Ben Furney Flour Mills Pty Ltd v Nonna's Bakehouse Pty Ltd

[2025] NSWSC 749

Supreme Court

New South Wales

Medium Neutral Citation:

Ben Furney Flour Mills Pty Ltd v Nonna’s Bakehouse Pty Ltd [2025] NSWSC 749

Hearing dates:

22-24, 28-30 April 2025

Date of orders:

17 July 2025

Decision date:

17 July 2025

Jurisdiction:

Equity - Commercial List

Before:

Rees J

Decision:

Judgment for the plaintiff.

Catchwords:

CONTRACT — sale of goods — miller supplies bulk flour to baker for 5 years — baker makes ‘artisan’ bread — requires flour suitable for its processes including high water absorption, long fermentation and no additives — extensive but inconclusive attempts by parties to formulate specifications for flour — uneventful supply for 4 years – change of head baker and recipe — drought followed by flooding rains — seasonal variation in flour — baker encounters difficulties using flour — continues to order flour until supply ceased for non-payment — whether breach of contract.

CONSUMER LAW — false or misleading representations — representations 8 years ago — whether representations made — whether ‘puffery’ — principles at [33]-[34], [64] — whether miller represented that it could supply flour that met baker’s specifications and requirements — unlikely, where no evidence that the baker had “specifications and requirements” at the time — whether represented would supply unique blend of consistent quality — represented consistent quality with seasonal variations — whether misleading — principles at [71]-[74] — reasonable basis for representation as to future matter.

PARTIES – contractual document addressed to incorrect company – miller and baker continue to trade for 5 years – who were the contracting parties – principles at [95]-[96] – correction by construction – obvious error.

TERMS – miller issues terms of sale – miller prepares Product Information Form (PIF) and Product Specification – letter of agreement – what were the contractual terms – whether PIF incorporated by reference – implied terms – Sale of Goods Act 1923 (NSW) – acceptance of updated terms of sale inferred from conduct – principles at [101]-[115].

SET-OFF – whether entitled to set-off damages against debt

ESTOPPEL — Estoppel by convention — Mutual assumption — Course of dealing — whether the baker estopped from disputing unpaid invoices where baker continued to order flour notwithstanding knowledge of flour deficiencies — no mutual assumption.

Legislation Cited:

Civil Procedure Act 2005 (NSW), s 21

Sale of Goods Act 1923 (NSW), s 57

Cases Cited:

Agnish Pty Ltd v Folio Invest Pty Ltd (No 4) [2020] FCA 120

Australian Competition and Consumer CommissionvColes Supermarkets (2014) 317 ALR 73; [2014] FCA 634

Australian Competition and Consumer Commission v Telstra Corporation Ltd (2007) 244 ALR 470; [2007] FCA 1904

Australian Competition and Consumer Commission v TPG Internet Pty Ltd (2013) 250 CLR 640; [2013] HCA 54

Australian Competition and Consumer Commission v We Buy Houses Pty Ltd [2017] FCA 915

Blackmore Design Group Pty Ltd v Mudge (2006) 4 DCLR(NSW) 30; [2006] NSWDC 160

Brighton Automotive Holdings Pty Ltd v Honda Australia Pty Ltd (No 2) [2024] VSC 262

Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653; [1986] HCA 81

Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592; [2004] HCA 60

Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd (2016) 260 CLR 1; [2016] HCA 26

Forrest v Australian Securities and Investments Commission (2012) 247 CLR 486; [2012] HCA 39

Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; [2009] NSWCA 407

Koufos v C Czarnikow Ltd (The Heron II) [1969] 1 AC 350

Lym International Pty Limited v Marcolongo (2011) 15 BPR 29,465; [2011] NSWCA 303

MacMilllan v Mumby [2006] NSWCA 74

Miller Heiman Pty Ltd v Sales Principles Pty Ltd (2017) 94 NSWLR 500; [2017] NSWCA 106

Mills v Walsh [2022] NSWCA 255

Moratic Pty Ltd v Gordon (2007) 13 BPR 24,213; [2007] NSWSC 5

Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191; [1982] HCA 44

Pethybridge v Stedikas Holdings Pty Ltd [2007] NSWCA 154

Rydledar Pty Ltd t/as Volume Plus v Euphoric Pty Ltd (2007) 69 NSWLR 603; [2007] NSWCA 65

Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603; [2007] NSWCA 65

Sagacious Procurement Pty Ltd v Symbion Health Ltd [2008] NSWCA 149

Self Care IP Holdings Pty Ltd v Allergan Australia Pty Ltd (2023) 277 CLR 186; [2023] HCA 8

Southdown Publications Pty Ltd v ACP Magazines Pty Ltd (2003) 60 IPR 367; [2003] NSWCA 347

Tasman Capital Pty Ltd v Sinclair [2008] NSWCA 248

Watson v Foxman (1995) 49 NSWLR 315

Wenham v Ella (1972) 127 CLR 454; [1972] HCA 43

Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522; [2005] HCA 17

Zhong v Guan [2024] NSWCA 300

Texts Cited:

JW Carter, Contract Law in Australia (8th ed, 2022, J W Carter Publishing)

Category:

Principal judgment

Parties:

Ben Furney Flour Mills Pty Ltd (Plaintiff)
Nonna’s Bakehouse Pty Ltd (First Defendant)
Pasquale Barbaro (Second Defendant)
Francesco Sergi (Third Defendant)

Representation:

Counsel:
JC Conde (Plaintiff)
EAJ Hyde (Defendants)

Solicitors:
HWL Ebsworth (Plaintiff)
Paradise Charnock Hing (Defendants)

File Number(s):

2022/350234

JUDGMENT

1. HER HONOUR: This case is about the sale of goods, specifically, flour. Ben Furney Flour Mills Pty Ltd is a miller in Dubbo. The miller seeks payment of unpaid invoices totalling some $800,000 from Nonna’s Bakehouse Pty Ltd and its directors and guarantors, Pasquale (Pat) Barbaro and Francesco (Frank) Sergi.

2. In turn, the baker seeks damages of some $2.5 million for breach of contract and misleading and deceptive conduct, where the miller is said to have represented that its flour would be fit for purpose and of consistent quality. The flour was said to be neither.

3. The issues are:

1. Did the miller make the representations, inducing the baker to enter into a letter of agreement in 2017?

2. What were the contractual terms, including any terms implied by the Sale of Goods Act 1923 (NSW) or product specifications incorporated by reference?

3. Has the baker suffered loss or damage as a consequence of breach of contract or misleading or deceptive conduct, and is the baker entitled to set-off such damages against the unpaid invoices?

4. Is the baker estopped from disputing the invoices or seeking damages, where the baker continued to order flour for more than a year, notwithstanding its knowledge of any deficiencies in the flour?

4. In sum, I am not satisfied that the representations were made. The miller supplied the baker for seven years before ceasing supply for non-payment. The baker changed its Production Manager in the sixth year, which led to major changes in the baker’s demands of its miller. While the miller appears to have ‘bent over backwards’ to meet the baker’s requirements, the touchstone is what were the miller’s contractual obligations.

5. Ascertaining those obligations was not entirely straightforward where, over the years, corporate entities and the terms of sale changed from time to time. The documentation was imperfect, although Mr Barbaro and Mr Sergi said they did not read it anyway.

6. The problem which may have emerged is that the miller’s attentiveness to the baker’s requests, feedback and complaints – no doubt in order to secure ongoing custom – led, over time, to an expectation of a level of performance which strayed some distance from the terms of trade. But there was no breach where, despite two ‘rounds’ of attempts, the parties did not formulate any specifications or parameters for the flour, with which it did or did not comply.

Witnesses

7. The miller relied on the evidence of chief executive officer Sarah Furney, quality assurance manager Raymond Chisholm and mill manager Garry Stewart. The baker relied on the evidence of Mr Barbaro and Mr Sergi, together with research and production manager Jorge Gironda, consultant miller Craig Holley, bakery manager Antonino Postorino and financial controller Alfred Kim. No adverse credits findings or Jones v Dunkel inferences were sought, nor made.

8. As to liability, the baker relied on the expert evidence of consultant baker Jan Baert, while the miller relied on food technologist Stephen Orchard. Mr Baert and Mr Orchard broadly agreed with each other. Mr Orchard was particularly impressive and careful; I preferred his views on points of disagreement.

9. As for quantum, the baker relied on the expert evidence of forensic accountant Adam Giliberti and the miller relied on forensic accountant Paul Russell. Whilst the forensic accountants disagreed strongly with each other, both were sound.

The baker and ‘artisan’ bread

10. The baker produces over 100 different types of baked goods in large-scale production. The goods are manufactured in Sydney and delivered daily across Australia, including to Woolworths, Aldi and Harris Farm.

11. Notwithstanding its large-scale production, Mr Sergi said Nonna’s Bakehouse carried on the business of an “artisan” bakery, producing handcrafted baked goods using traditional methods and natural ingredients. While part of Nonna’s Bakehouse’s process was automated to allow it to produce bread on a large commercial scale, it was otherwise described as a “very manual process” involving a precise sequence of unique steps. Mr Sergi said the baker required a specific type of flour to withstand the different stages involved in the manufacture of “artisan style” baked goods.

12. The experts, Mr Baert and Mr Orchard, agreed as to what was meant by ‘artisan’ bread, being bread made by hand using traditional processing techniques, typically in small batches. The process involves the use of pre-fermented dough (starters or a Biga), longer fermentation times, higher water content, the absence of bread improvers and long mixing times to allow for the addition of more water.

13. Two obvious differences appear from the agreed description of ‘artisan’ baking and the baker’s processes. First, Nonna’s Bakehouse made bread on a large-scale production, using semi-automatic processes. Second, the baker used a softener containing L-cysteine, which Mr Orchard considered unusual in an ‘artisan’ process. Notwithstanding this, the experts agreed that the baker could be considered to be making ‘artisan’ bread. The experts disagreed as to whether the baker’s process was unique; it does not matter.

14. As to the type of flour needed by an ‘artisan’ baker, a diverse range of parameters were identified by the lay and expert witnesses. There was no universal or recognised set of parameters. To assist in what follows, the following parameters were canvassed, albeit the relevance, required levels and appropriate test method were not without controversy:

Ash	The bran and germ layers of wheat are rich in minerals and, when tested, produce an ash level. This indicates the extraction rate or degree of milling. Ash content contributes to the flavour and colour of baked products.
Falling Number	Falling number measures the enzyme activity in the flour. The higher the falling number, the greater the ability of the dough to produce a good crumb and crust. The falling number is important for dough stability.
Protein	Wheat and flour is graded by protein content, although the quality of the protein is also significant.
Starch damage	Starch damage occurs during the grain milling process and affects the rate of hydration of flour and dough stability.
Water absorption	The amount of water that needs to be added to the flour to hydrate the flour correctly.

15. That brings us to the first and, indeed, key issue: how much did the miller know about the baker’s ‘artisan’ baking process and its flour requirements when the representations were said to have been made? Put another way, what were those requirements and were those requirements communicated to the miller? This takes us to the parties’ early dealings from 2015 to 2017.

Early dealings

16. In 2015, the baker decided to put the supply of flour and baking ingredients out to tender. This does not appear to have been a formal tender process. No tender documents were in evidence. Rather, Mr Barbaro called the miller’s salesperson, Mark Wright, and asked him to send through some “specs and prices”.

17. Mr Wright sent through prices for various flour products, together with a Certificate of Analysis setting out the typical results for each flour product on a range of measures, including protein, moisture, ash content and water absorption. The certificate noted that, while samples were prepared to best represent the batch nominated, “due to inherent process variation [the] result reported may differ slightly on an individual bag basis”.

18. The miller’s offer was contingent on completion and return of a credit application form. The proposed supplier was the miller’s corporate predecessor, Beltavia Pty Ltd as trustee for FP Operating Trust trading as “Ben Furney Flour Mills”. In June 2015, the baker completed the credit application form as trustee. (Nonna’s Bakehouse is the trustee of Nonna’s Bakehouse Unit Trust.) Mr Barbaro and Mr Sergi signed a Directors’ Guarantee and Indemnity Deed. The last page contained Terms of Sale (which were revised from time to time and to which I will return).

19. The miller sent flour samples to the baker for trial. The baker provided a sample of its current flour to the miller. On 17 August 2015, Mr Wright sent Mr Barbaro a “Flour Analysis Summary Template” for the miller’s premium flour, apparently as an example of the test data collated by the miller on each batch of floor (being moisture, protein, ash, water absorption and falling number). In return, Mr Barbaro provided Mr Wright with “info for the flour testing”, which I take to be the test results that Mr Barbaro wanted to see. This included starch damage and wet gluten, together with a Farinograph and Extensograph reading.

20. The miller’s chief executive officer, Ms Furney, prepared to meet with the baker in Sydney. Mr Wright provided Ms Furney with detailed notes in advance, advising that the baker had successfully trialled the miller’s premium flour, but:

“Pat [Barbaro] did say we were too expensive. …

Pat keeps talking re ash content, fa[l]ling number and starch number. I tend to think he is getting too technical, wants to see if we [will] mill flour for them. Sometimes I think customers get too technical in the hope of getting a better price.

I think all that [the miller] can offer is great flour, consist[ent] week after week, we need to hold firm on that and our pricing.”

21. The miller’s quality assurance manager, Mr Chisholm, had tested the baker’s current flour and compared it with the miller’s range of flours. He reported to Ms Furney, “In theory [our] Premium [flour] should be the stronger which should help get better volume if worked to its optimum.” As Ms Furney put it, the miller’s premium flour was identified as “the best flour to put forward.”

22. The parties first met on 24 August 2015. Mr Barbaro and the baker’s general manager, Bob Bentley, attended. Ms Furney and Mr Wright were accompanied by the miller’s sales manager, Brian Roberts. The miller provided testing scores for its premium flour. Mr Wright’s notes of the “sales meeting” recorded “Talked bulk flour and specs, agreed that [the miller] will send 2 pallets [of] premium [flour] for trial and … may look at a full silo trial”.

23. What “specs” were discussed is not known. Given the emails which had passed between Mr Wright and Mr Barbaro to that point, most likely the “specs” were the test results provided by the miller for its flour, although there appears to have been discussion as to what other tests the baker wanted to be performed.

24. After the meeting, Mr Roberts emailed Mr Barbaro and Mr Bentley, thanking them for taking the time to meet and “also for the tour of your bakery”. The baker was invited to tour the miller’s facility in Dubbo. Separately, Ms Furney emailed Mr Barbaro and Mr Bentley, thanking them for their time, adding “The tour of the factory gave us an in depth appreciation of your requirements.”

25. A decade later, Ms Furney could not recall this visit to the baker explicitly; she said she had visited the bakery several times. Ms Furney agreed that the baker described its bread making process in general, “long ferments, four hours, knock backs and … put through the machine. So the general walkthrough gave us … the flow of the bakery. We didn’t go into specifics … around ingredients, processing parameters or anything like that. It was just a general flow of the bakery.”

26. For his part, Mr Barbaro said that he told Ms Furney that the baker did not operate like an ordinary bakery; its processes were unique. The baker required a certain quality of flour which could withstand its baking process. The baker had a 4-hour fermentation process for standard baking products and an 18 to 26-hour fermentation process for other baking products such as a Biga and sourdough starters. During the fermentation process, the baker conducted two to three knockback processes on some products. The process was quite intensive, so the flour needed to be strong and stable enough to manage it. The most important thing was that the flour could handle a higher percentage of water and the baker’s baking process. He asked Ms Furney if she knew what the starch damage was (presumably, of the miller’s flour). Ms Furney said that she could find out that information and send him those details. (After the meeting, Ms Furney followed up a question regarding starch damage in her email, “our target is 6-9%, we are arranging some testing to give you an indication of where we are running at currently and will revert with results.”)

27. I do not attach great weight to Mr Barbaro’s recollection of this first meeting, where he made no note and the meeting took place a decade ago. Ms Furney’s professed lack of recollection is probably more realistic. In any event, the baker decided not to change flour suppliers, as the miller would not agree to drop its price. The miller did begin to supply the baker with a customised blend of grains and seeds called “Nonna’s Grain Mix”.

28. In 2016, the miller’s business was restructured: the plaintiff took over the conduct of the business and entered into new supply agreements with existing customers, including the baker. New Terms of Sale were accepted, to which I will return at [95]. The miller continued to supply “Nonna’s Grain Mix” as and when requested.

29. In December 2016, the miller approached Mr Barbaro again, offering to supply flour in bulk. In February 2017, the miller sent some flour for trial, accompanied by a Certificate of Analysis. Mr Roberts advised that the flour was being supplied to a bakery on the Gold Coast each week “and if suitable for your requirements would make it very easy for us to guarantee supply for the year with consistent product”.

30. In March 2017, Ms Furney spoke to the baker’s Technical Support Manager, Sergio Soria, about the trial. The water absorption of the miller’s flour was lower than the baker’s existing flour. A second pallet was sent, with better results. Mr Soria told Ms Furney that he was “happy to try [a] full run with this one”. Ms Furney arranged another meeting with Mr Bentley on 10 March 2017, to discuss the outcome of the trial. Two representations were said to have been made at this meeting.

First and second representation

31. The baker contended that, by 10 March 2017, the miller knew that the baker adopted a unique mixing, proofing and baking process which, amongst other things, used a traditional artisan method but with an automated process and required a 4-hour fermenting process with high water absorption. In addition, it was said that the miller knew the specifications and technical requirements of the flour used by the baker in its manufacturing processes. The baker further contended that the miller made two representations at this meeting:

1. the miller could bulk supply flour that would meet the baker’s specifications and requirements; and

2. the flour supplied to the baker would be a unique blend that would meet the baker's specifications and requirements.

32. According to the contemporaneous documents, in advance of the meeting on 10 March 2017, Mr Bentley advised that, in order for the baker to consider changing suppliers, the miller “would need … to be very clear in the meeting” on “Guarantee of Flour consistency & quality; Very Competitive Price”, on-time deliveries and value added benefits. The second meeting appears to have gone well, with Ms Furney thanking Mr Bentley and Mr Soria for “the wonderfully open and constructive meeting”.

33. The first step in considering whether a person has engaged in misleading and deceptive conduct is: was the representation made. Where the representation was oral, “it is necessary that the words spoken be proved with a degree of precision sufficient to enable the court to be reasonably satisfied that they were in fact misleading in the proved circumstances. In many cases … the question whether spoken words were misleading may depend upon what, if examined at the time, may have been seen to be relatively subtle nuances flowing from the use of one word, phrase or grammatical construction rather than another, or the presence or absence of some qualifying word or phrase, or condition”: Watson v Foxman (1995) 49 NSWLR 315 at 318 (McClelland CJ in Eq).

34. A representation may be “puffery”, as described by Gleeson J in Australian Competition and Consumer Commission v We Buy Houses Pty Ltd [2017] FCA 915 at [64]-[65]: (citations omitted)

Whether a representation constitutes puffery or marketing exaggeration and, consequently, is not actionable turns on the particular facts considered in light of the ordinary incidents and character of commercial behaviour. A claim will not be regarded as puffery if there is a definitive statement as to a characteristic or consequence of the claim.

By corollary, a characteristic often attributed to puffery is that it is “incapable of being proved to be correct or incorrect” …

35. It will be immediately observed that the only person who gave evidence about this meeting was Ms Furney. Mr Bentley and Mr Soria were not witnesses. Ms Furney said candidly that she had no clear memory of her dealings with the baker in the early years. Ms Furney refreshed her recollection from contemporaneous records and had regard to her usual practice. Ms Furney said she had “no idea of the intricacies” of the baker’s processes at this time but she understood, at a broader level, the steps in the process. Ms Furney did not think that she ever promised exclusivity of a blend.

36. As at 10 March 2017, discussions appear to have been at an early stage. The miller wanted to supply bulk flour and had provided two pallets of bagged flour for trial, with mixed results. All that the miller knew about the baker’s processes was whatever had been gleaned from a tour of the factory nearly two years earlier, together with inconclusive communications in respect of “specs”.

37. On the basis of the limited evidence of what was said at this meeting, I am satisfied that the miller represented that it could supply bulk flour to the baker. Indeed, the miller was obviously keen to do so. I accept that Ms Furney represented that the miller would work with the baker to provide a flour that met the baker’s needs. But I am not satisfied that the miller provided an assurance that it would be successful in that regard.

38. In saying this, I have in mind that there is no evidence that the baker had specifications and requirements at the time, beyond a broad requirement that the flour could be used in its baking processes. It seems unlikely these circumstances that Ms Furney would have represented that the miller could supply flour that would meet the baker’s “specifications and requirements” in the absence of a clear indication of what those “specifications and requirements” were. To represent that the miller could supply flour that would meet any “specifications and requirements” would have been puffery. I am not satisfied that the miller made the first representation.

39. Although Mr Barbaro said he understood that the Nonna’s Bakehouse Bulk Flour was different to the other flours that the miller was supplying to its customers, there is no evidence that Ms Furney represented at this meeting that the flour supplied would be a unique blend. The second representation is not established either.

40. Rather, the parties continued to investigate whether the miller’s flour would be suitable for the baker’s baking processes. On 27 March 2017, Mr Bentley asked for delivery of silo flour for trial. Ms Furney arranged delivery of 24 tonne of “Nonna’s Bulk Flour” and offered to supervise delivery, hoping to then meet Mr Sergi and spend some time with Mr Soria to understand “his requirements with regards to testing.”

41. On 3 April 2017, Ms Furney spoke to Mr Soria as to how the first bulk load had performed. Mr Soria said he had increased water by 2% and was happy with the flour; although he “could get more”, he wanted to be realistic, “don’t want to push more water at the sacrifice of quality.” He was “happy to try full run with this one”. On 5 April 2017, Ms Furney confirmed the delivery of another 24 tonne of flour, noting “I understand that our flour performed differently to the current benchmark within the process, at the same time producing an acceptable end product. Our milling team has reviewed their process and will implement some small changes in light of your feedback.” Ms Furney also noted that, in order to establish a level of satisfaction and confidence, the baker required the supply of bulk loads over the next four to five weeks until the baker could make a decision. Ms Furney asked for a sample of the baker’s current flour for testing.

42. On 10 April 2017, Mr Soria requested another tanker load of flour. Ms Furney provided comparative test results for the baker’s current flour, the last bulk load and a test blend called “Trial #2”. The test results indicated that the water absorption for “Trial #2” was on par with the baker’s current supplier, being 63.2% and 63.3% respectively. Ms Furney advised that a sample pallet of Trial #2 would be delivered shortly; the baker’s feedback was sought.

43. On 18 April 2017, Ms Furney spoke to Mr Soria regarding the performance of the second load of flour, when compared with the baker’s current supplier. Mr Soria reported that the miller’s dough “looks a bit better”. Mr Soria was “happy with the end product” from the miller’s flour, although the water absorption of the baker’s current supplier was a little higher. Ms Furney said the pallet of Trial #2 flour “should close the gap on water absorption.”

44. On 19 April 2017, Mr Chisholm provided Mr Soria with a Certificate of Analysis for the tanker delivery that day, noting that “Bake tests have not been carried out as your process description is so far from [these] methods that the results are not providing relevant information to you. … Once your process and our flour supply are fully settled, … we can discuss the future [Certificate of Analysis] to best suit your ongoing requirements.” This suggests that the miller had some understanding that the baker’s processes were different from standard commercial baking, although the baker’s process was not “fully settled”.

45. On 21 April 2017, Ms Furney spoke to Mr Soria with respect to the sample pallet “with increased ash content”, noting that Mr Soria was able to increase water absorption by 2% and wanted to try the flour in a larger scale. Ms Furney agreed to send the flour in a bulk load and advised “we would endeavour to creep that water absorption up a little further”. Ms Furney reported to her colleagues, including noting that Mill Manager, Garry Stewart, was “working on the flour now”. Mr Chisholm was asked to organise a bake test. Ms Furney also confirmed with Mr Soria that the next load of flour, “which has been milled to increase water absorption”, would be delivered in the next few days.

46. On 26 April 2017, Mr Chisholm provided Mr Soria with a Certificate of Analysis for the next flour delivery, noting that bake tests indicated a 2% increase in water absorption, as for the previous Trial #2 pallet. Ms Furney arranged a visit to the mill by Mr Barbaro and Mr Soria on 19 May 2017, with time set aside for the test kitchen and discussion of “Trial Feedback”. Mr Soria was apparently interested to have a good understanding of the miller’s systems and quality controls.

47. Mr Chisholm was involved in testing the flour. He said that, after the baker trialled the miller’s standard premium flour, the baker asked for “an increase in water absorption if it was possible on the flour that we’d supplied them for trial.” Adjustments were made to increase water absorption, but no other adjustments were made in relation to protein or the like. Those changes were then “spread across the board” and applied to the miller’s premium flour.

48. On 18 May 2017, the miller prepared a “Food Industry – Product Information Form” for the Australian Food and Grocery Council (referred to as PIFs) in respect of the supply of “Nonna’s Bakehouse Bulk Flour”, being supplier’s product code “FL-NBB”. The baker was provided with the PIF, according to a later email from the baker’s administrative assistant. Where the baker was visiting the mill the next day, it seems likely that the PIF was provided to the baker during the visit, although no-one said so.

49. The PIF began as follows:

WARRANTY: This document is intended as a guide only … The information in this document should not be relied on as legal advice … You should exercise your own skill, care and judgement before relying on this information in any important matter.

50. There followed a Supplier Declaration and Warranty. The miller agreed that “all Product it supplies to the Customer will conform with the Product Information unless otherwise agreed to in writing and in advance by the Customer”: para 1.4(4). The miller also agreed to “inform the Customer in writing and in advance of any change to the Product Information … if and when the supplier becomes aware of such changes”: para 1.4(6).

51. The PIF included chemical specifications and an accompanying test method for each parameter, being:

Protein   Minimum 11.2%

Moisture      Maximum 14%

Ash   Typical 0.50%

Water absorption   Typical 64%

Falling Number   Typical > 400

52. Mr Barbaro broadly agreed with that these chemical specifications were suitable for ‘artisan’ bread, although thought the ash level should be higher (while Mr Gironda thought the ash level was good). Mr Barbaro said that it did not really matter whether the protein met the percentage minimum as “it’s more the protein quality, not the protein levels.” Mr Barbaro agreed that “typical” did not mean “guaranteed” chemical properties, but added that he probably didn’t even look at the PIF.

53. Mr Gironda said that a PIF was used for compliance purposes and recorded the product ingredients and information as a guide. The PIF was used for the purposes of regulatory compliance checks to ensure that the product met food safety standards. Mr Gironda said that a PIF could not be used to determine the suitability of flour to manufacture a particular baking product. Mr Barbaro also said that the baker did not rely on the PIF to determine whether the flour was suitable for its baking processes; the baker needed the PIF as it was required by regulations to submit a PIF to its customers every three years.

54. Mr Barbaro and Mr Soria visited the mill on 19 May 2017, albeit briefly. Ms Furney recalled showing Mr Barbaro and Mr Soria the mill’s new Mixolab machine, which had yet to be commissioned. Ms Furney told Mr Soria that the miller had the ability to provide a Certificate of Analysis using the Mixolab, which provided an extensive range of data. Mr Soria requested these certificates and said the baker could work on correlating this to the bakery process. Ms Furney took Mr Barbaro and Mr Soria to the farm and discussed the fact that the miller sourced its wheat from the Dubbo region, which was a particularly hard wheat region with higher protein wheats.

55. After this third meeting, Mr Soria assured Ms Furney “we will have another opportunity to discuss a bit deeper about technical aspects next time”. Ms Furney summarised some key points in an email:

*   We have an unrivalled ability to provide you with flour milled through the year from a pool of consistent wheat sourced from select local growers

*   We understand your technical requirements and with the aid of the Mixolab moving forward can provide the standard farinograph data such as water absorption, stability, development time, etc. removing any variance attributed to human process. In addition using the profiler we can create a simulation profile based on a Nonna’s requirement. As we test flour samples the software provides details on difference and why i.e. higher starch damage, gluten quality – mixing index, gluten strength & gluten index, viscosity index (amylase activity/starch damage), amylase index, retrogradation index (starch characteristics & effect on shelf life. This will pin point for us any adjustments which need to be made within the mill to maintain standards.

56. According to Mr Barbaro, Mr Soria told Ms Furney that the most important thing for the baker was that they knew the specifications of the flour when it was delivered and that it was consistent and of high quality. The baker needed to be provided with a Certificate of Analysis, showing the specifications of the flour so that the baker could determine if it was suitable for their processes. The baker’s recipe should always remain the same. Ms Furney replied that the miller was looking to use Mixolab on a full-time basis and she believed it would give the baker the required information. As to consistency, the miller could provide the baker with flour milled through the year from a pool of consistent wheat sources from local growers, “This will guarantee consistency all year round. We know where to source good wheat because we buy from local growers and we know what they are growing.” Mr Barbaro also asked the miller whether it could conduct testing of the starch damage of the flour, as this was important for the baker to know.

57. Mr Barbaro recalled that Ms Furney said that the miller would store the baker’s flour separately to everyone else so it could age. (Ms Furney agreed that she said this (and also did this). Mr Barbaro said that he raised concerns about not having sufficient data to see how the flour would perform in the baker’s process or in respect of starch damage. He again explained to Ms Furney that the baker’s processes were different and, as they used more water in their dough, which was why it was important to have proper data. Ms Furney said she was very confident that they could work together and the miller would be able to provide whatever data was needed, “I’m confident that our flour will perform to your needs, because ours is one of the best in the market.”

58. On 22 May 2017, Mr Bentley arranged another meeting with Ms Furney, to discuss the results of flour trials to date, lab test facilities and key indicators / parameters, as well as price. Ms Furney collaborated with her colleagues as to what the baker’s objections to the miller’s products could be “and how we can handle them”. Ms Furney anticipated that the baker would be concerned that the miller’s product had 2% to 4% less water absorption than its current supplier. Ms Furney also asked the Mill Manager, “if they were to say they want more water absorption how do you suggest we could go about it, if we can?” Mr Stewart replied that he would make some changes “to see if we can get the ash and water up”.

Third representation

59. At the fourth meeting on 29 May 2017, Ms Furney met with Mr Barbaro and Mr Sergi. A third representation was said to have been made at this meeting. The miller is said to have represented that, during the course of each year, the flour supplied by the miller would be of a consistent quality.

60. According to the contemporaneous documents, the miller was given some “positive feedback”. After the meeting, Ms Furney emailed Mr Barbaro, noting that she was keen to work with Mr Soria and himself “in devising a testing and reporting system which will give you meaningful and reliable data which can form a prerequisite system for Nonna’s supply chain into the future.”

61. Mr Barbaro said he “vaguely” recalled his meetings with Ms Furney in 2017. As Mr Sergi recalled it, they discussed the key parameters of flour that the baker required for its baking process, although he could not recall what those parameters were. He said to Ms Furney that whatever Mr Barbaro and Mr Soria said needed to be in the flour was what they needed. The baker did not include additives in his products but baked bread using traditional recipes “and that is how it must be”. The baker could not compromise on quality; that was not negotiable. Ms Furney said she was confident that the miller could provide the baker with the flour that it needed.

62. Ms Furney said that her usual practice in discussing flour consistency was to inform the customer that the miller took steps to ensure that the flour supplied was of a consistent quality, however, given that flour is a natural product, there is always going to be some degree of variation in the quality of flour supplied. Ms Furney did not make any guarantee that the flour would have a fixed or unchanging quality or consistency, because that could not be achieved.

63. Ms Furney agreed that she understood that the baker’s process needed a consistent supply of high quality flour to be effective. Ms Furney understood that consistency was an important consideration for the baker. Ms Furney added that bakery parameters also need to be adjusted to suit the flour as “leaving the bakery parameters stagnant and expecting a good result every time would not be realistic with a natural product like we’re dealing with.” Bakeries used improvers to smooth out natural variations in flour. Ms Furney understood from Mr Soria that this was done at the bakery at the time.

64. I have deferred to the contemporaneous documents when considering whether the representation said to have been made eight years ago in 2017 was, in fact, made. The passage of time may have exacerbated the general problem that recollections given in the course of legal proceedings may be distorted, albeit innocently, by a desire to succeed. As McLelland CJ in Eq also noted in Watson v Foxman at 319:

… human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience.

65. I do not accept the baker’s submissions that its witnesses’ recollections were better than Ms Furney, as the decision to change suppliers was said to be more significant for the baker. Whilst Mr Barbaro and Mr Sergi’s affidavits set out a detailed recollection, Mr Barbaro agreed in cross-examination that his recollection was “vague”. It appeared from Mr Sergi’s cross examination that he had little involvement in the day-to-day operations of the bakery; his evidence was very ‘high level’. This is not to criticise either witness but to say that their evidence of representations said to have been made so long ago is affected by the factors described in Watson v Foxman.

66. I am satisfied that a representation of consistency was made, albeit qualified in two respects. First, Ms Furney emphasised that the miller had access to “a pool of consistent wheat sourced from select local growers”. This was emphasised in the visit to a farm in the local area. That is, the miller was not sourcing its grain from all over the country, nor from growers about which the miller had no details or business relationship.

65. The second qualification is apparent in the pleaded representation, that is, the consistency would be “during the course of each year”. The evidence was that grain grown in one year was harvested toward the end of the calendar year and supplied as flour in the next calendar year. The grain’s properties, and the resulting flour, were affected by the weather conditions during the growing year, be it droughts or flooding rains. As Mr Gironda put it, “Every year, flour changes. … And some years are very good, some years are very bad.” The baker did not allege that the miller represented that the flour would not display seasonal variations but simply that it would be consistent “during the course of each year”.

66. Mr Barbaro agreed that, as a natural product, there were variations in flour year to year with each wheat harvest. He agreed that it would have been a ridiculous assurance for the miller to say that they could give the baker flour irrespective of the weather. However, while Mr Barbaro accepted that widespread rain across a growing area could be expected to lead to weaker protein content in the flour, “but I’d expect the flour company to in source other wheat to provide what I need.” His professed expectation is at odds with Ms Furney’s emphasis that the consistency arose from obtaining grain from local farmers in the Dubbo area.

67. In sum, I find that the miller represented that, during the course of each year, the flour supplied by the miller would be of a consistent quality, subject to the two qualifications I have described.

Misleading and deceptive conduct?

70. The representation which I am satisfied was made at the meeting on 29 May 2017 is not identical to the third pleaded representation. For completeness, I will consider whether the representation that was made contravened the Australian Consumer Law.

71. A representation is false, misleading or deceptive or likely to mislead or deceive, if the representation induces or is capable of inducing error: Australian Competition and Consumer Commission v TPG Internet Pty Ltd (2013) 250 CLR 640; [2013] HCA 54 at [39]; Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 198; [1982] HCA 44. Whether a representation meets this description is a “quintessential question of fact”: Australian Competition and Consumer Commission v Telstra Corporation Ltd (2007) 244 ALR 470; [2007] FCA 1904 at [14]-[15] per Gordon J; Forrest v Australian Securities and Investments Commission (2012) 247 CLR 486; [2012] HCA 39 at [69] per French CJ, Gummow, Hayne and Kiefel JJ.

72. In considering the question, “It is necessary to view the conduct as a whole and in its proper context”: Australian Competition and Consumer CommissionvColes Supermarkets (2014) 317 ALR 73; [2014] FCA 634 at [41] per Allsop CJ; Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592; [2004] HCA 60 at [109] (McHugh J). More recently in Self Care IP Holdings Pty Ltd v Allergan Australia Pty Ltd (2023) 277 CLR 186; [2023] HCA 8, the Court observed at [82]:

The[se] steps require the Court to characterise, as an objective matter, the conduct viewed as a whole and its notional effects, judged by reference to its context, on the state of mind of the relevant person or class of persons. That context includes the immediate context – relevantly, all the words in the document or other communication and the manner in which those words are conveyed, not just a word or phrase in isolation – and the broader context of the relevant surrounding facts and circumstances.

73. The relevant time for testing whether conduct was misleading or deceptive is the date of the making of the representation and not with the benefit of hindsight: Agnish Pty Ltd v Folio Invest Pty Ltd (No 4) [2020] FCA 120 at [99].

74. The representation was that, during the course of each year, the flour supplied would be of a consistent quality, being sourced from an identified local region but subject to seasonal variations. The representation was as to a future matter. Such a representation will be taken to be misleading if the person did not have reasonable grounds for making it: s 4, Australian Consumer Law.

75. So far as the evidence reveals, the miller did source its grain from local growers, with whom it had established business relationships. The fact that the grains came from a specific local region would tend to indicate that the grain would have similar characteristics, being exposed to the same weather (at least).

76. Ms Furney said that the miller tested its flour every 30 minutes to ensure that the flour fell within internal limits, being moisture, protein, water absorption and ash content. The people supervising operations at the mill appear to have been able. Mr Stewart and Mr Chisholm were impressive and knowledgeable witnesses.

77. I am satisfied that the miller had reasonable grounds to represent that, during the course of each year, the flour supplied would be of a consistent quality subject to seasonal variations. The miller had a reliable supply of grain from local growers, a competent miller to grind the grain into flour and a careful quality assurance manager to monitor proceedings. I do not consider that the representation as made, being as to a future matter, was made without reasonable grounds, was misleading and deceptive, or likely to lead the baker into error.

78. If I am wrong about all of this, then I note that the baker is said to have relied on the three representations when deciding to enter into the Letter of Agreement. Assuming that to be the case, then the baker does not seek to extract itself from the Letter of Agreement. Rather, the baker complains that, four years later, the miller’s performance of its contractual obligations did not conform with those representations.

79. Mr Barbaro agreed that, when ordering the fateful flour from the miller in 2021 and 2022, he was not thinking about what Ms Furney had said during their meetings in 2017. That is, even if the representations were made, they were not relied upon when ordering the flour that was said to result in loss and damage. (I note that the baker did separately plead that the representations became implied terms in its contract with the miller, which I will consider shortly). In sum, even if the representations were made, were misleading, and were relied on when entering into the Letter of Agreement, the compensation sought under s 236 of the Australian Consumer Law is unrelated to the contravening conduct. As such, it is not necessary to consider the Australian Consumer Law claim further. It remains to consider the contractual claim, to which this judgment now turns.

Letter of Agreement

80. The miller continued to work with Mr Soria to see whether the miller’s flour would work in the baker’s baking processes. The focus appears to have been on whether the flour would absorb the required amount of water.

81. On 30 May 2017, the miller delivered another bulk load to the baker. Mr Soria advised that it had decreased water absorption. Ms Furney replied that the miller was running some additional analysis on the last three bulk loads and would revert with their findings. Some flour was also sent for external analysis “to pinpoint what might be causing the variance in this batch.” Ms Furney requested the optimum dough temperature maintained during the baker’s fermentation, so that it could be emulated at the mill. She also advised that a bulk load which had arrived on 2 June 2017 had an analysis “in line with our target parameters”. Ms Furney and Mr Chisholm asked to meet at the baker “to see this in production and ascertain how it is performing so that we can hopefully find some correlation between testing results and process performance.”

82. Ms Furney spoke to Mr Soria on 6 June 2017, who said the new load of flour was “the same as the last load and he is plainly cautious and only going to 78-79% Water as does not want any disasters overnight.”

83. On 13 June 2017, Ms Furney met with Mr Bentley at the bakery and was told that the baker had decided to bring the full supply of its bulk flour to the miller. Ms Furney said she would “draft up a one page letter of agreement and sent through for your review”. On 15 June 2017, Ms Furney provided Mr Bentley with a draft Letter of Agreement. Mr Bentley advised that he had reviewed the draft “and have no changes”, other than some minor details which are not relevant for present purposes. Ms Furney said she would “work on the edits” and provide a further document. Ms Furney also reported to her staff, noting that it had taken two years to secure this deal and encouraging them to give the baker “extraordinary in order to bed this down.”

84. On 29 June 2017, Ms Furney provided Mr Bentley with the “finalised Letter of Agreement.” The letter had some imperfections. At the outset, the letter was addressed to “Nonna’s Bakery Pty Ltd” and described an agreement between Nonna’s Bakery Pty Ltd and the miller. There was another company of that name, but it was not the baker.

85. At its conclusion, the Letter of Agreement was not signed, albeit no point was ultimately taken on this score. I note that, on 19 December 2018, Mr Bentley emailed Ms Furney, copied to Mr Sergi and Mr Barbaro, attaching the Letter of Agreement dated 29 June 2017 (but unsigned). Mr Bentley relied on the provisions of the Letter of Agreement in respect of price reviews. Ms Furney acceded. That is, the parties treated the unsigned Letter of Agreement as binding. I will return to the Letter of Agreement in more detail shortly.

Supply begins

86. On 1 July 2017, the miller began supplying the baker with “Nonna’s Bakehouse Bulk Flour”. Mr Chisholm said that it was the miller’s general business practice to provide a Product Specification to any new customer on the commencement of supply. (The baker later acknowledged, in a letter from its solicitor in 2022, that specifications had been provided to the baker five years earlier, that is, in 2017.) Although the Product Specification from 2017 could not be found, a later version was in evidence, dated 30 April 2019. The specification referred to “Nonna’s Bakehouse Bulk Flour”, product code “FL-NBB”, and noted:

Typical Chemical Properties:

Moisture      14% maximum

Protein (as is basis)   11.2% minimum – actual level dependent on season and grain availability

Ash   Typical 0.54%

87. The moisture and protein was the same as the PIF, while ash had increased from 0.50% to 0.54%. (I also note that Mr Stewart had endeavoured to “get the ash … up” after the PIF was prepared.) The water absorption and falling number were not included.

88. A “Typical Mixolab index profile” was displayed for the flour’s physical properties. Also provided was “Nutritional Information (Typical only)”, which noted, “As this product is manufactured from a natural raw material, actual results may differ from that listed due to grain and seasonal influence.” The specification concluded with a disclaimer as follows:

Disclaimer

Whilst every endeavo[u]r has been made to provide accurate information Ben Furney Flour Mills makes no warranty and accepts no liability either written or inferred that the results will be free from error, or if used, will ensure compliance with the relevant requirements of the Food Standards Code or other legislation. You should carefully evaluate the accuracy, completeness and relevance to your own purposes.

89. As to whether the Product Specification provided in mid-2017 was in the same terms, Ms Furney said that updates to the Product Specification were limited to changes to the date and formatting. Certainly, the 2019 and 2020 Product Specification were identical, apart from the issue date. The 2017 Product Specification is likely to have been in similar terms to the 2019 document. It is convenient to consider what were the terms of the contract between the miller and the baker.

The contract

90. The miller relied on the 2016 Terms of Sale (later updated in 2019), together with the Letter of Agreement. The miller submitted that no further terms were implied, as the Sale of Goods Act 1923 (NSW) allowed the parties to negate or vary these implied terms: s 57, Sale of Goods Act.

91. The baker initially contended that the only contractual document was the Letter of Agreement, which was said to include implied terms arising from the alleged representations, together with ss 18 and 19 of the Sale of Goods Act and the common law. The implied terms were said to be:

1. the bakery products would be in accordance with the specifications required by the baker to enable it to manufacture artisan baking goods using its unique mixing, proofing and baking processes;

2. the bakery products would be reasonably fit for purpose with respect to the requirements of the manufacturing processes and procedures used by the baker;

3. the bakery products would be acceptable and of a merchantable quality for the purpose of the manufacturing needs of the baker;

4. the bakery products would be reasonably free from defects;

5. the bakery products would be fit for their intended purpose; and

6. the bakery products would conform to the specifications notified or provided by Nonna’s Bakehouse to Ben Furney.

92. The baker ultimately contended that the 2016 Terms of Sale remained on foot as altered by the PIF and the Letter of Agreement: cl 1, 2016 Terms of Sale. The Letter of Agreement, however, was addressed to Nonna’s Bakery Pty Ltd, not to the baker. This was said to be an issue. That said, it was clear that an agreement had been reached for the supply of bulk flour.

93. The baker submitted that the Letter of Agreement referred to the PIF, by which the miller warranted that Nonna’s Bakehouse Bulk Flour would comply with the specifications in that document, which included particular amounts of protein, moisture, ash and water absorption. Although the specification as to water absorption was removed in later PIFs, this was done without the agreement of the baker and could not be so done. (The baker’s counsel referred to the 2020 Product Specification, which was not a PIF, and so the constraint in para 1.4(6) of the PIF does not apply. Nor was water absorption referred to in the 2019 Product Specification, for that matter.)

94. To this, the miller submitted that any reference to the PIF in the Letter of Agreement did not amount to a contractual term that the miller would comply with the specifications in the PIF in all circumstances. In any event, the language in the PIF was in terms of what was “typical” rather than what was required at all times.

Contracting parties

95. The first issue is whether the contract was between the miller and the baker, or with another company called Nonna’s Bakery Pty Ltd. As to how the Court ought determine the parties to the contract, one need go no further than Brereton JA’s summary in Mills v Walsh [2022] NSWCA 255 at [73]: (citations omitted)

The parties to a contract are identified according to the objective theory of contract, which involves ascertaining the intention of the parties from their communications and the circumstances in their mutual knowledge, including their evident commercial aims and expectations; their subjective beliefs and intentions are irrelevant, save insofar as they are manifest and shared. However, the post-contractual conduct of the parties may more readily be resorted to for this purpose than for the purpose of construing contractual terms.

96. That is, what would a reasonable observer of the communications that led to entry into the contract, together with the background facts known to the parties, conclude that the parties intended that the contract would be with: Pethybridge v Stedikas Holdings Pty Ltd [2007] NSWCA 154 at [54] (Campbell JA; Beazley and Basten JJA agreeing). The legal onus is on the party asserting that a particular party is in fact and law a party to the contract: Pethybridge at [54]. As Judge Rein (as his Honour then was) observed in Blackmore Design Group Pty Ltd v Mudge (2006) 4 DCLR(NSW) 30 at 36; [2006] NSWDC 160, the question of who in fact were parties to the contract is a mixed question of fact and law and “is often a very difficult question”: at [23], citing pertinent examples of Southdown Publications Pty Ltd v ACP Magazines Pty Ltd (2003) 60 IPR 367; [2003] NSWCA 347; MacMilllan v Mumby [2006] NSWCA 74.

97. The first contractual document was completed in 2016, when the plaintiff took over the miller’s business and entered into new supply agreements with existing customers, including the baker. In June 2016, the baker (as trustee for Nonna’s Bakehouse Unit Trust) completed a credit application with the plaintiff. Mr Barbaro and Mr Sergi signed a Directors’ Guarantee and Indemnity Deed, albeit not repeating that the baker was signing the document as trustee. The baker accepted that, when the 2016 application for credit was read as a whole, the application was made by Nonna’s Bakehouse as trustee of the Nonna’s Bakehouse Unit Trust. I agree. The contract was originally between the miller and the baker in its capacity as trustee of the Nonna’s Bakehouse Unit Trust.

98. The 2017 Letter of Agreement was addressed to “Nonna’s Bakery Pty Ltd” and referred to an agreement between that company and the miller. There is no reference in the contemporaneous documents to any intention to change the contracting parties. Post-contractual conduct is an aid to finding what the terms of the contract were: Lym International Pty Limited v Marcolongo (2011) 15 BPR 29,465; [2011] NSWCA 303 at [125]–[126] per Campbell JA which whom Basten JA and Sackar J agreed. I note that all purchase orders in evidence were issued by Nonna’s Bakehouse Unit Trust. All invoices and receipts were issued by the miller to Nonna’s Bakehouse at the same address as Nonna’s Bakehouse Unit Trust.

99. As the Court of Appeal recently confirmed in Zhong v Guan [2024] NSWCA 300 at [38] (Kirk JA, with whom Payne JA and Price AJA agreed):

… it is possible to construe a written contract in a manner which departs from some particular words or punctuation employed. This is an exercise in objective, purposive, contextual construction, giving effect to the court's assessment of what the parties have actually agreed consistently with basic principles of construction. … This constructional step will only be taken if it is clear, first, that the terms lead to absurd results or are inconsistent or manifest some obvious mistake as established by permissible evidence and, second, if the position intended to be agreed is clear. These matters may overlap. The greater the departure from the language employed then in general the more difficult it will be for the argument to be made out.

100. I find that reference in the Letter of Agreement to Nonna’s Bakery Pty Ltd was an error. The name was put forward by the miller and not corrected by the baker. The miller and the baker proceeded to do business nonetheless for five years. The contracting parties remained the miller and the baker as trustee of the Nonna’s Bakehouse Unit Trust.

Contractual terms

101. The second issue is what were the terms of the contractual arrangement between the parties, specifically, by the time that the miller supplied the contentious flour in 2021 and 2022. The question of what the parties agreed is a question of fact: Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd (2016) 260 CLR 1; [2016] HCA 26 at [27]. The Court must ascertain the “objective intention” of the parties, that is, “the intention that a reasonable person, with the knowledge of the words and actions of the parties communicated to each other, and the knowledge that the parties had of the surrounding circumstances, would conclude that the parties had, concerning the subject matter of the alleged contract”: Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603 at 655; [2007] NSWCA 65 per Campbell JA (with whom Mason P and Tobias JA agreed); Sagacious Procurement Pty Ltd v Symbion Health Ltd [2008] NSWCA 149 at [66] per Giles JA (with whom Hodgson and Campbell JJA agreed); Tasman Capital Pty Ltd v Sinclair [2008] NSWCA 248 at [26] per Glass JA (McColl JA and Young CJ in Eq agreeing).

101. As to whether the contract included implied terms as a consequence of the alleged representations, I have found that the first and second representation were not made. A variant of the third representation was made, as to consistency, but does not find voice in the suggested implied terms. By and large, the remaining suggested implied terms obliged the miller to provide flour which accorded with the baker’s “specifications required” or “specifications notified”, where the baker has not established that there were any “specifications”. As such, the suggested terms do not satisfy the requirements for implication of terms as set out in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1997) 180 CLR 266 at 282-3, in particular, the terms are not so obvious that “it goes without saying”, nor capable of clear expression.

102. Rather, the contractual terms initially comprised the 2016 Terms of Sale. The baker accepted these terms in the credit application form. Clause 1 of the Terms of Sale provided:

Content of Agreement between the Seller and Buyer

1   These terms of sale apply together with any additional or altered terms included in a quotation or notified in writing by the Seller before the acceptance of an order from the Buyer. All subsidiary agreements relating to the supply of Goods under orders from the Buyer are to be regarded as one agreement of the purposes of these terms of sale.

104. Further, in relation to the limitation of liability, cl 31 of the 2016 Terms of Sale provided:

31.   The Seller makes no representation as to the fitness of Goods supplied by it for any purpose, other than a purpose which has been notified to the Seller in writing, prior to the date of any agreement, by the Buyer, and confirmed in writing by the Seller to be applicable.

105. The question is whether the Letter of Agreement provided “additional or altered terms” under cl 1, or notified a purpose for which the goods must be fit, and which the miller accepted, under cl 31.

106. The Letter of Agreement did not read as an agreement per se but a series of short points of practical information in respect of ordering, delivery, emergency stock and contact information. Relevantly, the Letter of Agreement stated:

QUALITY

[Certificates of Analysis] (Bulk Deliveries): Pre delivery testing and reporting to be carried out showing individual load testing against target parameters and cumulative results collated and graphed

…

Short term Project: To work with Sergio Soria on correlations between Mixolab results, bakery performance & milling controls in order to establish firm quality parameters and pre delivery testing & reporting regime.

107. The scope of the project was to be identified in six weeks and completed within a further ten weeks by a team comprising Mr Soria, Mr Chisholm, Mr Stewart and Ms Furney. This portion of the Letter of Agreement indicates that the parties had not then established the specifications for the flour to be supplied but proposed to work together to establish those parameters as the flour was milled, tested, supplied and used.

108. The Letter of Agreement then turned to payment arrangements, including:

•   Please note our terms and conditions as signed off on with account application (attached)

109. An account application was not, in fact, attached. Presumably, this was a reference to the 2016 Terms of Sale, but it does not matter as those terms applied to the parties in any event.

110. The Letter of Agreement then turned to pricing, setting out the prices for its products in 2017, including for “FL-NBB”, being “Nonna’s Bulk Flour”. The Letter of Agreement used the product code referred to in the PIF, but did not refer to the PIF. The same product code appeared in the Product Specification, which was not referred to either. Alongside the product code, in the Letter of Agreement, was “Nonna’s Bulk Flour”. This did not match the product name in either the PIF or the Product Specification. I do not consider that the PIF was incorporated by reference, as any reference was opaque indeed. Rather, the product code was referred to in the pricing section of the letter to identify the product to which a particular price applied.

111. Further, in construing a contract, preference is given to a construction supplying a congruent operation to the various components of the whole: Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522; [2005] HCA 17 at [16] (per Gleeson CJ, McHugh, Gummow and Kirby JJ). The short-term project described in the Letter of Agreement records that the parties were going to work together to formulate the parameters for the flour, which were not then known to the contracting parties. To construe the references to the product code, “FL-NBB”, as incorporating the “typical” chemical specifications in the PIF as a contractual requirement would be inconsistent with the “Quality” portion of the Letter of Agreement, which made plain that the “target parameters” and specifications were a ‘work in progress’. In any event, I note that the chemical specifications which proved to be of particular importance to the baker, being water absorption and falling number, were only expressed as “typical” in the PIF rather than any mandatory parameters.

112. Neither party suggested that the Product Specification was a contractual document.

113. I consider that the effect of the Letter of Agreement was to vary the 2016 Terms of Sale by providing “additional or altered terms”: cl 1, Terms of Sale. So far as the quality of the flour was concerned, the miller was obliged to test the flour before delivery and provide a Certificate of Analysis. Further, the parties agreed to work together “to establish firm quality parameters” in light of how the flour performed in the bakery. Beyond this, the miller made no representation as to the fitness of goods supplied: cl 31, 2016 Terms of Sale. I do not consider that, as a consequence of the Letter of Agreement, “a purpose … has been notified to the Seller in writing, prior to the date of any agreement, by the Buyer, and confirmed in writing by the Seller to be applicable”, which changed that position: cl 31.

114. The miller updated the Terms of Sale in 2019. On 17 October 2019, the miller sent changes to the 2016 Terms of Sale to Mr Sergi, Mr Barbaro and Ms Trimboli (who had signed earlier credit application forms on behalf of the baker) and “[email protected]”. The baker was asked to complete and return an attached form, accepting the Terms of Sale, failing which the baker would be taken to have accepted the terms and conditions if it continued to seek the supply of further goods. There was no reply.

115. The baker continued to order goods from the miller. Acceptance may be inferred from conduct: JW Carter, Contract Law in Australia (8^th ed, 2022, J W Carter Publishing) at [3-05] and the authorities there cited. The baker’s conduct in continuing to place orders for the flour from 2019 on may be regarded as acceptance of the 2019 Terms of Sale and I so find. I will return to the relevant clauses in due course.

Trying to identify parameters

116. Attention turned to the “short term project” referred to in the Letter of Agreement. Ms Furney said the miller had committed to working with the baker to find correlations between test results and bakery performance in order to ascertain which numbers helped them in their process and which didn’t, “Nonna’s Bakehouse hadn’t specified parameters at that point, and I think that was what we were trying to ascertain – what parameters were important to them.” Mr Barbaro agreed that there was still more work to be done by the parties to establish firm quality parameters, pre-delivery testing and reporting.

117. On 17 July 2017, Mr Soria met with Ms Furney, Mr Chisholm and the miller’s Operations & Services Manager, Linden Cotzur, and to give them an appreciation of the baker’s process. Ms Furney said she introduced Mr Chisholm and Mr Soria at this meeting and they began their project.

118. Mr Chisholm recalled that he was shown through the plant and briefly walked through the area where flour was delivered, the mixing room, the automatic packing, the oven and proofing rooms. The tour gave a broad overview but they did not discuss any details about the baking process, such as temperatures or products being set for any particular amount of time, save for a reference to the dough sitting for four hours. Mr Soria told him that, when receiving a new load of flour, he and the head mixer looked at the flour and prepared test batches with the aim of identifying any adjustments that may be required to adapt the baking process to the characteristics of that flour. Through test bakes, Mr Soria would work out what they needed to do, based on whether it was sticky or dry and the adjustments they needed to make to the baking process to achieve an optimal result. Mr Soria and the head mixer would then write on a whiteboard in the mixing room for the following shifts what the bakers needed to do.

119. Following the meeting, Ms Furney confirmed:

As discussed we will:

…

2.   Provide hard copy of [Certificate of Analysis] with the delivery paperwork

3.   Ray [Chisholm] – Continue to provide Mixolab graphs with each load and begin to correlate this back to milling and [raw material] inputs & touch base with Sergio weekly to discuss correlating bakery data

4.   Sergio [Soria] – track and document control points and outcomes in the bakery against each load in order to find correlations with [the miller’s] reporting

…

7.   Sarah [Furney] – Mid August confirm meeting at Dubbo Mill to follow up on data capture, outcomes & work through physical testing methods to be introduced

120. On 18 August 2017, Mr Chisholm provided Ms Furney and Mr Stewart with “Nonna’s trend analysis” for moisture and ash content. Ms Furney proposed a meeting with Mr Soria on 31 August 2017 to discuss what was going well and what could be done better including:

•   Raw Material & Milling process correlations with test results

•   Bakery process correlations with test results

121. Following the meeting on 31 August 2017, Ms Furney emailed Mr Bentley that she and Mr Chisholm had been impressed with the work that Mr Soria and Mr Barbaro had done with “QA tracking. Combining the data collated from the wheat through to end product should give us all some very powerful indicators moving forward.”

122. In September 2017, Mr Chisholm compiled processing data provided by Mr Soria into a spreadsheet “in an attempt to identify which criteria are the best indicators of loaf characteristics.” Mr Chisholm provided the spreadsheet to Mr Soria and Ms Furney, requesting that Mr Soria continue to provide data on a weekly basis, in an attempt to correlate the miller’s test results with outcomes in the bakery. Mr Chisholm noted, “As you have already indicated consistency is the name of the game and possibly process adjustment based on [the] analysis may need to be tempered, especially at this stage, to only small movements until it can be determined how and to what level variation in test parameters effect process and loaf quality.”

123. From 29 September 2017 onwards, the miller changed from using the miller’s manual Farinograph to the more automated Mixolab. On 5 October 2017, Mr Chisholm provided Ms Furney with updated performance data for Nonna’s Bakehouse. The accompanying spreadsheet incorporated the baker’s results with the miller’s test results for the flour provided. Ms Furney organised a telephone conference on 24 October 2017 with Mr Soria, Mr Chisholm and Mr Stewart to obtain advice on how trial flour had performed, in particular, whether water absorption levels had been realised, the overall performance of the flour through the process and whether the end product was acceptable. On 26 October 2017, Ms Furney emailed Mr Soria and Mr Barbaro, “Just looking at the results consistency looks to be spot on are you seeing this in process also?”

124. Mr Chisholm said that he and Mr Soria were attempting to correlate a larger array of date from the baker and the miller to see if they could “actually come up with something that was actually predictive for them.” Mr Soria provided worksheets with the bakery related process data, being the actual amount of water added, mixing time and an evaluation of the final product. The data changed from sheet to sheet, indicating that there were changes in the amount of water added and the mixing time, as Mr Soria attempted to identify whether there were any observed properties in the Certificates of Analysis that he could correlate to necessary changes in the baking process.

125. Mr Chisholm said the process was ultimately unsuccessful. There were no obvious correlations. Ms Furney agreed that the project undertaken by Mr Chisholm and Mr Soria was inconclusive, “Nonna’s did not give us any numbers that they felt correlated well with their bakery process”. Ms Furney said, “We continued supplying the flour and they continued to accept the flour so I’m assuming we were supplying to their standards.”

Uneventful supply

126. By November 2017, the new season’s flour was becoming available. Ms Furney asked to be informed as to how this blend “handles through your process”. An analysis of the new season’s flour was also provided, together with Mr Chisholm’s comments.

127. Ms Furney agreed that, throughout 2018, 2019 and 2020, the supply of bulk flour continued relatively uninterrupted and without complaint by the baker. There were instances where it was reported that water absorption was different and required a change in the bakery process.

128. As is apparent in what follows, the miller continued to test flour that was sent to the baker. The baker continued to provide feedback on any problems encountered, including baking in summer or winter temperatures or where the grain was affected by drought conditions. Efforts continued to identify particular test parameters which would ensure success in the bakery.

129. On 15 March 2018, Ms Furney reminded Mr Chisholm that they needed to review Nonna’s testing results at a meeting on 26 March 2018, with samples and testing to be carried out on starch damage and ash content. On 29 March 2018, Ms Furney informed Mr Soria that the miller had “made some subtle changes in the mill” and asked if he could collate process information for two loads which were on their way “to tell us if these have [had] positive effects.”

130. Apparently, these loads gave poor processing qualities. This prompted Ms Furney to obtain starch damage tests to see whether this was the cause of the problem. Competitors’ products were also sent for testing, to gauge the miller’s performance within the industry. The test results were provided to Mr Soria, which noted that starch damage on the two loads was within the baker’s desired level and was consistent within a 0.1 variance between loads. The level of starch damage sat close to the industry average. (Ms Furney said the 0.1% difference in starch damage results indicated that starch damage was not likely to be the differentiator of performance.) Ms Furney welcomed the baker’s feedback and advised that the miller had also been working on water absorption and would discuss the outcomes the following week.

131. On 4 July 2018, Ms Furney provided Mr Soria with a report prepared by Mr Chisholm in respect of the change in flour experienced over May and June 2018. Ms Furney said the results of these tests indicated that the average starch damage was 6.5%. Ms Furney believed that the starch damage increased as the miller took measures to increase water absorption. Mr Chisholm said that, at that point in time, the miller had the PIF but, other than that, “no other parameters are actually specified for anybody.”

132. On 6 July 2018, Ms Furney followed up Mr Soria for any comments on the report. On 13 July 2018, Mr Chisholm provided Mr Soria and Mr Barbaro with a Certificate of Analysis and trend data for that day’s bulk delivery. Mr Chisholm noted that, although other parameters had remained consistent, the protein content had increased. The baker’s feedback was sought in respect of any performance improvement or variation in process which may be seen.

133. On 27 July 2018, Ms Furney emailed Mr Soria again, to arrange a telephone call to discuss recent test results. Ms Furney noted that the test results had “proven fairly stable over the past month and a half” but wanted feedback to correlate the current test results. Ms Furney also reported to Mr Bentley, “We have increased the protein level and have seen calculated water absorption increase so I am keen to see if the consistency has given [Mr Soria] the confidence to test the water absorption out.” Ms Furney also noted that the drought was receiving some press attention.

134. On 31 July 2018, Ms Furney and Mr Chisholm called Mr Soria to see how the flour was performing. Mr Sergi reported that the flour was taking 1% more water and had been “consistent and good”. The baker was going to start adding 1% more flour each week, “they play it a bit safe now but bakers will have to get used to a stickier dough.” Mr Chisholm also advised Mr Soria at the meeting and by email that two test parameters appeared useful to indicate whether flour would perform for the baker, being the C2 parameter in the Mixolab test, which was indicative of protein quality, and a formula to indicate specific loaf volume (SLV). Each grain lot received by the miller was being tested to obtain sufficient data to review for normal variation and to eventually identify what index level or trends would flow through to milled flour performance. The baker’s feedback to help link these results to “what you actually see” was sought.

135. On 28 August 2018, Mr Soria reported to Ms Furney that he was adding 1% more water each week, “He said it will be more difficult working with a wetter dough and the staff will complain at first but he is going to keeping pushing it 1% per week until he hits what he sees [as] is the limit. He said he is not worrying about what the paper work is saying, just increasing it.” Mr Soria also planned to come to the mill in the coming months “to do some testing with us in the kitchen.”

136. In October 2018, Ms Furney and Mr Cotzur met with Mr Bentley, Mr Sergi and Mr Soria, apparently to discuss 2019 pricing. In December 2018, the miller produced a mill flour protein spreadsheet, noting that the target protein for the Nonna’s Bulk Flour was 12.0 to 12.8 and target protein in wheat was 13.0 to 13.8.

137. On 17 December 2018, Mr Chisholm contacted Mr Soria, who had been “seeing a change in bakery or flour performance. Mr Chisholm sought feedback to assist in correlating the miller’s data. Mr Chisholm provided the Certificates of Analysis and trend data for that day’s bulk delivery:

Whilst we have seen some minor changes in different parameters on review no single parameter would appear to fall into a zone where previous experience would warn of a potential issue. Depending on what performance changes you are noting it would be very useful if you were able to identify any specific lots where a change has been noted and also what process effect was actually seen. It may be that the combination of what appear to be an insignificant variations in individual parameters is showing up as more significant in Nonna’s particular process.

I’ll get back in touch by phone tomorrow to discuss further and hopefully identify where we can provide additional data analysis which will provide an indicator for the flour ongoing.

138. On 21 December 2018, Mr Sergi advised Mr Chisholm that the bulk load was showing some variation to the previous load in several parameters, including an increase in the Falling Number. Mr Chisholm requested that no process adjustment be made until one mix lot had run, to determine how critical these variances might be in the Nonna’s system. If changes were required, then Mr Chisholm sought feedback “so we can review against flour and milling parameters for future loads.”

139. On 2 January 2019, Ms Furney emailed Mr Soria, noting the Certificate of Analysis for that day’s delivery had “stability and softening indexes [which] have tested significantly differently without negatively affecting the load volume result. It will be worth pulling a test batch from this load for trial prior to putting the silo into production.” Ms Furney advised that she would make inquiries at the mill to see what may have affected those results and would talk with Mr Soria “to see how it processed”.

310. Mr Barbaro said he had never experienced issues with flour like the issues experienced with the miller from July 2021 on. The wastage was significantly higher, making less bread with the same amount of flour. The baker was manufacturing approximately 16% to 22% less product compared to previous months based on the flour the baker was purchasing. The production team was under stress. Mr Barbaro was working extremely long hours. Additional labour was hired.

311. Mr Gironda said that the baker purchased more gluten and malt, together with additional flour to deal with increased wastage. More tubs of dough needed to be made as a goodly proportion had to be thrown out. This meant the baker needed to order more raw materials. Whilst usually one or two staff members worked at each stage of the baking process, an additional staff member had to be added to each area, together with a senior member on the floor supervising production. Instead of one person reviewing the bread for compliance, two to three people were needed. Extra cleaning staff were also needed to clean wet dough from the production lines and take wasted dough and non-conforming product to the bin.

312. From July 2021 to August 2022, bakery manager Mr Postorino took photographs with his mobile phone of bakery products he understood had been discarded as a result of quality issues with the flour supplied by the miller. He took the photographs as part of his ongoing efforts to monitor and address issues relating to inventory management and waste reduction. Wastage was also recorded in a notebook. Neither the photographs nor does the notebook provide sufficient detail of the precise reason why these baking products were discarded and do not assist me in resolving the issues in this case.

313. As to the accounting side of things, Mr Barbaro said that Nonna’s Bakehouse was the ultimate holding entity of companies which form part of the Nonna’s Group of Companies. Further detail was provided by financial controller, Mr Kim, albeit he commenced working for Nonna’s Bakehouse after the events with which these proceedings are concerned. Mr Kim said that the business known as “Nonna’s Bakery” was operated by a group of 11 companies. Nonna’s Bakehouse Pty Ltd is the main operating entity, which manufactures baked products and incurs all labour, material and equipment costs associated with production, including the cost of ingredients such as flour, gluten, malt and grains. Nonna’s Bakehouse sources its labour from Bakers 4U Pty Ltd (Mr Barbaro is a director of that company; the shares are owned by Calo Investments Pty Ltd). Additional labour was sourced from independent third-party contractors. Nonna’s Bakehouse sells goods to external and internal customers. The internal customers on-sell the products to supermarkets and food manufacturing companies.

314. As for expert evidence, Mr Giliberti was asked to assume that there were issues with the flour supplied between July 2021 and August 2022. Whilst there was an increase in sales in the 2021 financial year, Mr Giliberti was instructed to assume that this was due to the COVID-19 lockdown and the fact that Nonna’s Bakehouse was an essential business.

315. The two inputs into Mr Giliberti’s calculation were the direct cost of labour and sales. As to the direct cost of labour, Mr Giliberti said the bulk of the additional labour costs were incurred by Nonna’s Bakehouse directly, engaging independent contractors in cleaning, production and packaging. Mr Giliberti also included labour costs on-charged by Bakers 4U, even though these figures did not appear in Nonna’s Bakehouse income tax returns or financial statements. Mr Giliberti was unable to determine the basis on which Bakers 4U on-charged labour costs to Nonna’s Bakehouse. He simply took the figures as charged, but in respect of production line employees only. Mr Russell did not agree that including the labour costs of Bakers 4U was correct, but used it for the purposes of the exercise.

316. As to sales, Mr Giliberti agreed that there was no suggestion that the supply of flour resulted in a reduction of sales. Mr Giliberti used external sales, whilst Mr Russell also included Nonna’s Bakehouse internal sales. This was the main reason for the difference in their results.

317. Mr Giliberti calculated that direct labour costs as a percentage of sales was some 31% in the 2019, 2020 and 2021 financial years but increased to 43% in the 2022 financial year before returning to 32% in the 2023 financial year. There was also an increase in the cost of gluten, relative to the value of sales, from July 2021 to August 2022 when compared with the months prior to July 2021. However, in the context of the total costs of ingredients, Mr Giliberti considered that the increased cost of gluten was not materially significant. Mr Giliberti calculated that the additional cost of direct wages cost the baker $2,142,606, being 19.5% of sales. This comprised additional contractor costs of $1,886,671 and additional wage costs of Bakers 4U of $255,935. 1337 In his second report, Mr Giliberti calculated a labour-to-manufactured quantities ratio and calculated a loss of $2,425,462. Mr Giliberti remained of the view that the best available measure of loss was the earlier and lower figure of $2,142,606. 1338

318. Given his instructions, Mr Giliberti did not consider whether there was any better flour available to the baker during this period. Mr Giliberti did not compare the baker’s experience with other bakeries, including whether other bakeries suffered a spike in labour costs in the 2022 financial year. Nor did Mr Giliberti make any allowance for labour costs associated with Covid. Mr Giliberti disagreed that his calculations were affected by Nonna’s Bakehouse’s development of a new product, as he was only looking at the labour costs related to the production of bread, not the pursuit of new products or opportunities.

319. Mr Russell generally did not agree with Mr Giliberti’s methodology or calculations, where reliance was placed on accounting records that had not been prepared in accordance with generally accepted accounting principles and relied on accounting records and trading results of companies other than Nonna’s Bakehouse. Mr Russell considered that the method of allocation of costs was unorthodox, unusual, and not in accordance with the basic accounting principle of matching income with expenses. Further investigation was needed. Nor had Mr Giliberti reviewed the accuracy of the allocation of labour costs, or the appropriateness of the accounting treatment, but had accepted the financial records at face value. Nor could Mr Russell make sense of the financial records himself.

320. Mr Russell considered that Mr Giliberti’s model implicitly assumed that any labour increase was a result of faulty flour, without examining the reasons behind the increase. While it was clear that labour costs did increase, there was no apparent reason for the increase from the financial accounts or the information made available to him. Mr Russell contended that a preferable approach was to look at the wage and labour records and try and work out how and why it occurred. The largest contributor to the increase in cost was subcontractor costs for the 2022 financial year. This may indicate that the cause of the increase in labour costs was a restructuring of the workforce, Covid-related issues or some other issue not related to faulty flour.

321. Using Mr Russell’s approach, variations existed between the ratio of wages to sales from year to year but the variations were not significant and actually increased after the 2022 financial year. Even using Mr Giliberti’s calculations, Mr Russell noted that the cost of production for each manufactured product reduced in the 2022 financial year. Mr Russell’s analysis indicated that, while the overall direct labour and subcontractor costs increased in the 2022 financial year when compared with prior years as a percentage of sales, those costs continued to remain elevated in the 2023 financial year, when flour was no longer sourced from the miller. This indicated that a further review of the costs increase of direct labour and subcontractors was warranted. The fact that the miller ceased supplying flour to the baker in August 2022 indicated that any increased costs may not be in relation to claimed faulty flour related issues.

Conclusion

323. The general measure of contractual damages is the amount, so far as money can provide, necessary to put the plaintiff in the position they would have been if the contract had been performed: Koufos v C Czarnikow Ltd (The Heron II) [1969] 1 AC 350; Wenham v Ella (1972) 127 CLR 454 at 460; [1972] HCA 43 (per Barwick CJ); Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653; [1986] HCA 81. Assessing such damages requires the Court to compare the actual position of the party who sustains a loss by reason of the breach to what that party’s position would have likely been in a counterfactual scenario in which the contract was performed: Brighton Automotive Holdings Pty Ltd v Honda Australia Pty Ltd (No 2) [2024] VSC 262 at [74] (per Matthews J).

324. However, cl 50 of the 2019 Terms of Sale provided: (formatting added to assist comprehension)

Limitation of liability

…

50.   To the maximum extent permitted by law or expressly agreed in writing by the Seller with the Buyer, and subject to clause 51, the Seller:

(a)   excludes all liability for:

(i)   indirect and consequential loss, and loss of all actual or anticipated profit, revenue, capital, goodwill, savings, data, customers, use and benefits;

(ii)   downtime costs, loss of or damage to reputation, Losses under or in relation to other contracts and Losses suffered by a third party;

(iii)    all special, exemplary or punitive Losses; and

(b)    limits its liability (at the Seller's option) to:

(i)    replacement of those Goods or supply of equivalent Goods;

(ii)    payment of the costs of replacing those Goods or acquiring equivalent Goods; or

(iii)    repayment of any part of the purchase price of those Goods which have been paid by the Buyer.

325. Clause 51 concerned the supply of goods to a Consumer as defined in s 3 of the Australian Consumer Law and, thus, may be put to one side. Loss meant any liabilities, losses, damages, costs and expenses (including legal costs and expenses, regardless of whether incurred or awarded) arising in contract, tort (including negligence) or otherwise: cl 72.

326. The first question is whether the baker’s claim for additional expenses involved in using the Goods, being labour and ingredients, was excluded under cl 50(a). I take “consequential loss” to be a reference to loss suffered by the Buyer as a consequence of the Seller’s supply of Goods, either in accordance with the contract or at all. The baker’s contention that it suffered loss and damage in the form of additional outlay on labour and ingredients falls within this description. Likewise, the suggestion that the baker incurred additional expenses falls within “liability for … loss of all actual or anticipated profit”, where an increase in expenses as a consequence of the Seller’s supply of Goods must have the result that the baker’s profit is thereby reduced.

327. As such, the baker’s contention that the miller is liable for the additional labour costs and ingredients is excluded by cl 50(a)(i) in the 2019 Terms of Sale. If I am wrong about this, then the miller’s liability is limited by cl 50(b) to effectively, the cost of the flour supplied during the relevant period. I do not know what that figure is, but it is not what Mr Giliberti has calculated.

328. If I am wrong about that, then it is necessary to consider the measure of contractual damages, based on the competing views of Mr Giliberti and Mr Russell. It has to be said that Mr Giliberti’s analysis was very simple. That does not mean it was wrong, but it does mean that it may be of limited utility if the broad assumptions he was asked to make prove ill-suited to the facts as I have found them to be.

329. I consider that it is prudent to exclude the labour costs charged by Bakers 4U to Nonna’s Bakehouse, to the extent that those labour costs were not included by Nonna’s Bakehouse in its financial statements and tax returns. Where those financial statements were prepared on an accrual basis, the labour costs charged by Bakers 4U to Nonna’s Bakehouse should already be included in those accounts. This reduces the additional labour costs to $1,886,671. As to whether to include internal sales, I consider that Mr Russell’s approach is preferable, as labour costs are incurred in order to generate all sales. Likely, the sale price to external customers was higher than internal sales, but it should not matter as long as the same method of calculation is used in all financial years, that is, one is comparing ‘apples with apples’.

330. On the calculations of either expert, the labour-to-sales ratio increased markedly in the 2021 financial year by 11 to 12% from the previous year. The difference between the experts, however, is that in the subsequent financial year 2023, the labour-to-sales ratio reverted to historic levels (on Mr Giliberti’s calculation) or reduced only slightly (by 3%, according to Mr Russell). In that year, the miller no longer supplied flour to the baker. The fact that Mr Russell calculated only a slight reduction in labour costs after the miller ceased to supply the baker undermines confidence that the miller’s flour was the problem.

331. Further, what is immediately striking from the historical financial performance of the baker, for the 2019 to 2023 financial years, is the significant increase in the baker’s sales over those years, increasing by 45% overall. Whatever is said to have been wrong with the flour provided by the miller, it does not appear to have affected sales.

332. The second thing which draws the eye is the additional direct labour costs in the months when Mr Soria was running the bakery, when Mr Gironda began to run the bakery, and when the new flour began to be used in the bakery in early 2022. Data was collated from July 2021. In the four months from July to October 2021, additional labour costs ranged from $413 to $120,325, with an average additional labour cost of $60,582. Mr Gironda took over the bakery in October 2021. He was dealing with the same flour as Mr Soria, being flour from the 2020 harvest and supplied for the 2021 baking season. But the additional wage cost significantly increased in November and December 2021, to an average of $242,488.

333. The new grain from the 2021 harvest began to arrive at the bakery in early 2022. Additional wage costs remained high in January, February and March 2022, with an average of $249,005. Labour costs then dropped in the months which followed, which may suggest that the baker had worked out how to use that season’s flour.

334. What these figures suggest is that at least some of the increased labour costs are unrelated to the quality of the flour, but related to the change in the head baker, a reversion to the original recipes, and a general overhaul of the baker’s processes including procedures and staff training.

335. And what should be done about the fact that, in February 2022, Ms Furney told the baker that the miller was not able to supply the flour that it required, but the baker continued to order flour nonetheless? How can any additional labour costs be said to be caused by the miller’s breach of contract, where the baker requested flour knowing that it could only be used with additional staff? I consider that the cause of any loss from March 2022 on is the baker’s decision to order flour in those circumstances, rather than any breach of contract by the miller.

336. Doing the best I can, I would endeavour to remove the additional labour attributable to the change in head baker, recipe and approach from October 2021 on by using the average additional labour cost for the months preceding the change of baker from Mr Soria to Mr Gironda, being some $60,000 a month. I would allow the additional cost until the end of February 2022, after which the baker was ordering flour which it knew was unsuitable. The resulting figure is $480,000.

Set-off

337. The baker contended that it was entitled to set-off the loss and damage suffered against the whole of the miller’s claim under s 21 of the Civil Procedure Act 2005 (NSW).

338. The miller submitted that s 21 of the Civil Procedure Act depended on “mutual debts”, of which there were none: s 21(1). The section did not apply to the extent that the parties had agreed that debts (whether generally or as to specific debts) may not be set off against each other: s 21(3). The parties agreed that there could not be set-off in clause 18 of the Terms of Sale.

339. The baker made no submissions in support of set-off, and I take it to have accepted the miller’s submissions. For completeness, s 21 of the Civil Procedure Act 2005 (NSW) provides:

21   Defendant’s right to set-off

(1)   If there are mutual debts between a plaintiff and a defendant in any proceedings, the defendant may, by way of defence, set off against the plaintiff’s claim any debt that is owed by the plaintiff to the defendant and that was due and payable at the time the defence of set-off was filed, whether or not the mutual debts are different in nature.

…

(3)   This section does not apply to the extent to which the plaintiff and defendant have agreed that debts (whether generally or as to specific debts) may not be set off against each other.

(4)   This section does not affect any other rights or obligations of a debtor or creditor in respect of mutual debts, whether arising in equity or otherwise.

…

(6)    In this section, debt means any liquidated claim.

…

340. Importantly, “debt” means a liquidated claim: s 21(6). The baker’s claim for damages is an unliquidated claim. The baker did not point to any other common law or equitable rights. Further, cl 18 of the 2019 Terms of Sale provided:

“The Buyer must not set off any money alleged to be owing by the Seller against money due by the Buyer to the Seller.”

341. The parties have agreed that debts may not be set off against each other, albeit the claim for damages is probably not a debt either: cl 18, 2019 Terms of Sale. Where the onus of establishing a right of set-off is on the baker, I am not satisfied that it has been established.

Estoppel

342. Finally, the miller submitted that, by the baker continuing to order flour from June 2021 to August 2022, to pay for flour until April 2022, and to continue until August 2022 to make statements about bringing its payments up to date in due course, the baker may be taken to have represented, or alternatively, the parties may be taken to have conducted their relations on the assumption that the miller’s flour could be used by the baker. The miller relied on that assumption to its detriment by continuing to supply flour until August 2022, without receiving payment from April 2022. In the circumstances, the baker was said to be estopped from contending that it was not required to pay the disputed invoices and, or alternatively, that it had suffered loss and damage on the basis of alleged defects in the flour supplied.

343. The baker submitted that there could be no estoppel in circumstances where it was not, in fact, obliged to return the goods and nor was it paying for the orders placed. Rather, the miller was extending additional credit to the baker. They were in dispute about payments. There was no evidence from the miller that they only authorised the supply of additional flour because they relied on the baker’s actions.

344. In Moratic Pty Ltd v Gordon (2007) 13 BPR 24,213; [2007] NSWSC 5 at [32], Brereton J set out the elements of conventional estoppel as follows:

In common law conventional estoppel, it is necessary for a plaintiff to establish (1) that it has adopted an assumption as to the terms of its legal relationship with the defendant; (2) that the defendant has adopted the same assumption; (3) that both parties have conducted their relationship on the basis of that mutual assumption; (4) that each party knew or intended that the other act on that basis; and (5) that departure from the assumption will occasion detriment to the plaintiff.

345. That statement of principle has been approved by the Court of Appeal on numerous occasions, including in Rydledar Pty Ltd t/as Volume Plus v Euphoric Pty Ltd (2007) 69 NSWLR 603; [2007] NSWCA 65; Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; [2009] NSWCA 407 and Miller Heiman Pty Ltd v Sales Principles Pty Ltd (2017) 94 NSWLR 500; [2017] NSWCA 106.

346. It is not necessary to decide this, given my earlier findings. Suffice to say that the evidence does not support the existence of a mutual assumption that the miller’s flour could be used by the baker. Rather, the baker received a steady stream of complaints from Mr Gironda, with which it endeavoured to deal while continuing to fill Purchase Orders placed by the baker. The elements of conventional estoppel were not established.

Orders

347. For these reasons, I make the following orders:

1. Judgment for the plaintiff in the amount of $783,178 together with interest at 10% per annum calculated on daily balances of amounts unpaid.

2. Direct the parties within 7 days to provide a calculation of interest, preferably agreed, so that the final judgment amount may be entered.

3. Order the defendants to pay the plaintiff’s costs of the proceedings.

4. Dismiss the cross-claim with costs.

**********

Decision last updated: 17 July 2025