Fonterra Brands (Australia) Pty Ltd v Bega Cheese Ltd
[2021] VSC 75
•25 February 2021
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
INTELLECTUAL PROPERTY LIST
S ECI 2017 00283
| FONTERRA BRANDS (AUST) PTY LTD (ACN 095 181 669) | First Plaintiff/ First Defendant by Counterclaim |
| BONLAND CHEESE TRADING PTY LTD (ACN 001 148 992) | Second Plaintiff/ Second Defendant by Counterclaim |
| – v – | |
| BEGA CHEESE LTD (ACN 008 358 503) | Defendant/ Plaintiff by Counterclaim |
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JUDGE: | McDonald J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 18–22 November 2019; 2, 4, 6, 9–11, 17 December 2019; 31 January 2020; 3–6, 10–13, 17, 20, 24–26 February 2020; 3–6, 10, 12, 16–19, 23–26 March 2020 |
| WRITTEN CLOSING SUBMISSIONS ON CLAIM FILED: | 9, 30 April, 8, 18 May 2020 |
| WRITTEN CLOSING SUBMISSIONS ON COUNTERCLAIM FILED: | 6 May, 10 June, 8 July 2020 |
DATE OF JUDGMENT: | 25 February 2021 |
CASE MAY BE CITED AS: | Fonterra Brands (Australia) Pty Ltd v Bega Cheese Ltd |
MEDIUM NEUTRAL CITATION: | [2021] VSC 75 |
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CONTRACT — Construction — Exclusive licence granted to plaintiffs to use defendant’s registered trade marks on prescribed cheese and butter products — Whether defendant prohibited from using the trade marks on any products — Whether prohibition on defendant’s use of trade marks limited to products as defined in Agreements — Prohibition on defendant’s use of trade marks limited to products as defined.
RECTIFICATION — Unilateral and common mistake — Claim for rectification of Agreements to insert the words ‘on or in relation to any product or otherwise whatsoever’ — Whether at the time of executing agreements plaintiffs misapprehended that the defendant would be prohibited from using the trade marks on or in connection with any product whatsoever — Plaintiffs failed to establish misapprehension by clear and convincing proof — Claim for rectification dismissed.
RESTRAINT OF TRADE — Whether restraint of trade doctrine applicable to clause 3.2 of agreements if defendants prohibited from using trade marks on or in connection with any products — Whether restraint ancillary to licence to use trade marks — Restraint of trade doctrine applicable — Whether clause 3.2 of agreements invalid as an unreasonable restraint of trade if defendant prohibited from using trade marks on any products — Clause 3.2 not invalid as an unreasonable restraint of trade.
CONTRACT — Construction — Whether plaintiffs subject to contractual obligation to engage in above the line advertising and new product development — Whether plaintiffs required to effectively promote and develop sales of Bega branded products — Whether plaintiffs required to promote and develop sales of Bega branded products in foodservices sector — Whether plaintiffs required to position Bega cheese as a premium brand.
CONTRACT — Implied term — Whether agreements contain an implied term that plaintiffs would not give undue preference to the promotion and development of their own brands compared to the promotion and development of Bega branded products — Term not necessary to give business efficacy to agreements — Term not capable of clear expression — Term not reasonable or equitable.
CONTRACT — Plaintiffs solely responsible for ensuring compliance with legal and regulatory requirements relating to labelling, packaging and advertising of Bega branded products — Whether plaintiffs misrepresented origin of Bega branded products to consumers — Whether plaintiffs contravened ss 18 and 29(1)(k) of Australian Consumer Law — Whether impugned conduct conveyed pleaded representation.
CONTRACT — Whether common law rights of termination excluded by express contractual rights of termination.
CONTRACT — Whether notices of termination invalid because of failure to specify remedy — Whether notices invalid because of failure to identify breaches with sufficient specificity.
ELECTION — Whether defendant precluded from relying on notices of termination as a result of the service of subsequent notices after rights of termination under earlier notices had crystallised.
REMEDIES — Whether appropriate to grant declaration that defendant entitled to terminate agreements.
Evidence Act 2008(Vic) s 140, Civil Procedure Act 2010 s 7, Australian Consumer Law(Cth) ss 18, 29(1)(k), Trade Marks Act 1955 (Cth) s 19(3), Competition and Consumer Act (Cth) pt VIIA, Trade Mark Regulations 1955 (Cth) reg 3.1.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs/ Defendants by Counterclaim | Mr G Dalton QC and Mr P Creighton-Selvay | Arnold Bloch Leibler |
| For the Defendant/ Plaintiff by Counterclaim | Dr C Button QC, Mr J Davis QC, Mr B Holmes and Ms X Teo | Gilbert + Tobin |
TABLE OF CONTENTS
SUMMARY OF FINDINGS............................................................................................................. 1
PLAINTIFFS’ CLAIM................................................................................................................... 1
BEGA’S COUNTERCLAIM......................................................................................................... 1
PLAINTIFFS’ CLAIM....................................................................................................................... 3
BACKGROUND............................................................................................................................ 3
INTRODUCTION......................................................................................................................... 3
THE CONSTRUCTION OF CLAUSES 3.1 AND 3.2 OF THE TMLAs................................. 6
RECTIFICATION........................................................................................................................ 25
Establishing corporate state of mind.............................................................................. 28
Rectification for unilateral mistake................................................................................. 35
Mr Alexander Sloan............................................................................................. 36
The plaintiffs’ alternative submission as to the attribution of state of mind............ 48
Mr David Mallinson............................................................................................. 52
Mr Ashley Waugh................................................................................................ 58
Mr Wayne Leach................................................................................................... 59
The plaintiffs’ reliance upon contemporaneous documents....................................... 60
Admissions......................................................................................................................... 66
The plaintiffs’ failure to call witnesses........................................................................... 69
Ms Karen Woods and Ms Gail Owen................................................................ 69
Mr Chris Moller.................................................................................................... 75
Mr Wayne Leach................................................................................................... 76
Mr Warren Larsen................................................................................................ 76
Conclusion in relation to rectification for unilateral mistake..................................... 78
Rectification for common mistake................................................................................... 78
Restraint of trade............................................................................................................... 79
The plaintiffs’ contention that Bega has breached clause 3.2 irrespective of how it is construed................................................................................................................ 83
Conclusion.......................................................................................................................... 85
BEGA’S COUNTERCLAIM........................................................................................................... 85
MARKETING AND PROMOTION CLAIM........................................................................... 86
Express contractual terms relevant to the marketing and promotion claim............ 89
The construction of clauses 6.1 and 6.3.......................................................................... 93
The plaintiffs are not subject to any contractual obligation to position Bega cheese as a premium brand...................................................................................................... 98
The requirement to conduct marketing activities ‘broadly consistent with the AMPs’ 100
The plaintiffs are not subject to any contractual obligation to engage in NPD...... 101
The plaintiffs are not subject to any contractual obligation to ‘effectively’ promote and develop sales of Branded Products................................................................... 102
The plaintiffs are permitted to have regard to their own commercial interests.... 103
The plaintiffs’ marketing obligations under clauses 6.1 and 6.3.............................. 105
Foodservices..................................................................................................................... 117
The plaintiffs are not subject to any contractual obligation to promote and develop sales of Branded Products in the FSS.............................................................................. 121
Implied terms................................................................................................................... 127
The plaintiffs’ promotion and development of Branded Products in the retail sector and FSS 2012–2018.............................................................................................................. 138
The plaintiffs have promoted and developed sales of the Branded Products broadly consistent with the AMPs................................................................................... 143
Clause 6.1(b): Have the plaintiffs failed to ensure that when using any of the Trade Marks on or in relation to any Product the good name and image of the Trade Marks is maintained and not harmed?............................................................................. 151
Clause 6.3:Have the plaintiffs conducted their business operations in accordance with appropriate business standards applying in the Territory from time to time and in a manner not to damage the value of the Trade Marks, such conduct extending but not limited to promotional, marketing and advertising policies and content?. 152
Delisting of products....................................................................................................... 177
Shelf-ready packaging.................................................................................................... 178
No hindrance of purpose term...................................................................................... 178
Conclusion........................................................................................................................ 179
CHEESE QUALITY CLAIM.................................................................................................... 179
First cheese quality notice.............................................................................................. 183
Second cheese quality notice.......................................................................................... 192
PROVENANCE CLAIM.......................................................................................................... 206
Statutory provisions........................................................................................................ 209
The ‘Famous For’ television advertising campaign................................................... 210
‘Real Town, Real Cheese’ advertising campaign........................................................ 213
‘Real Town, Real Cheese’ print advertisements.......................................................... 218
website.............................................................................................. 220
Product packaging........................................................................................................... 222
Clauses 6.1 and 6.3 TMLAs............................................................................................ 228
Conclusion........................................................................................................................ 230
DOES CLAUSE 16.1 OF THE TMLAs EXCLUDE BEGA’S COMMON LAW RIGHTS OF TERMINATION?............................................................................................................. 231
THE VALIDITY OF THE NOTICES OF TERMINATION.................................................. 239
ELECTION................................................................................................................................. 245
IS BEGA ESTOPPED FROM TERMINATING THE TMLAs PURSUANT TO CLAUSE 16.1 BASED ON THE PLAINTIFFS’ BREACH OF CLAUSE 7.3?.................................................. 250
THE APPROPRIATENESS OF THE DECLARATORY RELIEF SOUGHT BY BEGA.... 254
CONCLUSION.......................................................................................................................... 257
HIS HONOUR:
SUMMARY OF FINDINGS
PLAINTIFFS’ CLAIM
(i)Construction of clauses 3.1 and 3.2 of the Trade Mark and Licensing Agreements (‘TMLAs’)
The prohibition on Bega’s use of the Trade Marks or similar trade marks is limited to Products as defined. I reject the plaintiffs’ contention that Bega is precluded from using the Trade Marks or similar trade marks on any products, save as expressly permitted by clauses 3.5 to 3.8 of the TMLAs.
(ii) Rectification for unilateral and common mistake
I reject the plaintiffs’ contention that sub-paragraphs (a) and (b) of clause 3.2 of each of the TMLAs should be rectified by adding the words ‘on or in relation to any product whatsoever’. The plaintiffs have failed to establish that when the TMLAs were signed on 8 May 2001 they misapprehended that clauses 3.1 and 3.2 restricted Bega from using the Trade Marks or trade marks similar to the Trade Marks on or in connection with any products without the plaintiffs’ consent unless expressly permitted by the Agreements.
(iii)Restraint of trade
I reject Bega’s contention (advanced in the alternative) that if clause 3.2 of the TMLAs prohibits Bega from using the trade marks on any products, the clause is invalid as an unreasonable restraint of trade. However, as I have rejected the plaintiffs’ construction of clauses 3.1 and 3.2 and the plaintiffs’ claim for rectification of clause 3.2, my conclusion that clause 3.2 as construed by the plaintiffs is valid and enforceable does not affect my primary findings.
(iv)Conclusion of the plaintiffs’ claim
The plaintiffs’ claim is dismissed.
BEGA’S COUNTERCLAIM
(i) Marketing and Promotion claim
I reject Bega’s contention that the plaintiffs breached express and implied contractual obligations by failing to effectively market and promote Bega branded products and the Bega brand. The TMLAs do not impose any contractual obligation on the plaintiffs:
(a) to engage in any particular type of marketing activity;
(b) to engage in new product development;
(c) to effectively promote and develop sales of Bega branded products;
(d) to promote and develop sales of Bega branded products in the foodservices sector.
(ii) Cheese quality claim
Bega’s claim that the plaintiffs breached clause 8.1 of the TMLAs and clause 13.7 of the Product Supply Agreement by supplying cheese the subject of the first cheese quality notice dated 16 March 2018 is rejected. Bega has failed to establish that the RF15% cheese the subject of the claim was of poor quality. The claim based on the second cheese quality notice dated 20 September 2018 is rejected. The grading results produced by the grading system introduced by Bega in July 2018 do not establish that the cheese which is the subject of the second cheese quality notice was of poor quality. Further, Bega has failed to establish that it suffered any material adverse effect as a consequence of the plaintiffs supplying it with cheese which is the subject of the first and second cheese quality notice, thereby enlivening a right of termination under clause 16.1(a) of the TMLAs.
(iii) Provenance claim
I reject Bega’s contention that the plaintiffs breached clauses 7.3, 6.1(b) and/or 6.3 of the TMLAs by misrepresenting to consumers that all cheese in Bega branded products is made in the Bega Valley. Bega has failed to establish that the plaintiffs breached ss 18 and/or 29(1)(k) of the Australian Consumer Law (‘ACL’) which is a necessary pre-condition to establishing a breach of clause 7.3. Bega has failed to establish that any breach of clause 7.3 has had a material adverse effect upon it. Bega’s claim for breach of clause 6.1(b) is rejected because it has failed to establish that the good name and image of the Trade Marks was harmed by the impugned conduct. The claim for breach of clause 6.3 is rejected because Bega has failed to establish that the value of the Trade Marks has been damaged by the impugned conduct.
(iv) Conclusion on Bega’s counterclaim
Bega’s counterclaim is dismissed.
PLAINTIFFS’ CLAIM
BACKGROUND
The trial of this proceeding was heard on 39 days between 18 November 2019 and 26 March 2020. The conduct of the proceedings was impacted by the spread of coronavirus (COVID-19) in Victoria. On 26 March 2020 Victoria recorded its first deaths related to COVID-19. On 26 March 2020 there were 520 active COVID-19 cases in Victoria, more than a threefold increase on the 150 active cases on 19 March 2020. Due to the uncertainty caused by the spread of COVID-19 I directed that there would be no further hearings subsequent to 26 March 2020 for the purpose of final submissions. I directed the parties to reduce their final submissions to writing. I informed the parties that if there were any aspects of the written submissions in respect of which I required clarification I would afford the parties an opportunity to file supplementary submissions. In recognition of the fact that there were to be no further hearings subsequent to 26 March 2020 I placed no restrictions on the length of the written submissions to be filed by the parties. The submissions filed by the parties subsequent to 26 March 2020 were extensive. The plaintiffs’ submissions on the claim and Bega’s counterclaim ran to 932 pages. Bega’s submissions on the plaintiffs’ claim and its counterclaim ran to 1,149 pages. I have read these submissions carefully. In this judgment I have not addressed each and every submission advanced by the parties. Rather, I have addressed what I have determined to be the real issues in dispute.
INTRODUCTION
On 8 May 2001 the first plaintiff (‘Fonterra’) and the second plaintiff (‘Bonland’) each executed a trade mark and licensing agreement (‘TMLA’) with the defendant (‘Bega’). The TMLA executed by Bonland operates in NSW and the ACT (‘Bonland TMLA’). The TMLA executed by Fonterra operates in the rest of Australia (‘Fonterra TMLA’). For the purposes of the issues which fall for determination in this judgment, absent specific reference to the terms of the Bonland TMLA or the Fonterra TMLA, the terms of the TMLAs are identical.
Pursuant to the TMLAs, Bega granted the plaintiffs a ‘sole and exclusive licence’ to use the Trade Marks as defined in the TMLAs. These Trade Marks consist of various ‘Bega’ Trade Marks. Bega granted the plaintiffs a sole and exclusive licence to use the trade marks in Australia on, or in relation to certain cheese and butter products (‘Products’). The initial term of the TMLAs is 25 years with the plaintiffs having a conditional right to extend for successive periods of 25 years. In theory, the TMLAs can operate in perpetuity.
Prior to the execution of the TMLAs, the promotion and sale of Bega branded cheese in Australia was conducted by Bega Cheese Trading Pty Ltd (‘BCT’) in New South Wales and the ACT and by Bonlac Food Ltd (‘Bonlac’) in the rest of Australia. BCT is the second plaintiff Bonland. It was a wholly owned subsidiary of Bega until Fonterra acquired all of its shares on 8 May 2001 as part of a suite of transactions which included the execution of the TMLAs.
Prior to the execution of the TMLAs, Bonlac held a perpetual licence from Bega to use the Bega brand to market natural and processed cheddar cheese in Australia (other than in NSW and the ACT) under the terms of a franchise deed dated 1 December 1983.[1]
[1]BEG.001.002.2898, 2902.
In April 2000 Bonlac entered into heads of agreement with the New Zealand Dairy Board (‘NZDB’) pursuant to which it was agreed, inter alia, that there would be a corporate restructure under which NZDB would take a 25 per cent equity in Bonlac and a new 50/50 joint venture consumer products company, ConsumerCo Pty Ltd (later renamed Fonterra) would be established.[2] ConsumerCo was incorporated on 26 February 2001.[3] By this time the negotiation of the provisions of the TMLAs relevant to this proceeding had been concluded. Those negotiations, which were conducted by representatives of each of Bonlac and NZDB and Bega were concluded on 23 January 2001.[4]
[2]Plaintiffs, ‘Plaintiffs’ Closing Submissions on the Claim’, 9 April 2020, [102] (‘Fonterra Closing Submissions on the Claim’).
[3]PLA.0009.0004.0027.
[4]Fonterra Closing Submissions on the Claim (n 2) [121].
From May 2001 until about September 2017, the plaintiffs were the only suppliers to grocery retailers and the foodservices industry in Australia of products bearing Bega trade marks. In mid-2017 Bega acquired Mondelez International’s Australian and New Zealand grocery and cheese business (‘MDLZ’) and notified the plaintiffs that it intended to launch its own products (which had been acquired from MDLZ) under the Bega trade mark.[5]
[5]Ibid [259].
From late 2017 Bega manufactured and offered for sale in Australia peanut butter products, nut spread products, macaroni and cheese products and ambient parmesan and cream cheese products bearing a stylised Bega mark similar to some of the Trade Marks.[6] Bega also published material in relation to a range of other products (such as its ‘Dairymont’ range of cheese products, its ‘ZoOSh’ range of condiments and Vegemite), and displayed promotional signage, on which, or alongside which, it has used a stylised Bega mark similar to some of the Trade Marks.[7]
[6]Ibid [265].
[7]Defendant, ‘Fifth Further Amended Defence to the Second Further Amended Statement of Claim and Counterclaim’, 31 March 2020, [19(a)], [20A(a)–(c), (e)] (‘Defence and Counterclaim’).
The plaintiffs claim that by engaging in this conduct Bega breached clauses 3.1 and 3.2 of the TMLAs.[8] The plaintiffs seek declarations to that effect and an injunction to restrain Bega from using the Trade Marks, save in respect of Products as defined. In the alternative, the plaintiffs seek rectification of clause 3.2 by the addition of words which would restrict Bega’s right to use the Trade Marks, or any similar trade mark ‘on or in relation to any product or otherwise whatsoever’.[9]
[8]Plaintiffs, ‘Fifth Further Amended Statement of Claim’, 12 March 2020, [24] (‘Fifth Further Amended Statement of Claim’).
[9]Fonterra Closing Submissions on the Claim (n 2) [220]; Fifth Further Amended Statement of Claim (n 8) [B1].
Bega submits that if clauses 3.1 and 3.2 are construed in the manner for which the plaintiffs contend the clauses are unenforceable as an unreasonable restraint of trade.[10] Alternatively, Bega submits that if clause 3.2 is rectified in the terms sought by the plaintiffs, clause 3.2 is unenforceable as an unreasonable restraint of trade.[11]
[10]Defendant, ‘Closing Submissions of Bega Cheese Limited on Fonterra’s Claim — Part 2’, 7 May 2020, [50] (‘Bega Closing Submissions on the Claim — Part 2’).
[11]Ibid [248].
THE CONSTRUCTION OF CLAUSES 3.1 AND 3.2 OF THE TMLAs
The issue for determination is whether clauses 3.1 and 3.2 prohibit Bega from using the Trade Marks or similar trade marks:
(i) as the plaintiffs contend, on any products, save as expressly provided by clauses 3.5 to 3.8; or
(ii) as Bega contends, only on Products, as defined.
Clauses 3.1 and 3.2 provide as follows:
3.1 Licence
Subject to clauses 3.5, 3.6, 3.7 and 3.8, Bega hereby grants to the Licensee, during the Term, the sole and exclusive:
(a) licence of the Trade Marks; and
(b)licence of any copyright owned by Bega or a Related Body Corporate of Bega in any Display Material,
in the Territory on or in relation to Products for sale in the Territory.
3.2Exclusivity
For the purpose of clause 3.1, ‘sole and exclusive licence’ means that during the Term Bega agrees, subject to clauses 3.5, 3.6, 3.7 and 3.8:
(a)not to grant to any other person (including any Related Body Corporate of Bega), the right to use the Trade Marks (or any trade mark which is similar to any Trade Mark) in the Territory; and
(b)not to use, or permit the use by any other person (including any Related Body Corporate of Bega) of, the Trade Marks (or any trade mark which is similar to any Trade Mark) in the Territory,
without the consent of the Licensee. The Licensee consents to Bega using the Trade Marks specified in Schedule 5 for the purposes set out in the Schedule.
Clauses 3.1 and 3.2 include the following terms which are defined in clause 1.1 of the TMLAs: Licensee, Term, Trade Mark, Related Body Corporate, Display Material, Products and Territory. ‘Trade Marks’ is defined as:
‘Trade Marks’ means the trade marks more particularly described in Schedule 1 (as may be amended by the parties from time to time by agreement in writing) and ‘Trade Mark’ means any one of those marks.[12]
[12]TMLAs, cl 1.1.
There are 22 trade marks listed in Schedule 1. Twenty-one of the trade marks are identified as ‘class 29’. Section 19(3) of the Trade Marks Act 1995 (Cth) states:
The regulations may provide for the classes into which goods and services are to be divided for the purposes of this Act.
Regulation 3.1(1)(a) of the Trade Marks Regulations 1995 (Cth) provides that for the purposes of s 19(3) ‘goods are divided into the classes of goods described in column 2 of Part 1 of Schedule 1’. The class of goods in class 29 includes ‘milk and milk products’.[13]
[13]Trade Marks Regulations 1995 (Cth) sch 1.
Schedule 1 of the TMLAs includes a ‘specification of goods’ in respect of each of the 22 trade marks. Save for the ‘Kameruka’ trade mark in class 30, the specification of goods for all of the remaining 21 trade marks is one or more of cheese, cheese slices, milk, cream, dairy products, butter, or yoghurt.
‘Products’ is defined as follows:
‘Products’ means any one or more of the following products:
(a)Cheese Products;
(b)butter; and
(c)any other products from time to time agreed by the parties in writing …[14]
[14]TMLAs, cl 1.1.
‘Cheese Products’ is defined as:
‘Cheese Products’ means:
(a)all natural and processed cheddar cheese products;
(b)String Cheese; and
(c)any other varieties of cheese or cheese products which the parties, from time to time, agree in writing should be included in this definition …[15]
[15]TMLAs, cl 1.1.
‘String Cheese’ is defined as:
‘String Cheese’ means the variety of cheese which constitutes Stringers …[16]
[16]Ibid.
‘Stringers’ is defined as:
‘Stringers’ means the cheese stick product known as ‘Bega Stringers’ …[17]
[17]Ibid.
When the TMLAs were executed on 8 May 2001 Bega’s core business was the manufacture and sale of natural and processed cheddar cheese.[18] Bega did not manufacture other cheese varieties such as mozzarella, parmesan, edam and gouda. The products licensed to the plaintiffs under the TMLAs represented, in effect, the total range of cheese products manufactured by Bega as at May 2001.
[18]Transcript of Proceedings, T 2214 L 1–9, T 2259 L 1–20, T 2260 L 10–11, L 24–5, T 2262 L 2–8 (24 February 2020); T 2566 L 9–15, T 2568 L 17–22, T 2575 L 23–9, T 2584 L 23–4, T 2620 L 10–11, T 2629 L 25, 2631 L 19–21 (4 March 2020).
The licence of Bega’s Trade Marks granted to the plaintiffs by clause 3.1 subsists ‘in the Territory’ on or in relation to Products for sale in the Territory. Absent any other relevant qualification, clause 3.1 does not restrict Bega from using its Trade Marks on any product for sale in Australia that is not a Product, as defined. Clause 3.1 does not prevent Bega from applying its Trade Marks to mozzarella, parmesan, edam and gouda, if Bega had commenced the production and marketing of these cheese varieties post-May 2001. However, the plaintiffs submit that, properly construed, the effect of clause 3.2 is that ‘during the Term Bega agrees not to use the Trade Marks (or any trade mark which is similar to any Trade Mark), in the Territory without the consent of the licensee’.[19] As such, the plaintiffs submit that the restriction on Bega’s right to use its Trade Marks extends to any product whatsoever.
[19]Plaintiffs, ‘Fonterra Outline of Opening Submissions’, 11 November 2019, [16] (‘Fonterra Opening Submissions’).
Before addressing the parties’ competing contentions it is necessary to set out the legal principles which govern the construction of commercial contracts. These were summarised by French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd:[20]
[20](2015) 256 CLR 104.
The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.
In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’. It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.
Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.
Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption ‘that the parties … intended to produce a commercial result’. Put another way, a commercial contract should be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.
These observations are not intended to state any departure from the law as set out in Codelfa Construction Pty Ltd v State Rail Authority (NSW) and Electricity Generation Corporation v Woodside Energy Ltd. We agree with the observations of Kiefel and Keane JJ with respect to Western Export Services Inc v Jireh International Pty Ltd.[21]
[21]Ibid 116–17 [46]–[52] (citations omitted).
The plaintiffs submit:[22]
When stripped of its subordinate phrases, the operative sentence of clause 3.2 simply says, ‘Bega agrees … (b) not to use … the Trade Marks (or any trade mark which is similar to any Trade Mark) in the Territory, without the consent of the Licensee.’
[22]Fonterra Closing Submissions on the Claim (n 2) [19].
The plaintiffs submit that the opening words of clause 3.2, ‘[f]or the purpose of clause 3.1, “sole and exclusive licence” means …’, are not words of limitation which confine the restriction imposed upon Bega by clause 3.2 to ‘Products’, as defined.[23]
[23]Plaintiffs, ‘Plaintiffs’ Submissions in Reply on the Claim’, 18 May 2020, [36] (‘Fonterra Reply Submissions on the Claim’).
I reject this submission. Clauses 3.1 and 3.2 are to be read together. The combined effect of the phrases:
·‘[f]or the purposes of clause 3.1’;
·‘sole and exclusive licence’; and
·‘means’
is to define the meaning of the sole and exclusive licence granted to the plaintiffs by clause 3.1. The sole and exclusive licence granted by clause 3.1 is a licence ‘on or in relation to Products’. The fact that the phrase ‘sole and exclusive licence’ appears in clause 3.2 in quotation marks is a strong textual indicator that clause 3.2 defines the meaning of the sole and exclusive licence granted by clause 3.1 in relation to Products. The definitional nature of clause 3.2 flows from the use of the word ‘means’, which also appears in every defined term in clause 1.1 of the TMLAs.
The plaintiffs submit there is nothing in the text or context of clause 3.2, or the TMLAs as a whole, to suggest that Bega’s express promise not to use or permit the use of the Trade Marks without the plaintiffs’ consent, should be read as limited to a promise not to use, or permit the use of the Trade Marks on or in relation to Products. I reject this submission. The plain meaning of the opening words of clause 3.2 is that the restriction prescribed by clause 3.2 is for the purpose of the licence granted by clause 3.1, which is a licence ‘on or in relation to Products’.
The plaintiffs submit that the expression ‘[f]or the purpose of’ in the opening line of clause 3.2 indicates that the words that follow apply to, rather than ‘are limited by’, the identified purpose.[24] In support of this submission the plaintiffs cite the observations of Fullagar J in Fisher v Hebburn Ltd (‘Fisher’):[25]
The expression ‘for the purposes of’ is a loose and vague expression. ‘For the purposes of sub-s. (4)’ is not an expression adapted to having any limiting effect on the operation of the substantive provision which follows.[26]
[24]Ibid [16].
[25](1960) 105 CLR 188 (‘Fisher’).
[26]Ibid 196.
The passage relied upon by the plaintiffs from Fisher is readily distinguishable. First, Fullagar J was considering the construction of beneficial legislation, the Workers Compensation Act 1926 (NSW). Second, the phrase considered by Fullagar J does not include the definitional term ‘means’.
In PTTEP Australasia (Ashmore Cartier) Pty Ltd v Commissioner of Taxation[27] Gordon J considered a contract containing the following clauses:
[27](2013) 97 ATR 702.
Price
4.1The buyer shall pay to the seller for each barrel of crude delivered in accordance with this agreement and in the final inventory the price calculated as follows: Price = APPIT + P + D
Variables/rounding off
4.2For the purposes of cl 4.1:
(a)P means the average of all of the mean of premium/discount quotations for Tapis crude oil as published in the Platt’s Pacific Rim Spot Crude Assessments for the 30 days commencing 60 days prior to the bill of lading date;
(b)D means:
(i)in relation to Jabiru Crude that is produced and available for lifting during the term, US $0.35;
(ii)in relation to Challis Crude that is produced and available for lifting during the term, US $0.35.[28]
[28]Ibid 723–4 (emphasis added).
As to the construction of clause 4.1, her Honour stated: ‘P and D were defined in cl 4.2’.[29] This finding was not disturbed on appeal.[30]
[29]Ibid 707 [16].
[30]PTTEP Australasian (Ashmore Cartier) Pty Ltd v Federal Commissioner of Taxation (2014) 222 FCR 592, 594 [8].
In Cambridge Credit Corporation Ltd v Parkes Developments Pty Ltd[31] Hope JA (Glass JA agreeing) considered that the term ‘profits and losses’ was defined by a clause stating:
For the purposes of Clause 5.1 hereof the words ‘profits or losses’ shall mean the difference between the sum of …[32]
[31][1974] 2 NSWLR 590.
[32]Cambridge Credit Corporation Ltd v Parkes Developments Pty Ltd [1974] 2 NSWLR 590, 593.
In addition to the authorities referred to above, there are other instances where courts have treated the phrase ‘for the purpose of’ as being definitional in nature: TCP Europe Ltd v Perry [2012] EWHC 1940 (QB), [55] (Seymour J); Little Images Pty Ltd v Fresh View Venture Pty Ltd [2011] QSC 402, [73] (McMurdo J); Re Lindholm; Re Opes Prime Stockbroking Ltd (admins apptd) (rec and mgr apptd) (2008) 171 FCR 473, 480 [31] (Finkelstein J); Commonwealth v Byrnes (2018) 54 VR 230, 304–5 [335]–[336].
The plaintiffs submit that the phrase ‘for the purpose of clause 3.1’ in the opening line of clause 3.2 is not a reference to the conferral and limitation of the plaintiffs’ rights to use the Trade Marks under clause 3.1. Instead, the plaintiffs submit that the ‘purpose of clause 3.1’ to which clause 3.2 is directed is the limitation of Bega’s ongoing right to use the Trade Marks, which is inherent in the grant of the sole and exclusive licence conferred by clause 3.1.[33]
[33]Fonterra Closing Submissions on the Claim (n 2) [25].
I accept the plaintiffs’ contention that clause 3.2 imposes obligations upon Bega. Nevertheless, it is clear from the opening words of clause 3.2 that those obligations are contingent upon and co-extensive with the rights conferred upon the plaintiffs in relation to Products. When clauses 3.1 and 3.2 are read together, the sole and exclusive licence granted to the plaintiffs to use the Bega Trade Marks means that Bega will not use or permit the use by any other person of the Trade Marks, or any similar trade mark, on or in relation to Products for sale in the Territory.
The plaintiffs submit that their construction of clause 3.2 is supported by the final sentence thereof which reads:
The Licensee consents to Bega using the Trade Marks specified in Schedule 5 for the purposes set out in the Schedule.
The plaintiffs submit that the majority of products listed in Schedule 5 are not Products, as defined, including whey powder, chocolate topping, Bega fudge, ricotta, shirts, caps and other items of clothing. They submit that if Bega’s construction of clauses 3.1 and 3.2 is correct, the plaintiffs’ consent to Bega’s use of the Trade Marks on these products, as recorded in the final sentence of clause 3.2, would be unnecessary.[34]
[34]Ibid [27].
I reject this submission. Schedule 5 includes both Products (20 kg bulk cheddar cheese, bulk butter, string cheese) and products. To the extent that Schedule 5 includes Products as defined, the plaintiffs’ consent to Bega using the Trade Marks on these Products, recorded in the final sentence of clause 3.2, is consistent with Bega being restrained from applying its Trade Marks to Products. Insofar as Schedule 5 lists products falling outside the definition of Products, the final sentence of clause 3.2 is consistent with the parties, for the avoidance of doubt, listing all the products manufactured by Bega in 2001, upon which Bega would be permitted to apply its Trade Marks.
I accept the plaintiffs’ submission that if the restriction imposed upon Bega by clause 3.2 is confined to Products it would have been unnecessary for the parties to have listed in Schedule 5 products falling outside the definition of Products in clause 1.1. However, the unambiguous opening words of clause 3.2 cannot be disregarded. To do so on the basis that some of the products listed in Schedule 5 fall outside the definition in clause 1.1, would be to construe clause 3.2 by reference to ‘the tail wagging the dog’.
Bega submits that insofar as there is any conflict between clause 3.2 and Schedule 5, clause 18.9 is engaged.[35] This clause provides:
If there is any conflict between the main body of this Agreement and any schedules or annexures comprising it, then the provisions of the main body of this Agreement prevail.
[35]Defendant, ‘Closing Submissions of Bega Cheese Limited on Fonterra’s Claim — Part 1’, 30 April 2020, [60] (‘Bega Closing Submissions on the Claim — Part 1’).
I do not consider that there is any conflict between clause 3.2 and Schedule 5. On its proper construction, clause 3.2 requires Bega to seek the plaintiffs’ consent to apply its Trade Marks to Products as defined. Insofar as Schedule 5 lists Products, the consent recorded in the final sentence of clause 3.2 is consistent with this construction. Insofar as some of the products listed in Schedule 5 are not Products, the plaintiffs have agreed to Bega acting in a way which was permitted by clause 3.2. If I am wrong in concluding that there is no conflict between clause 3.2 and Schedule 5, then recourse can be had to clause 18.9 to support a construction of clause 3.2 whereby the restrictions imposed upon Bega’s use of its Trade Marks is confined to Products.
The plaintiffs submit that if the parties had intended that Bega could sell in Australia any products under its Trade Marks, that intention would have been expressly recorded in clauses 3.1 and 3.2.[36] The plaintiffs submit that there is no basis for reading the words ‘on or in relation to Products’ into clause 3.2 when they have obviously been deliberately disregarded.[37] I reject this submission. It ignores the opening words of clause 3.2. By reason of the opening words, it is unnecessary for the phrase ‘on or in relation to Products’ to be read in to clause 3.2. The opening words of clause 3.2 confine the restrictions imposed upon Bega’s right to use its Trade Marks to Products. This conclusion is not altered by clauses 3.5 to 3.8 which govern Bega’s right to use its Trade Marks in certain prescribed circumstances, namely:
·Bega acting outside Australia (clause 3.5);
·Bega’s corporate identity (clause 3.6);
·Bega Heritage Centre (clause 3.7); and
·Product supply to licensee (clause 3.8).
[36]Fonterra Closing Submissions on the Claim (n 2) [29].
[37]Ibid [33].
In clauses 3.5 to 3.8 the plaintiffs and Bega have expressly recorded Bega’s permitted use of its Trade Marks. Clause 3.5 commences with the phrase ‘[t]he Licensee acknowledges … ’. Clause 3.6 commences with the words ‘[f]or the avoidance of doubt … ’. Contrary to the plaintiffs’ submission, the parties’ agreement to make express provision as set out in clauses 3.5 to 3.8 does not ‘[tell] strongly against construing clauses 3.1 and 3.2 as having [the] effect’ that Bega has ‘the right to sell all products other than Products in Australia under the Trade Marks’.[38]
[38]Ibid [32].
The plaintiffs submit that on Bega’s construction, clause 3.2 is ‘unnecessary and of no effect’ because it effects no change to the ordinary meaning of ‘sole and exclusive licence’.[39] I reject this submission. Objectively construed, in clause 3.2 the plaintiffs and Bega have defined the meaning of the sole and exclusive licence granted to the plaintiffs under clause 3.1. Of itself, this is sufficient to reject the plaintiffs’ contention. Further, I reject the plaintiffs’ contention that on Bega’s construction clause 3.2 effects no change to the ordinary meaning of ‘sole and exclusive licence’. The restrictions imposed upon Bega by clause 3.2 are not limited to Trade Marks as defined but extend to ‘any trade mark which is similar to any Trade Mark’ licensed under clause 3.1.
[39]Ibid [34].
Schedule 4 of the TMLAs sets out a methodology for valuing the plaintiffs’ rights to the Trade Marks (‘the fair value’) in the event that the TMLAs are terminated (other than by Bega under clause 16.1). Clause 3 of Schedule 4 is headed ‘Basis of Valuation’. In calculating fair value it is assumed that Bega ‘shall have to first establish and then maintain a national sales, marketing and distribution business through which the Bega Trade Marks are to be sold, marketed and distributed’, and that Bega ‘will need sufficient time to set up and manage the Bega Trade Marks’.[40] The plaintiffs submit that neither of these assumptions make any sense if Bega was already permitted to use its Trade Marks on products other than Products as defined.[41] In order to address this submission it is necessary to set out in full clauses 3[1], [5] and [6] of Schedule 4. These clauses provide:
[40]TMLAs, cl 3 [5], [6].
[41]Fonterra Closing Submissions on the Claim (n 2) [37].
3.In valuing of the rights held by the Licensee to the Bega Trade Marks in the Territory the valuer shall:
[1]Value the rights in relation to all Products in relation to which the Licensee is permitted to use the Trade Marks including cheddar and string cheese.
…
[5]Assume that Bega shall have to first establish and then maintain a national sales, marketing and distribution business through which the Bega Trade Marks are to be sold, marketed and distributed, and that all reasonable expenses will be incurred in running this Branded sales, marketing and distribution business.
Assume that such reasonable sales, marketing and distribution business related expenses shall be incremental to other then existing actual business expenses of Bega.
In calculating such costs, the independent valuer will have regard to the costs incurred by the Licensee for this business, the costs proposed by Bega and the costs for a service of appropriate quality and scope which could be provided by external parties.
[6]Have regard to the future prospects of the Bega Trade Marks when used by Bega, and assume Bega will need sufficient time to set up to manage the Bega Trade Marks.
Clause 3[5] refers to the ‘business through which the Bega Trade Marks are to be sold, marketed and distributed’. The reference to ‘Bega Trade Marks’ should be read consistently with clause 3[1], ie ‘all Products in relation to which the Licensee is permitted to use the Trade Marks’. Products, not trade marks, are sold, marketed and distributed. When clauses 3[1] and [5] are read together the valuer is required:
(i) to value the rights in relation to Products on which the plaintiffs had been permitted prior to the termination of the TMLAs to use the Trade Marks, including cheddar and string cheese; and
(ii) set off the assumed costs of Bega selling, marketing and distributing the Products in respect of which, prior to the termination of the TMLAs, the plaintiffs had been permitted to use the Trade Marks.
The assumed set off costs make sense irrespective of whether, prior to the termination of the TMLAs, Bega had already been selling, marketing and distributing other products, with or without the Bega Trade Mark. I reject the plaintiffs’ submission that the assumptions underpinning clauses 3[5] and [6] do not make any sense if Bega was already using the Trade Marks on products other than Products.
The plaintiffs submit that if Bega has the right to use its Trade Marks in relation to products other than Products as defined, this would produce a ‘capricious and unreasonable result’ and be ‘commercial nonsense’.[42] The plaintiffs submit that if Bega retained the right to sell cheese and dairy products, other than cheddar, string cheese and butter, this would be a ‘commercially absurd result’.[43] I reject these submissions. When the parties negotiated the TMLAs it would have been a very simple matter for the definition of ‘Cheese Products’ to have included a wide range of cheese varieties. This would have foreclosed the possibility of Bega being free to use the Trade Marks on cheese products which compete directly with, and potentially take market share from, the Branded Products (product that bears a Trade Mark) sold by the plaintiffs.[44]
[42]Ibid [40].
[43]Ibid [42].
[44]Ibid [43].
Rather than specifying a wide range of cheese varieties, the definition of Cheese Products is confined to:
(a) all natural and processed cheddar cheese products;
(b) String Cheese; and
(c) any other varieties of cheese or cheese products which the parties, from time to time, agree in writing should be included in this definition.[45]
[45]TMLAs, cl 1.1.
The extension of Cheese Products beyond cheddar and string cheese is conditional upon Bega’s agreement. Thus, the definition contemplates that Bega might in the future develop other varieties of cheese but not agree to such cheese varieties being included in the definition of Cheese Products. Far from being a commercially absurd result, the definition of Cheese Products, read in conjunction with clause 3.1 and 3.2, expressly contemplates the potential for Bega to:
(a) develop other cheese varieties;
(b) withhold agreement as to the inclusion of those cheese varieties in the definition of Cheese Products; and
(c) market and sell those products under the Bega Trade Mark.
In support of their contention that Bega’s retention of the right to sell cheese products such as parmesan and mozzarella under the Bega Trade Mark would be commercially absurd, the plaintiffs point to three matters:[46]
[46]Fonterra Closing Submissions on the Claim (n 2) [42]–[45].
(i) Bega would be free to use the Trade Marks on cheese products which would compete with, and take market share from, the Branded Products sold by the plaintiffs;
(ii) the sale by Bega of cheese products bearing the Trade Marks would be counted within the total sales by Participating Retailers of cheese products in the Branded Cheese Category by reference to which the Agreed Minimum Payment and the Minimum Market Performance Requirement are calculated. The plaintiffs submit this would increase the minimum royalty payable to Bega and increase the risk of the plaintiffs failing to meet the Minimum Market Performance Requirement to avoid termination of the TMLAs and the Product Supply Agreement; and
(ii) Bega would be free to use the Trade Marks on dairy and other products in a manner fundamentally inconsistent with the Agreed Marketing Principles prescribed in Schedule 2 of the TMLAs.
In Australian Broadcasting Commission v Australasian Performing Right Association Ltd[47] Gibbs J stated:
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.[48]
[47](1973) 129 CLR 99.
[48]Ibid 109. This passage was cited with approval by Tate JA in Apple and Pear Australia Ltd v Pink Lady America LLC (2016) 343 ALR 112, 141 [98].
The words used in clauses 3.1 and 3.2 are unambiguous. The opening words of clause 3.2: ‘[f]or the purpose of clause 3.1, “sole and exclusive licence” means …’ define the sole and exclusive licence granted by clause 3.1. That licence is granted in relation to ‘Products’ as defined. Accordingly, even if the matters relied upon by the plaintiffs do give rise to commercial anomalies, this does not justify departure from the unambiguous meaning of clauses 3.1 and 3.2. As Macfarlan JA observed in Jireh International Pty Ltd v Western Exports Services Inc:[49]
A court is not justified in disregarding unambiguous language simply because the contract would have a more commercial and businesslike operation if an interpretation different to that dictated by the language were adopted.[50]
In Apple and Pear Australia Ltd v Pink Lady America LLC[51] Tate JA cited this passage with approval in the context of her consideration of ‘the primacy of unambiguous contractual provisions’.[52]
[49][2011] NSWCA 137.
[50]Ibid [55] (Macfarlan JA, Young JA and Tobias AJA agreeing).
[51](2016) 343 ALR 112.
[52]Ibid 141–2 [99].
Not only is the meaning of clauses 3.1 and 3.2 unambiguous, the restriction imposed upon Bega’s right to use its Trade Marks works perfectly well when confined to ‘Products’ as defined. It is not permissible for the Court to rewrite clauses 3.1 and 3.2 to operate in what may, from the plaintiffs’ perspective, be a more reasonable fashion.[53]
[53]Jireh International Pty Ltd v Western Export Services Inc [2011] NSWCA 137, [64]–[65] (Macfarlan JA).
In any event, the plaintiffs have failed to establish that the sale by Bega of cheese products (other than cheddar and string cheese) would be commercially absurd by reason of such sale:
·cannibalising the plaintiffs’ sale of Branded Products;
·increasing the minimum royalty payable by the plaintiffs to Bega; and
·increasing the risk of the plaintiffs failing to meet the minimum market performance requirement.
In response to Bega’s submission that there is no proper evidentiary foundation to support such findings, the plaintiffs submit:
That is contrary to the evidence of Mr Simonovski, to the effect that Bega cheddar and Colby can be used in culinary occasions and that Perfect Italiano specialty culinary cheeses do attract consumers away from tasty cheese. It is also contrary to the way Bega conducted its M&P case as reflected, for example, in the cross-examination of Mr Dhu, which was premised on the basis that Bega natural cheddar cheese should have been promoted by Fonterra as a substitute for Mainland natural cheese varieties, including non-cheddar varieties, Egmont and Swiss. The Court should find that consumers do switch between and trade up to different cheese varieties and that the sale of Bega branded cheeses other than cheddar and Colby by Bega itself would take sales from Branded Products. In relation to the specific example given by Fonterra, the Court can and should infer from the fact that gouda, edam and Colby compete in the same category in tasting competitions that they also compete for sales.[54]
[54]Fonterra Reply Submissions on the Claim (n 23) [61].
The evidence referred to above falls well short of establishing that the potential for Bega to compete with the plaintiffs by selling products other than cheddar cheese and string cheese would be commercially absurd.
Further, I reject the plaintiffs’ contention that it would be anomalous if Bega was free to use the Trade Marks on dairy and other products by reason of the potential for it to do so in a manner inconsistent with the Agreed Marketing Principles. Bega retains ownership of its Trade Marks. If the TMLAs come to an end Bega will have the right to use the Trade Marks on cheddar and string cheese products. It would make no sense for Bega to market cheese products other than cheddar and string cheese, in a way which damages the value of its own Trade Marks.
The plaintiffs contend that the evidence of the parties’ negotiations is admissible in support of their construction of clause 3.2 because it is probative of:
(i)the objective background facts known to both parties, including the purpose or aim or subject matter of clause 3.2; and
(ii)the fact that the parties united in rejecting the meaning of clause 3.2 advanced by Bega in this case.[55]
[55]Ibid [64].
In Codelfa Construction Pty Ltd v State Rail Authority (NSW) (‘Codelfa’)[56] Mason J stated:
The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.
It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification.[57]
[56](1982) 149 CLR 337 (‘Codelfa’).
[57]Ibid 352.
Clauses 3.1 and 3.2 are not ambiguous or susceptible of more than one meaning. Evidence of pre-contractual negotiations between the parties is not admissible to contradict the plain meaning of clauses 3.1 and 3.2; ie the restriction on Bega’s right to use its Trade Marks is limited to Products as defined. This construction is far removed from that for which the plaintiffs contend; ie subject to the permitted uses identified in Schedule 5 and clauses 3.5 to 3.8, Bega is restricted from using its Trade Marks in Australia without the plaintiffs’ consent on or in relation to any product.
In Codelfa, Mason J stated:
Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except insofar as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties’ presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.[58]
[58]Ibid.
These observations are apposite in the present case. Negotiations in respect of clauses 3.1 and 3.2 were concluded on 23 January 2001. The TMLAs were executed on 8 May 2001. Consumer Co Pty Ltd was incorporated on 26 February 2001.[59] Consumer Co was the corporate vehicle for a joint venture between Bonlac Foods Ltd and the NZDB. Each of these parties had their own negotiating teams and separate legal representation during the negotiations. Bega Cheese Trading Pty Ltd was a wholly owned subsidiary of Bega until immediately prior to the execution of the Bonland TMLA agreement. On 23 January 2001 when negotiations in respect of clauses 3.1 and 3.2 were concluded:
[59]PLA.0009.0004.0027.
(a) ConsumerCo Pty Ltd did not exist; and
(b) Bega Cheese Trading Pty Ltd was a wholly owned subsidiary of Bega.
Bonlac and NZDB, who negotiated the terms of clauses 3.1 and 3.2 with Bega, are not parties to the TMLAs. It is ‘unrewarding’ to construe clauses 3.1 and 3.2 by reference to the actual intention of the negotiating parties, at the expense of the words used in clauses 3.1 and 3.2.[60]
[60]Codelfa (n 56) 352.
The plaintiffs submit that the evidence establishes that the parties were ‘united in rejecting’ Bega’s construction and that such evidence is admissible in support of the construction of clause 3.2 contended for by the plaintiffs. The plaintiffs submit as follows:
Third, the evidence of the parties’ negotiations establishes that, in their negotiations, they ‘united in rejecting’ Bega’s construction and mutually adopted ‘a particular interpretation of [the] … words’ of clause 3.2 that is only consistent with Fonterra’s construction. In particular:
(a) in his letter dated 18 December 2000, Mr Ferguson acknowledged, on behalf of Bega, that: ‘At present, Clause 3.2 prevents BCS from using the Trade Marks on any products without the prior consent of ConsumerCo.’
(b) in his letter to Mr van Ryn dated 21 December 2000, Mr Sloan referred to the letter from Mr Ferguson dated 18 December 2000 and beneath the heading ‘Rights to use the Bega Brand’ reiterated: ‘David Ferguson’s letter correctly identifies this issue as a “deal breaker” for all of the reasons we have discussed’.
(c) by email dated 3 January 2001 to Mr Ferguson, Ms Wood enclosed a document headed ‘Trademark Licence and Product Supply Agreement Outstanding Issues’, which recorded, in relation to Bega’s rights to use the Bega brand that Bonlac/NZDB ‘… are unable to move from the position we have previously put on this issue’.
(d) by his letter dated 23 January 2001, Mr Ferguson wrote, on behalf of Bega, that: ‘while Bega Co-op remains concerned with Clause 3.2 of the Trade Mark Licence it notes the importance of this provision to ConsumerCo and, provided that the other issues raised in this letter can be adequately dealt with, Bega Co-op is prepared to accept the current wording of Clause 3.2’.[61]
This correspondence demonstrates that the parties were united, in their negotiations, that the wording of clause 3.2 meant that Bega was prevented from using the Trade Marks on any products without Fonterra’s consent, amounting either to a mutual rejection of Bega’s construction or a mutual adoption of Fonterra’s construction. On the established principles referred to above, that evidence is admissible. It is compelling evidence as to which is the correct construction of clause 3.2.[62]
[61]Fonterra Reply Submissions on the Claim (n 23) [68].
[62]Ibid [69].
In support of the submissions set out above, the plaintiffs cite the judgment of Mason J in Codelfa:
There may perhaps be one situation in which evidence of the actual intention of the parties should be allowed to prevail over their presumed intention. If it transpires that the parties have refused to include in the contract a provision which would give effect to the presumed intention of persons in their position it may be proper to receive evidence of that refusal. After all, the Court is interpreting the contract which the parties have made and in that exercise the Court takes into account what reasonable men in that situation would have intended to convey by the words chosen. But is it right to carry that exercise to the point of placing on the words of the contract the meaning which the parties have united in rejecting? It is possible that evidence of mutual intention, if amounting to concurrence, is receivable so as to negative an inference sought to be drawn from surrounding circumstances.[63]
[63]Codelfa (n 56) 352–3.
Objectively construed, clause 3.2 restricts Bega’s right to use its Trade Marks on Products; ie cheddar cheese and string cheese products. The plaintiffs do not seek to admit evidence of the parties’ negotiations ‘so as to negative an inference sought to be drawn from surrounding circumstances’. Rather, the plaintiffs seek to admit such evidence in aid of a construction of clause 3.2 which is inconsistent with the plain meaning of the words used therein. The evidence is not admissible for this purpose.
Further, and in any event, I do not accept that the matters set out above constitute persuasive evidence of mutual intention that the restriction imposed by clause 3.2 would extend beyond Products as defined. In 2000–2001 Bega did not manufacture any cheese products other than the products which were the subject of the licence granted by clause 3.1; ie cheddar cheese and string cheese. Viewed in this context, the statement by Mr Ferguson in his letter of 18 December 2000: ‘[c]lause 3.2 prevents BCS from using the Trade Marks on any products without the prior consent of Consumer Co’,[64] is an accurate statement of the effect of clause 3.2 in respect of the of the cheese products manufactured by Bega in December 2000. The statement is not a clear acceptance that clause 3.2 prevents Bega from using its trade marks on any product whatsoever. When drafting clause 3.2 the parties chose to limit the scope of the restriction on Bega’s right to use its trade marks to Products, as defined. This is the plain meaning and effect of the opening words of clause 3.2.
[64]BEG.007.002.0245.
RECTIFICATION
In the event, as I have determined, that clause 3.2 does not prevent Bega from using the Trade Marks in Australia on any product without the plaintiffs’ consent, save in relation to Products as defined, the plaintiffs contend that clause 3.2 of each of the TMLAs should be rectified. The plaintiffs contend that the words ‘on or in relation to any product or otherwise whatsoever’ should be added to each of sub-paragraphs (a) and (b) of clause 3.2.[65]
[65]Fonterra Closing Submissions on the Claim (n 2) [220].
The plaintiffs seek an order for rectification for unilateral, or alternatively, common mistake.[66] In Leibler v Air New Zealand Ltd (No 2)[67] (‘Leibler’) Kenny JA set out the principles which govern an application for rectification on the ground of unilateral mistake:
The principles which govern an application for rectification of a contract on the ground of unilateral mistake can be briefly stated. If (1) one party, A, makes an agreement under a misapprehension that the agreement contains a particular provision which the agreement does not in fact contain; and (2) the other party, B, knows of the omission and that it is due to a mistake on A’s part; and (3) lets A remain under the misapprehension and concludes the agreement on the mistaken basis in circumstances where equity would require B to take some step or steps, depending on those circumstances, to bring the mistake to A’s attention; then (4) B will be precluded from relying upon A’s execution of the agreement to resist A’s claim for rectification to give effect to A’s intention.[68]
[66]Fifth Further Amended Statement of Claim (n 8) [B1].
[67][1999] 1 VR 1 (‘Leibler’).
[68]Ibid 14 [36] (Kenny JA, Winneke P and Phillips JA expressing substantial agreement).
Rectification for unilateral mistake is not confined to cases involving misapprehension that an agreement contains a particular provision which it does not in fact contain. The remedy is also available where one or both parties mistakenly thought that the words in an agreement bore a different meaning.[69]
[69]Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329, 336 (Sheller JA); Thiess Pty Ltd v Arup Pty Ltd [2012] QSC 185, [89] (‘Thiess’); Acorn Consolidated Pty Ltd v Hawkslade Investments Pty Ltd (1999) 21 WAR 425, 448–9 [105]–[106]; David Hodge, Rectification: The Modern Law and Practice Governing Claims for Rectification for Mistake (Thomson Reuters, 2nd ed, 2016) 472.
Before an order for rectification can be made on the grounds of mistake, the plaintiffs must establish by convincing proof that they not only made a mistake, but that the mistake was precisely the one identified by them for the purpose of their claim for rectification.[70] The mistake identified by the plaintiffs is their misapprehension at the time of executing the TMLAs that clauses 3.1 and 3.2 restricted Bega from using the Bega Trade Marks, or trade marks similar to the Trade Marks, in each Territory, on or in connection with any products without the plaintiffs’ consent unless expressly permitted by the Agreements (‘the Plaintiffs’ Understanding’).[71]
[70]Leibler (n 67) 15 [38].
[71]Fifth Further Amended Statement Of Claim (n 8) [30].
The plaintiffs bear the onus of proof on the balance of probabilities in accordance with s 140(1) of the Evidence Act 2008 (Vic). However, the plaintiffs’ application is also subject to s 140(2):
Without limiting the matters that the court may take into account in deciding whether it is so satisfied, it is to take into account —
(a) the nature of the cause of action or defence; and
(b) the nature of the subject-matter of the proceeding; and
(c) the gravity of the matters alleged.[72]
[72]See Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603, 713 [458]–[459] (‘Metcash’).
It is ‘elementary’ that rectification is granted only upon ‘clear and convincing proof’.[73] What needs to be proved by the plaintiffs in accordance with this standard is:
(a) not only that the TMLAs do not have the legal effect which the plaintiffs intended them to have, but also what the plaintiffs’ intention as to the legal effect of the TMLAs was when the TMLAs were executed (for rectification for unilateral mistake); and
(b) not only that the TMLAs do not correctly record the common intention of the parties, but also, what the common intention of the parties was when the TMLAs were executed (rectification for common mistake).[74]
[73]Ibid 712 [451]; Leibler (n 67) 15 [38].
[74]Metcash (n 72) 712 [451].
In Franklins Pty Ltd v Metcash Trading Ltd (‘Metcash’), the New South Wales Court of Appeal identified three policy reasons for requiring great care in making the factual findings of common intention that ground a rectification order for common mistake:
First, both the social institution of making contracts in writing, and the practical importance associated with it, of people ordinarily being able to rely upon a document, that is apparently regular, meaning what it says, contribute to the need for care in granting rectification … Second, there is a ‘danger of imposing on a party a contract which he did not make …’. [Third] [w]hen an agreement is one tailored to the particular case it deals with rather than being a standard form, has been reduced to writing through a process of negotiation between solicitors over a period of months, and is clearly a matter of great commercial significance to the parties, that situation in itself is a factor that tends to make it less likely that the parties have recorded their common intention incorrectly.[75]
[75]Ibid 713–14 [459]–[460].
Although made in the context of rectification for common mistake, these observations apply equally to a claim based on unilateral mistake. In Leibler, which involved a claim for rectification based on unilateral mistake, Kenny JA observed:
Ordinarily, where parties enter into prolonged negotiations in which they are assisted by solicitors, the executed document will be taken to represent their real intentions and a court will not reach a contrary conclusion unless satisfied by convincing proof.[76]
[76]Leibler (n 67) 19 [49].
In the present case, the parties entered into prolonged negotiations in which they were assisted by solicitors. Further, unlike Leibler, the mistake which the plaintiffs must establish does not involve a misapprehension that the TMLAs contain a particular provision which they do not in fact contain. Rather, the mistake is as to the legal effect of the words used in clause 3.2; ie that the parties have used words, which, when properly construed, do not express the plaintiffs’ true intention (unilateral mistake) or alternatively, the plaintiffs’ and Bega’s true intention (common mistake).
The TMLAs were executed on 8 May 2001. In assessing the weight to be given to the evidence led in the current proceedings I have had regard to the fact that witnesses have given evidence in respect of negotiations which occurred almost 20 years ago. Further, prior to late 2017 there had never been an issue between the plaintiffs and Bega as to whether clause 3.2 prevented Bega from applying its Trade Marks to products other than Cheese Products. It was only after the passage of many years following the execution of the TMLAs that the witnesses had occasion to turn their minds to what their intention was as to the legal effect of clause 3.2 in May 2001 when the TMLAs were executed.
Establishing corporate state of mind
The plaintiffs submit that the attribution of state of mind to the plaintiffs and Bega is critical for the purposes of their claims for unilateral and common mistake.[77] The plaintiffs advance five propositions in respect of the identification of the individual or individuals whose state of mind is to be attributed to the plaintiffs for the purposes of establishing the Plaintiffs’ Understanding.
[77]Fonterra Closing Submissions on the Claim (n 2) [69].
First, the plaintiffs cite the judgment of the majority in Krakowski v Eurolynx Properties Pty Ltd (‘Krakowski’),[78] which approved the following statement of Bright J in Brambles Holdings Ltd v Carey:[79]
Always, when beliefs or opinions or states of mind are attributed to a company it is necessary to specify some person or persons so closely and relevantly connected with the company that the state of mind of that person or those persons can be treated as being identified with the company so that their state of mind can be treated as being the state of mind of the company.[80]
Second, the plaintiffs submit that the state of mind of an individual can be attributed to a company even if that person was not its guiding mind and will for all purposes.[81] Third, when assessing the state of mind of a company, a company will be taken to have the ‘knowledge possessed by each of’ the key individuals involved in a transaction.[82] Fourth, there is no requirement, in order to establish the requisite corporate state of mind to found a claim for rectification, that the plaintiffs establish that all, or a majority, of the board of the plaintiffs or, Bonlac or NZDB, held the Plaintiffs’ Understanding.[83] Fifth, there is no requirement that the plaintiffs establish that all, or a majority, of the individuals responsible for executing the TMLAs on behalf of the plaintiffs held the Plaintiffs’ Understanding.[84]
[78](1995) 183 CLR 563 (‘Krakowski’).
[79](1976) 15 SASR 270, 279.
[80]Krakowski (n 78) 582–3.
[81]Fonterra Closing Submissions on the Claim (n 2) [74].
[82]Ibid [76].
[83]Ibid [81].
[84]Ibid [82].
In determining corporate state of mind, regard must be had to the particular context in which the issue of attribution arises.[85] There are many authorities which have considered the attribution of corporate state of mind in the context of claims for rectification. In Perpetual Ltd v Myer Pty Ltd (‘Perpetual’)[86] Croft J, in the context of a claim for rectification for common mistake, set out the following principles governing attribution of corporate state of mind:
Questions of intention when only natural persons are involved in the negotiation and execution of a contract which is sought to be rectified do not pose the same difficulties that may arise with respect to corporate parties. Thus, there is a question whether the state of mind of a natural person should be attributed to a corporate party as a matter of interpretation of the relevant substantive rule. The substantive rule here is the law of contract.
The primary rule of attribution in the case of a corporation is the corporate constitution, but further rules are required to enable the corporation to do business. The primary rule is supplemented by the general rules of attribution found in the principles of agency. The principle of agency used in contract law, particularly in cases of rectification, is that the relevant officer or employee is the person who is the ‘directing mind and will’ of the corporation in relation to the contract.
The cases dealing with rectification claims variously describe the relevant officer or employee whose intention is to be attributed to the corporation as the ‘decision maker’, the person ‘whose job it was to make the required business judgment as to the terms upon which [the corporation] should contract’; and the ‘decision maker’ as opposed to a person conducting a ‘mere negotiation’. The cases also recognise that the intentions of the negotiator will be material if the negotiator either is also the decision maker, or shares in a relevant way those intentions with the decision maker. It follows that where an organ of the corporation executes or approves a contract as a formality and the negotiator’s role is critical to that organ’s decision, the negotiator’s intention will be attributed to the corporation. This explains why the evidence may demonstrate objectively an intention by the decision maker to enter into the contract which the negotiator had negotiated and agreed, such that the intention, and the mistake, was adopted by the decision maker. The outcome of each case necessarily depends on the particular facts.[87]
[85]Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500, 512 (Lord Hoffmann); DPP (Vic) Reference No 1 of 1996 [1998] 3 VR 352, 354; Director General Department of Education and Training v MT (2006) 67 NSWLR 237, 244 [23] (Spigelman CJ, Ipp JA and Hunt AJA agreeing); Christian Youth Camps Ltd v Cobaw Community Health Services Ltd (2014) 50 VR 256, 284–6 [104]–[110]; Commonwealth Bank of Australia v Kojic (2016) 249 FCR 421, 445–6 [97]–[101] (Edelman J); North Adelaide Service Partnership v Retail Employees Superannuation Pty Ltd (2019) 132 SASR 398, 418 [112] (Blue J).
[86][2018] VSC 2, [104]–[105] (citations omitted) (‘Perpetual’).
[87]Ibid [104]–[106].
A subsequent appeal was dismissed, with the Court of Appeal citing the passage set out above as part of the trial judge ‘set[ting] out the legal principles to be applied in a rectification claim such as the present’.[88]
[88]Perpetual Ltd v Myer Pty Ltd [2019] VSCA 98, [85].
In Thiess,[89] a claim involving rectification for common mistake, Applegarth J stated:
The parties’ submissions canvass authorities that relate to the identity of the relevant decision-maker for the purpose of a claim for rectification. The authorities refer in different contexts to ‘the decision-taker’, the ‘decision-maker’, the person or persons to whom authority was delegated to negotiate and conclude an agreement and the person ‘whose job it was to make the required business judgment as to the terms upon which [the party] should contract’. These and similar expressions refer to an employee or employees to whom a company has delegated authority to act on its behalf in relation to a particular transaction. If the employee acts in accordance with his or her authority, then his or her intention in doing so may, depending on the circumstances, be capable of being regarded as the intention of the company. In some circumstances the intention of the ‘decision-maker’ will be different to the intention of the person who negotiated the contract or the person who executes the contract. The expressed intentions of ‘a mere negotiator’ who is not also the ‘decision-maker’ and who does not share those intentions with the person who is the decision-maker on behalf of the company may be immaterial.
The application of principles in relation to the attribution of intention for the purposes of rectification depends upon context, including whether the relevant decision-maker is the person authorised to negotiate the terms of the agreement and conclude those negotiations, or is the person authorised to execute the contract that binds the parties.
[865][2009] WASCA 229, [79].
[866]Ibid [77].
The Provenance Notice and CQN1 and CQN2 identified the alleged breaches with sufficient specificity to direct the plaintiffs’ mind ‘to what is said to be amiss’. The test is objective: how would a reasonable recipient have understood the notice.
I accept Bega’s submission that the Provenance Notice did not lack sufficient specificity as it:
·identified the precise conduct constituting the breach;
·referred to and extracted the clause said to be breached, clause 7.3;
·specified the impact of the breach to be rectified;
·identified the objective to be achieved in remedying the breach (namely ‘for there not to be any further damage to Bega and the Trade Marks’); and
·called for a remedy within 95 days.[867]
[867]BCRS (n 311) [1182]–[1183].
I also accept Bega’s submission that the plaintiffs did not allege that they were under any misapprehension as to the breach specified, that correspondence following the notice confirms the plaintiffs were not under any misapprehension, that in the context of the history and interactions between the parties the plaintiffs were aware of Bega’s position, and that correspondence from the plaintiffs’ solicitors denied the notice was valid but did not complain of a lack of specificity.[868]
[868]Ibid [1184]–[1187].
The plaintiffs submit that CQN1 is invalid because it failed to clearly direct the plaintiffs’ attention to the alleged breach with sufficient specificity to enable the default to be readily identified. The plaintiffs submit that CQN1 did not identify in any precise way the cheese alleged to have been defective.[869] I reject this submission.
[869]FCRS (n 296) [1932]–[1934].
CQN1 related to all RF15% cheese manufactured at Stanhope and delivered to Bega to cut and wrap by 16 March 2018. The plaintiffs did not require assistance from Bega to identify the impugned batches. Correspondence between the parties reveals that the plaintiffs had no doubt about the cheese which was in issue. When the plaintiffs responded to the notice they did not complain of any lack of specificity, but rather disputed the existence of any underlying breach.[870]
[870]BCRS (n 311) [1189]–[1198].
The plaintiffs submit that CQN2 is invalid because it failed to clearly direct the plaintiffs’ attention to the alleged breaches with sufficient specificity that the default was capable of being readily identified. I reject this submission. In its reply submission Bega submits:
In its response of 14 December 2018, Fonterra advised that it ‘had carefully considered the grading results provided by Bega’ and were able to ascertain that Fonterra’s ‘own evaluation and its own Expert grading results are not consistent with the Bega Results’. Fonterra stated that it ‘rejects the allegations and claims made by Bega’. Fonterra did not allege that there was a lack of specificity in the Second Quality Breach Notice. Rather, it engaged with, and disagreed with, the contents of the Notice on a substantive basis.[871]
[871]Ibid [1205] (emphasis in original).
I accept this submission. The M&P Notice, CQN1 and CQN2 and the Provenance Notice were valid notices for the purposes of clause 16.1 of the TMLAs.
ELECTION
Bega served four breach notices on the plaintiffs:
·CQN1 on 16 March 2018;
·M&P Notice on 8 June 2018;
·CQN2 on 21 September 2018; and
·Provenance Notice on 30 October 2018.
The plaintiffs submit that if they did breach the TMLAs as alleged in CQN1, CQN2, the M&P Notice and/or the Provenance Notice, Bega is not entitled to terminate the TMLAs pursuant to any of the notices. The plaintiffs submit that Bega elected to affirm the TMLAs and as a result is precluded from relying upon the notices.
I accept the plaintiffs’ submission that Bega elected to affirm the TMLAs by the service of CQN2 on 21 September 2018 and the Provenance Notice on 30 October 2018. As a consequence, Bega is not entitled to terminate the TMLAs in reliance upon CQN1 and the M&P Notice. I otherwise reject the plaintiffs’ submission based upon the doctrine of election by affirmation.
CQN2 and the Provenance Notice were served after the period stipulated in CQN1 and the M&P Notice for the plaintiffs to remedy the breaches alleged therein. The service of CQN2 and the Provenance Notice involved an actual election by Bega between mutually exclusive rights, namely:
(xii) exercising the right of termination which had crystallised 90 days after the service of CQN1 and/or the M&P Notice; or
(xiii) affirming the TMLAs by the service of CQN2 and the Provenance Notice which provided the plaintiffs with a period of 90/95 days to remedy the breaches set out therein.
In Khoury v Government Insurance Office (NSW)[872] the plurality set out the following principles in respect of the doctrine of election between inconsistent rights:
A person confronted by two truly alternative rights or sets of rights, such as the right to avoid or terminate a contract and the right to affirm it and insist on performance, may lose one or more of them by acting ‘in a manner which is consistent only with his having chosen to rely on [the other] of them’. Where an insurer is confronted with such alternative rights and elects to affirm the contract of insurance, he is commonly said to have ‘waived’ the right to avoid or terminate it. While actual ‘prejudice to the other side’ may be relevant, particularly in determining whether an election should be imputed to a person who is not shown to have made a conscious decision to elect, it is not necessary that such prejudice be demonstrated to establish a completed election between the right to affirm and the right to avoid a contract. An election, unlike estoppel, is concerned with what a party does and not what he causes the other party to do. At the latest, it is complete or ‘final’ when made and ‘communicated’ to the other party.
Where an election is not shown to have been consciously made, the words or conduct relied upon to impute it must unequivocally evidence ‘the exercise of one of the two sets of rights and [be] inconsistent with the exercise of the other’. It would seem however that, at least where the alternative rights arise under the terms of the one contract, a party may be held to have elected to affirm it notwithstanding that he was unaware of the actual right to avoid it. Even in such a case however, the party alleged to have elected to affirm the contract must be at least aware of the facts giving rise to the right to avoid the contract.[873]
[872](1984) 165 CLR 622.
[873]Ibid 633–4 (citations omitted).
In the case of election between affirmation of a contract or its disaffirmation pursuant to rights conferred by the contract, detriment to the other party is not a necessary element of election.[874]
[874]Sargent v ASL Developments Ltd (1974) 131 CLR 634, 647 (‘Sargent’); see also Epworth Foundation v Healthcare Imaging Services (Vic) Pty Ltd [2009] VSC 293, [137].
There is a distinction between actual election and imputed election. In Champtaloup v Thomas[875] Mahoney JA explained the difference as follows:
In order to understand the significance of the exercise of such a right in this regard, and what has been said concerning its significance qua election, it is important to bear in mind that the right to elect, whether to affirm or rescind a contract according to its contractual terms, may be found to have been exercised in two ways. First, it may be exercised by a conscious act of election. The party having the right may actually determine on his election and, in so far as communications may be necessary … communicate it to the other party, and an election is thereby made. A party may make his election in this way in terms, or he may do such acts as satisfy the court that it should be inferred as a fact that he has made it … But the question in such a case is as to his actual election, not as to whether an election should be imputed to him. And, once the actual election is found to have been made, the election is complete, although there has been no exercise of any contractual right and no act done or detriment produced under the contract.
Second, the party may do some act which is of such a nature that, irrespective of his actual intention or determination, the law treats him as having exercised his election. This imputation of an election may occur even though the party does not subjectively know that he has the right to elect, or even where he does not intend to elect.[876]
[875][1976] 2 NSWLR 264.
[876]Ibid, 274–5.
Actual election includes circumstances where an actual election can be objectively inferred from a party’s conduct. Thus, the absence of evidence that Bega consciously made an election to affirm the TMLAs by the service of CQN2 and the Provenance Notice does not preclude a finding of actual election.
Bega submits that in order for the innocent party to lose the right to terminate, the party in breach must establish that the innocent party had knowledge of the facts that give rise to that right.[877] Bega submits that the requirement of knowledge will not be satisfied on the basis of an argument that a party ought to have known of a particular fact or could have found out a particular fact. Rather, Bega submits that actual knowledge must be proven.[878]
[877]BCRS (n 311) [1263].
[878]Ibid [1265].
The extent of knowledge of relevant facts necessary for the doctrine of election to apply has been described as ‘full knowledge of the material facts’.[879] Where the election is between contracting parties and the contract itself confers inconsistent rights there is no question as to whether a party has knowledge of his/her choice of rights. The party is deemed to know the terms of their own contract and the rights it confers.[880]
[879]Sargent (n 874) 642.
[880]Ibid 645.
Both CQN2 and the Provenance Notice were signed by Bega’s CFO, Mr Colin Griffin. Each of CQN2 and the Provenance Notice was served on the plaintiffs under cover of a letter signed by Bega’s CEO, Mr van Heerwaarden.
The TMLAs conferred inconsistent rights upon Bega, namely:
(xiv) termination of the TMLAs upon expiry of the minimum 90 day period for remedying the breaches alleged in CQN1 (16 June 2018) and the M&P Notice (6 September 2018); and
(xv) the right to serve CQN2 and the Provenance Notice contingent upon offering the plaintiffs 90/95 days to remedy the alleged breaches set out therein.
Mr van Heerwaarden and Mr Griffin are deemed to have knowledge of the rights of termination and affirmation conferred upon Bega by the TMLAs.[881]
[881]See ibid 649.
Bega submits that by issuing breach notices it afforded the plaintiffs an opportunity to remedy the specified breaches. It submits that the issuing of a breach notice is a precondition to exercising rights of termination and does not, of itself, constitute conduct affirming the TMLAs.[882] I reject this submission. CQN2 was served on the plaintiffs on 21 September 2018. The Provenance Notice was served on 30 October 2018. Bega’s right to terminate the TMLAs pursuant to CQN1 crystallised on or about 16 June 2018. The right to terminate pursuant to the M&P Notice crystallised on 6 September 2018. Bega’s right of termination under CQN2 and the Provenance Notice was contingent upon the plaintiffs’ failure to remedy the specified breaches within 90 days of service of CQN2 and within 95 days of service of the Provenance Notice. Both CQN2 and the Provenance Notice were premised upon the TMLAs continuing to operate for the 90 day/95 day period within which the plaintiffs were afforded an opportunity to remedy the specified breaches.
[882]BCRS (n 311) [1441].
Bega submits that its right of termination under clause 16.1 of the TMLAs was preserved by an agreement reached with the plaintiffs in December 2018 that it would not, without providing 14 days’ notice, take any steps to terminate the TMLAs after the expiry of the 90 day period specified in the M&P Notice (which expired on 6 September 2018) and the 90 day period specified in CQN2 (which expired on 20 December 2018).[883] In June 2018 a similar agreement had been reached in respect of CQN1.[884] I reject Bega’s submission that its agreement not to take steps to terminate the TMLAs without first providing the plaintiffs 14 days’ notice preserved its right to terminate under CQN1 and the M&P Notice. Bega’s agreement to provide 14 days’ notice before terminating the TMLAs in reliance on CQN1 and the M&P Notice did not extend the period stipulated in the notices for the plaintiffs to remedy the stipulated breaches.
[883]BCCS (n 298) [1336]–[1341].
[884]BEG.014.031.0005.
Bega’s conduct in issuing CQN2 and the Provenance Notice was an actual election to affirm the TMLAs. I infer that Mr van Heerwaarden and Mr Griffin had actual knowledge of the termination and affirmation rights under the TMLAs, and that the issuing of the notices was inconsistent with the exercise of the rights of termination which crystallised upon the expiry of the 90 day period for remedying the alleged breaches under both CQN1 and the M&P Notice. The right of termination under CQN1 and the M&P Notice had crystallised prior to the service of CQN2 and the Provenance Notice.
Bega elected to affirm the TMLAs by the service of CQN2 and the Provenance Notice. As a result, Bega lost the right to terminate in reliance upon CQN1 and the M&P Notice. Further, if I am wrong in concluding that Bega’s common law rights of termination were excluded by clause 16.1 of the TMLAs, Bega lost the right to exercise common law rights of termination in respect of the breaches alleged in CQN1 and the M&P Notice.[885]
[885]GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 128 FCR 1, 91 [362], 93–4 [373]; R v Paulson [1921] 1 AC 271, 280; see also J W Carter, Carter’s Breach of Contract (LexisNexis Butterworths, 2nd ed, 2018) 534 [11–17].
Bega is not entitled to terminate the TMLAs pursuant to clause 16.1 or at common law in respect of the breaches alleged in CQN1 or the M&P Notice. However, this conclusion does not affect Bega’s right to rely upon CQN2 or the Provenance Notice. I reject the plaintiffs’ contention that Bega elected to affirm the TMLAs prior to serving CQN2 and the Provenance Notice with the result that Bega is precluded from terminating in reliance on those notices. Until the expiry of the 95 day period specified in the Provenance Notice and the 90 day period specified in CQN2, no right of termination arose under the notices. Prior to the right of termination crystallising Bega was not confronted with the choice of exercising mutually exclusive rights, which is the essence of election.[886] There was no unequivocal act by Bega subsequent to the service of CQN2 and the Provenance Notice which constituted an election by Bega to affirm the TMLAs so as to preclude Bega from having rights of termination based on CQN2 and the Provenance Notice.
IS BEGA ESTOPPED FROM TERMINATING THE TMLAs PURSUANT TO CLAUSE 16.1 BASED ON THE PLAINTIFFS’ BREACH OF CLAUSE 7.3?
[886]Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26, 41; see also Chint Australasia Pty Ltd v Cosmoluce Pty Ltd [2008] NSWSC 635, [38]–[40].
I have concluded that the plaintiffs have not breached clause 7.3 by representing that all cheese in Bega branded products is made in the Bega Valley. It is therefore not necessary to address the plaintiffs’ contention that Bega is estopped from alleging that the plaintiffs breached clause 7.3 thereby enlivening Bega’s right to terminate the agreements pursuant to clause 16.1. However, had it been necessary to address the plaintiffs’ estoppel argument, I would have rejected it.
The plaintiffs plead their estoppel defence in paragraph [85F] of their Reply and Defence to Counterclaim as follows:
Further or alternatively:
(a)Bega knew of, consented to and/or approved of, the Impugned Promotional Activities[887] (Bega’s Consent);
[887]The impugned promotional activities are the activities through which Bega alleges the plaintiffs conveyed the representation that all cheese in Branded Products is made in the Bega Valley; see Reply and Defence to Counterclaim (n 388) [85D] Particulars.
(b)Bega failed, at any time prior to the commencement of this proceeding, to:
(i)make any allegation that the Impugned Promotional Activities involved any breach by the Plaintiffs of their obligations under clause 7.3 of the Agreements;
(ii)make any demand, whether pursuant to clauses 6.4 or 7.1(d) of the Agreements or otherwise, for the Plaintiffs to cease or modify any of the Impugned Promotional Activities; (collectively, Bega’s Lack of Allegation/Demand);
(c)in reliance on and/or encouraged by Bega’s Consent and/or Bega’s Lack of Allegation/Demand, the Plaintiffs arranged and undertook the Impugned Promotional Activities on the assumption and/or expectation that Bega consented to, approved of, and/or did not object to the Impugned Promotional Activities (the Plaintiffs’ Assumption);
(d)Bega knew and intended that the Plaintiffs would, in reliance on and/or encouraged by Bega’s consent and/or Bega’s Lack of Allegation/Demand and/or the Plaintiffs’ Assumption, arrange and undertake the Impugned Promotional Activities;
(e)in the premises, it is unconscionable for Bega to now allege, and Bega is estopped from now alleging, that the Impugned Promotional Activities involved a breach by the Plaintiffs of clause 7.3 of the Agreements entitling Bega to terminate the Agreements pursuant to clause 16.1, in circumstances where the allegation, if upheld by the Court, would cause the Plaintiffs to suffer the detriment.
The plaintiffs submit that [85F] of the Reply and Defence to Counterclaim is a pleading of both equitable and common law estoppel. I reject this submission. Estoppel by convention (common law estoppel) has five elements:
(xvi) the plaintiff has adopted an assumption as to the terms of its legal relationship with the defendant;
(xvii) the defendant has adopted the same assumptions;
(xviii) both parties have conducted their relationship on the basis of that mutual assumption;
(xix) each party knows or intends that the other will act on that basis; and
(xx) departure from the assumption will cause detriment to one of them.[888] There is no pleading of a common assumption,[889] or alternatively, an assumption made by one party and acquiesced in by the other.[890]
[888]See Moratic Pty Ltd v Gordon (2007) 13 BPR 24713, 98270; Sze Tu v Lowe (2014) 89 NSWLR 317, 393 [431]; Mineralogy Pty Ltd v Sino Iron Pty Ltd (No 6) (2016) 329 ALR 1, 120–1 [760].
[889]LCY Pty Ltd v Ma [2017] VSCA 383, [45]–[46].
[890]India v Indian Steamship Co Ltd(No 2) [1998] AC 878, 901–2, 913 (‘The Indian Endurance and The Indian Grace’); Ryledar (n 103) 645 [198]; Strategic Property Reservoir Pty Ltd v Condec Pty Ltd [2012] VSC 634, [179]; Amcor Ltd v Barnes [2016] VSC 707, [380].
Unconscionability is not an element of estoppel by convention.[891] The plaintiffs plead that it is unconscionable for, and Bega is estopped from alleging, that the plaintiffs’ Impugned Promotional Activities breached clause 7.3 of the TMLAs.[892] The plaintiffs’ pleading of unconscionability is consistent with the pleaded estoppel being confined to equitable estoppel.
[891]Mineralogy Pty Ltd v Sino Iron Pty Ltd (No 6) (2016) 329 ALR 1, 121 [764].
[892]Reply and Defence to Counterclaim (n 388) [85F(e)].
The plaintiffs’ estoppel defence pleads ‘the plaintiffs’ Assumption’ as:
in reliance on and/or encouraged by Bega’s Consent and/or Bega’s Lack of Allegation/Demand, the Plaintiffs arranged and undertook the Impugned Promotional Activities on the assumption and/or expectation that Bega consented to, approved of, and/or did not object to the Impugned Promotional Activities …[893]
[893]Ibid [85F(c)].
The plaintiffs’ Assumption requires a finding that each of the plaintiffs had a particular state of mind, namely, an assumption or expectation that Bega consented to, approved of and/or did not object to the Impugned Promotional Activities. The plaintiffs did not lead any evidence from any witness capable of supporting a finding that the plaintiffs had the plaintiffs’ Assumption. First, it was necessary for the plaintiffs to identify the individual or individuals whose state of mind could be attributable to the plaintiffs. Second, having identified the individual or individuals whose state of mind could be attributed to the plaintiffs, it was necessary for the plaintiffs to lead evidence that the individual or individuals held the plaintiffs’ Assumption. The plaintiffs’ evidence did not address either of these matters. Further, the plaintiffs did not lead any evidence from any witness to the effect that the plaintiffs undertook the Impugned Promotional Activities in reliance upon Bega’s Consent to the activities and/or Bega’s Lack of Allegation/Demand that the activities breached clause 7.3 of the TMLAs.
It follows from the matters set out above that even if the plaintiffs’ estoppel pleading is read as a pleading of common law estoppel, a defence based on common law estoppel is not made out.
The plaintiffs submit that their reliance upon Bega’s Consent and/or Lack of Allegation/Demand, may be established by inferential reasoning. I reject this submission. I am not prepared to draw any inference in favour of the plaintiffs in circumstances where they could have, but did not lead any direct evidence regarding:
·the identification of an individual(s) whose state of mind could be attributed to the plaintiffs;
·establishing that such individual(s) held the plaintiff’s Assumption; and
·establishing that such individual(s) relied upon Bega’s Consent and/or Lack of Allegation/Demand in respect of the Impugned Promotional Activities.[894]
[894]Just Group Ltd v Peck [2016] VSC 614, [41]; Ausnet Electricity Services Pty Ltd v Liesfield [2014] VSC 474, [125]–[129].
If, contrary to this finding, it is appropriate to undertake inferential reasoning, there is no basis for inferring that the plaintiffs undertook the Impugned Promotional Activities in reliance upon Bega’s Consent and/or Lack of Allegation/Demand. Under clause 7.3 of the TMLAs the plaintiffs are solely responsible for ensuring compliance with all legal requirements relating to the advertising of Products. The plaintiffs were solely responsible for ensuring that the Impugned Promotional Activities complied with ss 18 and 29(1)(k) of the ACL. Any consent by Bega to the Impugned Promotional Activities, or any failure to object to the Impugned Promotional Activities, does not alter the terms of the TMLAs. In particular, Bega’s Consent and/or Lack of Allegation/Demand would not relieve the plaintiffs of their responsibility under clause 7.3 to ensure that the Impugned Promotional Activities complied with ss 18 and 29(1)(k) of the ACL.
Further, for a representation to found an estoppel it must be clear and unambiguous.[895] Where, as in the present case, one party relies on the silence of the other party as founding an estoppel, ‘the import of the silence must be clear and unequivocal and must be assessed in light of the broader context’.[896]
[895]Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd (2016) 260 CLR 1, 16 [35].
[896]Barport Pty Ltd v Baum [2019] VSCA 167, [119]; see also Workplace Safety Australia Pty Ltd v Simple OHS Solutions Pty Ltd (2015) 89 NSWLR 594, 621 [140].
In the present case, the broader context includes the plaintiffs’ acceptance under clause 7.3 of the TMLAs of sole responsibility of ensuring the compliance of the Impugned Promotional Activities with all legal and regulatory requirements. This context is also fatal to the plaintiffs’ reliance upon estoppel by convention. A course of dealings that is explicable by reference to some equally plausible assumption falls short of establishing that the parties accept the assumption contended for as the basis of their relations.[897] Bega’s Consent and Lack of Allegation/Demand in respect of the Impugned Promotional Activities is explicable by Bega having regarded the plaintiffs as being solely responsible for ensuring that the Impugned Promotional Activities complied with all statutory and regulatory requirements.
[897]Queensland Independent Wholesalers Ltd v Coutts Townsville Pty Ltd [1989] 2 Qd R 40, 46; cited with approval in Attorney General (ACT) v Eastman (2008) 163 ACTR 46, 57–8 [45]. See also Miller Heiman Pty Ltd v Sales Principles Pty Ltd (2017) 94 NSWLR 500, 509 [41]; TMA Australia Pty Ltd v Indect Electronics [2015] NSWCA 343, [117].
There is no basis for concluding that Bega represented to the plaintiffs that it would not allege that the plaintiffs breached their obligations under clause 7.3, thereby enlivening a right of termination under clause 16.1. Had it been necessary to do so, I would have rejected the plaintiffs’ estoppel defence.
THE APPROPRIATENESS OF THE DECLARATORY RELIEF SOUGHT BY BEGA
In paragraphs C, D, E, L and M of the prayer for relief in the Counterclaim Bega seeks declarations that it is ‘entitled to terminate’ the Bonland TMLA and the Fonterra TMLA. In light of my conclusion that the plaintiffs have not breached any of the provisions of the TMLAs there is no basis for making a declaration that Bega is entitled to terminate the TMLAs. However, even if I had concluded that the plaintiffs had breached the TMLAs, a question would have arisen as to whether the Court should refrain from granting declaratory relief in the terms sought.
A number of judgments of the New South Wales Court of Appeal support the conclusion that courts should refrain from granting a declaration that a party to a contract is entitled to terminate the contract.
In Galaxy Communications Pty Ltd v Paramount Films of Australia Inc (‘Galaxy Communications’)[898] Stein JA (Meagher JA agreeing) stated:
it is one thing to declare the present contractual rights of the parties, but it is another to declare them contingently on the plaintiff electing to take some course that he has not taken, is not bound to take and may not take. As with Dormer (at 434) the relief here sought is, in substance, that if the opponents elect to give a notice of termination, that notice will be valid and effective to terminate the agreements on the basis of the court’s finding on insolvency. I do think that the court should hesitate in lending itself to such potential effects on the contractual position of the parties given the circumstances of the case to which I have already referred.[899]
[898][1998] NSWSC 48.
[899]Ibid [35].
In Urica Library Systems BV v Sanderson Computers Pty Ltd[900] Rolfe J considered Galaxy Communications and other authorities where a declaration had been refused because it was claimed in relation to circumstances that had not occurred and might never happen, before concluding:
However, the present case differs. Urica has, I am satisfied, established, firstly, that there is an event of default and, secondly, that it wishes to rely on it to terminate the Software Agreement. So much was not in issue. The reason it has not pursued its right to terminate, which, of course, can be exercised extra-curially, is the threat that Sanderson would seek an injunction. In the face of this Urica was prepared to have its entitlement decided by the Court in which course Sanderson agreed. Accordingly, there is, in my opinion, a justiciable issue. On the facts it is neither hypothetical nor is it abstract. It would be extraordinary if the parties in commercial litigation could not arrange their affairs so that real disputes are resolved in an orderly way by the Court. That is what has occurred in this case with the concurrence of the parties. It is not open to Sanderson, on the present facts, to assert that there is no entitlement in Urica to the declaratory relief it seeks on discretionary grounds and, I am satisfied, there are no discretionary reasons why I should not grant that relief, if Urica is otherwise entitled to it.[901]
[900][1998] NSWSC 1020.
[901]Ibid.
Rolfe J’s declaration that Urica was entitled to terminate the Software Agreement was set aside on appeal. In Sanderson Computers Pty Ltd v Urica Library Systems BV (‘Sanderson’)[902] Sheller JA (Mason P and Powell JA agreeing) stated:
For reasons which are described in the judgment of Priestley JA in Galaxy, there will always be a problem where a claimant which has not terminated an agreement, seeks a declaration that it is entitled to do so. The declaration speaks from the time that it is made. Before a notice of termination is given or expires, events may overtake its validity. It is undesirable that questions such as waiver, and even more undesirable that questions about relief against forfeiture, be dealt with at all before there is a completed termination. Even if the respondent presently intends to give a notice of termination, it may delay it and fresh questions about election and waiver may arise. Such considerations firmly support the conclusion that in the present case his Honour’s exercise of the discretion to grant such a declaration miscarried. With all respect to his Honour, until such time as the respondent elected to terminate, the question as to whether it was entitled to do so remained hypothetical and abstract.[903]
[902](1998) 44 NSWLR 73 (‘Sanderson’).
[903]Ibid 80.
In Brighton Ceiling Pty Ltd v Pocrnja[904] Giles JA (Santow JA and McClellan AJA agreeing) stated:
It is recognised in [47], that it may be declared that conduct which has not yet taken place will not be in breach of a contract or a law, and that such a declaration will not be hypothetical in the sense presently under consideration. But as Sanderson Computers Pty Ltd v Urica Library Systems BV (1998) 44 NSWLR 73 shows, there is a difference between declaring the contractual rights of parties and declaring them contingently on one of the parties to the contract electing to take a course which the party has not taken, is not bound to take, and may not take. The same must apply to declarations of a position in law.[905]
[904][2005] NSWCA 175.
[905]Ibid [11]; see also Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15, [221]–[222] (Giles JA, with Sheller and Ipp JJA agreeing).
The written submissions filed by the parties did not address the judgments of the New South Wales Court of Appeal referred to above. I did not request the parties to file further submissions addressing these authorities. My finding that the plaintiffs did not breach the TMLAs means there is no basis for a declaration that Bega is entitled to terminate the TMLAs. It is not necessary to express a concluded view as to whether, had I concluded that the plaintiffs breached the TMLAs, it would have been appropriate to grant the declarations sought. I have not been able to locate any judgment of the Victorian Supreme Court which has considered the judgment of the New South Wales Court of Appeal in Sanderson. In Golden Sands Pty Ltd v Excel Quarries Pty Ltd,[906] Whelan J (as his Honour then was) appears to have made a declaration of entitlement to terminate without being called upon to consider the issue of whether the declaration was hypothetical.[907] Had I been satisfied that the plaintiffs had breached the TMLAs, in the absence of any relevant judgment of the Victorian Court of Appeal, I would have considered myself bound to follow the approach of the New South Wales Court of Appeal in Sanderson.[908]
[906][2008] VSC 276.
[907]Ibid [307]; see also 3143 Victoria Street Doncaster Pty Ltd v Retirement Services Australia (RSA) Pty Ltd [2010] VSC 317, [21]. Declaration set aside on appeal: RSA (n 319).
[908]Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89, 151–2 [135].
CONCLUSION
The plaintiffs’ claim and the defendant’s counterclaim are dismissed. I shall provide the parties with an opportunity to make submissions on costs.
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