum distribution fee assumed that the supplier would continue to conduct its business. The supplier was placed in receivership. The receiver then sold the supplier’s business and was thus unable to continue to supply the distributor. The distributor contended that the conduct of the receiver in selling the supplier’s business amounted to a repudiation of the supply and distribution agreement.
[23](1997) 42 NSWLR 462.

The Court of Appeal agreed with the distributor. The Court formulated the relevant question, and expressed its conclusion on that question, as follows:

the question is whether the agreement, on its true construction, obliged [the supplier] during the terms of the agency, either to continue their business or to take certain steps which depended upon such continuance, or gave the Distributor a right to a continuing benefit which could not be defeated by a decision on the part of [the supplier] to sell their business and assets.
There was nothing in the agreement which directly obliged [the supplier] to continue their business. However, the provisions set out above both obliged [the supplier] to take certain steps which depended upon such continuance and also gave [the distributor] a right to a continuing benefit.
...
[The distributor] was appointed the sole and exclusive distributor of the products of a certain business. That was a valuable right. It is difficult to accept that it was the intention of the parties, as manifested in their agreement, that [the supplier] could defeat that right simply by transferring to a third party ... the entirety of the business including the benefit of the licence agreements under which products were produced. The licence agreements held by [the supplier] were an important part of the commercial background to the agreement, and [the distributor’s] right to be, for the term of the agreement, the sole and exclusive distributor of products manufactured under such licences was an important continuing benefit which was intended to last during the term of the agreement.
...
In our view, the conduct of [the supplier] in transferring their business and assets to Sunhost amounted to a repudiation of the Distribution Agreement.[24]

[24]Ibid, 476-7.

The Roadshow Entertainment case is distinguishable from this case, because the parties made express provision in the participation agreement for the circumstance that Ansett may cease to operate the Global Rewards program. Clause 15(b) of the participation agreement expressly contemplates that Ansett may assign the Global Rewards program in certain circumstances and that, in such event, Ansett will either unconditionally guarantee the performance of the assignee[25] or will be bound by its best endeavours obligations under cll. 16(a) and 16(c).[26] Clause 16(a) recognises that there may be other ways, apart from assignment under cl. 15(b), in which the Global Rewards program may cease and be replaced by a substitute or successor program operated by Ansett, or by another entity where Ansett is a participant in the program. Clause 16(a) makes express provision for such circumstances.

BImplied Term

[25]Clause 15(b)(i).

[26]Clause 16(b).

The argument that the first alleged term should be implied was also based upon Recital A, cl. 3 and cl. 9(b) of the participation agreement. Further, it is alleged that the first alleged term is necessary in order to give the participation agreement business efficacy.

I reject the argument that the first alleged term should be implied in the participation agreement. It does not satisfy the conditions necessary to ground the implication of a term, as summarised above. In particular, for the reasons given above in rejecting it as an express term, the first alleged term is not necessary to give business efficacy to the participation agreement and is not so obvious that “it goes without saying”.

The first alleged term is not so obvious that it goes without saying. It is not clear that both parties would have agreed to its inclusion in the participation agreement if asked. There is no reason to suppose that Ansett would have agreed to make its unfettered right under cl. 1.3 of the Global Rewards terms and conditions to suspend or terminate the Global Rewards program subject to the giving of a month’s notice to Diners. This is especially so in circumstances where Ansett might expose itself to loss of bargain damages if it failed to give the notice. Furthermore, the parties in fact addressed the situation in cl. 9(b) and provided that Ansett may, not must, serve a notice so as to terminate the participation agreement in the event that it intended to cease operating the Global Rewards program.

It is not necessary to imply the first alleged term in order to make the participation agreement effective. The participation agreement is capable of sensible operation without the first alleged term, as set out above.

IX Second Alleged Term: Conditional Payment Obligation

The second alleged term upon which Diners relies is that Ansett’s right under cl. 5(a) to payment for unexchanged points is, subject to Ansett’s right to terminate the participation agreement under cl. 9(b), conditional on Ansett continuing to conduct the Global Rewards program at the time payment is due. Diners contends that this term arises upon a proper construction of the participation agreement, or alternatively as an implied term.

AExpress Term

Diners contends that the second alleged term arises upon a proper interpretation of the participation agreement, and that such an interpretation is “irresistible”. Diners’ argument is a straightforward one. It involves the following elements.

First, it was submitted that the critical words in cl. 5(a) are “credit” and “Points”.

Second, it was submitted that these words must be interpreted in the context of two “reciprocal fundamental obligations imposed on the parties.” These obligations were articulated in the following terms:

(1)The obligation contended for by Diners under the first alleged term, that Ansett would, subject only to its rights under cl. 9(b), conduct the Global Rewards program during the term of the participation agreement.
(2)The obligation of Diners under cl. 3 of the participation agreement to participate in the Global Rewards program in accordance with the terms of the participation agreement.

Third, it was submitted that in this context, the notion of “crediting” Points to Global Rewards members:

connotes something more than the mere making of a book entry on a frequent flyer statement. It connotes the delivery of something of underlying value. By way of analogy, if a bank is obliged to credit a transaction to a customer’s account, the obligation can hardly be said to be discharged by causing the transaction to appear on the customer’s bank statement; the notion of crediting requires that the transaction be real and valuable.[27]

[27]Diners’ written closing submissions on liability, [16].

Fourth, it was submitted that this notion of crediting is reinforced by the definition of “Points” in cl. 1 of the participation agreement in terms that Points “means GR Points”. It was submitted that:

From the definitions of GR appearing in Recital A and clause 1 of the Participation Agreement, a GR Point is a point capable of being exchanged for Awards such as airline travel in Australia or overseas. In other words, the definition of “Points” itself connotes something of value, not just a book entry on a frequent flyer statement.
... Once Ansett ceased to conduct GR, it could not be said to have “credited” unexchanged points to members in anything other than a wholly artificial and technical sense.[28]

[28]Diners’ written closing submissions on liability, [17] and [19].

I do not accept the submissions of Diners. The second alleged term does not arise upon a proper interpretation of the participation agreement, for the following reasons.

First, an essential element of Diners’ argument in support of the second alleged term is the acceptance of the first alleged term as one of the “fundamental reciprocal obligations” constituting the context in which cl. 5(a) must be interpreted. For the reasons given above, I reject the first alleged term.

[63]Ibid, [117], [120].

[64](1948) 48 SR (NSW) 417.

[65]Ibid, 427 (citations omitted).

The Court of Appeal in Burger King v Hungry Jack’s also referred to its earlier decision in Tricontinental Corporation Ltd v HDFI Ltd.[66] In that case also, reliance was placed on the statement by Sugerman J.[67] After referring to Sugerman J’s statement, which is set out in the judgment of Waddell AJA,[68] Samuels JA said:

I agree with Waddell A-JA that an analogous approach should be taken to the construction of cl 2.2.1. If that is the case, then one fixes upon the effect of the default in the given circumstances rather than upon the historical fact of its occurrence. The principal effect of Selkis’ default is that Tricontinental did not receive its money. If Selkis were given a (sic) opportunity to remedy this, it is possible that it could so arrange its affairs as to enable it to pay up. Hence it might be said that in this sense the event of default was capable of remedy.[69]

[66](1990) 21 NSWLR 689.

[67]Ibid, 702 (Samuels JA); 722-3 (Waddell AJA).

[68]Ibid, 723.

[69]Ibid, 702 (emphasis added).

This statement by Samuels JA is reflective of another statement by Sugerman J in Batson v de Carvalho that:

A breach may, I think, be “capable of remedy”, looking at the matter as at the date of giving notice, even though there is then no certainty that, notwithstanding the efforts of the lessee to remedy it, it will be remedied. What the lessee is entitled to is an “opportunity of complying with the requirements of the notice”: Fox v. Jolly.[70] He may in the result be unable to do so, e.g. because he cannot, in the case of a breach of a covenant to repair, obtain the requisite materials. Or the actual remedying of the breach may depend upon securing the concurrence of some person other than the lessee, and in the result it may not be secured. But I think it may none the less be said, looking at the matter as at the date of notice, that the breach is “capable of remedy” within the meaning of the section.[71]

[70][1916] 1 AC 1, 9.

[71](1948) 48 SR (NSW) 417, 426-7.

It was submitted on behalf of Diners that the relevant enquiry is to fix upon “the effect of the default in the given circumstances”, as emphasised in the statement by Samuels JA in Tricontinental v HDFI. Accordingly, it was submitted that no notice was required under cl. 9(c)(i) because, upon suspension of the Global Rewards program, Diners there and then suffered irreparable harm to its goodwill. Further, it was submitted that there was, on the evidence, no realistic possibility of Ansett ever remedying the breach by putting things right for the future.

I do not accept Diners’ contentions. They are inconsistent with the authorities discussed above. The effect of the authorities is that Ansett was entitled to an opportunity to remedy the postulated breach; and that this is so whether or not, on the evidence, there was a realistic possibility of the breach being remedied within the notice period specified in cl. 9(c)(i). As long as the breach was theoretically capable of remedy, the notice was required.

The suggested breach was theoretically capable of being remedied. For example, the administrator’s efforts to sell Ansett’s airline business could have been successful in circumstances where the purchaser, in order to preserve the goodwill of the business, determined to reinstate the Global Rewards program. Alternatively, the purchaser could have determined to allow Global Rewards members to participate in an equivalent program which recognised their accumulated Global Rewards Points, as contemplated by cll. 15 and 16 of the participation agreement.

In this regard, it was also submitted by Diners that any sale by Ansett of the Global Rewards program would, of itself, amount to a fresh repudiation of the participation agreement. Reliance was placed upon Roadshow Entertainment Pty Ltd v CEL Home Video Pty Ltd.[72] That decision is of no assistance to Diners. As I have said above, cl. 15(b) of the participation agreement expressly contemplates that Ansett may assign the Global Rewards program in certain circumstances and that, in such event, Ansett will either unconditionally guarantee the performance of the assignee[73] or will be bound by its best endeavours obligations under cll. 16(a) and 16(c).[74] Clause 16(a) recognises that there may be other ways, apart from assignment under cl. 15(b), in which the Global Rewards program may cease and be replaced by a substitute or successor program operated by Ansett, or by another entity where Ansett is a participant in the program. Clause 16(a) makes express provision for such circumstances.
[72](1997) 42 NSWLR 462.
[73]Clause 15(b)(i).
[74]Clause 16(b).

Further, the fact that irreparable harm may have been suffered is not to the point. The issue is whether an entitlement to terminate has arisen. If irreparable harm results from the breach, that may form the subject of an action for damages. It does not mean that a right to terminate without notice arises in contradiction of the clear terms of cl. 9(c)(i).

XIII Indemnity Claim

Clause 6 of the participation agreement is in the following terms:

6. Indemnification
(a)The Participant indemnifies and holds Ansett harmless against all liability, losses, damages, costs, expenses, actions and claims incurred by or brought against Ansett which may result from or arise in any manner out of:
(i)the supply of goods and services (being Awards) by the Participant to Members;
(ii)the promotion of GR by the Participant, or any promotional material or statements provided by the Participant or its agents to Ansett;
(iii)delay, failure or other act of omission by the Participant in the submission of Points accrual data or in the supply of Awards; or
(iv)any changes in the Participant’s participation in GR caused by the Participant.

(b)If an action or claim is made against Ansett for which the Participant may be liable under this clause 6, Ansett will allow the Participant to control the conduct of the defence. Ansett will not settle or compromise or prejudice the defence to the action or claim without the Participant’s prior written consent. The Participant’s liability under this clause 6 will not exceed the amount for which it would have been liable had the action or claim been made against it rather than Ansett.
(c)Ansett indemnifies and holds the Participant harmless against all liability, losses, damages, costs, expenses, actions and claims incurred by or brought against the Participant which may result from or arise in any manner out of:
(i)the provision of air transportation services by Ansett as a result of GR;
(ii)the promotion or administration of GR by Ansett except in relation to any promotional material or statements provided by the Participant or its agents to Ansett; or
(iii)any changes to GR caused by Ansett or any third party unrelated to the Participant.

(d)If an action or claim is made against the Participant for which Ansett may be liable under this clause 6, the Participant will allow Ansett to control the conduct of the defence. The Participant will not settle or compromise the defence to the action or claim without Ansett’s prior written consent. Ansett’s liability under this clause 6 will not exceed the amount for which it would have been liable had the action or claim been made against it rather than the Participant.[75]

[75]Emphasis added.

The emphasised words in cl. 6(c)(iii) form the basis of the submission by Diners that it is entitled to be indemnified by Ansett for all of its losses arising in any manner out of Ansett’s decision to suspend the Global Rewards program.

The claim by Diners under cl. 6(c)(iii) of the participation agreement was put in the alternative, to cover the situation that all of its other claims based on the alleged terms failed. The contention was supported by the following reasoning.

First, it was submitted that indemnity clauses fall into two broad categories. Reliance was placed upon the following statement in Lewison, The Interpretation of Contracts:[76]

The first category consists of clauses where one party agrees to indemnify the other against liability which that other may have towards him. In such a case the indemnity is “the obverse of an exempting clause”.
The second category consists of clauses in which one party to the contract agrees to indemnify the other party against liability which that other party may incur towards third parties. There is no legal impediment to the inclusion in a contract on an indemnity clause of either category. However, in order to be effective, particularly in relation to loss caused by the negligence of the party indemnified, clear and unambiguous language must be used.[77]

[76](3^rd ed, 2004).

[77]Ibid [12.15].

Second, it was submitted that clause 6 was plainly intended to provide for broad indemnities spanning both categories. It was submitted that the inclusion of the emphasised words is only explicable if clause 6 is read as requiring Ansett to indemnify Diners against losses and expenses incurred by Diners as a result of Ansett’s own conduct, as specified in cll. 6(c)(i), (ii) and (iii).

Third, it was submitted that cl. 6(d) does not assist Ansett in its contention that cl. 6(c) is only concerned with an indemnity against liabilities of Diners resulting from claims against it by third parties. It was submitted that cl. 6(d) is directed to “a subset” of the indemnities provided for by cl. 6(c); that cl. 6(d) is silent as to the direct indemnity provided for by cl. 6(c); and that if it were otherwise the words “all... losses... expenses... incurred by...” would have no work to do in cl. 6(c).

As to the final sentence of cl. 6(d), which limits liability “under this clause 6” to liability in respect of third party claims, Diners’ contention is that it should be read as if the words “In that event” were inserted at the beginning of the sentence. It was submitted that this was necessary in order to make the final sentence accord with the apparent intention of cl. 6(d) which was only to deal with a “subset” of the broader indemnities provided for in cl. 6(c).

Fourth, it was submitted that the decision by Ansett’s administrators to suspend the Global Rewards program constituted a change to that program, so as to enliven the indemnity provided for by cl. 6(c)(iii).

I do not accept the submissions made on behalf of Diners in this regard. Clause 6 should be understood as providing only for indemnities in respect of third party claims against Diners or Ansett. It should not be understood as providing for Ansett to indemnify Diners against any losses and expenses incurred by Diners as a result of Ansett’s conduct. Further and in any event, the suspension of the Global Rewards program did not involve any change to that program, so as to enliven any indemnity provided for by cl. 6(iii).

Clause 6(c)(iii) of the participation agreement must not be considered in isolation. It must be read in the context of cl. 6 as a whole. In turn, cl. 6 must be read in the context of the participation agreement as a whole. When this is done, it is clear that cl. 6 does not span both of the possible categories of indemnity referred to in the quoted passage from Lewison. Clause 6 is concerned only with providing for indemnities in respect of claims by third parties. I am of this view for the following reasons.

First, the circumstances in which the indemnities apply, as stated in cl. 6(a)(i)-(iv) and cl. 6(c)(i)-(iii), are obviously directed towards claims by third parties arising out of such circumstances. For example, it is obvious how the provision of air services by Ansett “as a result of GR”, the subject of cl. 6(c)(i), could give rise to a claim by a disgruntled Global Rewards member against Diners, having regard to Diners’ participation in the Global Rewards program. On the other hand, it is difficult to see how Diners could have a direct claim against Ansett arising out of such services to a Global Rewards member. Similarly, with respect to cl. 6(a)(ii), it is easy to see how a claim could be made against Diners arising out of the promotion by Ansett of the Global Rewards program, in circumstances where that promotion relates to the ability of Global Rewards members to earn points by using their Diners card. For example, a statutory claim for false and misleading conduct in respect of such promotional material. On the other hand, it is difficult to see how, in the absence of a third party claim against Diners, promotional activities of Ansett in relation to the Global Rewards program would give rise to a direct liability by Ansett to Diners.

The circumstances referred to in cl. 6(c)(iii), relating to changes to the Global Rewards program unrelated to Diners, may obviously give rise to a claim (however hopeless) by a disgruntled Global Rewards member against Ansett or Diners. Further, I accept that changes to the Global Rewards program have the capacity to cause direct loss to Diners. For example, by making the program less attractive in comparison to the Qantas frequent flyer program, thus causing Diners cardholders to cease or reduce expenditure on their Diners cards in favour of spending on cards linked to the Qantas program. However, for the reasons appearing below, I do not accept that any losses incurred by Diners as a result of changes to the Global Rewards program were intended to be the subject matter of the indemnity in cl. 6(c)(iii).

Second, this conclusion is reinforced by cll. 6(b) and 6(d) of the participation agreement. Clauses 6(b) and 6(d) expressly concern indemnity against third party claims. The language used in these clauses assumes that an indemnity is only available in respect of third party claims. The first sentence of these clauses refers to “an action or claim ... for which [Ansett or Diners] may be liable under this clause 6”.[78] The third sentence provides that the liability of Ansett or Diners “under this clause 6 will not exceed the amount for which it would have been liable had the action or claim been made against it rather than [Ansett or Diners].”[79]
[78]Emphasis added.
[79]Emphasis added.

Third, the interpretation contended for by Diners makes no commercial sense. In circumstances where the parties contracted in the knowledge that Ansett had an unfettered right, without notice and in its absolute discretion, to suspend or terminate the Global Rewards program at any time, to cancel a membership at any time, to restrict the availability of awards or to withdraw or change the awards which were available at any time, and to vary the rules and conditions of the program, it would require very clear words to attribute such an intention to the parties. This is especially so when regard is had to cl. 9(b) of the participation agreement, which gives Ansett a right to terminate the participation agreement in circumstances where it intends to cease operating the Global Rewards program. The parties cannot have intended that Ansett would expose itself to an indemnity claim under cl. 6(c)(iii) if it exercised this right.

Further, and in any event, even if cl. 6(c)(iii) could be interpreted as Diners contends, I do not accept that the suspension of the Global Rewards program constituted a “change” to that program. The program terms and conditions remained the same. Ansett simply exercised one of them. That is not a change to the program. The program remained unaltered.[80]
[80]It appears that the concept of “changes to GR” refers to any change beyond those contemplated by cl. 15(b), as reflected in the extended definition of “GR” in cl. 1. There is no question of any such change in this case.

XIV Unjust Enrichment

Diners raises one final defence and counterclaim. It contends that it is in any event entitled to withhold payment for the amounts claimed, and to recover the amounts paid by it in respect of unredeemable points, on the ground of unjust enrichment.

Diners’ submissions in support of this contention may be summarised as follows:

(1)The payments made by it under cl. 5(a) of the participation agreement, and the payments claimed by Ansett from it under that clause, are properly to be characterised as payments for the provision of seats on flights to its cardholders.
(2)It is now impossible for Diners cardholders to exchange Global Rewards Points for Awards.
(3)Accordingly, Ansett has provided no benefit for the payments made by it and sought from it under cl. 5(a).
(4)In these circumstances, there has been a total failure of consideration in respect of the unredeemable points, and there will be a total failure of consideration if it is required to pay the amounts claimed.

Diners sought to support its contentions by the following analogy:

The situation is akin to where a seller of land terminates the contract after the buyer has paid instalments. The buyer is entitled to recover instalments that have been paid because the consideration for the payment, namely the transfer of title, has failed. Here Diners has paid instalments for the provision of seats on flights to its members, and the seats have not and will not be provided. There has thus been a total failure of consideration in respect of the unredeemable points payment.[81]

[81]Diners’ written closing submissions on liability, [38] (emphasis added).

I do not accept Diners’ contentions in this regard. Once again, they depend upon Diners’ characterisation of the payments which it is obliged to make under cl. 5(a) as payments “for the provision of seats on flights to its members”. I have already rejected this characterisation of the payments under cl. 5(a). The payments required by cl. 5(a) are unambiguously payments for Points which have been credited by Ansett to the Global Rewards accounts of Diners cardholders in respect of Qualifying Purchases on their Diners cards. As I have emphasised throughout these reasons, those points were at all times credited subject to the terms and conditions of the Global Rewards program.

There is no issue that Ansett credited the Points for which it claims payment, and the Points in respect of which Diners makes its counterclaim for the unredeemable points payment. In these circumstances, there is no merit in Diners’ contention that, because there is now no chance that the Points can be exchanged for Awards, there has been a total failure of consideration. By crediting Points in respect of Qualifying Purchases, Ansett performed the contractual obligation imposed upon it by cl. 5(a), thus providing the contracted for consideration for the payments required by Diners under cl. 5(a). The fact that the Points are now valueless, because Ansett exercised a right attached to the Points, does not mean that there has been a total failure of consideration.[82]
[82]Baltic Shipping Co v Dillon (1993) 176 CLR 344, 350-1 (Mason CJ), 367 (Brennan J), 379 (Deane and Dawson JJ), 388-9 (McHugh J).

Diners sought to avoid this result by reference to the emphasised words in the following statement by Gleeson CJ, Gaudron and Hayne JJ in Roxborough v Rothmans of Pall Mall[83] that:

Failure of consideration is not limited to non-performance of a contractual obligation, although it may include that. The authorities... show that the concept embraces payment for a purpose which has failed as, for example, where a condition has not been fulfilled, or a contemplated state of affairs has disappeared.[84]

[83](2001) 208 CLR 516.

[84]Ibid, [16] (emphasis added); see also [104] (Gummow J).

The emphasised words do not assist Diners. First, the purpose of the payments has not failed, because the payments made and claimed were and are for Points which have been credited by Ansett. Second, the parties expressly contemplated in their agreement that Ansett may cease to operate the Global Rewards program or become insolvent. It cannot be said that such a state of affairs was not contemplated.

XV Conclusion

I have rejected all of the defences and counterclaims raised by Diners. Accordingly, it is unnecessary to consider issues of causation and quantification of the damages which are the subject of Diners’ counterclaims. There will be judgment for Ansett on its claim. Diners’ counterclaims will be dismissed. I will hear the parties as to interest, costs and the precise form of the judgment to be entered by the Court.

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[2007] VSC 102

30 April 2007