Elders Ltd v Incitec Pivot Ltd
[2006] SASC 99
•7 April 2006
SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
ELDERS LTD v INCITEC PIVOT LTD & ANOR
Judgment of The Honourable Justice Debelle
7 April 2006
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES
Supply contract – provision for determination if parties unable to agree trading terms – termination by buyer – whether buyer terminated in accordance with contract – whether implied term of good faith – whether buyer repudiated contract by entering into alternative supply arrangements – anticipatory breach – whether seller entitled to rescind – whether buyer incapacitated from complying with supply contract – held, buyer had validly terminated the supply contract – not incapacitated from complying with supply contract.
Trade Practices Act (Cth) 1974 s 47, referred to.
Alfred C Toepfer International GmbH v Itex Itagrani Export SA [1993] 1 Lloyd's Rep 360; André et Cie v Cook Industries Inc [1987] 2 Lloyd's Rep 463; Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191; Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99; Australian Casualty Co Ltd v Federico (1986) 160 CLR 513; British and Beningtons Ltd v North Western Cachar Tea Co Ltd [1923] AC 48; Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187; Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337; Cohen & Co v Ockerby & Co Ltd (1917) 24 CLR 288; Concut Pty Ltd v Worrell (2000) 176 ALR 693; Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471; Foran v Wight (1989) 168 CLR 385; Glencore Grain Rotterdam BV v Lebanese Organisation for International Commerce [1997] 4 All ER 514; Gollin Co Ltd v Karenlee Nominees Pty Ltd (1983) 153 CLR 455; Heisler v Anglo-Dal Ltd [1954] 2 All ER 770; Heyman v Darwins Ltd [1942] AC 356; Hillas & Co Ltd v Arcos Ltd (1932) 147 LT 503; L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235; Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623; Loughridge v Lavery [1969] VR 912; Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181; McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17; Psaltis v Schultz (1948) 76 CLR 547; Rawson v Hobbs (1961) 107 CLR 466; Roadshow Entertainment Pty Ltd v ACN 053 006 269 Pty Ltd (1997) 42 NSWLR 462; Ross T Smyth & Co Ltd v T D Bailey Son & Co [1940] 3 All ER 60; Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd [1990] VR 834; Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359; Shevill v Builders Licensing Board (1982) 149 CLR 620; South Sydney District Rugby League Football Club Ltd v News Ltd (2000) 177 ALR 611; Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; Universal Cargo Carriers Corporation v Citati [1957] 2 QB 401; Upper Hunter County District v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429, considered.
ELDERS LTD v INCITEC PIVOT LTD & ANOR
[2006] SASC 99Civil:
DEBELLE J. On 7 December 2004 the plaintiff Elders Ltd (“Elders”) gave notice that it terminated a contract for the sale and supply of fertilizer products. By that contract the defendants sold and supplied fertilizer products to Elders. The contract was of substantial commercial significance to both Elders and the defendants, a proposition illustrated by the fact that in the year ended 30 June 2004 the defendants sold in excess of 436,000 tonnes of fertilizer to Elders at a cost of some $162 million. The issues in this action stem from that notice of termination.
In this action, Elders seeks a declaration that on 7 December 2004 it had lawfully given notice of termination in accordance with the contract. As the contract provided for a period of six months’ notice of termination during which the parties were bound to continue to trade, Elders also seeks a declaration that the defendants were obliged to continue to sell and supply it fertilizer products pursuant to the contract until 7 June 2005. The defendants had treated Elders’ notice of termination as a repudiation of the contract and had accepted the repudiation. Elders, therefore, also seeks a declaration that the termination of the agreement by the defendants was invalid. In addition, Elders seeks ancillary relief.
For their part, the defendants contend that Elders wrongfully terminated the contract and so repudiated it. The defendants say they accepted the repudiation and rescinded the contract. Alternatively, they claim that they were entitled to rescind the contract because Elders had repudiated the contract by entering into other supply arrangements which prevented it from being able to perform its obligations under the contract. The defendants counterclaim damages.
There are, therefore, essentially two issues in the action. The first is whether Elders terminated the contract in accordance with its terms. The second is whether it repudiated the contract either by giving notice of termination or by entering into other supply arrangements.
The Parties
Elders is a corporation with a long history of involvement in agri‑business. Its business includes the supply and sale of products and services to farmers throughout Australia by means of a network of branches and agencies. Among the products it sells are fertilizers. It also provides a service of spreading fertilizer. Its sales of fertilizer in Australia in the year ended 30 June 2004 exceeded 1 million tonnes. About three‑quarters of those sales are made in bulk form.
Until 2003 a major supplier of fertilizer products was Incitec Ltd (“Incitec”). It was a subsidiary of Orica Ltd. Orica had previously been known as ICI Australia Ltd.
Since 1913 a company called Pivot Ltd (“Pivot”) had also traded in fertilizer. It was a co-operative. In 2003 it had some 39,000 farmers as shareholders who received rebates on purchases of fertilizer.
In 2002 Incitec and Pivot decided to merge. A restructuring of the companies in the Orica group was effected to enable the merger. It is unnecessary to note the details of that restructuring. It is sufficient to note that by 1 June 2003 the merger had occurred with the new merged company being called Incitec Pivot Ltd. In late 1999, Elders had acquired some 20 per cent of the shares in Incitec. As a result of the merger between Pivot and Incitec its shares were acquired. Incitec Pivot Ltd carries on business as a manufacturer of fertilizer products. It owns all of the shares in the second defendant Incitec Fertilizers Ltd which carries on business as a distributor of the fertilizer products manufactured by Incitec Pivot Ltd. I will call Incitec Pivot Ltd “IPL” and Incitec Fertilizers Ltd “IFL”.
It will be noticed that in correspondence and other documents, neither of the parties was always careful to distinguish between each of Incitec, IPL and IFL. Given the close relationship between those companies, that is entirely understandable. In the reasons which follow, nothing turns on the separate corporate personality of IPL and IFL. I will not always distinguish between them. Generally speaking, when I refer to IPL, I mean both IPL and IFL except where the context indicates to the contrary. For that reason and notwithstanding that at the date when Elders terminated the Supply Agreement the parties to that agreement were Elders and IFL, I will refer to the Supply Agreement by such expressions as “the IPL Supply Agreement”, or “the Supply Agreement with IPL”, or simply “the Supply Agreement”.
IFL and IPL together carry on a substantial business as manufacturers, importers, distributors and retailers of fertilizer products. The two companies supply slightly in excess of 70 per cent of the total volume of fertiliser products sold in what the parties called “eastern and southern Australia”. By that they meant all States other than Western Australia and Tasmania.
The Supply Agreement
For some years before the merger of Incitec and Pivot, Elders had been purchasing fertilizer from Incitec. From at least April 2000, Elders and Incitec had been dealing with one another pursuant to an annual agreement called “Dealer Trading Terms Package”. In these proceedings the parties have called this agreement and each of the later agreements concerning their terms of trade “the Supply Agreement”. I adopt that expression.
In 2002 Elders and Incitec decided to replace their annual agreement with a Supply Agreement for a period of three years. I will later mention the circumstances in which that occurred. Following the merger between Incitec and Pivot, the Supply Agreement continued to operate and the term of the agreement was extended until 31 March 2007. After the merger the parties to the Supply Agreement were Elders and Incitec Fertilizers Ltd.
Clause 9 of the Supply Agreement prescribed the circumstances in which the parties could terminate the Supply Agreement. For the purposes of this action, the relevant clause is cl 9.2 which provides:
9.2Either party may terminate this Agreement on 6 month’s prior written notice to the other, if the parties are unable to agree on a Trading Terms Package by the 1st December each year. During this notice period the Trading Terms Package for the prior year will continue to apply.
By letter dated 7 December 2004 Elders terminated the Supply Agreement stating that it did so pursuant to cl 9.2. Two of the issues in this action are whether it was entitled to terminate pursuant to cl 9.2 and, if not, whether by terminating the agreement Elders repudiated the contract.
There was not a great deal of dispute about most of the facts leading to the termination of the Supply Agreement by Elders. There was little dispute about the events leading to the Supply Agreement coming into existence. There was no dispute about the actual terms of the Supply Agreement. The dispute concerned the questions whether Elders had terminated the Supply Agreement in accordance with its terms and whether it had repudiated the Supply Agreement by entering into other arrangements for the supply of fertilizer products.
THE COMPANIES AND THEIR PERSONNEL
Elders Ltd
Elders is a wholly owned subsidiary of Futuris Corporation Ltd (“Futuris”). At all relevant times, the managing director of Futuris was Mr L Wozniczka.
The managing director of Elders at all relevant times was Mr G A Hunt. He became managing director in October 2001. Before then he had been the chief operating officer of Elders. He had been employed by Elders since 1979 and had extensive experience in rural industry.
The persons employed by Elders who were involved in the day‑to‑day dealings with either Incitec, IPL or IFL under the Supply Agreement were Messrs Leviny, Denton and Horley. Other employees of Elders who had some involvement with Incitec, IPL or IFL were Messrs Barber, Stanton and Sukkel.
Mr T J C Leviny had been employed by Elders and Futuris since 1996. Between June 2001 and December 2004 he had been employed by Elders as national business development manager and dealt with Incitec. Mr Paul Barber had been responsible for Elders’ dealings with Incitec before Mr. Leviny took over that role in June 2001. Until November 2002 his duties included managing Elders’ national fertilizer business. He was succeeded in that role by Mr Denton.
Mr M S Denton was general manager of merchandise for Elders when he gave his evidence. He had been employed by Elders for more than 18 years. From 1995 until 2002 he was Elders’ manager for Victoria and the Riverina area of New South Wales. His duties included managing Elders’ fertilizer business in Victoria. In November 2002 he was appointed Elders’ national fertilizer and supply chain manager to replace Leviny.
Mr J J Horley is national manager of Elders. He has been employed by Elders since 1992. Between July 2003 and January 2005 he was seconded by Elders to Futuris as a senior corporate analyst. His duties required him to acquire knowledge of the fertilizer industry and, in particular, Elders’ dealings with Incitec and IPL and IFL. In 2004 he was engaged in the negotiations leading to the establishment of a joint venture to acquire and sell fertilizer products.
Mr M G Sukkel is employed by Elders as the state manager of merchandise in Victoria and in the Riverina area of New South Wales. He attended a number of meetings in Melbourne with IPL to discuss trading terms.
Incitec Pivot Ltd
IPL is ultimately a subsidiary of Orica Ltd. At all relevant times the managing director and chief executive officer of IPL was Mr G J Witcombe. Immediately before holding that office, Mr Witcombe had since October 1998 been managing director of Incitec.
Before the merger of Incitec and Pivot, Mr R Wilson of Incitec had conducted negotiations with Elders concerning the sale and supply of fertilizer products. Mr J M Lloyd succeeded Mr Wilson as general manager‑commercial of IPL in late May 2003. He had extensive experience in the business of supplying and retailing in rural markets.
Mr K R Browne was the person in IPL who had had most frequent contact with Mr Denton in 2003 and 2004 in relation to issues concerning the Supply Agreement. Mr Browne had had 15 years experience in rural and agricultural business. In 2001 he joined Pivot as regional manager for Queensland and New South Wales, and was employed by IPL after the merger of Incitec and Pivot. Mr Browne’s immediate superior was Mr Lloyd.
Others employed by IPL who were involved from time to time were Mr S Bowman and Mr Jacobs.
The Witnesses
Both Elders and the defendants tendered affidavits sworn by employees of each company. Not all of the deponents were cross‑examined. Elders tendered affidavits sworn or affirmed by the following persons on the dates indicated.
Mr M S Denton 11 March 2005
Mr M S Denton 23 March 2005
Mr J J Horley 8 March 2005
Mr G A Hunt 11 March 2005
Mr T J C Leviny 11 March 2005
Mr T J C Leviny 24 March 2005
Mr M G Sukkel 10 March 2005
Messrs Denton, Horley, Hunt and Leviny were cross‑examined.
The defendants tendered affidavits sworn by the following persons on the dates indicated.
Mr K R Browne 21 March 2005
Mr J M Lloyd 18 March 2005
Mr D G Morley 18 March 2005
Mr G J Witcombe 18 March 2005
Mr G J Witcombe 4 April 2005
Messrs Browne, Lloyd, Witcombe and Morley were all cross‑examined.
I will in these reasons refer to each of these persons by surname only, intending no disrespect to any of them.
The affidavit evidence tendered by both Elders and the defendants included some self‑serving material. I have had no regard to it. Some of the affidavit evidence tendered by the defendants explained their reasons for not agreeing to requests by Elders for changes to the trading terms. It is not necessary to examine their reasons for refusing Elders’ requests for changes to trading terms. I make no judgment as to whether they were valid or appropriate reasons, and I do not set out the evidence as to those reasons. As will be seen, the issue is not whether the defendants had valid reasons for refusing the changes by Elders but whether Elders did, in fact, request changes to trading terms and whether the defendants did, in fact, agree to them.
Although there was a good deal of common ground between the parties on the factual issues, those facts which were in dispute make it necessary to express my views as to the credibility of the witnesses. I confine my findings to the witnesses who were cross‑examined, given that there was no factual dispute in relation to the evidence of those deponents who were not cross‑examined.
I was impressed with each of the witnesses called by Elders. I find that Denton, Hunt, Leviny and Horley were each honest witnesses and I accept their evidence. Hunt was clearly trying to recall events accurately. Although nervous, Horley was candid and honest.
I find that the defendants’ witnesses Browne, Lloyd and Morley gave their evidence honestly and to the best of their recollection. However, where that evidence conflicts with that of the witnesses called by Elders, I prefer the evidence of the witnesses called by Elders because, as a general rule, they had a contemporaneous written document upon which each could rely to refresh his memory. On occasions, Browne had no recollection of a meeting, although he did not deny it had been held. On others, he did not have an accurate recall of it. I was unimpressed with the evidence of Witcombe. He was argumentative and sought to act as an advocate for the defendants’ case. His evidence lacked credibility and, on occasions, was quite inconsistent with objective facts. I set out my reasons for rejecting his evidence in more detail later. I do not rely on his evidence. Where it conflicts with the evidence of Hunt, I unhesitatingly accept the evidence of Hunt.
THE SUPPLY AGREEMENT
I will now turn to examine the facts leading to the creation of the Supply Agreement, the dealings between Elders and the defendants, and the termination of the Supply Agreement by Elders on 7 December 2004. I will then examine the question whether Elders terminated the Supply Agreement in accordance with its terms before dealing finally with the question whether Elders repudiated the agreement by entering into other arrangements for the supply of fertilizer products.
Creation of the Supply Agreement
In 2000 Elders and Incitec agreed the terms on which they would deal with one another. The agreement was called “Dealer Trading Terms Package”. The parties called it the “Supply Agreement”. The Supply Agreement operated from 1 April 2000 until 31 March 2001.
In July 2001 Incitec sent Elders a fresh Supply Agreement for the year 1 April 2001 to 31 March 2002. It was in substance in the same terms as the Supply Agreement for the previous year.
In about November 2001, Elders and Incitec began to discuss trading terms for the period after 1 April 2002. A number of meetings were held. One occurred on 23 January 2002. It lasted several hours. In the course of the meeting a number of issues were discussed. One was a change in the period of the Supply Agreement from an agreement for one year to an agreement for a period of three years, that is to say, from 1 April 2002 to 31 March 2005. Leviny and Wilson also discussed a joint business plan. Further negotiations followed the meeting on 23 January 2002. Ultimately, in July 2002, the parties agreed a new Supply Agreement. The previous annual agreement was replaced with a three year agreement for the period 1 April 2002 to 31 March 2005. The parties also agreed a joint business plan. It was called “National Joint Business Plan 2001/2002”.
At a meeting on 31 July 2002 Leviny handed Wilson a copy of the Supply Agreement signed on behalf of Elders. Despite promises to do so, Incitec did not provide Elders with a copy executed by or on behalf of Incitec. I will refer later to the terms of the Supply Agreement.
Elders and Incitec continued to deal with each other under the terms of the new Supply Agreement. The Supply Agreement provided in cl 3.1 that the parties were at liberty to review the trading terms each year. The relevant part of cl 3.1 was in these terms:
These Trading Terms will be reviewed and agreed on an annual basis prior to the 1st April each year.
Clause 9.2 entitled the parties to terminate the agreement if they were unable to agree on a trading terms package by 1 April in each year. It was in these terms:
9.2Either party may terminate this Agreement on 6 month’s prior written notice to the other, if the parties are unable to agree on a Trading Terms Package by the 1st April each year. During this notice period the Trading Terms Package for the prior year will continue to apply.
Before they had entered into this three year contract, the parties had been bound by the previous annual agreements and so each was in a position to renew the agreement if the terms of trade were not satisfactory. The combined operation of cl 3.1 and cl 9.2 provided the opportunity for an annual examination of the trading terms as well as an opportunity for either party to terminate the agreement if satisfactory terms could not be agreed. I will later examine cl 3.1 and cl 9.2 in more detail.
In mid-July 2002 the merger between Incitec and Pivot was announced. The proposed merger affected attempts by Elders to amend the terms of the Supply Agreement. Elders was concerned that the merger might have consequences for its ability to purchase fertilizer in 2003.
Leviny and Wilson discussed some of the consequences of the merger at a meeting on 3 October 2002 and in later telephone conversations and meetings in 2002 and early 2003.
In or about November 2002 Elders imported a quantity of ammonium nitrate. It had imported that product at a cost of about $380 per tonne. At that time Incitec was selling ammonium nitrate to Elders for more than $500 per tonne. I find that Elders had purchased the shipment because Incitec’s price was not competitive. As will be noted later, the Supply Agreement provided that Incitec was the preferred supplier of fertilizer products but Elders was entitled to purchase from a third party if Incitec could not match or better the price at which Elders could purchase the product. Elders had complied with that right of first refusal to Incitec. On 6 November 2002 Wilson telephoned Leviny to enquire about the purchase. Leviny made enquiries and by letter dated 6 November 2002 informed Wilson that Elders had complied with the Supply Agreement in purchasing the ammonium nitrate. The letter informed Wilson of the facts and complained, among other things, that Incitec’s price was not competitive. Incitec did not take the issue any further.
On 26 November 2002 a meeting was held between representatives of both Elders and Incitec in Brisbane. It was a strategy planning meeting. It was a long meeting. Each of the parties had a number of representatives present. Presentations were made on behalf of both Elders and Incitec. At the conclusion of the meeting Wilson presented Elders with an award for being Incitec’s customer with the largest growth. After the meeting on 26 November 2002 Denton took over Leviny’s role as fertilizer manager for Elders.
In late 2002 a dispute arose between Futuris and Orica concerning the terms of the proposed merger with Pivot. In January 2003 that dispute was resolved and the parties executed an agreement embodying the terms of the compromise. Clause 12 of that agreement provided for the extension of the period of the Supply Agreement from three years to five years. Clause 12 was in these terms:
Orica will procure Incitec immediately Orica becomes entitled to 90% or more of the issued shares in Incitec to extend the existing 3 year trading agreement it has with Elders such that it becomes a 5 year agreement and must procure any entity operating the proposed merged fertiliser business of Incitec and Pivot to assume the obligations of Incitec under that 5 year agreement.
Clause 13 provided the establishment of a working group to examine proposals to improve some aspects of the Supply Agreement. Clause 13 provided:
Following Futuris’ acceptance of the takeover offer, Orica will establish a corporate working group with external advice as appropriate to investigate Futuris’ ideas for improved customer service and value creating (ie to both Incitec and/or Incitec Pivot and their customers) industry issues (including without limitation, the introduction of a national price and volume discount arrangement) such working group to report to Malcolm Broomhead no later than 30 June 2003. Orica will assess Futuris’ ideas having regard to Orica’s judgments as to the commercial interests of the entity conducting the fertiliser business.
The working group was established. It met on 24 March 2003. The meeting lasted all day. The representatives from Incitec asked Leviny to send a letter setting out the issues which Elders believed required attention. Leviny sent the letter on 27 March 2003. A meeting of the working group on 13 May 2003 followed. In Leviny’s view Incitec was not prepared to agree the changes requested by Elders. Another meeting was held on 6 June 2003. After that meeting, Leviny believed that Incitec would not change the trading terms. He informed Wozniczka, the managing director of Futuris, to that effect.
On 30 January 2003 a meeting was held between Incitec and Elders. It was described as a “corporate account review meeting”. The main items discussed at the meeting were the sales by Elders to date in that trading year, Incitec’s winter crop program, the desire of Elders to obtain ammonium nitrate from a supplier other than Incitec, and Elders’ request for review of the Supply Agreement. Incitec agreed to Elders purchasing ammonium nitrate from other suppliers in the event that the quoted price of Incitec was higher than prices of other suppliers. The question of a review of the trading terms was deferred to the next meeting.
The next meeting occurred on 18 March 2003. It was a meeting between Denton and Wilson. At that meeting Wilson handed Denton a letter amending the Supply Agreement so that it was to operate for a further two years and asked Elders to sign it. Wilson asked that the review of trading terms not take place until after the merger of Incitec and Pivot. Denton reluctantly agreed.
By letter dated 1 May 2003 the parties agreed to amend the Supply Agreement in two respects. First, the operation of the Supply Agreement was extended for two years, from 31 March 2005 to 31 March 2007. The second was that IFL replaced Incitec as the supplier. Apart from those two changes, the terms of the Supply Agreement remained the same. Leviny’s belief that Incitec would not agree to make any further amendments to the trading terms was correct.
The merger of Incitec and Pivot took effect on or about 1 June 2003.
On 1 July 2003 Elders asked for a review of the trading terms pursuant to cl 3.1. A meeting to discuss trading terms was held on 28 August 2003. I will later refer in more detail to that meeting. Elders sought a number of amendments to the trading terms. Incitec agreed to one amendment only, namely, to amend the date in each year by which the parties were at liberty to review the trading terms. The date was amended from 1 April to 1 December.
After 28 August 2003 the Supply Agreement, therefore, comprised four documents, being
1.The Dealer Trading Terms Package.
2.The National Joint Business Plan.
3.The letter from Incitec Ltd to Elders dated 17 March 2003 by which Incitec Fertilizers Ltd took over the obligations of Incitec Ltd and by which the term of the agreement was extended to 31 March 2007.
4.Minutes of meeting of 28 August 2003 at which the review date was amended to 1 December in each year.
The issues in this action do not require consideration of any document other than the Dealer Trading Terms Package which, for convenience, I call “the Supply Agreement”.
A Substantial Commercial Contract
The Supply Agreement was a substantial commercial contract which on 1 May 2003 was to operate for almost four years. The volume of fertilizer sales was high and the value of that fertilizer was significant to both Incitec and Elders. That is best illustrated by the following table of sales expressed in dollar value and tonnes sold.
Year ended
Fertilizer purchased by Elders from Incitec/IPL
$
Fertilizer purchased by Elders from Incitec/IPL
Tonnes
30 June 2000
$73.2 million
244,350
30 June 2001
$92.7 million
259,500
30 June 2003
$127.2 million
348,000
30 June 2004
$161.9 million
436,000
In that period approximately 95 per cent of all fertilizer purchased by Elders in the eastern States of Australia was supplied by IPL. The significance of these sales to both parties is emphasised by the substantial growth in sales from 2000 onward.
I turn to examine the terms of the Supply Agreement.
The Terms of the Supply Agreement
As already mentioned, the Supply Agreement is an agreement for the sale and supply of fertilizer products. When extended on 1 May 2003, it was to operate for almost four more years until 31 March 2007.
The present parties to the agreement are Elders and IFL. Elders entered into the agreement on behalf of itself and each of its dealers and subsidiaries which sell fertilizer: cl 2.3.
The agreement is relatively short. It is not necessary to set out all of its terms. I summarise some clauses but set out the whole of those clauses which are relevant to the issues in this action. I include the amendments made on 1 May 2003 and 28 August 2003.
1.This clause provides for the term of the contract which, following the amendment, was until 31 March 2007.
2.This clause provides that IFL will supply the full range of its fertilizer products to Elders and Elders agrees to purchase those products in accordance with the agreement. It also provides that the agreement applies to all the areas in eastern and southern Australia serviced by IFL. The evidence was that the areas covered were all States of Australia other than Western Australia and Tasmania.
3.It is necessary to set out the whole of cl 3.
3.1 Elders will be entitled to a rebate from Incitec on the Product it purchases under this Agreement. The rebate for the first year of this Agreement will be calculated in accordance with these Trading Terms. These Trading Terms will be reviewed and agreed on an annual basis prior to the 1st December each year.
3.2 The price of Product supplied by Incitec under this Agreement will be as specified by Incitec. Incitec reserves the right to vary its prices at any time.
3.3 Elders agrees to support and communicate Incitec as its’ [sic] preferred supplier of relevant fertilizer products in the area outlined in 2.2(b). However, Elders may purchase fertilizer products from a third party to the extent that:-
(a)Incitec rejects an order for Product from Elders;
(b)Elders wishes to purchase a particular type of fertilizer product that is not a listed Incitec product and Incitec is unable to supply that fertilizer product;
(c)Incitec is unable to supply Elders in accordance with any agreed order; or
(d)Elders is able to purchase fertilizer from a third party for a price less than that offered by Incitec (after taking into account all discounts and rebates), provided that Elders has first given Incitec at least [1] working days to match or better the third party’s price.
(e)The transfer of new or existing business to Incitec is not viewed as detrimental to the economic and/or operating performance of that business or Elders branch.
(f)Agreed service levels are not met.
Given the issues in this action, cl 3.1 and cl 3.3(d) are important provisions. I will examine their import later.
4.This clause provides for different types of trading accounts. Nothing turns on the provisions of cl 4.
5.Clause 3.1 entitled Elders to a rebate in respect of purchases under the agreement. Clause 5 provides four kinds of rebate, a Base Business Rebate, a Business Focus Rebate, a Corporate Support Rebate, and a Big N Field Service Specialist Accreditation Rebate.
5.1 The Base Business Rebate is payable on all sales of what the agreement calls Incitec Fertilizer’s major products. The rebate is effectively a discount. It is available to all dealers “who support Incitec Fertilizer’s products on an ongoing basis”. It was a rebate of 5 per cent. Clause 5.1 provides:
Eligibility for the Base Business Rebate will require that the Dealer provides Incitec Fertilizers with a last right of refusal on supply of the Dealer’s requirements for products within the Incitec Fertilizers product range. Should Incitec Fertilizers elect not to take up this offer the Dealer’s eligibility will not be affected. (Refer 3.3)
5.2 The Business Focus Rebate was payable on the achievement of goals and targets as defined by the Joint Business Plan or other agreed performance measures. It was a rebate of 2.5 per cent.
5.3 The Corporate Support Rebate was a rebate of 1 per cent paid for the achievement of an agreed Joint Business Planning Program with IFL.
5.4 The Big N Field Service Specialist Accreditation Rebate was payable to dealers who achieved Field Service Specialist Accreditation in respect of IFL’s range of “Big N” fertilizer products.
6.This clause provided for incentives for specific products in specific geographical areas, with a view to increasing market share and profitability of both IFL and Elders. It was in these terms:
To achieve the mutual growth and profitability objectives of both the Dealer and Incitec Fertilizers, Incitec Fertilizers will, from time to time, initiate specific product incentives. Such product incentives will be targeted at specific geographical areas and timings with an overriding objective of gaining incremental growth and profitability for both the Dealer and Incitec Fertilizers.
7.This clause provided for terms of payment and nothing turns on it.
8.This clause spells out the terms upon which the parties had entered into the Supply Agreement. It is entitled “Relationship Commitment”. It is important and I set out all of its terms:
Elders Ltd and Incitec Fertilizers enter into this Trading Term Package agreement with the mutual intent and commitment to grow and strengthen both the business relationship and profitability, whilst positioning Incitec as the preferred fertilizer supplier to Elders on the East Coast. The undersigned agree and understand the contents of the Trading Terms Package and the spirit of this relationship.
Nothing in this Agreement is intended to create any partnership, agency, franchise or fiduciary relationship between the parties or restricts the right of Incitec to sell fertilizer products and services to third parties.
I will later examine its import.
9.This is the last clause in the agreement. It is important because it spells out the rights of the parties to terminate the agreement.
9.1 Either party may terminate this Agreement on written notice to the other if:
(a)the other party is in breach of this Agreement and fails to remedy the breach within 30 days of written notice of the breach; or
(b)the other party is insolvent, subject to any order for winding up, has an administrator or receiver appointed over all or any part of its assets, or enters into a scheme of arrangement with its creditors.
9.2 Either party may terminate this Agreement on 6 month’s prior written notice to the other, if the parties are unable to agree on a Trading Terms Package by the 1st December each year. During this notice period the Trading Terms Package for the prior year will continue to apply.
9.3 Incitec may terminate this Agreement on 6 month’s prior written notice to Elders in relation to any part of the Territory if Incitec ceases to sell fertilizer products in that part of the Territory.
9.4 Elders may terminate this Agreement on 6 month’s prior written notice to Incitec in relation to any part of the Territory if Incitec is unable to supply sell fertilizer products in that part of the Territory.
9.5 Incitec may terminate this Agreement on 6 month’s prior written notice to Elders if there is a change in the ownership of Elders such that more than 50% of its shares are directly or indirectly owned by a competitor of Incitec in the market for the manufacture or import of fertilizers.
9.6 Elders may terminate this Agreement on 6 month’s prior written notice to Incitec if there is a change in ownership of Incitec such that more than 50% of its shares are directly or indirectly owned by a competitor of Elders in the market for the resale of fertilizer to end users.
Initially, the Supply Agreement also consisted of the document entitled “National Joint Business Plan 2001/2002”. It contained business strategies, growth targets, and other processes to increase the market share and thereby the profitability of Elders and IFL. It begins with what is called the “Vision of the Parties”. It reads:
1.VISION
The cooperative development of a successful long-term strategic partnership, based on mutual trust and sustainable competitive advantage, that profitably grows both company’s business.
We aim to maximise the long-term sustainable valuation of both shareholders’ equity.
Paragraph 4 of the Business Plan lists what are called “Agreements and Actions for 2002”. It is in these terms:
· Mutual respect for each parties [sic] rights to establish channel freely in the market.
· Incitec and Elders agree to continue to develop transparent and open pricing and pricing administration processes.
· Incitec agrees to develop and offer alternative wholesale pricing options including fixed parcel quotes.
· Elders agree to conduct a full review of field assets and infrastructure with Incitec.
· Supply security – Single super and other products for growth in supply Southern region.
· Strategic plan to target high analysis pasture blends for growing southern market.
· Big N – Access to grow business for both companies.
· Pricing policies – Competitive and responsive pricing strategies from Incitec. Investigation of profit sharing strategies in highly competitive markets especially in the south.
· Staff recruitment – Attracting quality staff to drive business growth.
· Training – Ensuring staff have competence to sell fertilizer ie Nutrient Advantage, Big N Accreditation, sales training.
· SHE & Environmental Management.
The evidence was that, although it was intended to review the Business Plan each year, no such plan was prepared in subsequent years. However, it must be noted that it included business targets for later years, namely, to achieve “a 30% market share of the rural inputs business by the end of 2004, including fertilizer” and to sell 2.1 million tonnes of fertilizer in eastern Australia by 2003. In this action, the parties treated the Business Plan as part of the Supply Agreement, notwithstanding that it had not been reviewed in the years subsequent to its creation. Strictly speaking, the Business Plan is not part of the Supply Agreement. In my view, it has no higher status than an expression of the goals of both Elders and IPL in future years.
THE INTERPRETATION OF THE SUPPLY AGREEMENT
Relevant Principles
This was a commercial contract made by two substantial companies. It dealt with the terms of trade and provided an opportunity to review those terms of trade. It was prepared by businessmen, not lawyers.
When determining the rights and liabilities of parties to a contract, the court acts objectively, having regard to the expressed intention of the parties. That principle has been frequently expressed by the High Court and was most recently affirmed in Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22] and in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [40].See also Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 at [34]. In Toll at [40] the court said:
What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.
The Court must ascertain the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract: Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at 188 per Gleeson CJ, Gummow and Hayne JJ.
Like any other contract, the court must read the contract as a whole: L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235. If the words are clear and fairly susceptible to one meaning only, the court must give effect to those words: Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99, per Gibbs J at 109. Where a clause is open to two constructions, the court will construe it so as to avoid consequences which appear capricious, unreasonable, inconvenient or unjust. Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (supra), per Gibbs J at 109; Australian Casualty Co Ltd v Federico (1986) 160 CLR 513 at 520. The court must give commercial efficacy to the contract and the obligations contained in it. These principles were summarised by Gibbs J in Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (supra) at 109 ‑ 110 in these terms:
It is trite law that the primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another. If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, “even though the construction adopted is not the most obvious, or the most grammatically accurate”, to use the words from earlier authority cited in Locke v Dunlop, which, although spoken in relation to a will, are applicable to the construction of written instruments generally; see also Bottomley’s Case. Further, it will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument. Finally, the statement of Lord Wright in Hillas & Co Ltd v Arcos Ltd, that the court should construe commercial contracts “fairly and broadly, without being too astute or subtle in finding defects”, should not, in my opinion, be understood as limited to documents drawn by businessmen for themselves and without legal assistance (cf Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd). (Citations omitted)
Regard will be had to the surrounding circumstances if the language of the contract is ambiguous or susceptible of more than one meaning but it is not admissible to contradict the plain meaning of the words used: Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 352 – 353. In Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd [1990] VR 834 at 837 McGarvie J, with whom Kaye and Ormiston JJ agreed:
A contract is to be construed in the light of the surrounding circumstances existing and known to the parties when the contract was made: Butt v Long (1953) 88 CLR 476, at pp 486 - 7 and 490. This includes the genesis of the transaction, the objective framework of facts within which the contract came into existence and the commercial purpose of the parties, in the objective sense of what reasonable persons would have in mind in their situation: Codelfa (1982) 149 CLR 337, at pp 347 – 53.
The essential question is, what would reasonable business people in the position of the parties have taken the clause to mean: Schenker at 838.
It is well settled that, when interpreting a commercial contract, the court will not adopt a narrow technical or artificial interpretation of the words used in that contract. So in Cohen & Co v Ockerby & Co Ltd (1917) 24 CLR 288 at 300, Isaacs J said:
…the expressions, and particularly any elliptical expressions, in a mercantile contract are to be read in no narrow spirit of construction, but as the Court would suppose two honest business men would understand the words they have actually used with reference to their subject matter and the surrounding circumstances.
In Hillas & Co Ltd v Arcos Ltd (1932) 147 LT 503 at 514, Lord Wright said that the court should construe commercial contracts “fairly and broadly” without being too astute or subtle in finding defects. To like effect are the observations of Barwick CJ in Upper Hunter County District v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429 at 437:
In the search for that intention, no narrow or pedantic approach is warranted, particularly in the case of commercial arrangements.
The interpretation of the contract must accord with business commonsense: Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201 per Lord Diplock, with whom the other members of the House of Lords agreed. Lord Diplock said:
If detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.
More recently in McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579, Gleeson CJ and Kirby J each expressed views on the interpretation of commercial contracts. The court was dealing with a contract of insurance which is but one form of commercial contract. Gleeson CJ said at [22]:
A policy of insurance, even one required by statute, is a commercial contract and should be given a businesslike interpretation. Interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure. (Citations omitted).
Kirby J said that questions of meaning are:
…to be answered in a practical and realistic way, not in a way which adopts an overly fine or theoretical approach that is alien to commercial agreements.
To put the position shortly, the interpretation must be commercially sensible and accord with commercial reality or, as was said in Gollin Co Ltd v Karenlee Nominees Pty Ltd (1983) 153 CLR 455 at 464, must accord with “commercial efficacy or common sense”.
The Meaning and Effect of Clause 9.2
Central to the determination of the issues in this action is the meaning of cl 9.2 of the Supply Agreement It is convenient to repeat the terms of cl 9.2:
Either party may terminate this Agreement on 6 month’s prior written notice to the other, if the parties are unable to agree on a Trading Terms Package by the 1st December each year. During this notice period the Trading Terms Package for the prior year will continue to apply.
The defendants contend that it is not possible to terminate the Supply Agreement unless there has been a review of the Trading Terms Package in the relevant year pursuant to cl 3.1. The effect of the defendants’ argument is to make the holding of a review a condition precedent to the exercise of the power to terminate in cl 9.2.
When considering the meaning and operation of cl 9.2, regard must be had to the fact that the Supply Agreement was of substantial commercial importance for both parties. It concerned the sale and supply of substantial volumes of fertilizer products. In the year ended 30 June 2004 the value of sales by IPL to Elders was more than $160 million. It was not an agreement which the parties would intend could be determined either summarily or at will. The parties have recognised that, by stipulating the grounds on which each was entitled to terminate the agreement.
When extended on 1 May 2003, the Supply Agreement was to operate for almost four years. That fact demonstrates that this was not an annual agreement determinable on six months’ notice. In addition, neither party was at liberty to terminate the agreement by simply giving the other six months’ notice. A party could terminate the contract only in the circumstances prescribed in cl 9, which contains five sets of circumstances in which the Supply Agreement could be terminated on six months’ notice. Clause 9.2 is one of those provisions.
It is necessary to examine the meaning and effect of both cl 3.1 and cl 9.2. I deal first with the meaning and effect of cl 3.1.
The Meaning of Clause 3.1
Clause 3.1 of the Supply Agreement includes the sentence
These Trading Terms will be reviewed and agreed on an annual basis prior to the 1st December each year.
The inclusion of that sentence reflects the previous course of dealing between Elders and the Incitec Group. Before this Supply Agreement, Elders had been purchasing fertilizer from Incitec pursuant to an annual agreement. I find that, when the parties entered into this Supply Agreement in 2002 for a period of three years, each party wished to preserve the ability in each year to negotiate terms of trade for the following year. Without that ability, the parties would have been locked into an agreement for three years which neither could amend except by agreement. The intent of that sentence was to enable each party to seek a change to the trading terms at least once in each year. Obviously, it would be commercially unrealistic to bind oneself to an agreement for a period as long as three years without any ability to renegotiate the terms of trade given that a change in market conditions, financial constraints or other commercial factors might require the terms to be amended.
The Supply Agreement did not stipulate any process by which the review was to occur. As this was a commercial contract drawn by businessmen, practical effect must be given to the sentence in cl 3.1. There is nothing which suggests that the process should be formal. I find that it was not necessary to request a review of all of the terms of trade. It would suffice if the request related to one or two items only. That is entirely consistent with business efficacy and commercial reality.
One unusual feature of cl 3.1 is that it provides that the trading terms “will be reviewed and agreed” in each year. The effect of that statement is to oblige the parties to agree the trading terms after a review. Plainly, that was not and could not have been their intention. While it might impose an obligation on the parties to review trading terms in each year, it could not oblige either party to agree them. The terms proposed by one party may be quite unacceptable to the other. In addition, cl 9.2 enables either party to terminate if the trading terms cannot be agreed. In this rather inexpertly drawn contract, the word “will” in the context in which it appears is not intended to impose any obligation other than that, if one party calls for a review, the other party is bound to participate in it. As this was a contract for a period of years and thus different from the annual agreements which had existed before, the parties wished to retain the ability to re‑negotiate the terms of trade for the ensuing year. Clause 3.1 provides, therefore, an opportunity for review if one party should seek it.
For these reasons, cl 3.1 does not impose an obligation on the parties to have a review in each year. Instead, it provides the opportunity for either party to request a review if that party believes it is necessary. This conclusion is consistent with commercial reality. If both parties are content with the trading terms, neither will seek a review. In this context cl 3.1 must be read together with cl 9.2. Clause 3.1 provides the opportunity for review if one party should seek it. If the parties are unable to agree the terms, either party is at liberty to terminate the agreement. The parties intended that, if one party sought to change the trading terms, the other party must seriously consider the request, knowing that if the changes were not agreed or if the parties could not agree some other terms of trade, the other party would be at liberty to terminate the agreement.
Some Aspects of Clause 9.2
Before examining the meaning and effect of cl 9.2, it is necessary to note one aspect of the combined operation of cl 3.1 and cl 9.2. If a review is conducted and changes are not agreed, it is not only the party who requested the change who is at liberty to terminate. If, after a review, the parties are unable to agree on a Trading Terms Package, both are at liberty to terminate.
Certain aspects of the operation of cl 9.2 should also be noted. One stems from the phrase “the parties are unable to agree on a Trading Terms Package by 1 December in each year”. The effect of those words is that a party who has been asked to agree an alteration of the trading terms has until 1 December in that year to decide whether to agree to it. Thus, one party could request an alteration to the trading terms in January and the other party would have until 1 December in that year to agree to it. If the parties are unable to agree, notice of termination could not be given before 2 December in that year.
A second aspect of the operation of cl 9.2 is that, if a party is lawfully entitled to terminate in accordance with cl 9.2, the parties are bound to trade with each other for a period of six months thereafter upon the same terms and conditions as had existed before the notice had been given. Thus, if one party is dissatisfied, it cannot give notice until 2 December and must continue to trade on the existing terms for six months thereafter, unless the parties make some other arrangement. The party to whom notice is given therefore has a substantial time within which to enter into other commercial arrangements. Six months’ notice was, on any view, a substantial period of notice for a three year contract.
Shortly stated, the practical effect of cl 9.2 is that a party who intends to terminate because of an inability to agree trading terms cannot do so until 2 December in that year. Once notice is given both parties are bound to continue to trade on the existing terms and conditions, unless of course they make some other agreement. In addition, once there is a failure to agree trading terms, each party is at liberty to terminate, but not before 2 December. The right to terminate is not vested only in the party requesting the change.
The Meaning of Clause 9.2
Three questions have to be considered when examining the meaning of cl 9.2, namely,
1.what is meant by the expression “trading terms package”,
2.is an annual review a condition precedent for the operation of cl 9.2, and
3.what is meant by the expression “the parties are unable to agree”?
I will examine each in turn.
Trading Terms Package
The event which entitles a party to terminate the Supply Agreement is the fact that the parties have been unable to agree a Trading Terms Package. I do not think it is necessary, when determining the issues in this case, to define the expression “Trading Terms Package”. In ordinary usage, the expression “trading terms” means terms of trade. If a party requested a change to but one of the terms of trade, it would be seeking a change to the Trading Terms Package. Thus, whatever is precisely meant by the expression “Trading Terms Package”, a request to alter one term which affects the terms of trade is sufficient to constitute a request to change the Trading Terms Package. That conclusion is re‑inforced by a consideration of what might be meant by the expression “Trading Terms Package”.
The Supply Agreement is entitled “Dealer Trading Terms Package”. That might suggest that the whole of this relatively short agreement constitutes the Trading Terms Package. There is little in the agreement which does not deal with the terms on which the parties trade.
On the other hand, as cl 3 of the Supply Agreement is headed “Trading Terms”, there is a question whether the expression “Trading Terms Package” in cl 9.2 refers only to what is prescribed by cl 3. However, other clauses also deal with important aspects of the terms of trade. Clause 5, which deals with the amount of each rebate and the circumstances in which they are paid, is obviously one such provision. The amount of the rebate directly relates to the profitability of both Elders as buyer and IPL as seller. A request to change the amount of rebates would plainly affect one of the terms of trade. More significantly, the entitlement of Elders to rebates is expressly provided in cl 3.1. Thus, the reference to rebates in cl 3.1 incorporates by reference all of cl 5 so that rebates constitute part of the terms of trade.
All of the other clauses in the Supply Agreement affect, in one way or another, the manner in which the parties trade with each other. They deal with the obligations of IPL to supply, product incentives, terms of payment, the commercial relationship of the parties and definition of terms. For these reasons, all of what is contained in the Dealer Trading Terms Package constitutes a Trading Terms Package. The use of the pronoun “these” in the expression “these Trading Terms” in cl 3.1 might suggest that the trading terms are limited to what is provided in cl 3 or, at least, in cl 3 and cl 5, because of the reference to rebates in cl 3.1. However, for the reasons already expressed, I do not think it is limited in that way.
As is evident from the evidence of both Denton and Browne, both parties recognised that trading terms were different from what they called “operational issues”. Operational issues concern what might be called routine issues arising in the course of the day‑to‑day trading operations.
Mr Browne’s evidence was that the product incentives referred to in cl 6 of the Supply Agreement were not part of the terms of trade. He classified them as operational issues. There can be no doubt that operational issues would have to be resolved when implementing product incentives pursuant to cl 6. However, the terms of the agreement which provided for product incentives and the terms on which they are provided would constitute trading terms. The distinction between trading terms and operational issues is, however, not of great moment and does not affect the determination of the issue in this action.
For those reasons, cl 9.2 may be called into operation if the parties are unable to agree on as few as one or two terms of trade.
Is an Annual Review a Condition Precedent?
Clause 9.2 is not expressed to be subject to the terms of cl 3.1, and nor is it expressed to be subject to a review of trading terms pursuant to cl 3.1. There is no expression in cl 9.2 or elsewhere in the Supply Agreement which requires that the parties have participated in a review before the ability to terminate comes into operation. There is, therefore, no express requirement that an annual review is a pre‑requisite to the operation of cl 9.2. Is such a requirement to be implied? For the reasons which follow, I think not.
The only pre‑requisite which is expressed in cl 9.2 is that the parties have been unable to agree a Trading Terms Package before 1 December in each year. In that respect, it operates in the same way as each of the other provisions for termination spelled out in cl 9, that is to say, the right to terminate is grounded on the events for which each of the sub‑clauses in cl 9 provides. Each of those provisions stands separate and distinct from the other sub‑clauses in cl 9 as well as from any other provision in the Supply Agreement. That is one indication that the operation of cl 9.2 does not in any way depend on the fact that there has or has not been a review of the trading terms in that year under cl 3.1.
It would be commercially unrealistic if a review under cl 3.1 was a pre‑requisite to termination under cl 9.2. The occasion might arise when one party proposes but one change only to what is a fundamental trading term and the other party does not agree to it. It could not be suggested that a refusal by the other party to agree that term would not entitle the other to terminate. That would defeat the intent of this trading agreement. This is a contract which should have commercial efficacy and a party should not be bound to trading terms which operate to its disadvantage in circumstances where it has requested a change and that change has been refused. The parties have, therefore, provided the ability to terminate if they are unable to agree the trading terms.
The issue boils down to the simple proposition that it is possible for the parties to be unable to agree on trading terms without having had a review. If one party proposes a change to the terms and the other rejects it, they are plainly unable to agree the trading terms. A review cannot enhance that inability to agree.
There is a further reason why a review is not a prerequisite to the operation of cl 9.2. Assume that a review of the trading terms had already occurred in the relevant year, say, in May of that year, and new terms had been agreed. Assume also that the conditions in the fertilizer market significantly change after the review so that the new terms become highly unacceptable to one party. Is there any reason why that party could not propose new terms and, if the other party did not agree the new terms, terminate the Supply Agreement? I do not think there is. There is nothing in cl 3.1 or in cl 9.2 which requires that each party is able to make one request only in each year to change the terms of trade. Indeed, the potential for change in a market means that ordinary commercial prudence requires that parties be at liberty to agree to change the terms of trade more than once in each year. If after a review, a party seeks to change the terms and the other party disagrees, the parties are in a position where they are unable to agree. In that event, either party would be at liberty to terminate under cl 9.2.
Had the parties intended that a review was a necessary prerequisite for the ability of a party to terminate, they could easily have said so. As they have not, and there is nothing else which suggests that a review is a prerequisite, it must be concluded that an annual review is not a condition precedent to the ability to terminate under cl 9.2. The only prerequisite is that the parties have been unable to agree the trading terms by 1 December in each year.
Thus, it is not a condition precedent to the entitlement of a party to terminate under cl 9.2 that there has been a review under cl 3.1. The defendants’ contention that cl 9.2 does not provide a right to terminate if neither party has sought a review must be rejected. The only prerequisite for termination pursuant to cl 9.2 is that the parties have been unable to agree a Trading Terms Package by 1 December in each year.
The Meaning of “unable to agree”
The question whether the parties are unable to agree trading terms is an objective fact requiring only a determination whether the parties have been able to agree the terms on which they trade. They have either agreed them or they have not. There is no question of fault involved. It is, however, necessary to consider what circumstances would give rise to the parties being unable to agree trading terms. One obvious prerequisite for an inability to agree is that one party has requested an amendment to the terms of trade. In the absence of such a request the other party cannot know that the other party seeks an amendment. As a matter of commercial efficacy and as a matter of ordinary fairness, it is reasonable to imply a term that the request for the amendment should be in writing or, if made orally, confirmed in writing.
If a request to amend the trading terms has been made, there are four obvious possible sets of facts. There are, no doubt, others. These four are sufficient to illustrate the issue. It is convenient to refer to the parties as A and B when examining them.
1.If A requests an amendment and B agrees to that amendment or both parties negotiate an agreed alternative, cl 9.2 cannot operate.
2.If A requests an amendment and B refuses to agree to it, either party is clearly at liberty to terminate pursuant to cl 9.2.
3.A third possibility is that A requests an amendment and B says it will consider the request. If nothing occurs before 1 December in that year, the parties have been unable to agree trading terms by that date so that either party would be at liberty to terminate within a reasonable time after 1 December. As this is a commercial contract relating to substantial dealings involving in excess of $150 million in each year, it is important that issues affecting the terms on which the parties trade are resolved promptly. Thus, once a request has been made for change by A, there is no obligation on A to continue to press it. A is entitled to make the request and await B’s response. Equally, once the request has been made for change by A, B must deal with the request within a reasonable time. If B does not, B must be deemed not to have agreed to the request.
4.A fourth possibility is a variation of the third. If A requests an amendment and A and B negotiate upon that request but do not reach an agreement by 1 December in that year, they are clearly in the position of being unable to agree within the meaning of cl 9.2.
Thus, the expression “unable to agree” does not necessarily require that the party to whom the request for change has been made has communicated a refusal to agree. It will also be satisfied if a request for a change is made and that request is not answered. Again, it will be satisfied if the request for change is answered by a statement that the request will be considered but is not dealt with before 1 December in that year. Reasonable commercial dealing in a contract of this magnitude requires that requests for change are resolved within a reasonable time – in this case the parties allowed until 1 December in each year.
It is implicit in cl 9.2 that notice to terminate must be given within a reasonable time after 1 December. If notice to terminate is not given with a reasonable time, the party requesting the change must renew the request for a change in trading terms and, if it intends to terminate, must wait until 1 December of the following year. It is not necessary in this case to decide what constitutes a reasonable time within which to terminate as Elders gave notice on 7 December 2004, within a week after 1 December 2004. Viewed commercially, Elders gave notice of the termination within a reasonable time.
Notwithstanding that there are several possible sets of circumstances which would result in the parties being unable to agree, it is sufficient for the purposes of the issues in this action to decide that, if one party makes a request in writing to change the trading terms and the other party refuses to agree to it, either party is entitled to terminate the Supply Agreement within a reasonable time after 1 December in that year in which the request was made.
An important consequence of the fact that cl 9.2 operates only if the parties are unable to agree the trading terms is that a party is not entitled to terminate merely because it is dissatisfied with the trading terms. The mere fact that one party has expressed dissatisfaction with the trading terms, even in writing, does not, standing alone, signal to the other that it is not willing to trade on those terms. Something more than an expression of dissatisfaction is required before the other party is in a position to know that the other disagrees with the terms of trade to the extent that it wishes to terminate the contract. If a party writes expressing its dissatisfaction, it will not be in a position to rely on cl 9.2 unless the letter also requests a change in the trading terms.
I have considered whether a written request to amend the trading terms should include a statement to the effect that, if the parties cannot agree new trading terms, the party giving notice may terminate the Supply Agreement. It is not necessary because of the terms of cl 9.2. The parties are aware of the terms of cl 9.2 and must, therefore, know that if one party seeks an amendment and they are unable to agree to that amendment, there is a risk that the agreement may be terminated.
For these reasons, the condition that the parties are unable to agree on the Trading Terms Package will be satisfied if one party makes a request in writing to amend one or more terms of trade and, before 1 December in that year, the parties do not either agree to the proposed amendment or agree to an alternative to the proposed amendment.
There are at least two means by which the parties could have provided an additional safeguard against an unexpected termination. First, they could have included the expression “after a review” in cl 9.2 so it would have read:
Either party may terminate this Agreement on six months’ prior written notice to the other if, after a review under clause 3.1, they are unable to agree on a Trading Terms Package.
Secondly, they could have expressed cl 9.2 in terms which required a party, who proposed a change in the trading terms or a review of trading terms and who intended to terminate if the other party did not agree to the change, to give notice of that intention. They did not adopt either alternative. I find that they did not because each believed that the combined commercial effect of the fact that the Supply Agreement could not be terminated before 1 December in any year, the fact that six months’ notice had to be given, and the fact that the existing trading terms continued to operate over that period of six months, was adequate protection for their respective positions and that the period of six months provided a commercially realistic time in which to restructure their commercial arrangements.
Mr Rushton SC submitted that, if a review under cl 3.1 is not a condition precedent for the exercise of cl 9.2, any request for amendment of the trading terms, no matter how trivial or unimportant or how occasional or informal, could provide a basis for termination. That was, he said, commercially unrealistic when the parties are bound to a substantial commercial contract of this kind. Furthermore, he submitted, it would leave this substantial commercial contract at the whim of a party. Neither party to the agreement, he said, could safely plan for the future. One party would have to deal with each and every isolated complaint and request of the other on the footing that, if it did not agree to it, it was vulnerable to termination. That, he said, introduced an unworkable and uncommercial level of uncertainty. However, if a review of trading terms must take place before the ability to terminate can come into operation, each party would come to the review in the knowledge that, if the terms were not agreed, either party was at liberty to terminate the Supply Agreement. These factors, Mr Rushton said, pointed to the conclusion that a review under cl 3.1 was a condition precedent to termination under cl 9.2.
When the rhetoric is removed, this contention amounts to no more than an argument that a party should not be permitted to terminate if it is merely dissatisfied with the terms of trade. I have already stated that dissatisfaction cannot be a ground for termination and addressed the issue by implying the term that a party seeking to amend should give written notice.
Next, this contention is at odds with the facts. As I will shortly find, Elders sought to amend the trading terms in a number of substantial respects. Elders did not seek to make minor or insignificant changes to the trading terms. To the extent that Mr Rushton suggested that the Supply Agreement might be liable to termination on a whim or minor ground, those are issues which could be examined by the Court if it was contended that the termination was wrongful or made on inadequate grounds.
A further and more significant answer to Mr Rushton’s argument lies in the fact that it is not possible to terminate before 1 December in each year, that six months’ notice of termination is required, and that all existing trading terms continue to operate over the period of notice. In a contract which was to operate for a term of three years and ten months when it was amended on 1 May 2003, a period of six months’ notice provided a long time for either party to restructure its commercial arrangements. That period is correspondingly longer when the contract was to extend for a further term of two years and nine months, when notice was given on 7 December 2004. There can be little doubt that the parties each believed that six months’ notice was sufficient in the event that they disagreed on trading terms.
Furthermore, it is a corollary of the fact that a party would continue to be bound to the existing terms of trade for the whole of the period of six months’ notice that it would be highly unlikely that a party would terminate on flimsy grounds or on a whim. That party would know that it would continue to be bound to the existing trading terms for a further six months. In addition, the benefit of the existing commercial arrangement and the difficulty of putting in place fresh arrangements would provide a real disincentive to terminating the Supply Agreement for other than substantial commercial reasons. The likelihood is that a party would terminate only on substantial grounds.
Finally, there is a good deal of unreality in the defendants’ contention. Elders has purported to terminate the Supply Agreement on the ground that IPL has not agreed certain terms which, as I will find, were important and material terms of the Supply Agreement. The effect of the defendants’ contention is that Elders should have sought a review. If it had done so and the terms had not been agreed, Elders could then have lawfully terminated in accordance with the terms of the Supply Agreement. It would have been an unrealistic exercise, if not an exercise in futility, given that the parties were clearly unable to agree to amend the trading terms. The review in August 2003, and Incitec’s subsequent conduct, made it clear to Elders that Incitec was not minded to alter the terms of trade in the manner sought by Elders.
With that understanding of the meaning and effect of cl 3.1 and cl 9.2 it is convenient to note the events leading to the termination of the Supply Agreement and the events associated with its termination. After noting those facts, I will examine the question whether Elders terminated in accordance with the terms of the Supply Agreement.
THE EVENTS LEADING TO TERMINATION
I have so far considered the events leading to the parties making the Supply Agreement in the form in which it existed on 7 December 2004 when Elders gave notice it was terminating the agreement. When examining the main events leading to the termination of the Supply Agreement, it is convenient to take a step back to 1 July 2003.
A Request for a Review
On 1 July 2003 a meeting was held in the offices of Elders in Adelaide between Denton for Elders and Messrs Browne, Bowman and McKeller for Incitec. A number of items were discussed including Elders’ request for review of the trading terms. Browne asked Denton to send him the amendments proposed by Elders. The parties agreed to hold a planning meeting on 6 August 2003. The planning meeting was held. The purpose was to discuss the strategies of the respective companies, to enable Elders to meet IPL personnel, and to outline IPL’s plans. The trading terms were not specifically discussed at the meeting. However, at a dinner which followed the meeting, the question of Elders purchasing in bulk quantities was mentioned as was the topic of Elders having a second supplier. A representative of IPL said a second supplier would unsettle the relationship between IPL and Elders. Browne questioned the need for Elders to be able to make purchases in bulk.
After the meeting on 1 July, Denton prepared, in consultation with Barber of Elders, a draft amended form of the Supply Agreement with revised trading terms. However, he did not send that draft to Browne. Instead, on 11 August 2003 he sent Browne an email stating that he had redrafted the trading terms and asked for a meeting to discuss them. In his email he listed the proposed amendments. I list the changes sought, with an explanation of each based on the affidavit evidence of Denton, which was not disputed on this point.
1.Change of the annual review date. Elders sought to change the date to 1 December in each year. This is self‑explanatory.
2.Wholesale purchasing. Elders asked IPL to sell to it 1,000 tonne lots of fertilizer on a wholesale or net price basis. Elders had made this request on a number of earlier occasions. The request had been consistently declined by Incitec or IPL. Elders’ purpose was to obtain large lots at a fixed wholesale price, instead of having to make many purchases of fertilizer to satisfy individual orders.
3.Agent and dealer model. Elders was aware that competitors had an agent and dealer model and asked if IPL was considering it and, if so, would it offer such arrangements to Elders.
4.Rebates and discounts. Under this heading, Elders sought
·to replace the three‑level rebate system with a fixed rebate of 8.5 per cent on all sales;
·a growth target rebate to reward increased sales of IFL’s products;
·an advertising allowance; and
·a fixed cash payment discount.
5.The position of IPL as a preferred supplier to Elders. Whilst Elders was content for IFL to remain its preferred supplier, it sought the consent of IPL to a second, and sometimes a third, supplier to ensure the availability of fertilizer products. It was proposed that IPL as the preferred supplier would supply about 70 per cent of Elders’ requirements, with the other suppliers making up the remaining 30 per cent. Two related issues were delays and lack of competitiveness caused by IPL’s right of first refusal.
These issues were listed in Denton’s email to Browne. Denton listed nine points. I have grouped some of them together in the above summary.
Review on 28 August 2003
Elders’ request for these alterations to the trading terms was discussed at a meeting held in Adelaide on 28 August 2003. Present at the meeting were Denton and Horley for Elders and Browne and Bowman for IPL. The meeting was held at a restaurant. Denton went through the items listed in his email. His evidence was that Browne rejected all of the proposed amendments except the change in the annual review date. While Browne agrees that the review date was changed, he does not agree that IPL rejected all of the remaining requests by Elders for changes. He relies on minutes of the meeting prepared by Bowman. I find that those minutes disclose that Browne rejected the proposal by Elders to purchase fertilizer in bulk, the proposed changes to the rebate system, and the proposed arrangements for a set price discount. At the meeting Browne said that the issue of agent and dealer models and the issue of the advertising allowance would be discussed later. Although the minutes prepared by Bowman do not record that Elders raised the question of IPL as the preferred supplier, I find that Elders did ask for the ability to have a second supplier in order to achieve a greater price competitiveness and a better ability to serve its customers. This proposal was one of Elders’ main concerns with the terms of the Supply Agreement. For that reason, Elders would have pressed it. I find that Mr Bowman’s minutes are not a completely accurate record of what occurred at the meeting. In making that finding, I do not suggest that there was any deliberate mis‑statement of the position. Another issue which was briefly discussed at the meeting was the Winter Crop Program. No changes were agreed to the arrangements for the management of the Winter Crop Program. The meeting lasted about two to three hours.
As a result of the meeting Denton decided that there was little prospect of IPL agreeing to any change to the Supply Agreement which would be beneficial to Elders, irrespective of what Elders’ sales performance might be.
On 29 August 2003 AWB Limited announced that it had acquired the Landmark rural business from Wesfarmers Limited. Shortly after that acquisition, there were rumours that AWB Limited was looking to acquire a fertilizer supplier in Western Australia and become a fertilizer importer in its own right. Denton became concerned that Elders’ fertilizer business might be at risk. He, therefore, sought to renew the discussions with IPL regarding the terms of the Supply Agreement and sought a meeting with Browne.
There is no obligation in the Hi‑Fert Supply Agreement on either Elders or Landmark to take half of the Minimum Requirement or the Target Amount. Thus, either could take more or less than half, provided that together they took the Minimum Requirement of at least 500,000 tonnes.
The Shortfall Penalty is payable only if Elders or Landmark do not take three‑quarters of their Requirements Forecast. If the Requirements Forecast was for the Minimum Requirement (500,000 tonnes) and Elders was to take half of the forecast quantities, the Target Amount for Elders would be 187,500 tonnes. Elders would be liable to pay the Shortfall Penalty only if it took less than 187,500 tonnes. In this way the Hi‑Fert Supply Agreement imposed a take or pay obligation on Elders.
The fact that the Hi‑Fert Supply Agreement provides for the Shortfall Penalty raises questions as to whether ELF, Elders and Landmark would be in breach of the Hi‑Fert Supply Agreement if Elders and Landmark took less than the Minimum Requirement of 500,000 tonnes in any one year. The point was not argued. It is sufficient to note that there is a real question whether a breach would thereby result. The fact is that the agreement provides the penalty for taking less than the Target Amount, which has a relationship to the Minimum Requirement. Even if it is assumed there was a breach, the next question is whether Hi‑Fert would take any action, given that Elders and Landmark between them controlled more than two-thirds of the voting rights in Hi‑Fert. It is sufficient for present purposes to note that there is a real question whether Hi‑Fert would take any step if Elders and Landmark failed to purchase all of the Minimum Requirement.
The ELF Shareholders Agreement mirrors some of the terms of the Supply Agreement. It too was executed on 9 December 2004. The parties to the agreement are ELF, Landmark and Elders. Again, I will not set out all of the terms of the agreement except those clauses which are necessary. I summarise the effect of those terms of the agreement so far as they are relevant to this action. By this agreement, Elders and Landmark contracted to comply with the obligations that were required of each under the Supply Agreement, including the provisions by which ELF had agreed to procure the compliance of Elders and Landmark. In addition, Elders and Landmark each agreed to pay its proportion of any Shortfall Penalty: see cl 7.6 and cl 7.7.
The agreement expressly recognised that Elders was bound to the IPL Supply Agreement, which was referred to in the agreement as “the Elders Incitec Agreement”. Fertilizer acquired by Elders through that agreement is excluded from the fertilizer products referred to in the Hi-Fert Supply Agreement: see cl 1. However, I do not think that exclusion has any relevance to the issues in this action. It does not affect the operation of the Shortfall Penalty. Its purpose seems to be limited to establishing that Landmark and ELF expressly recognised Elders’ obligations to IPL.
The ELF Shareholders Agreement provided in cl 7.13 that Elders had a special and additional obligation to that which it had under cl 7.7 to pay an amount of $15.00 per tonne for any shortfall in taking up its minimum requirement. Clause 7.13 provides:
Schedule 10 represents the Year 1 monthly fertiliser product requirements of the Elders Group (in aggregate, the Monthly Requirement). If the Elders Group does not acquire the Monthly Requirement (provided that the Elders Group has an obligation to buy under the Hi-Fert Supply Agreement), within 10 Business Days after the end of the Year a reconciliation of actual purchases to the Monthly Requirement will be undertaken and Elders must then within a further 10 Business Days pay to Hi‑Fert an amount of $15 per tonne for each tonne of the Minimum Requirements that is not purchased pursuant to the Supply Agreements, such payment to be made to compensate Hi‑Fert for the loss of such purchases. For the avoidance of doubt, this clause 7.13 is separate to and does not detract from the obligations imposed under clause 7.7.
There are at least two difficulties in understanding the meaning and effect of cl 7.13. As the last sentence states, it is a separate obligation from that in cl 7.7, which reflects the terms of the Hi‑Fert Supply Agreement relating to payments of the Shortfall Penalty. The first difficulty is whether it imposes an obligation to pay a penalty in respect of each month in which the “monthly requirement” is not taken, or whether it is an additional penalty if the whole of the year’s requirements are not purchased in that year or within a further ten days at the end of the year. It appears to be the latter. Secondly, this is a obligation in addition to the obligation under the Hi‑Fert Supply Agreement to pay the Shortfall Penalty, an obligation reflecting cl 7.7. The purpose is not entirely clear. I do not think it is material to the determination of the issues in this action.
The Shareholders Agreement also contained in cl 7.12 an acknowledgement by both Elders and Landmark that Elders was party to the Supply Agreement with IPL. The clause provides mutual indemnities as between Elders and Landmark. Clause 7.12 was in these terms:
(a)The Shareholders acknowledge that Elders is party to the Elders Incitec Agreement, and that Elders will continue to perform the terms of that Agreement until its expiry.
(b)Elders will:
(i) enable the Landmark Group to purchase fertiliser under the Elders Incitec Agreement; and
(ii) use its best endeavours provide Landmark with dedicated (separate) access to Elders’ computer systems for the purpose of ordering fertiliser under the Elders Incitec Agreement. Elders will ensure that it has no access to Landmark confidential information in providing such access.
(c)Landmark acknowledges that the Landmark Group acknowledges that Elders cannot guarantee that Incitec Fertilisers will supply product under the Elders Incitec Agreement and that the Landmark Group shall be in no better position than the Elders Group in respect to their rights under the Elders Incitec Contract.
(d)Elders indemnifies the Landmark Group for any claim suffered by the Landmark Group arising out of the Elders Group’s obligations under the Elders Incitec Contract and including any action for inducement of breach of contract brought by Incitec Fertilisers Limited (or any of its Related Corporations) in connection with the Elders Incitec Agreement; and
(e)Landmark indemnifies the Elders Group for any claim suffered by the Elders Group arising out of an action for inducement of breach of contract brought by any member of the Incitec Pivot Limited group in connection with any contract or arrangement the Landmark Group has, or has had, with the Incitec Pivot Limited group.
I do not think that the provisions of cl 7.12 have any real relevance to the determination of the issues in this action. The obligation in sub‑cl (a) was to last for six months until 7 June 2005. Clause 7.12 adds little more than to explain why Elders might incur the Shortfall Penalty in the first six months of the operation of this agreement.
The Implications for Elders
Shortly stated, the implications for Elders were that it was required to purchase from Hi-Fert 187,500 tonnes of fertilizer in each year. If it failed to do so, it had to pay the Shortfall Penalty.
The total amount of fertiliser product purchased by Elders in the year ended 30 June 2004 from IPL was 436,000 tonnes and from Hi-Fert 45,000 tonnes making a total of 481,000 tonnes. Elders estimated that its requirements in 2005 were approximately 550,000 tonnes. Thus 187,500 tonnes represented 34 per cent or just over one-third of its total requirement. Thus Elders could continue to purchase two‑thirds of its requirements from IPL or purchase more and pay the Shortfall Penalty.
The Shortfall Penalty was not calculated by reference to the Minimum Requirement. Instead, the Supply Agreement defined a “Target Amount” which for present purposes may be described as three-quarters of the minimum requirement. The Target Amount is therefore 375,000 tonnes. Elders and Landmark were each obliged to take half of that target amount. The shortfall is, therefore, the amount by which the amount purchased by either Elders and Landmark fell short of their respective targets of 187,500 tonnes. The Shortfall Penalty is payable in respect of that shortfall. The penalty is calculated by reference to the actual costs to Hi-Fert of that product including acquisition costs and storage costs and other reasonable costs incurred by Hi-Fert which resulted from the shortfall.
Neither the Supply Agreement nor the Shareholders Agreement imposed an obligation upon Elders to purchase. Instead, the obligation of Elders was to purchase a minimum requirement with a financial penalty if it did not, that penalty representing the costs of that acquisition and associated costs incurred by Hi-Fert.
Repudiation – the Relevant Principles
As Lord Wright said in Heyman v Darwins Ltd [1942] AC 356 at 378, the word “repudiation” is an ambiguous word capable of being used in a number of senses. For the purpose of determining the issues in this action, it is sufficient to note that it applies when
1.a party manifests an inability or unwillingness to perform a contract, or
2.a party evinces an intention no longer to be bound by the contract, or to fulfil it in a manner substantially inconsistent with its obligations.
See Heyman v Darwins Ltd at 378 – 379; Shevill v Builders Licensing Board (1982) 149 CLR 620 per Gibbs CJ at 625 – 626, with whom Murphy and Brennan JJ agreed; Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 at 33 per Mason J, at 40 per Brennan J; Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 per Mason CJ at 634, Brennan J at 642, Gaudron J at 664.
The question for determination is whether the other party is ready and willing to perform its obligations under the contract. Readiness and willingness to perform import the capacity or ability to do so: Foran v Wight (1989) 168 CLR 385 at 397, 424, 451; Roadshow Entertainment Pty Ltd v ACN 053 006 269 Pty Ltd, Receiver & Manager Appointed (1997) 42 NSWLR 462 at 480. In the case of anticipatory breach, the anticipated breach must concern an essential term of the contract: Loughridge v Lavery [1969] VR 912 at 924.
Repudiation is a serious matter and is not to be lightly found or inferred: Ross T Smyth & Co Ltd v T D Bailey Son & Co [1940] 3 All ER 60 at 71; Shevill v Builders Licensing Board, per Wilson J at 633; Progressive Mailing House, per Mason J at 32; Laurinda Pty Ltd per Brennan J at 643 and per Deane and Dawson JJ at 657.
A party will not establish that the other has repudiated the contract unless he proves that the other party has “become wholly and finally disabled” from performing his contractual obligations: British and Beningtons Ltd v North Western Cachar Tea Co Ltd [1923] AC 48 per Lord Sumner at 72; Universal Cargo Carriers Corporation v Citati [1957] 2 QB 401 per Devlin J at 450; Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245, per Mason CJ at 262, with whom Deane, Dawson and Toohey JJ agreed, and per Gaudron J at 280. In Foran v Wight (supra) at 425, Brennan J expressed the view that Lord Sumner’s phrase “wholly and finally disabled” was too demanding a test of incapacity. Brennan J added:
The test of incapacity either as a ground of rescission or as an element in readiness and willingness, is an exacting test though it must be expressed as a matter of degree.
That comment followed a reference to two sets of observations by Sir Owen Dixon which Brennan J had quoted with approval (at 425). In Psaltis v Schultz (1948) 76 CLR 547 at 560, Dixon J had said:
To be ready and willing to perform a contract a party must not only be disposed to do the act promised but also have the capacity to do it. But the tenor of the promise will show when and how the act is to be performed and it is to that time and mode of performance that the capacity and disposition to fulfil the promise are to be directed. It is enough that he is not presently incapacitated from future performance and is not indisposed to do, when the time comes, what the contract requires. (Emphasis added)
In Rawson v Hobbs (1961) 107 CLR 466 at 481, Dixon CJ expressed what Brennan J called “a caution against lightly finding a party not to be ready and willing”. Dixon CJ said:
One must be very careful to see that nothing but a substantial incapacity or definitive resolve or decision against doing in the future what the contract requires is counted as an absence of readiness and willingness. On the other hand it is absurd to treat one party as tied to the performance of an executory contract although the other has neither the means nor intention of performing his part when his turn comes, simply because his incapacity to do so is not necessarily final or logically complete.
However, Dixon CJ’s test requires that the party asserting a repudiation must establish “nothing but a substantial incapacity or definitive resolve or decision against doing in the future what the contract requires”. At the time that the contract is rescinded, the other party must then be incapacitated or not willing to perform the future obligation. A “substantial incapacity” is a reference to a party’s inability to perform its obligations under the contract. A party either has the capacity to perform those obligations or it does not. There is, I suggest, little, if any, difference between the test of Dixon CJ and the test of Lord Sumner. A party who has a substantial incapacity is just as disabled from performing his obligations under the contract as a party who is “wholly and finally disabled”. The epithets which have been used in the expressions just quoted are different ways of expressing the principle that repudiation is not lightly to be found.
The question whether the other party is able and willing to perform its obligations is to be determined at the time of rescission: Foran v Wight (per Brennan J at 425). The onus of proof is on the party asserting the repudiation: Sunbird Plaza per Mason CJ at 264, with whom Deane, Dawson and Toohey JJ agreed. That onus is a difficult one to discharge: Roadshow Entertainment at 481.
Generally speaking, when determining whether a party has repudiated the contract the court will consider the words or conduct of the party alleged to have repudiated and determine whether, viewed objectively, they convey to a reasonable person in the situation of the other party, repudiation of the contract or a fundamental obligation under it: Laurinda per Deane and Dawson JJ, who said:
An issue of repudiation turns upon objective acts and omissions and not upon uncommunicated intention. The question is what effect the lessor’s conduct “would be reasonably calculated to have upon a reasonable person” (per Lord Herschell LC, Carswell v Collard; Forslind v Bechely‑Crundall). It suffices that, viewed objectively, the conduct of the relevant party has been such as to convey to a reasonable person, in the situation of the other party, repudiation or disavowal either of the contract as a whole or of a fundamental obligation under it. (Citation omitted)
Thus, the issue of repudiation is decided by a consideration of objective acts and omissions. Applying that principle to this commercial contract, the question is whether, viewed objectively, a reasonable businessman in the position of IPL would conclude that Elders had, by entering into the alternative supply arrangements, placed itself in a position where it did not intend or was unable to perform its obligations under the Supply Agreement. In Halsbury’s Laws of Australia (vol 6) at 110‑9335, Professor Carter describes this principle as the principle of inferred liability and notes that there is no decision applying the principle of inferred liability to a case of anticipatory breach of a commercial contract. He refers to Devlin J’s dictum in Universal Cargo at 450 that inability to perform must proceed “in fact not in supposition”.
The principle of inferred liability must, I think, be qualified in the particular circumstances of this case. There are two reasons for that conclusion. The first is that, as has already been found, Elders had expressed its willingness to comply with its obligations under the Supply Agreement with IPL. It will be recalled that, after it had given notice that it was terminating the Supply Agreement, Elders expressed on more than one occasion its intention to comply with the terms of the Supply Agreement for the six month period ending on 7 June 2005. Given that expression of willingness to perform its obligations, the only question was whether Elders in fact had the capacity or ability to perform its obligations under the Supply Agreement with IPL.
The second reason relates to the question whether Elders had the ability to perform its obligations under the Supply Agreement with IPL. The resolution of that question turns on an examination of Elders’ obligations under the alternative supply arrangements with Hi‑Fert. The circumstances of this case differ from those cases in which a party has acted in a way where it is apparent that it no longer intends to be bound by the contract, for example, a building owner who has contracted to build with one builder and who engages another or a purchaser of goods who states their intention not to comply with the contract of sale. As Elders had stated its intention to perform its obligations, it is necessary to examine its other contractual obligations and determine whether Elders retained the ability to perform its obligations under the Supply Agreement with IPL. The fact that IPL had rescinded before it knew of the terms on which Elders had contracted with Hi‑Fert only serves to underline the necessity of examining those terms. It would obviously be unfair to hold that Elders was liable in damages because it had wrongfully repudiated the Supply Agreement, when in truth there was no reasonable basis upon which IPL could reach the conclusion that it could not perform. If the position were otherwise, the mere fact that Elders had entered into alternative supply arrangements would be sufficient to enable IPL to rescind. The proposition has only to be stated to be rejected. There is nothing inherently inconsistent in entering into two supply arrangements. Those arrangements will be inconsistent only if it is not possible to comply with both. It is, therefore, plainly necessary to examine whether by entering into the alternative arrangements Elders had rendered itself unable to perform its obligations under the Supply Agreement.
That conclusion is consistent with the reasoning of Dixon CJ in Rawson v Hobbs at 481, which requires a substantial incapacity or definitive resolve against doing in the future what is required by the contract. Thus, it is necessary to determine whether Elders was substantially incapacitated from performing its obligations under the Supply Agreement with IPL.
This conclusion is consistent also with the decision of Saville J in Alfred C Toepfer International GmbH v Itex Itagrani Export SA [1993] 1 Lloyd’s Rep 360 which rejected the proposition that where one party makes a contract but has or undertakes potentially inconsistent obligations under another engagement with a third party, he is bound to be treated in law as being unable to perform the contract. Saville J continued (362):
That proposition does not represent English law. The fact that a party has entered into inconsistent obligations does not in itself necessarily establish such inability, unless those obligations are of such a nature or have such an effect that it can truly be said that the party in question has put it out of its power to perform its obligations.
That last proposition must be established as a fact, not as a mere supposition: Universal Cargo at 450. Elders had to be in a position where it did not have the capacity to perform the obligations under the Supply Agreement: Psaltis v Schultz (supra) at 560. Thus, IPL had to prove that on the balance of probabilities Elders could not perform its obligations under the Supply Agreement. It had to prove that the obligations of Elders under its supply arrangements with Hi-Fert were of such nature or had such an effect that it could be truly said that Elders had put it out of its power to perform its obligations under the Supply Agreement. That proposition is entirely consistent with the principle expressed in such cases as Rawson v Hobbs, Universal Cargo, and Sunbird Plaza.
When it rescinded the Supply Agreement, IPL did not rely on the ground that Elders had entered into contractual arrangements which prevented it from performing its obligations under the Supply Agreement. IPL rescinded the Supply Agreement on 16 December 2004. It did so on the ground that Elders had repudiated the Supply Agreement by wrongfully terminating it. It accepted the repudiation and rescinded the agreement, reserving its rights arising from the repudiation. It was not until it filed its defence and counterclaim that IPL pleaded an alternative ground of repudiation, namely, that by entering into the alternative supply arrangements Elders evinced an intention no longer to be bound by the terms of the Supply Agreement and thereby repudiated the Supply Agreement. A party rescinding a contract on the ground of the other party’s repudiation is entitled to rely on any ground that was valid at the time of termination, even though it was not relied on at the time and even though the ground actually relied on is found to be without substance: Sunbird Plaza per Mason J at 262 applying Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359; Concut Pty Ltd v Worrell (2000) 176 ALR 693 at 701. Thus, although IPL did not know of the terms of the contracts creating the alternative supply arrangements with Hi‑Fert, it is entitled to rely on them for the purpose of seeking to establish that Elders was unable to perform its obligations under the Supply Agreement: Universal Cargo at 453.
The principle that a party may rely on any ground that was valid at the time of termination is subject to an important qualification. If the ground of the repudiation which was not initially taken is one which, if taken, could have been put right, the principle will not apply: Heisler v Anglo‑Dal Ltd [1954] 2 All ER 770 at 773; André et Cie v Cook Industries Inc [1987] 2 Lloyd’s Rep 463 at 468 ‑ 469; Glencore Grain Rotterdam BV v Lebanese Organisation for International Commerce [1997] 4 All ER 514 at 527. Thus, as Professor Carter notes, there must be an opportunity for the promisor to perform in accordance with the contract. However, this is not to be understood as providing an opportunity to the promisor to remedy the breach: Carter at 37020. This principle adds weight to the proposition that in the case of rescission of a commercial contract on the ground of anticipatory breach, where there is evidence of an expressed intention to adhere to the terms of the contract, the question whether the rescission is justified should be determined by examining the ability of the party said to be in breach to perform its obligations under the contract.
Did Elders Repudiate the Supply Agreement?
I turn to examine whether IPL has proved that, by entering into the alternative supply arrangements, Elders evinced an intention no longer to be bound by the Supply Agreement with IPL or to fulfil it in a manner substantially inconsistent with its obligations and so repudiated that Supply Agreement. To succeed IPL must establish on the balance of probabilities that Elders was incapacitated from performing its contractual obligations under the Supply Agreement, that is to say, that it did not have the ability to perform its contractual obligations under the Supply Agreement. As mentioned earlier, that incapacity must be proved in fact and not in supposition: Devlin J in Universal Cargo (supra), applied in Sunbird Plaza at 262‑280.
That question had to be considered in light of the finding that on 7 December 2004 Elders validly gave notice of termination of the Supply Agreement in accordance with the terms of cl 9.2. Thus, Elders was obliged to comply with its obligations under the Supply Agreement until 7 June 2005. As already mentioned, after Elders had given notice of termination of the Supply Agreement, it had expressed its intention to comply with its obligations until 7 June 2005. That assertion must be tested against the question whether Elders in fact had the capacity to comply with its obligations under the Supply Agreement.
The important fact to emerge from the above review of the alternative supply agreements with Hi-Fert is that Elders was bound to a take or pay contract. Elders would not, therefore, be in breach of the Hi-Fert Supply Agreement if it failed to purchase fertilizer from Hi‑Fert. It would be in breach only if it also failed to pay the Shortfall Penalty. It was entirely for Elders to decide whether or not it would purchase fertilizer from Hi‑Fert. If it did not, it paid the Shortfall Penalty. It was possible, therefore, for Elders to comply with the IPL Supply Agreement notwithstanding that it had entered into the Hi‑Fert Supply Agreement.
The fact that Elders had entered into alternative supply arrangements did not necessarily mean that it did not intend to perform its obligations under the IPL Supply Agreement. That would only be so if the obligations under each supply contract were mutually inconsistent. They were not. At least one means by which Elders could perform its obligations under both was to purchase its requirements from IPL for six months and incur the Shortfall Penalty under the Hi‑Fert Supply Agreement. There may well have been others. It is not the task of this Court to determine the commercial wisdom of Elders deciding to incur the Shortfall Penalty. When it entered into the Hi‑Fert supply arrangements, Elders took a commercial risk that it would be able to comply with both. However, there is a significant difference between taking a commercial risk and being unable to perform.
The force of that last conclusion is emphasised by the evidence in this action which proved that Elders had for a long time held a concern that it should have a second supplier to ensure that it had both certainty and continuity of supply and that it could purchase at a competitive price. A reasonable businessman in the position of IPL would have been aware that Elders had sought to have a second supplier and would not know whether the new arrangements were consistent or not with the IPL Supply Agreement. Furthermore, by entering into the new supply arrangements with Hi‑Fert, Elders may have taken the view that if the price for what it perceived to be improved supply arrangements was that for the first six months of the Hi‑Fert Supply Agreement it had to pay the Shortfall Penalty, that was a reasonable price to pay for improved trading terms which in the longer term would be more attractive to it. That was a matter of commercial judgment for the management and directors of Elders. It is not for this Court either to assess the merits of that decision or to second-guess its commercial wisdom.
There is, therefore, nothing in the Hi‑Fert supply arrangements which evinced an intention on the part of Elders not to perform its obligations under the IPL Supply Agreement. Elders had stated that it would comply with the terms of the IPL Supply Agreement. In a long‑term supply contract of this kind, where one party has contracted to purchase goods from another as its preferred supplier and has for several years purchased in accordance with that supply contract, it is reasonable for it to be given the opportunity to continue to perform its contractual obligations, particularly where those obligations are for a further six months only. Elders was, therefore, entitled to be given the opportunity to demonstrate that it could honour its expressed willingness to comply. IPL’s peremptory termination of the Supply Agreement denied Elders that opportunity. IPL would not have suffered any commercial disadvantage if it had provided Elders that opportunity.
The difficulty for IPL is that it rescinded the Supply Agreement before it knew that Elders could not honour the terms of the IPL Supply Agreement. It is not self‑evident that Elders could not perform the obligations under the Supply Agreement with IPL, particularly as those obligations were to continue for a further six months only. In short, IPL could not know whether Elders was going to act in breach until Elders failed to purchase fertilizer products from IPL in accordance with the IPL Supply Agreement. There is nothing inherent in the terms of the Hi‑Fert Supply Agreement which meant that Elders could not satisfy the terms of the IPL Supply Agreement or did not intend to do so.
Those are sufficient reasons to reject the contentions of the defendants. It was a case which failed to have due regard to the terms of the Hi‑Fert supply arrangements and to the commercial options available to Elders. It was a case grounded on supposition, not fact. IPL’s argument is an instance of the example given by Devlin J in Universal Cargo at 450 in support of his proposition that an anticipatory breach must be proved in fact and not in supposition. Devlin J continued:
If, for example, one party to a contract were to go to another and say that well‑informed opinion on the market was that he would be unable to fulfil his obligations when the time came, he might get the answer from his adversary that the latter did not care to have his affairs discussed on the market and did not choose to give any information about them except the assurance that he could and would fulfil his obligations. If that assurance was rejected and the contract rescinded before the time for performance came and the assurance in fact turned out to be well‑founded, it would be intolerable if the rescinder was entitled to claim that he was protected because he had acted on the basis of well‑informed opinion.
Equally, in this case, it would be intolerable if IPL was entitled to claim damages for an anticipatory breach because it had acted on no more than an inference which is not supported by the terms of a contract. The two Supply Agreements were not inherently inconsistent.
The terms of cl 3.3 of the IPL Supply Agreement do not assist IPL’s cause. IPL relied in particular on cl 3.3(d), which gave the so‑called right of last refusal to IPL. It is important to remember the terms of that clause. It permitted Elders to purchase from a third party if IPL could not match or better the price of that third party when all allowance was made for discounts and rebates. It is convenient to repeat the terms of cl 3.3(d):
(d)Elders is able to purchase fertilizer from a third party for a price less than that offered by Incitec (after taking into account all discounts and rebates), provided that Elders has first given Incitec at least [1] working days to match or better the third party’s price.
When IPL rescinded the Supply Agreement it did not know the prices at which Hi‑Fert intended to sell different kinds of fertilizer products to Elders. For all IPL knew, those prices might have been prices which IPL could not match or better. What must be remembered at all times was that Elders and IPL were operating in a market where there were other suppliers and where prices must be competitive. The evidence proves a number of instances when Elders sought competitive prices from IPL. There were occasions when IPL could not match or better the price at which Elders purchased fertilizer products from third parties. Both parties were aware of the need for pricing to be competitive. Indeed, it is scarcely necessary to refer to the evidence, since the need for competitive pricing is a self‑evident fact when a party is competing in a market where there are other suppliers all competing for the same custom. There is a complete absence of any evidence on the prices at which either IPL or Hi‑Fert were going to sell fertilizer products to Elders. The absence of such evidence substantially undermined IPL’s case.
I acknowledge that the question of the prices at which Elders was to buy Hi‑Fert fertilizer products was treated by the parties as confidential information. There are obvious reasons why that should be so. I do not criticise IPL’s legal representatives for failing to press for disclosure of those prices. It is sufficient to note that the question of prices emphasises the fact that IPL was not in a position reasonably to infer that Elders would not continue to perform its obligations under the Supply Agreement and, in particular, comply with the terms of cl 3.3(d). If the Hi‑Fert price was a price less than that at which IPL could sell, Elders would be entitled to purchase from Hi‑Fert.
IPL did not know at least four facts which were relevant to the question whether Elders would in the future act in breach of the IPL Supply Agreement. It did not know
·the manner in which Elders proposed to comply with its obligations as to minimum requirements given that it was bound to the IPL Supply Agreement for the first six months only of 2005;
·whether it would be able to match or better the price at which Hi-Fert could supply Elders;
·whether, if it could match Hi‑Fert’s price, Elders would be prepared to pay the Shortfall Penalty; and
·whether it was able to supply all of the fertilizer products which Elders wished to purchase.
Because this was a contract to supply goods into the future and because there is nothing in the Hi‑Fert Supply Agreement which necessarily had the consequence that by entering into it Elders was in breach of the IPL Supply Agreement, IPL had to wait until Elders acted in breach of the IPL Supply Agreement before it was in a position to rescind it and claim damages for the breach. Because it was a long‑term supply agreement, IPL had a very difficult onus to discharge.
For these reasons, IPL acted wrongfully, if not also prematurely, when it rescinded the Supply Agreement. Elders had informed IPL that it intended to comply with the Supply Agreement. IPL therefore knew Elders’ intentions. The only question was whether Elders had the capacity to perform under the Supply Agreement with IPL. For the reasons expressed above, it did have that capacity. IPL acted on a presumed state of affairs which did not exist in fact.
Mr Rushton SC described the question whether Elders would perform its obligations under the IPL Supply Agreement as a “theoretical possibility”. He sought to rely on the remarks of Dixon J in Rawson v Hobbs at 481 which were referred to in Brennan J in Foran v Wight at 425:
… it is absurd to treat one party as tied to the performance of an executory contract although the other has neither the means nor the intention of performing his part when his turn comes, simply because his incapacity to do so is not necessarily final or logically complete.
However, those remarks were preceded by a passage which is equally important:
One must be very careful to see that nothing but a substantial incapacity or definitive resolve or decision against doing in the future what the contract requires is counted as an absence of readiness and willingness.
That passage emphasises that it is necessary to determine whether Elders was incapacitated from performing its obligations under the Supply Agreement. In any event, the passage relied on by Mr Rushton does not assist IPL’s cause. IPL had the burden of establishing on the balance of probabilities that Elders had neither the means nor the intention of fulfilling its obligations under the IPL Supply Agreement. For the reasons already expressed, it failed to discharge that burden. It was not reasonable for IPL to infer that Elders would not or could not meet the obligations under the IPL Supply Agreement. For these reasons, IPL did not establish that Elders had repudiated the Supply Agreement when it entered into the Hi‑Fert Supply Agreement. It is to assume too much to conclude that Elders evinced an intention not to comply with the IPL Supply Agreement.
The terms of cl 8 of the Supply Agreement do not improve IPL’s position. It will be remembered that cl 8 is the provision by which the parties agreed to treat IPL as the preferred supplier. Although the business relationship is expressed as one in which IPL is the preferred supplier, the parties expressly disclaimed any intention of partnership, agency, franchise, or fiduciary relationship. That disclaimer emphasises that this was in all respects a commercial relationship. The parties to the Supply Agreement are substantial corporations, each intending to trade profitably. Clause 8 is consistent with cl 3.3 in that it allows for the fact that Elders may trade with a third party if IPL does not have the product to sell, is unable to supply an order, or if Elders can purchase at a cheaper price than IPL can sell it.
Given this conclusion, it is not necessary to examine the argument advanced on behalf of Elders that the provisions of s 47 of the Trade Practices Act 1974 (Cth) invalidated the IPL Supply Agreement if IPL sought to treat it as an agreement by which IPL was the exclusive seller to Elders. If that argument is correct, it is another barrier on the part of the defendants.
Mr Rushton SC also contended that Elders’ intention to repudiate the contract was established by the fact that it was not prepared to seek a review of trading terms in 2004. The submission must fail for several reasons. First, for the reasons already explained, Elders had no obligation to seek a review of trading terms in 2004. Secondly, as Mr Denton said in his evidence, Elders did not wish to engage in a review because it believed, in the light of its previous experience with IPL, that IPL would not agree to change the trading terms. Thirdly, a review of trading terms stands entirely separate and apart from an intention to enter into other supply agreements and perform them consistently with the IPL Supply Agreement. Finally, while the Supply Agreement provided that IPL was Elders’ preferred supplier, that did not prevent Elders from entering into other supply arrangements.
Mr Rushton also contended that Elders failed to honour the right of last refusal provided in cl 3.3(d). However, no occasion for the exercise of that right had come into existence when IPL rescinded the Supply Agreement on 16 December 2004. Reasonable notice of intended purchases was necessary if IPL was to be able to supply Elders. Obviously, large quantities of fertilizer products could not be purchased at a moment’s notice. Orders would have to be made well ahead of the date of the intended purchase and supply. There is no evidence that, when IPL rescinded the Supply Agreement on 16 December 2004, that Elders would not or could not comply with the terms of cl 3.3(d). I repeat, the fact that Elders had entered into new supply arrangements from 1 January 2005 did not necessarily mean that Elders would not or could not comply with cl 3.3(d). There is no evidence that IPL could better the price Elders was to pay Hi‑Fert or, if IPL could better that price, that Elders would act in breach. For all IPL knew, Elders might elect to pay the shortfall penalty for the six months to 7 June 2005 as the price for what it perceived to be a better trading relationship. This is an instance of IPL being willing to wound but afraid to strike. The relevant witnesses from Elders were all cross‑examined by counsel for the defendants. However, no questions were directed to the topic of Elders’ actual intentions after 1 January 2005, when Elders became bound to take or pay under the Hi‑Fert Supply Agreement. The IPL case rests on supposition. The opportunity to examine the facts was not used.
For all of these reasons, IPL has not established that, when it rescinded the Supply Agreement, Elders was unable or unwilling to comply with the Supply Agreement or had evinced an intention no longer to be bound by it, or to fulfil it only in a manner substantially inconsistent with its obligations under the Supply Agreement.
Conclusion
For these reasons, I conclude, first, that Elders terminated the Supply Agreement in accordance with its terms and, secondly, when it entered into the alternative supply arrangements with Hi‑Fert, Elders did not repudiate the IPL Supply Agreement. I therefore uphold the claim of Elders and dismiss the defendants’ counterclaim. I will hear the parties as to the terms of the orders.
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