Factory 5 Pty Ltd (in Liquidation) v State of Victoria

[2013] HCATrans 102

[2013] HCATrans 102

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne       No M111 of 2012

B e t w e e n -

FACTORY 5 PTY LTD (IN LIQUIDATION)

Applicant

and

STATE OF VICTORIA

Respondent

Application for special leave to appeal

CRENNAN J
KIEFEL J
KEANE J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 10 MAY 2013, AT 10.56 AM

Copyright in the High Court of Australia

MR N.F. HUTLEY, SC:   If your Honours please, I appear with my learned friends, MR P.D. CORBETT, SC and MR J.F. RICHARDSON, for the applicant.  (instructed by Piper Alderman Lawyers)

MR A.C. ARCHIBALD, QC:   If the Court pleases, I appear with my friend, MR P.D. HERZFELD, for the respondent.  (instructed by Allens Lawyers)

CRENNAN J:   Yes, Mr Hutley.

MR HUTLEY:   Your Honours, the case concerns the dealings, as your Honours know, between a statutory corporation M2006 and my client concerning the appointment of a sole concessionaire of what are called Games product for the 2006 Melbourne Commonwealth Games.  At trial there were two principal issues, although a series of subsidiary issues, which were not dealt with in the Full Court because of the way it went off in the Full Court.

Two principal issues is whether there was a contract created by the deal note of 23 December and, secondly, the meaning of what was called the concessionaire as manufacturers clause.  Now, the trial judge found that there was a contract and he found that there was a contract of what is sometimes called the fourth class of Masters v Cameron and he did that on the basis of a detailed analysis of the course of conduct which led to the agreement being executed on 23 December.

In that regard, it is important to note, if I could take your Honours shortly, to paragraph 30 in the trial judge’s judgment at page 12 of the application book.  This is a letter of 16 December which commenced the, in effect, process of negotiation.  It, in effect, gave ‑ created an arrangement of exclusive negotiation until the close of business on 23 December 2004, and then it is said:

In order to achieve the most successful outcome for both Melbourne 2006 and TPFS5 we propose the following terms and structure.  These terms will be further detailed in a legally binding Deal Memo and Long Form Agreement.

So, in effect, the commencement of the negotiating period, which was a very short one, contemplated that there would be, at the conclusion of it, a legally binding deal memo and then thereafter a long form agreement, in effect, a classic of the fourth class.  There then transpired a series of email communications over the next little while which culminated in the execution of the document of 23 December which your Honours will find relevantly in the trial judge at paragraph 41. 

It in turn referred to a series of letters and emails which passed between the parties in the interim.  Now, those letters included a provision which came to be called the concessionaire as manufacturer clause.  It can be best seen, if your Honours please, at page 156 in the application book at line 50 or thereabout.  It says:

To confirm, the purpose of inclusion of trading benchmarks is to ensure the Concessionaire can manufacture should a Licensee be unreasonable or unable to deliver.  Notwithstanding the benchmarks, M2006 will grant permission at its absolute discretion to allow Concessionaire to manufacture, and reserves the right to find an alternative Licensee should we decide this is appropriate.

CRENNAN J:   Was there some agreement anywhere about the standard which would apply to the reasonableness of Playcorp’s conduct?

MR HUTLEY:   Your Honour, I think it is fair to say that this is the case.  There was agreement as to certain benchmarks – trading benchmarks.  We accept that there was not a total agreement as to those trading benchmarks, in fact, we embrace that.  We say that when one looks at the environment in which this agreement was to take place, the original agreement, there was obviously an understanding that a plan would be put in place to get to a binding deal member over a very short period of time.  Then further, a binding long form agreement thereafter.  It was of the nature of that that there might be some disagreements of the sort of matters such as criteria of which your Honour refers, we accept that.

CRENNAN J:   Does that not get you into the territory of the third category of Masters v Cameron?

MR HUTLEY:   With respect, no, your Honour, because can I say this?  The parties chose, at the end of the day, and the point on which the case went off is that the Full Court found that the reference in the concessionaire as manufacturer clause to be unreasonable was, in effect, so uncertain as to indicate a failure of agreement.

KIEFEL J:   Where does the Full Court actually say that?

MR HUTLEY:   With respect, your Honour, if one goes to the Full Court’s judgment and look at paragraph 50 ‑ they take this up at 57 and following.  At 57 they deal with the question that there are two limbs to the concessionaire as manufacturing.  At 58 they say:

The parties thought they had reached agreement on all the essential questions by the time the letter of 23 December 2004 was signed.  However, an objective bystander would have been unable to ascertain or specify what criteria would need to be established for Factory 5 to exercise the right to manufacture “should a licensee be unreasonable or unable to deliver”.

And then they go on and on and then they consider the matters over the next few pages.  If you can take it up at 62:

For a commercial contract to be workable, the parties had to have some objective means of ascertaining how, as between Factory 5 and Playcorp –

et cetera, and then they go on.

KIEFEL J:   This all suggests that there are further matters to be agreed, not that unreasonableness is inherently uncertain as a term.

MR HUTLEY:   With respect, your Honour, we say that the choice of the word “unreasonableness” with respect to the character of right one is dealing with here.  This is not in a case – and the analogy we say that the court took with agreements which provide a sale of goods or property at a reasonable price and the statement that there has to be some criteria by reference to which reasonableness has been determined for there to be a binding contract was quite the wrong approach in a commercial contract of this variety for this reason. 

This was a provision which gave unto my client a right to supplant one of potentially many manufacturers as itself if it was able to establish that the particular terms of a given manufacturer were unreasonable.  Now, there was agreement as to many benchmarks.  There are benchmarks to do with various things that the courts refer to them.  They speak of them in paragraph 18 of the judgment that the trial judge came with, but they did not have benchmarks with respect to price. 

What we say is this ‑ for parties to agree at the end of a very tight negotiating when they are aiming to get a binding contract, is that this particular right will be enforceable if a person acts unreasonably, is the very sort of provision you would put in place if you had not come to agreement about every criteria as to reasonableness because the way in which a question of unreasonableness could arise could be many and various, some of which you may be able to establish a reasonableness criterion, for example, the time of payment under a supplier contract, the interest rate for delayed payment, you may be able to get reasonableness provisions of that variety.  If, with respect to price, there may be difficulties in doing so; that would depend upon evidence. 

What the parties have done is said your right will arise if you can establish that in respect of the given supplier his/her or its terms are unreasonable.  It may be we fail in respect of a given problem because we cannot establish there are objective criteria, but non constat that possibility leads to the bringing down of a commercial contract between commercial parties who have obviously, because the negotiations show there were disagreements about certain aspects of that, but they chose the very form of language, commercially apposite, to deal at that point of time with the problem which their Honours said brings the agreement down.

We say, with respect, that fails to give due regard to the principles which have informed the courts since Hillas v Arcos in 1932 and, your Honours, we have set out in the materials, your Honours will find that behind tab 1.  Your Honours, no doubt, are well familiar with it.  Every law school student doing contracts has known about the sort of short form of contract for the sale of vast amounts of timber.  The famous statements of Lord Tomlin at page 6 in the materials is at about point 6 on the page:

On the one hand the conveyance of real estate presenting an artificial form grown up through the centuries and embodying terms of art whose meanings and effect have long since been determined by the courts, and, on the other hand, the formless document, the product of the minds of men seeking to record a complex trade bargain intended to be carried out, both fall to be construed by the same legal principles, and the problem for a court of construction must always be so to balance matters that, without violation of essential principle, the dealings of men may as far as possible be treated as effective, and that the law may not incur the reproach of being the destroyer of bargains. 

Then, of course, the famous passage of Lord Wright which your Honours will find at page 10 in the second last full paragraph, “The document of 21 May 1930”.  Now, your Honours, the Full Court, rather than approaching that, we say, seminal approach to the dealing with exactly these sorts of documents, documents brought into existence between business men and women under extreme pressures of time designed to, in effect, from the outset to be binding, having, as it were – and we do not run away from this – taking, as it were, stopgap terms at the end of the day to deal with – to deal with the very sort of difficulty which their Honours say destroys the bargain is exactly the approach which is contrary to the fundamental approach that the court should take to these sorts of bargains.  The courts have referred – in this Court there has ‑ ‑ ‑

CRENNAN J:   So you are complaining, are you, about the way in which familiar principles were applied to these two parties?

MR HUTLEY:   No, with respect, your Honour, the courts considered that the principles with respect to reasonableness in bargains in this Court which is reasonableness criteria for, as it were, the essential subject matter of the contract, that is, the price of the goods being bought and criterion for it, dictated – dictated the conclusion.  So this case, we say, has implications well beyond the particular fact because the courts in referring, for example, to this Court’s decision in Meehan v Jones, as they did at paragraph 62, says the approach to this sort of bargain where the parties have obviously set a criteria of unreasonableness before which somebody acquires a right would always fail unless that party ex ante can establish, with respect to the myriad of possible circumstances which may call for the determination of that criteria, the determination of that question, there are objective criteria existing in the world. 

That is the effect of their Honours – it is not peculiar, in our respectful submission.  It is, in effect, decisions of this Court directed we say to a wholly different universe of discourse have been said to apply generally wherever one uses the word “reasonable” or here “unreasonable”.  We say that is important.  That will serve to stultify rather than promote the achievement of bargains, particularly bargains under constraints of time where the parties are aiming to come to a consensus and recognise that there are matters between them and divide a formula which preserves the structure of agreement and the binding nature, no doubt contemplating in a more perfect world and in a more perfect time thereafter they may be able to overcome some of the, as it were, vulgarities of potential disagreement.

KEANE J:   So you suggest we should read the second paragraph of the letter of 23 December which is at paragraph 41, page 11 of the judgment of the primary judge ‑ we should read ‑ ‑ ‑

MR HUTLEY:   I am sorry, your Honour, if I could just turn it up. 

KEANE J:   Page 11, paragraph 41, the letter of 23 December, the “Concessionaire Agreement”, the second paragraph:

We confirm that the parties have agreed that F5 is to be appointed as Concessionaire subject to reaching agreement on a legally binding Long Form Concessionaire Agreement to be provided by M2006 and subject to M2006 Board Approval.

It went on to say, save that if agreement cannot be reached on terms in relation to third party suppliers, we will all do what is reasonable.

MR HUTLEY:   No, with respect, your Honour, no.  Firstly, as to that clause, a consideration of it took place at paragraphs 43 to 48 in the trial judge’s reasons.  The trial judge found objectively that those clauses reflected, having regard to the fact of the original plan which I took you to at paragraph 30 and the fact that he found that that plan was in no way departed from, that those words were properly objectively to be understood as referring to the understanding that there would be further discussion of the long form agreement.  Now, in the Full Court ‑ ‑ ‑

KEANE J:   And preserving the parties’ liberty to withdraw from those negotiations if consensus on the terms of that agreement could not be achieved.

MR HUTLEY:   Yes, I accept that completely, your Honour.

KEANE J:   And in the end, notwithstanding everybody’s best endeavour in good faith, they did not reach consensus on those matters.

MR HUTLEY:   I accept that too, your Honour, and all that would result in is that my client’s right, if it be a right, was impoverished to the extent that it could not establish in respect of the give and take case in the future, if it so asserted, that a particular provision of a supplier’s contract was unreasonable.

KEANE J:   Where do you point to the other side’s agreement to be bound by these considerations of reasonableness rather than the particular considerations and terms which they were bargaining towards and which, through no fault on either side, they never reached consensus?

MR HUTLEY:   In the word, they proposed the word to the other side, is that we had the right to apply manufacturer if another manufacturer was supplying on unreasonable terms or was unable to supply.  They propounded that term as the compromise where they could not get agreement on the benchmarking terms in relation to it.  So it lies, with respect, in their propounding a term for their benefit, their benefit being is we agree to be bound but if you are going to have the right, as opposed to our relevantly unfettered discretion to change manufacturers, you must establish that their terms are unreasonable.

So, in other words, it was a provision which could only work to my client’s disadvantage.  If they could not work out terms which were reasonable, such as to determine unreasonableness, and they alleged in respect of a given manufacturer such as Playcorp that, for example, their price was too high for beagles with nodding heads or whatever it was, then my client simply did not establish its right.  That is why we say, in a sense, this is a classic case of commercial compromise achieving, and in not the best of language, a sensible – a result on a basis intended to be binding as per the plan, et cetera. 

In that regard, your Honours, can I make reference to this?  The Full Court had regard to the matter which your Honour took me to when they turned to a consideration of that at application book 105, at 58 to which I took your Honours.  That was the principal consideration of the term which I have been addressing you on.  They then went on at paragraph 64.  It says:

It follows that this critical provision was not agreed as at 23 December 2004 –

They say it follows from the matters I have been addressing and we say it does not follow at all.  They then go on to consider the other factors such as the attributes of 23 December agreement to which your Honour addressed my attention, but they obviously, we submit, it is clear from the way they have drafted it, see that as confirmatory of the conclusion which is driven by their approach to this critical clause, contrary to the trial judge’s approach who went back to 16 December and said it was always contemplated there would be a binding deal agreement – I do apologise.

CRENNAN J:   Finish your sentence, Mr Hutley.

MR HUTLEY:   There was a binding deal agreement contemplated.  So, in other words, the case turned, with respect, on this question and this question we say is a question of significance.

CRENNAN J:   Thank you, Mr Hutley.

The decision of the Full Court of the Federal Court of Australia involved the application of settled principles to the determination of whether a binding agreement had been concluded between the parties.  Correspondence on which the applicant for special leave relies was expressed to be subject to conditions that the parties reach agreement on a legally binding long form agreement in terms approved by the respondent’s board.

These conditions were never satisfied, notwithstanding the parties’ efforts in that regard.  The decision of the Full Court required the application of settled principles to the circumstances of the case.  No question of principle arises and, in any event, the applicant does not enjoy sufficient prospects of success to warrant the grant of special leave to appeal.  The application should be dismissed with costs.

AT 11.19 AM THE MATTER WAS CONCLUDED