Casama Group Pty Ltd v Four Sisters Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL COURT

No. SCI 2011 of 00650

CASAMA GROUP PTY LTD (ACN 004 564 069)	Plaintiff
v
FOUR SISTERS PTY LTD (ACN 069 621 003)	Defendants

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JUDGE:	JUDD J
WHERE HELD:	Melbourne
DATE OF HEARING:	21 – 24, 28 May and 7 June 2012
DATE OF JUDGMENT:	18 September 2012
CASE MAY BE CITED AS:	Casama Group Pty Ltd v Four Sisters Pty Ltd
MEDIUM NEUTRAL CITATION:	[2012] VSC 376

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CONTRACT – Construction – Period of notice required for termination of wine distribution agreements – Ambiguity – Reference to commonly understood surrounding circumstances in ascertaining purpose or object – Alternative termination provisions operate disjunctively – Defendant entitled to terminate giving 12 months written notice

CONTRACT – Termination for cause – Reliance on ground of default not known at time of termination – Exception to general rule - Pre-condition for termination in addition to a default – Right to terminate qualified by proviso - ‘unless the distributor is able to demonstrate to the reasonable satisfaction of the producer that the (default) due substantially to factors beyond the control of the distributor’ – Distributor entitled to an opportunity to persuade the producer not to terminate – Producer must consider and reject explanation before termination – Pre-condition not satisfied prior to termination.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr M Wyles of Senior Counsel with Mr A Segal of counsel for the Plaintiff	Cornwall Stodart
For the Defendants	Mr P Cawthorn of Senior Counsel with Mr J Foster of Counsel for the Defendants	R V Theobald

HIS HONOUR:

Introduction

The plaintiff, Casama Group Pty Ltd, carries on business in Australia selling, marketing and distributing domestic and imported wines. There are two sales divisions within Casama, Red+White and Mezzanine. The first defendant, Four Sisters Pty Ltd, is the producer of four table wines and a sparkling wine under the brand ‘Four Sisters’. The table wines include a chardonnay, merlot, sauvignon blanc semillon blend and shiraz. The sparkling wine is a blend of pinot noir and chardonnay. The second defendant, Tahbilk Pty Ltd, also produces table wines including cabernet sauvignon, shiraz, chardonnay, marsanne and viognier.

Four Sisters and Tahbilk are subsidiaries of Australian Vineyard Company Pty Ltd (AVC). Alistair John Purbrick is a director of AVC, Four Sisters and Tahbilk. Casama is a privately owned family company controlled by John Valmorbida.

This proceeding concerns the termination by the wine producers, Four Sisters and Tahbilk, of distribution agreements dated 30 December 2004, under which Casama agreed to distribute the producers’ wine throughout Australia. At the time of termination, the producers’ product comprised a significant part of Casama’s wine portfolio. Casama claims to have suffered a significant fall in revenue as a consequence of wrongful termination. It claimed relief in the nature of specific performance, declarations, compensation under the agreement and damages for breach.

Background

The formal relationship between Casama and Mr Purbrick’s wine producing entities commenced with a distribution agreement between Casama and Four Sisters dated 1 January 1996. At that time Casama carried on business under the name Fesq Dorado & Co. The term of the agreement was 10 years, with a qualified renewal for a further 10 years, which would take effect unless a party gave not less than three months notice to the other party prior to the commencement date of the further term.

On 12 February 2001, Casama and AVC on behalf of Tahbilk executed Heads of Agreement. The express intention was that AVC would move all of its existing AVC brands to Casama, but ‘with the long term view that AVC may establish its own Sales and Marketing Division in the Eastern States of Australia (ie NSW, Victoria and Queensland). In all other States and Territories AVC will use Casama’s existing infrastructure. This would be subject to ongoing review.’ Casama agreed ‘that if AVC decide not to establish its own Sales and Marketing Division in the Eastern States of Australia that Casama will establish another Casama Sales and Marketing Division to enable AVC to continue to enjoy sales growth. At that time it is agreed that a new Distribution Agreement will be established for those brands which will be represented by the new Casama Sales and Marketing Division and that the new Distribution Agreement will reflect as a minimum requirement, the terms and conditions of the current Distribution Agreements.’

At the time the Heads of Agreement were executed, Tahbilk was contracted to another distributor. That relationship was to continued until the end of 2004. By 2003, Four Sisters had become the largest single brand in Casama’s portfolio, but Mr Purbrick was contemplating the establishment of his own sales and marketing division. He was also considering a public offering of shares in AVC. The public offering was never pursued, and on 30 December 2004 Casama entered into new distribution agreements with Four Sisters and Tahbilk.

The distribution agreements were in almost identical terms. Because of the different products and anticipated volumes to be sold under each agreement there were differences, particularly insofar as the terms made reference to product sales for the purpose of budgets, performance obligations and compensation in the event of termination. Those differences are not material, although the numbers are relevant to the case against Four Sisters and its counterclaim. The relevant passages from the Four Sisters’ agreement are set out below and include the principal terms on which the parties rely.

RECITALS:
A.Producer carries on business as a wine maker and marketer and sells wine in Australia.
B.The Distributor carries on business as marketer, wholesaler and distributor of wines and other related products under the business name ‘Red and White Fine Wines’.
C.Producer has agreed to appoint the Distributor who has agreed to act as the exclusive distributor of Producer’s Products in the Territory on the subject to the provisions of this Agreement.

1 . AGREEMENT
…
1.5 Definitions
In this agreement unless the contrary intention appears:-
…
‘Current Wholesale Prices’ means at a particular time the wholesale prices for Producer’s Products at that time as agreed by Producer and the Distributor in accordance with the provisions of this Agreement and being the wholesale prices for determination of the Distributor’s Price in accordance with Clause 9.3:
…
‘Distributor’s Sales’ for a period means the actual $ sales of Producer’s Products by the Distributor;
…

2. APPOINTMENT AND TERM
2.1 Exclusive Distribution
The Producer appoints the Distributor to be the exclusive distributor of the Producer’s Products in the Territory during the Term and on and subject to the provisions of this Agreement.

3. RELATIONSHIP OF PARTIES
3.1 Relationship of Producer and Distributor
The relationship of Producer and the Distributor pursuant to this Agreement is that of producer and wholesale distributor. The Distributor is not an agent of Producer and the Distributor and the Producer are not in any relationship of joint venture or partnership. The Distributor will order Producer’s Products from the Producer and will purchase Producer’s Products in accordance with the provisions of this Agreement and will sell Producer’s Products in the Territory.

3.2 Exclusion of Agency
The Distributor will not hold itself out or act as agent for Producer without the express authority in writing of the Producer. Producer will not hold itself out as agent or act as agent of the Distributor without the express consent in writing of the Distributor.
…

4. TERM
4.1 Terms of Agreement
The Term of this Agreement will commence on the Date hereof and will continue for a period of three (3) years (the initial term) or until terminated in the following manner:-
(i)This Agreement is terminated by notice in writing by a party in accordance with the provisions of this Agreement;
(ii)This Agreement is terminated by the mutual consent and agreement in writing of the parties; or
(iii)This Agreement is otherwise validly rescinded or terminated pursuant to the provisions hereof.

4.2 Option for Renewal
This Agreement will automatically be renewed for a further term of three (3) years unless either party terminates this Agreement upon giving to the other not less than twelve (12) month’s notice in writing prior to the commencing date of such further term.
This Agreement will be further automatically renewed for further successive terms each of three (3) years unless otherwise terminated pursuant to the provisions hereof.

4.3 Compensation to Distributor
(1)If this Agreement is terminated by the Producer by notice to the Distributor in accordance with Clause 4.2 or if at any time the Producer shall assign or transfer the Producer’s Brand without the prior written consent of the Distributor, the Producer will pay to the Distributor an amount (termination amount) calculated according to the compensation matrix detailed in Appendix 1.
(2)For example if the Distributor’s sales of the Producer’s Products over the immediately preceding 12 month period was 100,000 dozen at an average of $85/dozen, then the termination amount to be paid to the Distributor would be $850,000 (100,000 x 85 x 0.1).
(3)The termination amount will be paid by the Producer to the Distributor 60 days after determination of this Agreement. The Distributor will not be entitled to any other compensation on termination of this Agreement by the Producer in accordance with Clause 4.2.
(4)…
(5)The Distributor will not be entitled to any other compensation on termination of this Agreement except for the termination amount if appropriate.
(6)If the Agreement is properly terminated by the Producer by reason of default or breach on the part of the Distributor of Clauses 20.1 or 20.3, no termination amount will be payable by the Producer to the Distributor.
(7)Notwithstanding the foregoing, no termination amount will be payable by the Producer to the Distributor, if the Distributor’s Sales during any three (3) month period of the termination notice are less than 80% of the Distributor’s Sales during the equivalent three (3) month period of the immediately preceding year.
(8)Notwithstanding the foregoing, no termination amount will be payable by the Producer to the Distributor, if the Distributor’s Sales during any three (3) month period of the termination notice are greater than 120% of the Distributor’s Sales during the equivalent three (3) month period of the immediately preceding year, after adjusting for any mutually agreed sales target increases.
[Paragraph numbers added for convenience of reference.]
…

5. NEW PRODUCTS AND OTHER PRODUCERS PRODUCTS
…

5.2 Competing Products
The Distributor and each related entity of the Distributor may sell, promote or distribute any wine product of any other winemaker but shall not introduce a new wine product from another winemaker of a similar wine style and with a similar price point to the Producer’s products without the consent of the Producer.
…

6. SALES AND MARKETING BUDGETS AND PERFORMANCE
6.1 Marketing Efforts
The Distributor will use its best endeavours at all times to achieve sales of the Producer’s Products in accordance with the current Sales budget and to give effect to the current Marketing Budge and to create and maintain and meet demand for the Producer’s Products within the Territory and to enhance the image and profile of the Producer’s Products in the Territory.
…

6.3      Sales Budget
Producer and the Distributor will meet or communicate and will negotiate in good faith as soon as possible in or prior to the month of May in each year and will determine and agree a Sales Budget (‘Sales Budge’) for the financial year commencing on the following 1^st day of July taking into account all such matters as the parties may reasonably consider to be relevant and in particular:-
(i)        existing product sales;
(ii)       market share and trends in market shares in the Territory;
(iii)      Producer’s proposed marketing plans for the year;
(iv)     the Marketing Budget for the year;
(v)any price rises or variations intended or likely to be made in the Producer’s Products;
(vi)availability of stock; and
(vii)any new Producer’s Product which Producer reasonably intends to produce and to release for marketing within the period of the Sales Budget.

If the Producer and Distributor cannot agree a sales budget for the next financial year then either the actual sales or the sales budget (whichever is the higher) from the current financial year will be used as the sales budget for the next financial year.
…

7. REPORTS RECORDS AND ACCOUNTS
…

7.3 Good Faith
The Distributor and Producer will deal with each other in good faith in relation to this Agreement and each party will give to the other, subject to any reasonable requirements for confidentiality, all such information and particulars relating to the Producer’s Products and matters arising under this Agreement as may reasonably be requested or necessary from time to time.
…

8. TRADING TERMS AND INVOICES
8.1 Liability for Payment
The Distributor’s Price for all Producer’s Products that are purchase by the Distributor from Producer will become due and payable on the due date for payment.
…

9. PRICES
…

9.3 Distributors Price
The price which will be paid for Producer’s Products purchased by the Distributor from Producer (‘Distributor’s Price’) will be the Current Wholesale Price for each Producer’s Product less the Distributors Margin unless any special price or margin is agreed by Producer and the Distributor for any particular products from time to time.

9.4 Distributor’s Margin
The margin of the Distributor (‘Distributors Margin’) is thirty-two per cent (32%) of the current recommended Wholesale Price of Producer’s Products, except in the case of deliveries direct from winery to the trade which is twenty-two percent (22.0%) of the current recommended wholesale price of Producer’s Products.
[Following cl 9.4 were the words ‘please note email clarification dated 20 June 2005 attached’ – no such email was attached to the document.]
…

20. TERMINATION AND DEFAULT
20.1 Termination for Non-performance
Without limiting any other right or remedy of Producer this Agreement may be terminated at any time from the date hereof by not less than one month’s notice in writing by Producer to the Distributor if:-
(a)during the immediately preceding financial year the Distributor’s Sales were less than eighty percent (80%) of the Sales required by the Sales Budget for that year unless the Distributor is able to demonstrate to the reasonable satisfaction of Producer that the deficiency in Distributors Sales is due substantially to factors beyond the control of the Distributor;
(b)The Distributor sells the business operation conducted under the business name ‘Red & White Fine Wines’ (as described in Recitals B) to an unrelated third party.

20.2 Termination by Written Notice
After the initial term either party may terminate this Agreement by giving twelve (12) months written notice to the other party.

20.3 External Management, Insolvency or Cessation of Business
Either Producer or the Distributor (‘Terminating Party’) may terminate this Agreement by notice in writing to the other party (‘Other Party’) if the Other Party:
(i)becomes an externally administered body corporate within the meaning of the Corporations Law;
(ii)has a controller (within the meaning of the Corporations Law) enter into possession or take control of all or any of its assets or undertaking;
(iii)becomes insolvent within the meaning of the Corporations law;
(iv)ceases effectively to carry on its business pursuant to this Agreement.
(v)is in breach of clause 18.1.

20.4 Unauthorised Transfer of Agreement
Either party may terminate this Agreement by notice in writing to the other if the other party assigns or transfers, or are deemed to have assigned or transferred, this Agreement without the consent of the other in accordance with the provisions of this Agreement.
If this Agreement is terminated by either party pursuant to this sub-clause, the party assigning or transferring shall pay to the other a termination amount calculated and paid in accordance with the formula specified in Clause 4.3 or Clause 4.4 as the case applies.

By 2008 sales of Four Sisters wines exceeded 130,000 cases per annum. It is not to be doubted that the agreement was important to Casama. While sales of Tahbilk wines involved smaller volumes, they were no less important because of the overall significance to Casama’s business of its relationship with AVC.

It was common ground that in 2008 the market for wine in Australia, and in particular the market for sauvignon blanc and sauvignon blanc blends, was facing challenges. There was the global financial crisis. Imported sauvignon blanc wines from New Zealand began to swamp the market, and had a negative impact on the sales of Four Sisters’ products. The extent and timing of these events and the impact on Casama’s performance was the subject of some evidence and much disagreement. But in any event, sales peaked in the 2008 financial year and declined each year thereafter.

On 15 September 2010, Mr Purbrick wrote on behalf of Four Sisters to Frank Joseph Kraps, Chief Executive Officer of Casama, giving 12 months’ notice of termination of the Distribution Agreement. Without expressly mentioning cl 20.2 of the agreement, it seems reasonably clear that Mr Purbrick was purporting to terminate under that provision. His letter stated,

Dear Frank,
I have received the Four Sisters sales update for the period 01/07/10 to 31/08/10 which shows that the brand has YTD sales of 7,943 dozen (which includes new sku sales of 1,839 dozen – Sparkling Sauvignon blanc, Moscato and Pinot Grigio) against a budge of 16,826 dozen.
Sales achieved for the brand during the same period last year were 14,710 dozen. After deducting new sku sales of 1,839 dozen the drop in sales for the equivalent period this year is 8,606 dozen.
This is totally unacceptable.
These current results follow 2008/2009 which were 27% below budget and 2009/2010 which were 20% below budget and the current figures indicate that sales for this financial year may be as much as 50% below budget.
R&W’s under achievement of sales budgets over the last two years, and the resultant losses we have incurred on the sales of bulk wine, have brought enormous financial pressures upon our business.
It is particularly distressing that we are committed to investing an additional $200,000 A&P funding for the period 01/07/10 to 31/12/10 (over and above the normal Four Sisters A & P funding) to promote the sparkling wines when it seems that such a commitment, given current sales, may be throwing good money after bad.
It is obvious that this situation cannot continue and we have no choice but to advise that we hereby give 12 months notice of the termination of the Distribution Agreement dated 30 December 2004.
You are requested to provide:
·An explanation for the dismal July and August sales performance and;
·A sales plan designed to claw back and increase sales which will have the ultimate result of achieving the sales budget by 30^th June 2011.

I await your early response.

On 3 December 2010 Mr Purbrick, writing on behalf of Four Sisters and Tahbilk, sent an email to Mr Valmorbida and Mr Kraps giving notice of termination of the Tahbilk distribution agreement. There was no mention of 12 months notice. Mr Purbrick further advised that the Tahbilk group would take over the distribution of Tahbilk and Four Sisters’ brands on Tuesday 1 March 2011. He wrote:

Dear John and Frank,
Further to my email dated 15^th September 2010 in which Casama Pty Ltd was advised that Four Sisters Pty Ltd was giving 12 months notice of termination of its Distribution Agreement dated 30^th December 2004, I hereby advise that Tahbilk Pty Ltd is also giving notice of termination of its Distribution Agreement also dated 30^th December 2004.
I further advise that the Tahbilk Group will formally take over the distribution of the Tahbilk and Four Sisters brands on Tuesday 1^st March 2011.
I had hoped to be able to meet with you today to discuss these matters face to face but Cindy confirmed some time ago that you are both interstate.
I’m sending this email today to allow you, if you wish, to alert the R&W State Managers and Management team prior to Monday 6^th December 2010 when our purchase of The Wine Company Pty Ltd will become public knowledge.
There are a number of matters that need to be discussed and resolved before the brands transition to our distribution company on the 1^st March 2011 which I list below:
·Four Sisters and Tahbilk branded stock needs to be transitioned from R&W warehouses to our nominated warehouses – John Irvine will liaise with you in this regard.
·A final A&P claim reconciliation for both brands will have to be calculated to 28^th February 2011 – John Irvine will liaise with you in this regard.
·Compensation payment matters.
·Endeavour Wines Pty Ltd contract winemaking at Moncreiffs Pty Ltd.
·R&W New Zealand distribution of the Tahbilk and Four Sisters brands.

I confirm that we will meet at your offices to discuss the last 4 dots points at 10.00am on Wednesday 8^th December 2010.

Casama commenced this proceeding on 14 February 2011 seeking declarations that Four Sisters and Tahbilk had wrongfully purported to terminate their respective distribution agreements; and a declaration that on a proper construction of the agreements the defendants could not terminate the agreements under cl 20.2, unless more than 12 months notice was given prior to the end of a three year term. Thus, Casama contended, the notices of termination were ineffective. Casama also alleged repudiation of the agreements as a consequence of the alleged unauthorised terminations; unconscionable conduct contrary to Schedule 2, s 22 of the Australian Competition and Consumer Act 2010 (Cth); and a claim that Mr Purbrick aided, abetted, counselled or procured, or had been directly and indirectly knowingly concerned in or a party to, those contraventions. An alternative case was pleaded against Mr Purbrick alleging that he wrongfully procured and induced Four Sisters and Tahbilk to breach the terms of their respective agreements with intent to injure Casama. The claims against Mr Purbrick were abandoned at trial. Casama sought specific performance of each of the agreements and damages. It made an application for an interlocutory injunction to restrain Four Sisters and Tahbilk from terminating the agreements. That application was refused.

The initial defence of Tahbilk raised Casama’s obligation to mitigate its loss and contended that it was not entitled to specific performance. The defence filed by Four Sisters was a little more elaborate, and was soon followed by a new defence from Tahbilk adopting much the same form. Four Sisters contended that it was entitled to terminate the distribution agreement on one month’s notice because of Casama’s failure to meet the sales threshold of 80% of budget under cl 20.1(a). In a later iteration, Four Sisters made it clear that it was contending that, for the purpose of cl 20.1(a), ‘sales’ required to meet the performance threshold was to be measured in actual dollar terms and not, as Casama seemed to contend, by reference to the volume sold.

Four Sisters also alleged repudiation of the Four Sisters’ agreement by Casama. The repudiatory conduct included an alleged breach of cl 5.2, involving the distribution of wines of a similar style and price point without the consent of Four Sisters. The offending wines were Ferngrove semillon sauvignon blanc, Cowrock shiraz, Cowrock sauvignon blanc, One Planet shiraz and One Planet sauvignon blanc. The conduct relied upon by Four Sisters also included an allegation that from July 2008, Casama failed to perform to required sales budgets; gave away free stock towards the end of the financial year ended 30 June 2010; attempted to renegotiate the agreement; and failed to afford unfettered access to Casama’s sales team. Four Sisters claimed to have accepted Casama’s repudiation on 3 December 2010. There was an additional overlapping allegation that Casama had breached its duty of good faith, imposed under cl 7.3, by selling competing wine, by giving away stock in June 2010 and by failing to afford unfettered access to its sales team.

As time passed, the issues between the parties underwent modification. By an amended statement of claim,[1] Casama introduced a claim for rectification based on an alleged pre-existing agreement made between November 2003 and December 2004, under which the parties agreed (a) that Casama would be appointed the exclusive distributor for a period of three years; (b) the distribution agreement would continue for an initial period of three years and thereafter for successive fixed three year periods until termination; (c) after the initial three year period the distribution agreement could only be terminated by either party upon giving 12 months notice in writing prior to the end of any successive three year period or on breach by either party of the agreement; and (d) that compensation, based on an agreed formula, would be payable by the producer to Casama if the distribution agreement was terminated otherwise than for breach. Casama alleged that the executed distribution agreements dated 30 December 2004 were entered into in the belief that they embodied these terms when in fact they did not.
[1]6 April 2011.

Casama contended that cl 4.3 of each distribution agreement, dealing with compensation, should be rectified so that the first paragraph would provide,

If this agreement is terminated by the Producer by notice to the Distributor in accordance with Clause 4.2 or Clause 20.2, or if at any time the Producer shall assign or transfer the Producer’s Brand without the prior written consent of the Distributor, the Producer will pay to the Distributor an amount (termination amount) calculated according to the compensation matrix detailed in Appendix A1.[2]

[2]The highlighted passage is the extent of the proposed rectification.

As a corollary, Casama contended that cl 20.2, once rectified, should provide,

Subject to clause 4, after the initial term, either party may terminate this Agreement by giving twelve (12) months written notice to the other party.[3]

[3]The highlighted passage is the extent of the proposed rectification.

Casama’s rectification case was abandoned at trial.

In May 2011, Four Sisters filed a further amended defence and counterclaim which included a new allegation that Casama had breached of cl 6.1 by its failure to use best endeavours to achieve the budget. It contended that by reason of Casama’s breach, no termination amount was payable under cl 4.3 of the agreement; and that in any event, Casama was not entitled to a termination payment by reason of the operation of the 7^th paragraph in cl 4.3. Four Sisters counterclaimed, claiming damages for breach of Casama’s obligation to use its best endeavours to achieve the sales budget (cl 6.1); the distribution of competing product (cl 5.2); and for an alleged breach of duty of good faith (cl 7.3). Similar, but not identical, claims were initially made by Tahbilk, but withdrawn prior to trial.

In August 2011, Casama introduced a new allegation against Four Sisters. It alleged that if the Four Sisters agreement was terminable on 12 months notice pursuant to cl 20.2, the notice that was given was inadequate because it was to conclude on 28 February 2011. A similar allegation was made against Tahbilk.

By further amended defences,[4] the defendants contended that the compensation matrix under cl 4.3 was a penalty and unenforceable. They also contended that insofar as they were liable to pay compensation, any liability was to be reduced by the amount of the profits or other benefits derived by Casama during the period of notice. The defendants sought to imply a term into the agreements to that effect. Tahbilk also alleged that if the termination provisions were engaged, no amount would be payable by it because the benchmark figure of 40,000 cases had not be achieved in the preceding 12 month period as required by the compensation matrix.
[4]4 May 2012.

Some further amendments were made to the pleadings during the course of the trial as a consequence of Four Sisters’ reliance on cl 20.1(a), and issues raised concerning the operation of what may be described as a ‘proviso’ to the right of termination. The right to terminate was subject to the ability of ‘the Distributor… to demonstrate to the reasonable satisfaction of the Producer that the deficiency in Distributor Sales is due substantially to factors beyond the control of the Distributor;’.

Four Sisters alleged that Casama had failed to demonstrate, to Four Sisters’ reasonable satisfaction, that the deficiency in its sales was due substantially to factors beyond its control. In reply, Casama alleged that under cl 20.1(a) Four Sisters was required to undertake the following steps: (a) satisfy itself in good faith that the sales did not achieve the threshold; (b) then notify Casama and request it to provide such material as it might wish to rely upon to demonstrate that the deficiency was due substantially to factors beyond its control; (c) evaluate that material; (d) make a determination in good faith and acting reasonably; and (e) notify Casama in writing with reasons. Casama alleged that Four Sisters did not make the necessary inquiry of it to ascertain whether Casama was able to demonstrate factors beyond its control.

Objections to evidence

Numerous objections were made by the defendants to the evidence of Casama at the commencement of the trial. The evidence at trial was prepared in the form of witness statements. Some of the evidence advanced by Casama in support of its rectification case, abandoned at trial, overlapped with evidence of surrounding circumstances called in aid of its construction case. Casama continued to rely upon evidence concerning the early relationship between the parties, prior agreements, the nature of the wine distribution industry and the respective business operations and practices of the parties. The parties agreed that they would reserve their respective positions to the end of the trial, at which time Casama would identify precisely what evidence it continued to rely upon, thus reducing the scope of disputed material.

The adoption of such a course, while convenient in this case, should only be undertaken with caution. Parties may conduct their respective cases on assumptions about what may be admitted into evidence, which may later prove to be mistaken. They also run the risk of making relevant, through their cross-examination, material that was subject to objection and that might, but for the cross-examination, have been inadmissible.

The particular evidence to which the defendants objected fell into a number of categories. There was subjective evidence concerning the meaning of the agreements or what a Casama witnesses thought it meant. Such evidence was plainly inadmissible. Another category of evidence described the nature of the business of the parties, the way in which they conducted their businesses, and particular features of the market in which they operated. That evidence was relevant background and included commonly understood facts. Such evidence was, in my view, admissible for reasons set out below, although of variable weight.

There was other evidence, in the nature of assertions and opinions about the competitive characteristics of wines alleged to have been marketed in breach of cl 5.2, and about factors which might have adversely affected the market for the defendants’ wines. While admitting that evidence, I am mindful of its limited value.

Attached is a schedule of the defendants’ continuing objections to those parts of the evidence upon which Casama relied. I have confined my consideration of Casama’s witness statements to those parts on which it expressly relied, but eliminating the passages where the defendants’ objections had been upheld. The objections in relation to the majority of such paragraphs have been disallowed. Consequently, most paragraphs relied upon by Casama have been admitted into evidence. In the attached Schedule, I have identified the defendants’ objections and the passages that in my opinion are inadmissible.

Issues at trial

At trial some issues were abandoned while others took their place. By the end of the trial the following questions arose from the pleadings, although not all were pressed in final submissions. This was a trial on liability alone, although some consideration of the basis for the various claims for damages was necessary. The questions for the court were:

(1)What, if any, evidence of the circumstances surrounding the making of the distribution agreements may be properly received as an aid to their construction?
(2)What period of notice of termination were the defendants required to give Casama under cl 20.2?
(3)To what extent did Casama fail to achieve the sales required by the Sales Budget for the Four Sisters wines during the financial year ended 30 June 2010?
(4)Was Four Sisters entitled to rely on the deficiency in sales to terminate the distribution agreement pursuant to cl 20.1(a)?
(5)Did Casama breach its obligation to Four Sisters under cl 6.1 of the distribution agreements to use its best endeavours to achieve its sales budgets?
(6)Did Casama breach its obligation to Four Sisters under cl 5.2 of the distribution agreement by introducing into his range of products for sale and distribution, wines of a similar style with a similar price point to Four Sisters wines without the consent of Four Sisters?
(7)Did Casama breach its duty of good faith imposed by cl 7.3 of the Four Sisters agreement?
(8)Did Casama repudiate the Four Sisters agreement?
(9)Did Four Sisters suffer any loss and damage by reason of any breach by Casama of cll 5.2, 6.1 or 7.3 of the agreement?
(10)Are any of the defendants required to compensate Casama under cl 4.3 of the distribution agreements?
(11)Is cl 4.3 of the distribution agreements unenforceable as a penalty?
(12)If any compensation is payable by either of the defendants under cl 4.3, is that compensation to be reduced by the profit, if any, derived by Casama during the period of any notice given?

Period of notice

Having abandoned its rectification case, Casama contended that on its proper construction each agreement required that unless terminated for cause, it could only be brought to an end by a party giving not less than 12 months notice of termination, such notice to expire before the commencement of the next three year term. Thus, according to Casama, such a notice had the limited effect of preventing a renewal of the agreement for a further term under the second paragraph in cl 4.2. Casama contended that, the notices of termination given by Four Sisters on 15 September 2010, and by Tabilk on 3 December 2010, did not even have the effect of terminating the agreements one year thereafter. It contended that, at best, the notices would only be effective to terminate the agreements on 30 December 2013. That is, at the end of the next three year term commencing not less than one year after the notices were given. It was a necessary part of Casama’s case that each termination take place under cl 4.2, thus attracting an entitlement to compensation under cl 4.3.

Casama conceded that, in conformity with the current state of the law, ambiguity was required before surrounding circumstances may be taken into account to assist in the construction of the words of a contract. In refusing the application for special leave to appeal to the High Court in Western Export Services Inc v Jireh International Pty Ltd[5], Gummow, Hayden and Bell JJ said:

Acceptance of the applicant’s submission, clearly would require reconsideration by this court of what was said in Codelfa Construction Pty Ltd v State Rail Authority of NSW by Mason J, with the concurrence of Stephen J and Wilson J, to be the “true rule” as to the admission of evidence of surrounding circumstances. Until this court embarks upon that exercise and disapproves or revises what was said in Codelfa, intermediate appellate courts are bound to follow that precedent. The same is true of primary judges, notwithstanding what may appear to have been said by intermediate appellate courts.

[5][2011] HCA 45.

In Codelfa,[6] Mason J stated that there must be ambiguity present before the court can consider extrinsic evidence:

Evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract where it has a plain meaning.

[6]Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, 352.

The position of that statement in Codelfa, as binding authority, was made clear in the joint reasons of five Justices in Royal Botanic Gardens and Domain Trust v South Sydney City Council.[7] I do not read anything said in Pacific Carriers Ltd v BNP Paribas;[8] Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd;[9] Wilkie v Gordian Runoff Ltd[10] and International Air Transport Association v Ansett Australia Holdings Ltd[11] as inconsistent with what was said by Mason J in the passage in Codelfa mentioned above.
[7](2002) 240 CLR 45 [39].
[8](2004) 218 CLR 451 [22].
[9](2004) 219 CLR 165 [40].
[10](2005) 221 CLR 522, 528-529 [15].
[11](2008) 234 CLR 151 [8].

Merely because there are different views about the meaning of a contractual provision does not mean there exists relevant ambiguity or that the passage is susceptible to more than one meaning. But a provision in a contract may be susceptible to more than one meaning even though the words appear at first glance to be unambiguous. It is often the case that an understanding of the genesis, background and context of an agreement, commonly understood by the parties, is essential to an understanding of its commercial purpose, and thus the meaning to be attributed to apparently clear words. In Pacific Carriers Ltd v BNP Paribas,[12] when approving this approach, the court said,[13]

In Codelfa Construction Pty Ltd v State Rail Authority of NSW, Mason J set out with evident approval the statement by Lord Wilberforce in Reardon Smith Line Ltd v Hansen-Tangen:
In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.

[12](2004) 218 CLR 451.

[13](2004) 218 CLR 451 [22].

In order to properly understand the terms and operation of the distribution agreements, it is necessary to understand the nature of the business undertaking of each party, the market in which they operated and the susceptibility of the market to factors that influenced their decisions. Once those matters were understood, the purpose of the agreements and their relevant provisions became clear, and thus the meaning of the words.

The context in which such agreements are negotiated and made sometimes include unexpressed assumptions about commonly understood facts. These may include assumptions about business management, marketing practices and risks. The evidence revealed that the marketing of wine was complex, and involved a consideration of market segments, varietal implications, branding, price points, tax implications, volumes and promotional activity, including discounting and free product; as well as a consideration of seasonal variation, public perception, exchange rates and local and foreign competition. The parties endeavoured to structure their agreements to accommodate these factors, often without any express acknowledgement. A clinical reading of the words in the agreements, in the absence of such evidence, would not have exposed the purpose or object of some important provisions. Without that evidence the commercial purpose, so important to ascertain and then employ as a tool in the construction of the provisions, would have been elusive.

Casama sought to go further than commonly understood facts necessary to inform the commercial purpose of relevant provisions, and give evidence of its expectations about the extent and nature of mutual commitment. To have regard to such evidence would be to embrace a subjective theory of contract. For example, Casama contended that the nature of the industry required a significant investment by a distributor in a producer’s product, making long term relationships essential. Thus, so it argued, a provision that entitled the producers to walk away on one year’s notice should be regarded as absurd, and the words construed so that, in the absence of termination for cause, a party was only entitled to terminate by interrupting the automatic renewal process that took place each three years; and then on the basis that compensation would be payable in any event by the producer if it terminated as if the termination were made under cl 4.2.

In addition to the facts and circumstances concerning the nature and scope of the businesses carried on by the parties, Casama sought to rely upon the fact that the Four Sisters wines and brand had been created by Mr Purbrick to fill a spot in the retail market identified by Casama as an opportunity. Casama had first been appointed to distribute Four Sisters wines by an agreement dated 1 January 1996. That agreement was to continue for a period of 10 years with a qualified renewal option of a further 10 years. Casama contended that under the 1996 agreement Four Sisters had, in effect, obtained Casama’s commitment to distribute its wine until 31 December 2015. The anticipated duration of that agreement, Casama contended, provided an incentive for it to invest in promoting the Four Sisters brand. Casama also relied on Heads of Agreement dated 12 February 2001 as providing some indication of the level of commitment the parties had, and must have, to one another.

Insofar as Casama sought to introduce into evidence the subjective expectations and beliefs of Mr Valmorbida and Mr Kraps, about the basis upon which Casama had assumed its distribution obligations under the 2004 agreements, it was rejected as inadmissible, and the remaining objections of defendants objections to that material have been upheld. But the background facts and surrounding circumstances that have been allowed into evidence, and which are relied upon by Casama, including the 1996 agreement and the Heads of Agreement, do not assist the construction of the agreements for which it contends. For one thing, the termination regime found in the 2004 agreements under consideration is plainly different to that found in the 1996 agreement.

Casama’s arguments in support of its construction of the termination provisions of the agreements were not easy to follow. Its intended end point was, quite obviously, to make cl 20.2, which provided for termination on 12 months written notice, subject to and forming part of cl 4.2, so that termination by such a notice was a termination under cl 4.2; and had the limited effect of interrupting the commencement of a new three year term under the automatic renewal provisions. If the termination was under cl 4.2, it may engage the compensation provisions in cl 4.3. In other words, Casama sought to achieve the rectification it had abandoned by a different route.

Casama’s process of reasoning to reach that end point was convoluted and circular. At times its arguments assumed that the agreements had been rectified as it had initially sought, but later abandoned. Doing the best I can, Casama appeared to rely upon a perceived distinction between the notions of ‘renewal’ and ‘resuscitation’ of the agreements at the end of any three year period, after the initial term. It argued that at the conclusion of each three year period, the agreement did not come to an end, but continued on for another three year term unless stopped by a notice under cl 20.2. Thus, notice under cl 20.2 was a notice under cl 4.2. Casama rejected the proposition that cl 20.2 was a stand-alone right of termination. It submitted that a reasonable person reading cll 4.2 and 20.2 would understand that the notice under cl 20.2 was intended to have the limited role of stopping automatic renewal under cl 4.2.

The rationale for Casama’s central thesis seemed no more complex than the proposition that a reasonable party entering into the agreement would not have placed themselves in a position where the other party could terminate at any time on 12 months notice. Casama also relied on the difficulty caused by such termination when it was required to maintain stock and fill orders during the period of such notice. These contentions were without substance. There was no real difficulty with stock on termination. More importantly, the objective facts were to the contrary. Quite apart from the words of clause 20.2, read in context, there was a sound basis for the defendants contention that the period of notice and the right of termination had been deliberately chosen to give flexibility to the defendants in planning for the future.

Casama submitted that the omission of any reference to cl 20.2 in paragraph 6 of cl 4.3 was consistent with an intention that termination under cl 20.2 was a termination under cl 4.2, as the mechanism to allow either party to stop the agreement being automatically renewed. That argument incorrectly assumed that the agreements were as Casama had initially contended they should be following rectification. In that respect the argument was circular.

In the absence of an assignment or transfer of the brand, cl 4.3 provides, in terms, for compensation only if a ‘notice… in accordance with clause 4.2’ has been given. The only notice ‘in accordance with clause 4.2’ is the one mentioned in the first paragraph. A notice under cl 20.2 is expressed not to be available during the first term. Accordingly, if, by its express terms, cl 4.3 is only engaged by a notice under the first paragraph of cl 4.2, there would be no occasion for any mention of cl 20.2 in paragraph 6 under cl 4.3. Further, it should be noted that cl 20.4 is not mentioned in paragraph 6 under cl 4.3. That is because it includes its own reference to compensation under cll 4.3 or 4.4.

I am not persuaded by Casama’s construction arguments. The reasoning strains to demonstrate more than one meaning when there is only one consistent construction of cll 4 and 20. The 2004 agreements indicate a clear intention to provide the parties with an opportunity to terminate on one years notice after the initial term of three years. The first paragraph in cl 4.2 deals with quite a different subject-matter to the second paragraph. The first paragraph provides a mechanism under which renewal of the agreement beyond the initial term will be automatic unless at least 12 months notice of termination is given prior to the commencement of the first further term of three years. It is a stand-alone renewal provision. The second paragraph in cl 4.2 deals with further successive terms; that is, terms beyond the further term mentioned in the first paragraph. Automatic renewal for a further successive term is expressly made subject to termination of the agreement ‘pursuant to the provisions hereof’.

The termination provisions found in cl 20 are unusually narrow. Clause 20.1 provides for termination at any time in the event of prescribed non-performance or Casama’s sale of its business. Clause 20.2 provides for termination on 12 months notice after the initial term mentioned in cl 4.1. Clause 20.3 provides for termination on the happening of more conventional grounds such as insolvency, cessation of business or change of ownership. Clause 20.4 authorises termination upon an assignment or transfer of the agreement without the consent of the other.

What is not found in cl 20 is a general right of termination for breach of an obligation with notice to remedy or otherwise. The explicit and confined grounds for termination provide a clear indication of the intention of the parties to formulate a code by which the agreement may be brought to an end. The interaction between cl 20 and cl 4 is obvious. Clauses 4 and 20 should be read together as a network of provisions to achieve the following overall objectives. First, under cl 4.1 the agreement was to continue only for a guaranteed term of three years (the initial term), but even then it could be terminated in accordance with the provisions of this agreement. Thus, the initial term was significantly shorter than the intitial term of the 1996 agreement. Putting to one side an agreement to terminate, cl 4.1(i) and (iii) may seem to overlap. Paragraph (i) seems to refer to termination under cl 20, other than cl 20.2; while paragraph (iii) is a catch-all.

Second, under cl 4.2, either party could prevent renewal for a further term by giving the notice mentioned in the first paragraph. Third, the compensation provisions in cl 4.3 would only be engaged if the notice mentioned in the first paragraph of cl 4.2 were to be given by the producer, or the producer assigned or transferred its brand, or in the circumstances mentioned in cl 20.4. Fourth, the agreement would continue by automatic extensions for further successive terms, but only if it had not been validly terminated. Fifth, one way in which the agreement could be validly terminated was 12 months written notice. Thus, if the agreement has been validly terminated under cl 20.2, there would be no occasion for the automatic renewal provisions under the second paragraph of cl 4.2 to operate. The precondition for automatic renewal – a subsisting agreement – no longer existed.

Casama sought to further assist its construction argument by differentiating between cll 20.1 and 20.2. It pointed out that the words ‘at any time’, in the prefatory words to cl 20.1, are not to be found in cl 20.2. Casama argued that the absence of those words in cl 20.2 meant that its operation was confined to preventing the next three year term from commencing in cl 20.2. In my view, there is no basis for that contention in the absence of the rectification initially sought by Casama, but abandoned. Furthermore, cl 20.2 is differentiated by a limitation upon when it may be invoked – after the initial term – which, contrary to Casama’s contentions, is consistent with the operation of that clause as a stand-alone provision in which the notice is one that may only be given after the notice mentioned in the first paragraph of cl 4.2 had lost relevance. I note in passing, that while cll 20.3 and 20.4 do not contain the words at any time, expressly authorising their application within the initial term, they are of a character that a reasonable person would have understood could operate at any time. They involve more conventional default provisions relating to insolvency, unauthorised assignment etc.

In my opinion the defendants were entitled to terminate the agreements when they purported to do so in 2010, by notices in writing given under cl 20.2. Four Sisters was entitled to give notice on 15 September 2010 terminating the agreement one year later; and Tahbilk was entitled to give notice on 3 December 2010 terminating its agreement one year later, even though it did not purport to do so. Putting to one side termination for cause under cl 20.1(a), the earlier termination under each notice, by cessation of business on 28 February 2011, was a breach of the agreements by the defendants. I am satisfied that Casama suffered substantial loss as a consequence.

Terminating for cause

While the letter of termination from Four Sisters, dated 15 September 2010, gave 12 months’ notice of termination, it also explained its decision by reference to declining sales. Four Sisters asserted that sales were 27 per cent below budget for the 2009 financial year, but only 20 per cent below budget for the 2010 financial year. Mr Purbrick went on to predict the shortfall in the current financial year by as much as 50 per cent.

A few months after this proceeding was commenced, Four Sisters amended its defence and counterclaim[14] to include an allegation that Casama breached its obligation under cl 6.1 to use its best endeavours to achieve sales budgets and, more specifically, that it was entitled to terminate the agreement under cl 20.1(a) because Casama had failed to achieve a prescribed level of sales. Under cl 20.1(a) Four Sisters was entitled to terminate on one month’s notice ‘if during the immediately preceding financial year [2009-2010] the Distributors Sales were less than eighty per cent (80%) of the Sales required by the Sales Budget for that year’.
[14]27 May 2011.

The allegation became complicated by disagreement over the manner of calculation of the shortfall, and by the proviso contained in cl 20.1(a). The issue concerning the calculation had two components. First, Four Sisters contended that the definition of ‘Distributors Sales’ for a period meant the actual dollar sales and not, as Casama contended, to be assessed by reference to volume. Casama contended that the sales budget for the 2008, 2009, 2010 and 2011 financial years had been set, pursuant to cl 6.3, by reference to a number of cases or 9LE’s (9 litre equivalents). Thus, it argued, it was unrealistic to measure performance for the purpose of cl 20.1(a) in a dollar sum which would vary depending upon discounts and rebates, given to customers.

The agreed budgets were indeed set by reference to 9LE’s, which represent cases of one dozen 750ml bottles of wine. The definition of Distributors Sales supports the contention of Four Sisters that the assessment of performance under cl 20.1(a) is to be made in dollar terms.

Second, assuming a calculation in a dollar amount, there was a dispute as to whether the amount was to be calculated before or after allowing for discounts and rebates, for which no payment was actually received by Casama from customers. In other words, was the calculation to be made only by reference to the cash actually received from sales? The agreement neglected to define what was meant by the term, Sales.

The proviso found in cl 20.1(a), and the way it was employed by Four Sisters, were unusual. The right of termination was not absolute. That of itself is not unusual, but in this case there was interposed a process in which Casama might demonstrate ‘to the reasonable satisfaction of [Four Sisters] that the deficiency in Distributors Sales is due substantially to factors beyond the control of [Casama]’.

The proviso led to Four Sisters pleading by way of defence that Casama had failed to demonstrate to its reasonable satisfaction that the deficiency in sales was due substantially to factors beyond its control. Four Sisters contended that at the time it gave notices of termination, on 15 September and 3 December 2010, it was unaware that cl 20.1(a) had been triggered by a relevant sales deficiency. Although the September letter of termination complained that sales were 20 per cent below budget, it had not suggested that the deficiency fell below the termination threshold under cl 20.1(a). While Four Sisters was obviously mindful of a deficiency, the terms of its complaint indicated that the calculation made by Four Sisters was by reference to volume, as Casama contended should be the case.

The Calculation

Four Sisters contended that it was entitled to rely upon a default discovered after termination. As a broad proposition, that was not in dispute. If, as Casama contended, performance for the purpose of cl 20.1(a) was to be assessed by volume, it had achieved a little over 80 per cent of the budget. But, if performance was to be assessed by reference to the dollar amount actually received by Casama from its customers, it did not achieve the 80 per cent threshold. The difference is referable to the discounts and rebates given to customers.

There was no contention on the part of Four Sisters that Casama was not entitled to give discounts or rebates or supply bonus stock. There was an agreed price per case as between Four Sisters and Casama, which was sometimes discounted. The parties agreed on a regime of shared promotional activity, including discounts and bonus stock. Casama made regular claims against Four Sisters for a contribution to be made by Four Sisters. Four Sisters’ contention, in a nutshell, was that the definition of Distributors Sales should be construed to mean the dollar amount of actual sales, net of all discounts and rebates; or the amount actually received by Casama from all sales, and not the amount invoiced. The difficulty with that contention was the absence of any such limiting words in the agreement.

Four Sisters contended that, to calculate Casama’s performance without deducting discounts and rebates, was unrealistic and ought to be rejected. It was not readily apparent why that should be so. Four Sisters submitted that Mr Vaughan had agreed that the amount of the gross sales was a notional figure. But that concession added nothing to the debate. The amount actually received by Casama over the financial year to 30 June 2010, after allowing for discounts and rebates, was $7,858,189. The dollar value of budgeted sales at full price was $10,508,330. That is, 110,614 cases multiplied by the agreed wholesale price of $95 per case. Thus, Four Sisters contended, Casama had achieved only 74.74% of budget. On the other hand invoiced sales, before discounts and rebates were allowed, were $8,482,850, or 80.73% of the dollar amount of budgeted sales.

Four Sisters’ contention that the computation of Casama’s performance for the purpose of cl 20.1(a), should be made in a dollar amount, is undeniably correct. But the contest between a dollar amount and volume is without significance if a consistent approach is to be adopted in the calculation of the dollar amount of budgeted and actual sales.

The agreement did not prescribe the basis on which the calculation of the budget or sales was to be made for the purpose of cl 20.1(a), save that it was to be made in actual dollars. The parties might have addressed the issue by requiring all discounts and rebates to be disregarded, but they either neglected or chose not to do so. In the absence of definition, which might dictate that the manner of calculation should be different, there should, in my view, be consistency of approach. Thus, one might ask why the budget should be calculated on a gross basis, without regard to agreed discounts, while sales are to be calculated on a net basis, after deducting discounts and rebates.

Any ambiguity resulting from the failure of the parties to define how the budget and sales were to be calculated for the purpose of cl 20.1(a) is, in my opinion, to be resolved in favour of using consistent concepts for the assessments. If discounts and rebates are to be stripped out of sales, why should they not also be stripped out of the calculation of the budget amount? It is to be presumed, in the absence of words to the contrary, that the parties intended consistency between the manner of calculating the sales threshold (the budget) and the manner of calculating performance under cl 20.1(a). The construction contended for by Four Sisters is inconsistent, illogical and defies commercial common sense. Applying consistent concepts in the calculation of the budget and sales leads to the conclusion that Casama did not fall below the 80% threshold.

Ultimately, however, this part of the dispute is of no consequence because, as I find below, Four Sisters is unable to rely upon cl 20.1(a) because of the operation of the proviso.

The proviso

Four Sisters contended that it was not until October 2011 that it discovered the actual dollar amount of the receipts from sales that enabled it to particularise the claimed shortfall. The delay in particularising this part of the case is not relevant for present purposes, although Four Sisters sought to rely upon the absence of such information prior to termination to explain why it had not relied on cl 20.1(a) as a ground for termination. In ordinary circumstances the authorities favour permitting a party to rely upon a ground of default not known at the time of termination in order to justify a notice of termination.[15] The right to rely upon grounds unknown at the time of termination is not, however, without qualification. One exception to the general right to rely on such a ground is where preconditions to reliance on that ground were not satisfied.[16]
[15]Shepherd v Felt & Textiles Ltd (1931) 45 CLR 359, 377; RW Jaksch & Associates Pty Ltd v Hawks [2005] VSCA 307 [61]; Rivat Pty Ltd v B&N Elomar Engineering Pty Ltd [2007] NSWSC 638 [60-61].
[16]See generally, Carter JW, Carter on Contract, Butterworth 2002 [37-030]; [37-060].

The operation of the proviso in this case bore some similarity with the ‘show cause’ procedure found in the contract under consideration in Commonwealth v Amann Aviation Pty Ltd.[17] The relevant clause in Amann was more explicit, in that it imposed on the Commonwealth an obligation to require the contractor to ‘show cause in writing to the satisfaction of the secretary, why the contract… should not be cancelled’. There was no express requirement for ‘reasonable satisfaction’, as in the present case, although the High Court did not disturb that part of the decision of the majority in the Full Court of the Federal Court[18] in which they concluded that the Secretary, invested with the power of the Commonwealth, was bound to act without actual bias, not capriciously or in bad faith. The court accepted that the decision of the Secretary was reviewable. The reviewability of the decision by the Secretary did not turn upon his or her role as an officer of the Commonwealth, but rather on the nature of the decision to be made in the context of the contract read as a whole. In the High Court, Mason CJ and Dawson J said in their joint judgment,

the prescription of the ‘show cause’ procedure, coupled with the references to ‘the satisfaction’ of the Secretary, indicate that the decision-making function of the Secretary under the clause called for something more on his part than a mere pursuit of what was to the advantage, or in the interests, of the Commonwealth. In other words, the Secretary was required to arrive at a decision after weighing in the balance the matters that led him to invoke the ‘show cause’ procedure, such case as Amann might wish to present in accordance with that procedure and such other matters as might bear upon the issue of cancellation. Accordingly, we are not persuaded that this Court should depart from the interpretation placed upon cl 2.24 by the Full Court of the Federal Court.

[17]Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64.

[18]Amann Aviation Pty Ltd v Commonwealth (1990) 22 FCR 527 per Davies and Shepherd JJ.

Thus, one question that arises is whether Four Sisters can avail itself of cl 20.1(a) in circumstances where Casama was not invited by Four Sisters, or did not have an opportunity, or there was no relevant occasion to explain the critical deficiency, and thus seek to persuade Four Sisters that the deficiency was substantially due to circumstances beyond its control.

The proviso assumes that Casama would be aware of a deficiency by reason of which Four Sisters might terminate the agreement, if not satisfied by Casama’s attempt to explain the causes. It also assumes that consideration would be given by Four Sisters to the explanation. It is difficult to see how those assumptions have any scope for operation if, prior to termination, the occasion for such an explanation had not arisen. Four Sisters did not assert a deficiency, that might have justified termination in the absence of a satisfactory explanation, until well after termination.

The way in which this issue was developed at trial was unusual. Until trial, the parties had pleaded their respective cases without regard to the proviso as an impediment to Four Sisters’ reliance on the deficiency following termination. Casama alleged circumstances beyond its control by way of reply in late 2011, but it was not until after the commencement of the trial that Four Sisters alleged that Mr Purbrick had given consideration to Casama’s attempt to demonstrate such circumstances, and had rejected the explanation. The attempted demonstration by Casama, and rejection by Mr Purbrick, all took place well after termination. And in the case of Mr Purbrick’s rejection, it was only made in response to ‘factors referred to in paragraph 7 of the Reply of the plaintiffs’. The reply in question was dated 18 July 2011. Furthermore, Four Sisters expressly alleged that it was unaware of the facts necessary to conclude that cl 20.1(a) could be relied upon until very shortly before the trial commenced.

After the trial had commenced, Four Sisters alleged in its third further amended defence and counterclaim,[19]
[19]Dated 29 May 2012.

37AA.Further or alternatively, the Plaintiff has failed to demonstrate to the reasonable satisfaction of the First Defendant that the deficiency in the Plaintiff’s sales referred to in clause 20.1(a) of the Distribution Agreement (‘the Sales Deficiency’) was due substantially to factors beyond the control of the Plaintiff.
PARTICULARS
(a)At the times when the First Defendant gave notices of termination on 15 September 2010 (CB1099) and 3 December 2010 it was not aware that clause 20.1(a) had been triggered by the Sales Deficiency;
(b)the Plaintiff incorrectly contends that the Sales Deficiency did not exist either then or at all;
(c)the First Defendant (through Alister Purbrick) suspected in or about February 2011 that a Sales Deficiency existed having regard to what he assumed would be the Plaintiff’s actual dollar sales for the 2009/2010 financial year;
(d)the First Defendant pleaded in its Defence dated 10 March 2011 that the Sales were less than 80%, (namely 77.6%) based on an estimate of the Plaintiff’s actual dollar sales for the 2009/2010 financial year;
(e)it was only when the Plaintiff discovered on 24 October 2011 (on a confidential basis) the actual $ sales in the relevant year which established that during the relevant year the Sales Deficiency gave a right to terminate under clause 20.1(a) of the Distribution Agreement;
(f)when the First Defendant reviewed and considered the documents produced by the Plaintiff regarding the Sales Deficiency after 24 October 2011, namely, in or about 4 May 2012 it concluded that clause 20.1(a) could be relied on;
(g)the First Defendant (through Mr Alister Purbrick) has had regard to the alleged factors referred to in paragraph 7 of the Reply[20] of the Plaintiff namely:
[20] In an earlier iteration of its reply and defence to counterclaim, to which Four Sisters made reference, Casama had alleged that,
(i)the Global Financial Crisis;
(ii)the impact of sales of NZ Sauvignon Blanc;
(iii)the allegedly high $AUS;
(iv)the impact of ownbrand sales;

and determined that the Plaintiff was not able to demonstrate to the reasonable satisfaction of the First Defendant that the deficiency in Distributor Sales in the relevant year was substantially due to factors beyond the control of the Plaintiff.

37AB.Accordingly, the First Defendant is entitled to rely and does rely on clause 20.1(a) to terminate the Four Sisters Distribution Agreement…
37A.Accordingly, by reason of the term contained in clause 4.3 of the Four Sisters Agreement referred to in paragraph 36D.1 no termination amount is payable to the Plaintiff.

Four Sisters did not contend that any consideration had been given to any of the factors advanced by Casama prior to termination. To complete the picture, Casama alleged in its reply and defence to counterclaim:

7AA.As to paragraph 37AA, the Plaintiff says:
…
(g)Pursuant to cl 20.1(a) where Four Sisters intended to rely on that clause to terminate the agreement by not less than one month’s notice to Casama, Four Sisters was required, both by cl 20.1(a) and cl 7.3:
(I)to satisfy itself in good faith that Casama’s sales in the immediately preceding financial year were in fact less than 80% of the sales required by the agreed Sales Budget;
(II)where Four Sisters and Casama had agreed the Sales Budget pursuant to cl 6.3 to be for cases only, Four Sisters was required to take into account only the number of cases sold by Casama;
(III)having formed an opinion in good faith that Casama’s sales were in fact less than 80% of the Sales Budget, notify Casama of that opinion in writing, stating the basis for Four Sisters calculations;
(IV)request Casama to provide to Four Sisters such material as Casama might wish to rely upon to demonstrate to the reasonable satisfaction of Four Sisters that the alleged deficiency in Casama’s sales was due substantially to factors beyond Casama’s control;
(V)evaluate in good faith and acting reasonably any material so provided by Casama;
(VI)notify Casama in writing, together with the reasons therefore, of Four Sisters determination that it was not reasonably satisfied that the alleged deficiency in sales was due substantially to factors beyond the control of Casama.

(h)In breach of cl 20.1(a) and cl 7.3 at no time did the First Defendant enquire whether the Plaintiff was able to demonstrate to the reasonable satisfaction of the First Defendant that the deficiency in Distributor’s Sales was due substantially to factors beyond the control of the Plaintiff or otherwise comply with cl 20.1(a) and 7.3 in accordance with their terms as set out in (g) above.
(i)It says further that clause 20.1(a) does not operate retrospectively to allow the First Defendant, after termination of the Four Sisters Agreement, to determine that the Plaintiff could not have demonstrated to the reasonable satisfaction of the First Defendant that the deficiency in Distributor’s Sales was due substantially to factors beyond the control of the Plaintiff.
(j)Further and/or in the alternatively, at the time Four Sisters gave notice on 3 December 2010 terminating the agreement effective 28 February 2011 it had not complied with cl 20.1(a) as set out in (g) above and was in no position to do so.
(k)Further or alternatively, Four Sisters has at no time complied with cl 20.1(a) and cl 7.3 as is required and as is described in (g) above.
(l)Further or alternatively by its counsel, the First Defendant accepted on 23 May 2012 that its perception of the market for the First Defendant’s products and the reason for Casama achieving sales of 89,217.8 cases (excluding bonus cases) (being the perception of Mr Alister Purbrick) held in the period between July 2010 until 3 December 2010 was different to the perception of the market which he had formed in more recent times after considering various statistics about the market made available to him from, inter alia, A.C. Neilson, and Wine Australia. (T.147 L10 – T.149 L16].
(m)It otherwise denies the allegations contained in paragraph 37AA.

Thus, Casama contended for an elaborate process under which Four Sisters was to (a) satisfy itself in good faith of the deficiency; (b) notify Casama and request explanatory material; (c) evaluate the material in good faith and acting reasonably; and (d) notify Casama of its decision with reasons. In my opinion cl 20.1(a) does not impose such onerous obligations on Four Sisters.

In Minion v Graystone Pty Ltd[21] the Queensland Court of Appeal considered the validity of various grounds for termination of an excavation contract, one of which had not been relied upon at the time of termination. The contract included specified grounds, one of which was in the following terms:

(ii)Graystone forming the opinion, on reasonable grounds, that it would be impracticable for the Sub-Contractor to complete the works at the rate(s) of progress and/or within the time(s) provided for in Graystone Construction Schedule.
…
(iv)The Sub-Contractor becoming insolvent…

[21](1989) 1 QdR 157.

The notice of termination relied expressly on ground (ii) above, but did not mention insolvency. The Court of Appeal held that the party terminating the contract was entitled to rely upon the contractor’s insolvency even though it was not aware of the state of affairs at the time. When dealing with the appellant’s contentions concerning the validity of ground (ii), the court gave consideration to its requirements. It is in that respect that the decision provides some assistance in this case. Casama, submitted that the reasoning of the court, derived from the separate judgments of McPherson J and Derrington J, supported its contention that a requirement of cl 20.1(a) had not been met.

McPherson J said of the appellant’s reliance on ground (ii),

However, cl 7A(ii) refers not simply to the formation of such an opinion but to an opinion ‘on reasonable grounds’, and the question for decision therefore was and is whether there were reasonable grounds for believing that the subcontractor could complete at the progress rate and within the time provided. His Honour held that there were not. He accepted, as he was entitled to do, evidence of the subcontractor that he had available to him a second machine, and that it could have been brought on site in readiness for excavation to begin on 24 June. While accepting that Mr Martin of Graystone honestly held the opinion that it was impracticable for the subcontractor to complete on time, his Honour nevertheless held that the opinion was not based on reasonable grounds. His reason for making this finding was that Mr Martin did not in the course of the telephone call on Thursday, 20 June inquire whether or not there was another machine available to the subcontractor. It is, of course, equally true to say that the latter did not volunteer the information that there was; but the question is primarily one of fact, and I would not, in a matter like this in which the trial judge had the advantage of seeing and assessing the witnesses, be prepared to disturb his conclusion that Mr Martin’s opinion was not well founded even if honestly held by him.

Thus, his Honour (McPherson J) accepted the premise that the requisite opinion must have been formed before termination on this ground. Derrington J elaborated further, imposing a requirement on the party forming the opinion to at least obtain relevant information before it could be said that the opinion had been formed on reasonable grounds. His Honour said,

In respect of the second ground of justification advanced by the appellant, that is, that Graystone had formed the opinion that it would be “impracticable for the subcontractor to complete the works at the rate of progress and/or within the time provided for in the Graystone construction schedule’, it is correctly conceded by the appellant that the relevant elements are whether Graystone formed the appropriate opinion and whether it had reasonable grounds to do so.
This formula does not require that the opinion necessarily be right, but only that it be based upon reasonable grounds. Its purpose is obviously to provide a remedy to the contractor in circumstances where he may not be able to ascertain the correct factual situation within the time limited by the exigencies of the works and so reference is made to his opinion rather than the actual facts. It must be appreciated that in contracts such as this where the delay by a subcontractor in performance of part of the work may cause very substantial and critical delay to others, with substantial consequential loss to the contractor, it is reasonable that he be authorised to take over the work in suitable circumstances in order to avoid that loss. Because time is often critical, the remedy avoids dependence upon the actual state of affairs, for the contractor may have considerable difficulty and may be required to take inordinate time in order to ascertain the true facts. Consequently, he is invested with the power to exercise this remedy if he forms a proper opinion, that is, one based on reasonable grounds. In this context, while the reasonableness of the relevant grounds must be objective, it also means that they must be confined to grounds which are either known or reasonably knowable to the contractor in those circumstances in accordance with the purpose of the remedy. At the same time, because of the loss which the subcontractor will suffer on the exercise of this power, the contractor is required to exercise appropriate caution in attempting to ascertain the facts relevant to his opinion.
In the present case, the appellant was entitled to claim that, taking into consideration the past difficulties experienced with the respondent and, further, the fact of repossession of the machinery which the respondent intended to use in the work, it was reasonable to proceed further with its enquiries with a reasonably strong presumption supporting the necessary opinion. However, because in their discussion at the time the respondent demurred to the suggestion that the appellant was entitled to take over the work on these grounds, while he might be criticised that he did not volunteer that he had an alternative replacement machine, it is fatal to the appellant’s cause that it moved against him in this way without making the proper enquiry. It would have been simple, prudent and correct to have asked him for an explanation and demonstration as to how he proposed to meet his obligations. Because of the purpose of the remedy, and in the light of the prima facie presumption favouring the opinion derived from what had gone before, any failure on his part to provide proper and reasonable proof of his capacity to perform according to the contract would then have justified the appellant in forming the necessary opinion even if it ultimately proved to be wrong. However, before it could have the necessary opinion on reasonable grounds, it was necessary for the appellant to enquire into such questions if the grounds are to be reasonable and it failed to ensure this. It is this obligation which makes the difference between the result flowing from the failure of the respondent on the one hand to volunteer his intended use of an alternative machine and, on the other hand, the failure of the appellant to enquire satisfactorily about the matter. Although they were both at fault, it was the appellant who was required to establish sufficient grounds before forming the opinion which activated its right.[22]

[22]Emphasis added.

The case of Minion is merely illustrative of a contract imposing pre-conditions on the right to terminate. Clause 20.1(a) is more prescriptive than the clause under consideration in Minion v Graystone. Moreover, the obligation to demonstrate adverse factors beyond its control was expressly imposed on Casama. But that did not, in my view, require Casama to anticipate that Four Sisters might seek to rely upon cl 20.1(a) to terminate, thus enlivening its opportunity to demonstrate factors beyond its control.

It is true that circumstances might exist where it is unarguable that there was a deficiency capable of triggering a right of termination under cl 20.1(a). Even so, in my view, some indication at least would be necessary from Four Sisters of its intention to rely upon cl 20.1(a), if only to put Casama on notice that it may wish to avail itself of the opportunity to demonstrate, to the reasonable satisfaction of Four Sisters, that the deficiency was due substantially to factors beyond its control.

The evidence disclosed that there were exchanges between the parties prior to termination in which information was proffered by Casama to explain the ‘below budget sales’. But it was not part of Four Sisters case to contend that it was dissatisfied by Casama’s explanation prior to termination. Nor did it contend that Mr Purbrick turned his mind to any explanation by Casama until well after termination. While Four Sisters did not advance such a case, a contention that Casama ought to have known of the deficiency would not have succeeded. That is because the deficiency expressly identified by Four Sisters prior to termination was not below the threshold for termination.

The different formulations of the requirement for termination found in the contract in Minion, and the proviso in the present case, all require a party to form an opinion or achieving a state of satisfaction, or reasonable satisfaction. The requisite state of mind has a subjective and objective component. As Campbell J said in Adelaide Brighton v Osterbridge,[23]

Where a contract requires that some task be performed to the “reasonable satisfaction” of one of the contracting parties, that standard is attained both if that party is in fact satisfied, and also if that party ought, as a reasonable person, be satisfied: Smith v Sadler (1880) 6 VLR (L) 5 at 6; McDougall v Aero Marine of Emsworth Ltd [1958] 1 WLR 1126 at 1131; [1958] 3 All ER 431 at 437 per Diplock J.

[23][2005] NSWSC 737 [142].

In Commonwealth Bank of Australia v Parform Pty Ltd[24] Sundberg J considered the meaning of the words, in s 459F of the Corporations Law, ‘to the creditor’s reasonable satisfaction’

… I do not think that the phrase is intended to enable the creditor to be the sole judge of his satisfaction. The words “to the creditor’s reasonable satisfaction” seemed to me to posit an objective test. In other words, where the debtor puts up a proposal which the creditor rejects, it is for the court to decide whether in rejecting it the creditor was acting reasonably in all the circumstances.

[24](1995) 13 ACLC 1309.

The precise content of the subjective and objective components of ‘satisfaction’ will depend upon the terms of each contract. In the present case it is unnecessary to precisely define the content. The occasion for Four Sisters to be reasonably satisfied of Casama’s explanation did not arise because Casama was never made aware of circumstances that might reasonably have put it on notice of any risk of termination under cl 20.1(a), and thus a need to demonstrate factors beyond its control.

Thus, a precondition for the exercise of the power to terminate under cl 20.1(a) was not satisfied. At a minimum, Casama must have been aware that Four Sisters might seek to terminate for its failure to meet the threshold of 80% of Distribution Sales under cl 20.1(a). Casama was at least entitled to decide whether to seek to persuade Four Sisters that the deficiency was due to factors substantially beyond its control.

Accordingly, Four Sisters is unable to rely upon cl 20.1(a) as a ground of termination, even though it might now be established that there was a deficiency under cl 20.1(a) that would have justified termination.

Assuming, contrary to the foregoing, that it was open to Four Sisters to consider the factors advanced by Casama after termination, and decide whether to accept the explanation or not, there is a further difficulty in its reliance on that clause.

The ‘factors’ relied upon by Casama by way of explanation for the shortfall in sales were the global financial crisis, the impact of sales in Australia of imported Sauvignon Blanc from New Zealand, the high value of the Australian dollar and the impact in the market of ‘own brand’ sales. It was not contended by Four Sisters that these factors were somehow within Casama’s control. Its case was that the factors were no longer causing adverse conditions or that they had been taken into account when setting the 2010 budget.

Mr Purbrick gave evidence concerning the impact of the global financial crisis and the relative value of the Australian dollar against the United States dollar. While his evidence was not challenged, it was not persuasive expert testimony. It was more in the nature of a businessman’s perception of the market, informed in part by some statistics assembled for the purpose of giving evidence at trial in support of the case for his companies. His evidence concerning the impact of the high Australian dollar, said to make imported wine more attractive and to diminish export opportunities, was rudimentary.

I accept that, had Casama advanced material to demonstrate factors beyond its control, it must persuade Four Sisters, acting reasonably. It is unlikely that a court would disturb the opinion of Four Sisters, rejecting Casama’s explanation, in the absence of evidence demonstrating that the opinion was manifestly unreasonable, capricious or formed in bad faith. It would seem that much of what was said by Mr Purbrick to explain his rejection of the ‘factors’ was not intended to discharge any onus of proof, but was intended to demonstrate that his decision to reject the explanations was genuinely held and reasonable. I do not regard Four Sisters as bearing any onus to prove that its decision was bona fide or reasonable. In that respect this case is to be distinguished from Adelaide Brighton.[25]
[25](2005) NSWSC 737 [143].

That said, however, the evidence adduced by Four Sisters on this topic seemed to miss the point. While leaving the formation of the requisite judgment or opinion solely with Four Sisters, the proviso set for Casama a relatively low threshold of proof – to demonstrate that the deficiency was due substantially to factors beyond the control of Casama.

There was no question that the factors relied upon by Casama were beyond its control. There was some debate as to whether the factors continued to be active in the market. Importantly, the range of possible factors available to be advanced by Casama were not limited by reference to what had already been taken into account when setting the budget. Thus, it would have been manifestly unreasonable had Four Sisters rejected an explanation given by Casama because the factors had already been taken into account.

Four Sisters’ case, based on its right to rely upon cl 20.1(a), was misconceived from the outset. Unfortunately, that part of its case occupied a disproportionate amount of trial time.

Compensation under cl 4.3

There arose four issues concerning Casama’s claim for compensation under cl 4.3. First, was cl 4.3 engaged at all by either termination? Second, even if cl 4.3 was engaged by reason of a termination, is the clause unenforceable as a penalty? Third, is compensation denied because of the proviso in the seventh paragraph of cl 4.3? Fourth, is any compensation payable to be reduced by the amount of profit derived by Casama during the period of any notice given?

As mentioned above, a central plank of Casama’s construction case was designed to achieve the engagement of cl 4.3, on the basis that each termination was said to have been made by notice given under cl 4.2. The importance of that aspect of the case was driven by the limited scope for compensation under the first paragraph of cl 4.3. That paragraph provides,

If this Agreement is terminated by the Producer by notice to the Distributor in accordance with Clause 4.2, or if at any time the Producer shall assign or transfer the Producer’s Brand without the prior written consent of the Distributor the Producer will pay to the Distributor an amount (termination amount) calculated according to the compensation matrix detailed in Appendix 1.

I have already found that the only termination notice capable of engaging cl 4.3 was one made under the first paragraph of cl 4.2. That is the only notice to which cl 4.2 makes reference. Contrary to Casama’s contentions I am of the opinion that the opportunity for compensation under cl 4.3, upon delivery of a termination notice[26] ceased after renewal for the further term of three years under cl 4.2. Casama’s contention that cl 4.3 was engaged by the termination notices given in 2010 depended upon a construction of the agreements which attributed to a notice given under cl 20.2 the character of a notice under cl 4.2. That construction has been rejected. Accordingly, it seems unnecessary to consider the remaining questions relating to the allegation of a penalty; and the scope of the seventh paragraph in cl 4.3 to deny compensation (because Casama’s sales during any three month period of the termination notice were less than 80 per cent of the Distributors Sales during the equivalent three month period of the immediately preceding year). It also seems unnecessary to consider the question whether the compensation ought to be reduced by the amount of profit, if any, made by Casama during the period of notice. Nevertheless, I will address each of those questions briefly.
[26]Pursuant to the first paragraph under cl 4.2.

I am not persuaded the compensation matrix is a penalty. The defendants’ case in that regard depended upon casting the right to compensation as one arising on a breach of the agreement, because the compensation matrix could not be a fair reflection of the damages payable in the event of such a breach.[27] It is artificial and unhelpful to address the defendants’ penalty contention on the premise that cl 4.3 operated beyond its intended scope. That is, as if the primary contention of Casama was correct, namely, that the clause was intended to operate indefinitely following any notice given under cl 20.2, when quite plainly it was not. If, as I have found, the compensation matrix was only engaged in favour of Casama if Four Sisters or Tahbilk exercised its right under the first paragraph in cl 4.2, (to give a notice preventing the commencement of a further term, or upon the assignment or transfer by Tahbilk or Four Sisters of its brand or of the agreement, without the consent of Casama) the provisions has very limited scope of operation.
[27]Andrews & Ors v Australia & New Zealand Banking Group Ltd [2011] FCA 1376; 86 ACSR 292; but see High Court of Australia [2012] HCA 30.

The matrix appears to be a careful formulation designed to limit the amount that might otherwise be claimed by Casama in the event of an unauthorised assignment or transfer of the brand or of the agreement, or where the producer exercised its right to walk away from the agreement at the end of the first term. Paragraph 5 under cl 4.3 expressly denied to Casama any other compensation. Thus, cl 4.3 seems designed and intended to limit the amount to which Casama may be entitled in the event of an unauthorised assignment or transfer, rather than impose something in the nature of a ‘penalty’ on the producer in such circumstances.

The operation of the seventh paragraph in cl 4.3, in which compensation is denied, depends upon an analysis of the Distributors Sales made during any three month period of the termination notice. The notice mentioned in that paragraph is plainly one given pursuant to the first paragraph of cl 4.2. Not surprisingly, Four Sisters did not advance this ground of defence at trial.

The question whether any profit made by the distributor during the period of notice is to be taken into account when calculating the termination payment is not expressly dealt with in cl 4.3. The defendants sought to imply a term into the agreement to that effect. Paragraphs 7 and 8 under cl 4.3 invite an analysis of the distributor’s performance during that period. Should the distributor’s performance be less than 80%, compared with an equivalent three month period in the immediately preceding year, or greater than 120%, no compensation is payable. The existence of these provisions, expressly denying an entitlement on the basis of performance, coupled with the detailed calculation of compensation to be made under the matrix, militate against the implication of any term that would require a further adjustment of the kind contended for by the defendants.

In my view, the distributor would be entitled to work out any notice period and claim compensation (if compensation was payable under cl 4.3) but would not be entitled to any ‘other compensation’. Applying the test enunciated in BP Refinery, (Westernport) Pty Ltd v Shire of Hasting[28] it cannot be said that the term was necessary to give business efficacy to the contract, or that it was obvious or reasonable and equitable. Clause 4.3, limited in operation as I have found, did not require the adjustment or qualification for which the defendants contended.
[28](1977) 180 CLR 266, 282-3.

Failure to use best endeavours – cl 6.1

As noted above, the breach of cl 6.1 alleged by Four Sisters in its defence and counterclaim was confined to Casama’s failure to achieve the sales budget in the 2009 and 2010 financial years. During the course of the evidence, the defendants sought to augment that part of their case by contending, during the cross-examination of Mr Vaughan, a witness for Casama, that by overselling in June 2010 it had damaged its opportunity to make sales in July, August and September. The defendants’ case drifted between an allegation that the breach occurred in June, illustrated by high sales, and that it occurred in July, August and September, illustrated by the low sales. These contentions were not supported by the evidence, and only faintly pressed as part of the defendants’ repudiation case and counterclaim.

The mere fact that there was a deficiency in sales against budget, or that sales plunged in July, August and September, because they were too high in June, does not evidence a breach of the relevant obligation. Such a breach might, of course, be demonstrated by establishing that Casama failed to properly market the wines, or unjustifiably reduced its sales team or failed in some other ‘endeavour’ to do its best on behalf of the defendant. The defendants’ evidence did not purport to address such matters. In the circumstances, the allegation should not have been pursued at trial. I reject the allegation of breach of the obligation to use best endeavours.

Competing products

Four Sisters alleged that Casama breached cl 5.2 of the agreement by distributing wines of a similar style and price point to the Four Sisters products without its consent. The particular wines identified in Four Sisters’ defence and counterclaim were Ferngrove Semillon Sauvignon Blanc, Cowrock Shiraz, Cowrock Sauvignon Blanc, One Planet Shiraz, One Planet Sauvignon Blanc and Republic Sauvignon Blanc Semillon. Four Sisters submitted that Mr Purbrick gave unchallenged evidence that Casama had introduced the brands into its portfolio and that their introduction constituted a breach of cl 5.2. His evidence did not extend to asserting that Cowrock Shiraz was a competing wine.

Ferngrove Semillon Sauvignon Blanc

Ferngrove Semillon Sauvignon Blanc was introduced into Casama’s portfolio of products in about January 2005 but ceased to be marketed before termination. On 8 February 2005, Mr Purbrick sent an email to Mr Callan expressing his disappointment that Casama (Red + White) was marketing Ferngrove Semillon Sauvignon Blanc. In his email he said that it was at the same price point and in direct competition with the Four Sisters brand. He alleged a breach of cl 5.2, and proposed a meeting to ‘thrash this out’.

Mr Callan responded a few days later, stating that he did not consider the Ferngrove product to compete with Four Sisters. He said that while Four Sisters was a Victorian wine, Ferngrove was a Western Australia appellation. He said that 70 per cent of Ferngrove sales were Western Australia whereas only two per cent of Four Sisters sales were in that State. Mr Callan said that the volume of Ferngrove wine was only 12,000 cases, whereas Four Sisters was more than 100,000 cases; and that more than 60 per cent of Ferngrove sales were ‘on premises’, but only 11 per cent of Four Sisters sales were of that kind. While that exchange was not the end of the discussion over those wines, there was no evidence of any meeting that ‘thrashed out’ the dispute. It seemed to lapse until raised again at a meeting in about mid-2009.

The only evidence of breach was a bare assertion by Mr Purbrick that the wine competed with Four Sisters Sauvignon Blanc Semillon in both price and style. Four Sisters did not seek to prevent Casama from marketing the wine, or even demand that it stop. I have no doubt that Mr Purbrick kept a very close watch on possible competition from competing wines distributed by Casama. While there were some further complaints about the wines, no action was taken or even threatened by Four Sisters to stop the sales. The Ferngrove wine was removed from Casama’s portfolio in early 2010.

Cowrock Sauvignon Blanc

The Cowrock wines (Shiraz and Sauvignon Blanc) were also Western Australian appellations. They were introduced into Casama portfolio in about July 2006 and Casama ceased marketing those wines in around June 2009. Shortly after the introduction of the wines into the Casama portfolio, Mr Purbrick complained to Casama. He sent an email to Mr Kraps in which he stated that it had come to his attention that Red+White had entered into a joint venture to produce, market and sell the Cowrock wines. Mr Purbrick alleged a breach of cl 5.2. He did not explain the basis of the breach. His complaint seemed more directed at the potential impact of the new brand on the capacity of Red+White to promote and sell Four Sisters products in circumstances where it had ‘a very crowded portfolio of brands’. He concluded,

Finally I am angry and disappointed Red+White have not only made this decision without consultation with ourselves but further have done so after we brought to Kieran Callan’s attention our dismay at the introduction of the ‘Fern Grove’ brand in 2004 which was also in clear contravention of cl 5.2 of our Distribution Agreement.
At the time we were assured that this would never happen again.
I need to urgently discuss this with you and look forward to your call.

Mr Kraps responded the same day, referring to a conversation earlier in the week with Mr Irvine in which the marketing of the wine was discussed. Mr Kraps described the wine as a replacement brand for another wine from Margaret River that was no longer in the Casama portfolio. He invited Mr Purbrick to call him directly if he had any further issues. No action was taken by Four Sisters, and there the matter seemed to have been left.

Republic Sauvignon Blanc Semillon

Republic Sauvignon Blanc Semillon was a label designed to sell excess wine stocks at a relatively low price. Mr Kraps said that the brand was aimed at chain stores, catering and convention businesses. Mr Purbrick said that he was informed of the release of the Republic brand in late March 2009 and wrote to Mr Kraps by email on 30 March alleging a breach of cl 5.2. Mr Valmorbida responded the same day setting out features of the wine that he claimed differentiated it from the Four Sisters’ product.

By email dated 21 June 2009, Mr Purbrick wrote to Messrs Valmorbida and Kraps confirming a meeting to be held the following day which he hoped would ‘pave the way for a stronger and more meaningful strategic relationship in the future’. A topic for discussion was alleged breaches of cl 5.2 of the Four Sisters agreement through the sale of the Republic and Ferngrove wines. A meeting took place on 23 June 2009 at which those issues were apparently discussed. The minutes of that meeting, attended by Mr Purbrick and others on behalf of Four Sisters and Mr Valmorbida, Mr Kraps and others on behalf of Casama, mention the Republic brand but make no mention of any action to be taken other than to continue marketing the brand in order to clear Casama’s excess wines stocks.

One Planet Shiraz and Sauvignon Blanc

One Planet Shiraz and Sauvignon Blanc were sold in Tetra-Pac and intended for sale in the United Kingdom. It was introduced into Casama’s portfolio in early 2010 and deleted shortly thereafter. As with the other wines about which complaint was made, it was not part of Casama’s portfolio at the time of termination.

It would appear from a review of communications passing between Casama and Four Sisters that Mr Vaughan (Red+White) contacted Mr Irvine (Four Sisters) by email on 29 April 2010 notifying him of Casama’s intention to commence distribution of One Planet wines. Mr Vaughan mentioned the Tetra-Pac packaging, variety, appellation and price. The Shiraz was from McLaren Vale and the Sauvignon Blanc from the Adelaide Hills. The wholesale price point was $100 per dozen. Mr Vaughan invited a request for further information. Mr Irvine notified Mr Purbrick, who sought ‘some visuals of the Tetra-Pac’ and details of who owned the brand. Eventually Mr Vaughan sent Mr Irvine some promotional data and identified the owner of the brand. Mr Irvine passed the data on to Mr Purbrick.

In early May 2010, Mr Kraps provided more detailed information to Mr Irvine concerning ownership of the brand, assuring him that Red+White would continue to focus on Four Sisters as its number one brand within the national chains. He said,

We do not foresee One Planet competing in price with Four Sisters. The promotional price vision is to be set at $12.95 to my knowledge.

In the same email Mr Kraps advised Mr Irvine of Casama’s intention to cease distributing Ferngrove wines.

In each case, having identified what he asserted was a competing wine, and conscious of Four Sisters’ rights under the agreement, Mr Purbrick did not take any step to prevent Casama from marketing the wine. There was not even a demand that Casama stop doing so.

Casama contends that the conduct constituted a waiver or that there was an agreement permitting Casama to continue to market the wines. The evidence does not go so far as to disclose any agreement, although the minutes of the meeting in June 2009 may indicate some form of limited agreement. But I do not think that it is helpful to analyse the conduct of Four Sisters in terms of waiver. Four Sisters was alive to its rights and elected to take no action to prevent what it contended was a breach. Having so elected, Four Sisters is not entitled to rely upon such conduct to support a breach of the agreement and claim damages. Casama had ceased to market any of those wines prior to Four Sisters purportedly accepting its repudiation. Thus, it could not be said that Casama threatened to do so in the future.

Furthermore, the evidence of any breach was inconclusive. There were allegations coupled with assertions from Mr Purbrick, with a rejection of breach by Casama in each case with some explanation. The evidence advanced on behalf of Four Sisters fell far short of what would be required to establish a breach. This was an example of an allegation that should not have been pursued at trial having regard to the very limited evidence advanced in support of it by Four Sisters.

Breach of duty of good faith

The defendants pleaded a breach of the duty of good faith imposed by cl 7.3 of the Four Sisters agreement. The conduct relied on to support that allegation was the breach of cl 5.2 (sale of competing product); bonus stock given away in June 2010 (also relied upon at one point as a breach of cl 6.1); and Casama’s failure to afford unfettered access to its sales team. The defendants did not develop or press this alleged breach in final submissions. The evidence did not support the allegation concerning access to the Casama sales team, nor did Four Sisters explain how that might be a breach. Insofar as the sale of competing product was a breach of the agreement, such conduct was proscribed by cl 5.2 and a breach determined by reference to that provision. There was no suggestion that Casama was not entitled to provide bonus stock to its customers. Four Sisters’ complaint about the supply of bonus stock in June 2010 was misconceived. I find no breach of cl 7.3.

Repudiation

Four Sisters alleged that Casama repudiated the Four Sisters’ agreement which was accepted on 3 December 2010. Its case for repudiation rolled up all of the other allegations including the shortfall in sales in the preceding financial year, the potential disaster in sales for the 2011 year, and the sale of competing brands.

The concept of repudiation advanced by Four Sisters was the absence of readiness or willingness to perform, manifest through a collection of alleged breaches by Casama, and augmented by the prospect that sales would fall well below the 80 per cent threshold of Distributors Sales in the 2011 financial year.

At the root of the right of termination for repudiation is the concept of manifest unwillingness or inability to perform in such circumstances that the promisee is entitled to conclude that the contract will not be performed substantially according to its requirements.[29] Thus, the question is whether the conduct of Casama manifest such an unwillingness or inability to perform.
[29]Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115, 136.

Four Sisters relied upon ‘a cumulative series of breaches’, while acknowledging that it had in the past affirmed the contract in the face of some breaches. Presumably, these were the alleged breaches of cl 5.2. Four Sisters contended that Casama had, by the conduct complained of, indicated its intention to perform the contract only in a manner that was substantially inconsistent with its terms.[30]
[30]Lauranda v Capalaba Park Shopping Centre Pty Ltd (1988-89) 166 CLR 623, 647, 648 and 658.

I am not satisfied that by marketing the Ferngrove, Cowrock, One Planet and Republic wines, Casama breached cl 5.2 of the agreement. But even if it did, I have found that Four Sisters, in full knowledge of its rights under the agreement, elected not to take action to stop such conduct. Four Sisters argued that even so, its right to terminate may be revived if further breaches are committed. That may be so, but the offending conduct was no longer being carried out at the time Four Sisters purported to accept the repudiation.

The accumulation of alleged breaches was not made out. Four Sisters has failed to establish a breach of Casama’s obligation of good faith, or a breach of cl 5.2 (competing brands) or a breach of the best endeavours obligation. It may also be relevant to an analysis of the significance of such alleged breaches to remember that the parties did not include them within the termination framework of cl 20, although that point was not argued and I make no finding in that regard.

While the 2011 financial year had not closed, and thus it was not possible to reach a conclusion about the level of Distributors Sales, Four Sisters had reason to be alarmed. But, as noted above, falling sales did not necessarily reflect Casama’s unwillingness or inability to perform, according to its best endeavours, to market and sell Four Sisters’ wine. In my view the fact of plunging sales in the first half of the 2011 financial year did not, without more, entitle Four Sisters to treat the agreement as repudiated by Casama. Accordingly, Four Sisters did not establish that Casama was unwilling, unready or unable to perform its obligations under the agreement.

Counterclaim

Four Sisters counterclaimed for loss and damage by reason of the alleged breaches of the duty of good faith, Casama’s failure to use its best endeavours to achieve budgeted sales and selling competing wines. There was no counterclaim by Tahbilk. The alleged breaches were not established.

Conclusions

While the defendants were entitled to terminate the agreements on 12 months notice under cl 20.2, they were not entitled to earlier termination or to treat the agreements as at an end by purporting to accept Casama’s conduct as a repudiation. By taking over the distribution of their own wines on 1 March 2011, the defendants repudiated the agreements. Casama did not accept the repudiation, but having failed to enforce the agreements it is entitled to damages for breach. The breach is the defendants’ failure to give the minimum period of 12 months notice of termination.

Casama is not entitled to compensation under cl 4.3, but to damages for any loss consequent upon the breaches.

The counterclaim is dismissed.

---

SCHEDULE

Objections to evidence and ruling

Paragraphs or passages in witness statements relied upon by Casama to which the defendants object. They are admitted into evidence unless marked ‘inadmissible’.

*FJ Kraps*
11
12
13
16
18	inadmissible
19
20
37 (last sentence)	inadmissible
38
46
47
48
49
50
51
52
53
56
*K Callan*
37
42	inadmissible
*C Vaughan*
53
54
55
56
57
58
59 (5^th line)
69 (second sentence to end)
70
71
72 (first sentence)
96
97
98
99
100

*J Valmorbida*
6
7
8
9
10
11
13
16
18
19
20
21
22
32	inadmissible
34
35
36
37	inadmissible
40
42 (second sentence to end of page 11)
43
44
45
46
47
48
49
50 (second sentence to end)
51

7(e)if, which is denied, in the immediately preceding financial year, 1 July 2009 to 30 June 2010, the Plaintiff’s sales were less than 80% of the sales required by the sales budget for that year, any deficiency in distribution sales was due to factors beyond the control of the Plaintiff, and in such circumstances the First Defendant is not entitled to terminate the Four Sisters Agreement pursuant to clause 20.1 or any other basis.

PARTICULARS

(I)The level of sales of Four Sisters wine in the financial years of 2009 and 2010 was not due to any decline in Casama’s performance in the distribution of Four Sisters wines or commitment to the Four Sisters brand.

(II)The Australian wine industry was detrimentally impacted by the Global Financial Crisis, which struck in about July 2008 and continued to affect sales during the relevant period.

(III)Retail sales of wine, particularly those with a price point of between $7 and $15, which included Four Sisters wines, dropped dramatically in the said period.

(IV)The First Defendant decided to increase the price of all of its wines from $90 to $95 per dozen from about 1 March 2008;

(V)The Plaintiff had no control over the price at which retailers sold Four Sisters wines;

(VI)Due to the tightening of credit caused by the Global Financial Crisis, traders carried less stock of wines, including the Four Sisters brand of wines.

(VII)There was a large increase in private label brands owned by the national chains, such as Woolworths and Coles, which reduced traditional branded product sales.

(VIII)Export markets such as the United Kingdom and the United States of America, were severely impacted by the Global Financial Crisis. Further, as the Australian dollar strengthened, the cost of exported wines increased. A combination of these factors caused foreign demand for wines within the price point of $7 to $15, which includes the Four Sisters wines, to decline substantially. Further, the wines that may have otherwise been exported were supplied in the Australian wine market, increasing the volume of competing products, and thereby causing a decline in sales of other brands including the Four Sisters brand of wine.

(IX)There was a large increase in competition from 2008 with regard to New Zealand Sauvignon Blanc vintage wines, otherwise known as the ‘Savalanche’.

[2012] VSC 376

18 September 2012