Franklins Pty Ltd v Metcash Trading Ltd - [2007] NSWSC 242

No judgment structure available for this case.

CITATION: Franklins Pty Ltd v Metcash Trading Ltd [2007] NSWSC 242

HEARING DATE(S): 11-15, 18-22, and 29 September 2006; further written submissions 5 and 10 October 2006, and 1 November 2006.

JUDGMENT DATE :
21 March 2007

JURISDICTION: Equity Division
Commercial List

JUDGMENT OF: Palmer J

DECISION: Rectification of contract ordered.

CATCHWORDS: CONTRACT – CONSTRUCTION – Supply Agreement between wholesale and retailer – meaning of definitions – whether certain words had special meaning in industry – whether ejusdem generis rule applicable – meaning of “such as”. - RECTIFICATION – Whether parties had common intention not correctly expressed in contract.

LEGISLATION CITED: Trade Practices Act 1974 (Cth) – s.51AA, s.52, s.87

CASES CITED: - Ambatielos v Anton Jurgens Margarine Works [1923] AC 175
- Arnot v Hill-Douglas [2006] NSWSC 429
- Australian Co-operative Foods Ltd v Norco Co-operative Ltd (1999) 46 NSWLR 267
- Beale v Government Insurance Office of New South Wales (1997) 48 NSWLR 430
- C.G. Mal Pty Ltd v Sanyo Office Machines Pty Ltd [2001] NSWSC 445
- Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471
- Housing Commission of New South Wales v Tatmar Pastoral Co Pty Ltd [1983] 3 NSWLR 378
- Hudson Investment Group Ltd v Australian Hardboards Ltd [2005] NSWSC 716
- Johnson Mathey Ltd v A C Rochester Overseas Corp (1990) 23 NSWLR 190
- K B Furniture Ltd v Tauranga District Council [1993] 3 NZLR 197
- Kirchner v Venus (1859) 12 Moo PCC 361
- Mifsud v Campbell (1991) 21 NSWLR 725
- Muriti v Prendergast [2005] NSWSC 281
- Skywest Aviation Pty Ltd v Commonwealth of Australia (1995) 126 FLR 61
- Vince Coles Pty Ltd v Skischufabrik Dynafit (NSWCA unrep. 28.10.1985, BC8500453)

PARTIES: Franklins Pty Ltd – Plaintiff
Metcash Trading Ltd – Defendant

FILE NUMBER(S): SC 50018/05

COUNSEL: L.G. Foster SC, Ms S. Fendekian – Plaintiff
J.B. Simpkins SC – Defendant

SOLICITORS: Blake Dawson Waldron – Plaintiff
Freehills – Defendant

50018/05 Franklins Pty Ltd v Metcash Trading Ltd

JUDGMENT
21 March 2007

Introduction

1 The Plaintiff (“Franklins”) operates a large chain of supermarkets. The Defendant (“Metcash”) conducts a substantial business as a wholesale supplier of goods and services to supermarkets.

2 The parties entered into a Supply Agreement dated 14 September 2001. The fundamental object of the Supply Agreement was to combine the buying power of the parties in order to obtain the best possible prices from suppliers.

3 The Supply Agreement contains detailed provisions as to the price mechanism to be applied to goods bought from suppliers by Metcash for the purpose of on-sale to Franklins. The parties fell into disagreement about how the pricing mechanism works. The Supply Agreement was terminated on 31 January 2005.

4 Franklins contends that it has been overcharged for the supply of goods under the terms of the Supply Agreement. It says that various discounts and allowances obtained from suppliers by Metcash in respect of goods purchased for on-sale to Franklins under the Supply Agreement ought to have been passed on to Franklins under the terms of the Agreement, but have been retained by Metcash. Franklins sought inspection of Metcash’s records relating to the prices of goods acquired by Metcash and supplied to Franklins, relying upon a term of the Supply Agreement which, it claims, entitles it to such inspection. Metcash declined to allow inspection, saying that certain categories of documents fell outside the inspection provisions of the Supply Agreement.

5 Franklins has commenced proceedings against Metcash seeking:

– an order that Metcash make the relevant records available for its inspection;

6 Both of Franklins’ claims to relief depend upon construction of the Supply Agreement.

7 By its Defence, Metcash denies the construction placed on the Supply Agreement by Franklins. It contends that, upon the true construction of the Agreement, certain discounts and allowances which it obtained from suppliers in respect of goods on-sold to Franklins were not to be passed on to Franklins but were for Metcash’s own benefit. Metcash contends that Franklins’ right of inspection of documents under the Supply Agreement is limited and does not permit Franklins to see confidential records not relating to transactions in which Franklins has no financial interest.

8 In the alternative, by an Amended Cross Claim, Metcash claims that:

– the Supply Agreement should be rectified to reflect the construction as to retention of discounts and allowances by Metcash for which Metcash contends;

– the Supply Agreement should be varied to reflect that construction under s.87 Trade Practices Act 1974 (Cth) by reason of misleading and deceptive conduct or unconscionable conduct on the part of Franklins;

– Franklins is estopped from relying upon a construction of the Supply Agreement contrary to the construction for which Metcash contends;

Background

9 Franklins (called in the Supply Agreement “Interfrank Holdings Pty Ltd”) is a subsidiary of a large retail chain which has carried on business for many years in South Africa under the name “Pick ’n Pay”. The names “Pick ’n Pay” and “Interfrank” appear in many of the documents in the proceedings but, for the sake of convenient reference, I will include all of the relevant companies in the group within the name “Franklins”.

10 The present Chief Executive Officer of Franklins, Mr Sean Summers, has had more than thirty years’ experience in the supermarket retailing industry, mostly in South Africa, with one year’s experience in Australia in 1985. In early 2001, Mr Summers came to Australia to investigate the possibility of Franklins acquiring a retail chain in this country. Eventually, Franklins acquired a substantial number of stores and sought to develop a supply agreement with a wholesaler. It commenced discussions with Metcash in about April 2001.

11 Metcash is a subsidiary of a large supermarket wholesale business carried on in South Africa. Its Chief Executive Officer in Australia is Mr Andrew Reitzer who, like Mr Summers, has had many years experience in the supermarket business, mostly in South Africa. His experience is on the wholesaling side. Mr Reitzer came to Australia in about 1998, when Metcash acquired its present supermarket wholesale business in Australia from Davids Holdings Limited.

12 The fundamental concept of the Supply Agreement which the parties discussed at the commencement of their negotiations was that Metcash, as wholesaler, would purchase from suppliers all goods required both for Franklins and for Metcash’s other supermarket customers, such as the IGA stores, and would on-sell to Franklins those volumes purchased to meet Franklins’ requirements. With the benefit of the substantial additional volumes of products to be acquired for the Franklins’ stores, Metcash would be able to negotiate with suppliers for a better price. However, Franklins also wished to have a direct relationship with suppliers and to negotiate separately with them for other discounts, allowances and rebates in respect of volumes being supplied to it through Metcash.

13 It is common ground between the parties that, in broad terms, there are two types or discounts or allowances operating between suppliers and wholesalers such as Metcash. The first category is called “published” discounts and allowances, being those discounts or allowances given pursuant to trading terms which are shown on the suppliers’ invoices or in published trading terms. Such discounts and allowances are also referred to as “on invoice” and, paradoxically, “off invoice”. Some people refer to them as “on invoice” because their terms are shown on the face of the invoice as is the deduction from list price in accordance with those terms. Some people refer to them as “off invoice” because the deductions are taken off the price as shown on the invoice.

14 The second category of discounts or allowances is called “confidential” because such discounts or allowances are negotiated privately between a particular supplier and the wholesaler, and reflect their respective bargaining strengths. Suppliers and wholesales strive to keep the terms of confidential discounts strictly secret from competitors.

15 A primary issue to be negotiated between Franklins and Metcash was the price at which Metcash would on-sell to Franklins goods acquired to meet its requirements. Metcash had inherited from Davids Holdings’ business a pricing system in its computer called “Wholesale 5”, which was the price basis according to which it sold to its supermarket customers. This pricing system passed on to Metcash’s customers the “published” discounts (otherwise called the “on invoice” or “off invoice” discounts) which had been obtained by Metcash from its suppliers but did not pass on the confidential discounts, which Metcash retained as part of its profit.

16 The most significant issue in this case revolves around the use of “Wholesale 5” in the definition of the price at which Metcash would on-sell goods to Franklins under the Supply Agreement. Metcash’s position is that it agreed to sell to Franklins at the “Wholesale 5” price, so that it passed on to Franklins the published discounts or allowances which it had obtained from suppliers referable to the volumes of goods ordered for Franklins, leaving Franklins to negotiate its own confidential discounts directly with suppliers, and Metcash would retain for its own benefit any other confidential discounts referable to those volumes which Franklins was unable to obtain for itself.

17 Franklins’ position is that it agreed with Metcash that Metcash would pass on to it (reflected in the price for goods sold under the Supply Agreement) all discounts and allowances, whether published or confidential, obtained by Metcash and referable to the volumes of goods sold to Franklins.

18 Both parties say that their understanding of the price agreed is reflected in the definition of “Wholesale Price” in the Supply Agreement, properly construed. However, in the alternative, Metcash says that if the definition of “Wholesale Price” in the Supply Agreement does not reflect what it says was the agreed price basis, then the Supply Agreement must be rectified. There are alternative bases for relief claimed by Metcash, as I have noted above.

Treatment of issues

19 On 29 July 2005, in the course of case management, Bergin J noted that the parties proposed questions for separate trial and expected to be able to agree upon a formulation of those questions. The parties proceeded on that basis, but it was not until the fourth day of the trial that they finally agreed upon a set of Issues for Determination (“MFI 2”).

20 The agreed Issues, as formulated by the parties, are many and complex – unnecessarily so in some cases, as will emerge shortly. Metcash, in its Outline of Submissions, accurately stated the principal issues at a general level as follows:

“(a) What is the proper construction of the formal Supply Agreement ….

(b) If the agreement bears the Franklins’ meaning, can it be rectified to give effect to the Metcash meaning;

(c) If the agreement bears the Franklins meaning and cannot be rectified, is Franklins estopped from contending that the agreement has other than the Metcash meaning?”

21 As the parties have agreed upon a formulation of the issues, I will deal with each of the issues in turn, lest it be thought that I have overlooked any of them. It is appropriate to record, however, that Franklins’ written submissions comprise 143 pages, Metcash’s written submissions comprise 211 pages, and that the parties’ oral submissions comprise 122 pages of transcript, i.e., the parties’ submissions total 476 pages. I am grateful for the industry and thoroughness of the parties’ legal advisers, from which I have derived much assistance. I have considered all of these submissions and I have endeavoured in these reasons to deal with all of the material evidence upon which findings are required.

22 However, without intending disrespect, I do not think it necessary to recount every one of the arguments put by Counsel. Some of those arguments are variations upon a common theme or are of relatively slight importance. I have dealt only with those arguments which, in my opinion, have some bearing on the outcome of a significant factual or legal issue, and then sometimes in an abbreviated fashion to avoid producing a judgment equal in length to the parties’ submissions. For the same reasons, I have not dealt with every disputed piece of evidence: practically every oral statement proffered in evidence by one side was disputed by the other, although most of such statements had little significance to the critical issues. I have focussed only on conflicts as to significant evidence. This course is, I think, consistent with the duty of the Court to give adequate reasons for judgment: see e.g. Housing Commission of New South Wales v Tatmar Pastoral Co Pty Ltd [1983] 3 NSWLR 378, at 385-386; Mifsud v Campbell (1991) 21 NSWLR 725 at 728; Beale v Government Insurance Office of New South Wales (1997) 48 NSWLR 430, at 443.

23 The parties have agreed on the further disposition of the proceedings, as follows:

“It is the intention of this formulation of the Issues in the proceedings that they will, if determined, resolve all matters of construction of the agreement between the parties, leaving only the questions of breach (including that described below) and the existence and quantification of any loss and damage to be determined in the event that any liability is established by either party.

Irrespective of the outcome of this separate determination, there will remain for determination a question of liability concerning inconsistencies between the description or classification of discounts, allowances and rebates in trading terms between [Metcash] and its suppliers during the term of the Supply Agreement and the benefit or service provided by [Metcash] to its suppliers which triggered [Metcash]’s entitlement to receive those discounts, allowance and rebates, further details of which are set out in the letter from Blake Dawson Waldron, solicitors for [Franklins], to Freehills, solicitors for [Metcash], dated 30 June 2005.”

“Whether on or about 24 May 2001 [Franklins] and [Metcash] entered into a binding legal contract for the supply of products by [Metcash] to [Franklins] the terms of which are set out in a letter from [Metcash] to [Franklins] dated 24 May 2001. This alleged agreement is called ‘the Agreement’ in the Amended Defence.”

24 On 24 May 2001 Mr Hunter sent to Mr Zelinsky a letter agreement for his signature. A covering letter from Mr Hunter stated:

“Under instructions from Metcash Trading Limited, I forward Letter Agreement reflecting recent discussions between yourself and Andrew Reitzer.

I am instructed that the supply arrangements referred to in the Letter which relate to the 20 Fresco stores are subject to the prior termination of Metcash’s supply agreements with Fresco on agreed terms.

Please sign and return the attached copy of the Letter Agreement to me by courier, or alternatively, I can arrange to collect.”

25 Mr Simpkins SC, who appears for Metcash, submits that the Supply Agreement executed on 14 September 2001 was a "formalisation" of a legally binding contract between the parties made on 24 May. Accordingly, if Metcash's construction argument fails and it must rely on its rectification claim, Metcash argues that the Supply Agreement should be rectified to accord with the contract made on 24 May 2001.

26 Mr Foster SC, who appears with Ms Fendekian of Counsel for Franklins, does not appear to be overly concerned with the question whether the 24 May letter constituted a binding contract between the parties. He submits that it did not, but in any event he relies principally on an “entire agreement clause”, clause 14.2, in the Supply Agreement. That clause provides:

“All previous negotiations, understandings, representations, warranties, memoranda or commitments in relation to, or in any way affecting, the subject matter of this agreement, including the letter from Metcash to [Franklins] dated 14 June 2001 (and countersigned by [Franklins]) are merged in and superseded by this agreement.”

27 Mr Foster says that, even if the letter of 24 May 2001 constituted a binding contract, it was superseded by the Supply Agreement and could have had no contractual force thereafter.

28 In my opinion, Mr Foster's submission is correct. It is clear that the parties, in signing and countersigning the letter of 24 May, intended thereby to set out the terms of their agreement so far as they had been formulated up to that point. The terms of the letter agreement may certainly be used to ascertain the parties’ common intention as at the time that the letter was signed, but that intention is relevant only to Metcash's claims for rectification and to an estoppel founded on representations: see e.g. Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471, at [33]-[36]. Whether that intention was expressed in a contractually binding manner does not matter and raises a false issue.

29 For these reasons, I decline to answer Question 1.

“Whether on or about 14 June 2001 [Franklins] and [Metcash] entered a further binding legal contract for the supply of products by [Metcash] to [Franklins] the terms of which are set out in a letter from [Metcash] to [Franklins] dated 14 June 2001. This alleged agreement is called ‘the Revised Agreement’ in the Amended Defence.”

30 On 14 June 2001, Mr Reitzer sent to Mr Zelinsky a letter setting out “the adjusted main points that make up our agreed business relationship and supply agreement”. The letter contained provisions to which I will refer in more detail in the course of discussing the rectification and estoppel claims. The letter concluded:

“The parties intend the terms set out in this letter to form the basis of a formal supply agreement which will be prepared, negotiated and executed as soon as possible.

As agreed, kindly sign a copy of this letter and return it to me as acknowledgement of your acceptance of the aforementioned arrangement.”

31 Mr Zelinsky signed and returned the letter on or about 14 June 2001. Metcash submits that the letter also constituted a binding contract between the parties. I am inclined to think that it did not, because the concluding paragraphs refer to an "arrangement" and described the letter as "the basis of a formal agreement which will be … negotiated”.

32 However, as in the case of Question 1, whether or not this letter constituted a binding contract is irrelevant, because the "entire agreement clause" in the Supply Agreement expressly provided that the letter of 14 June was of no further effect. Like the letter of 24 May 2001, the letter of 14 June 2001 may be evidence of the parties’ common intention as at the date it bears, but that is so regardless of whether the letter ever constituted a binding contract.

33 For these reasons I decline to answer Question 2.

“If the answer to Question 2 is yes, what effect did the making of the Revised Agreement have on the Agreement.”

34 For the reasons set out above, this question is irrelevant, except for the purpose of Metcash’s rectification and estoppel claims. I will deal with the letters in that context. I decline to determine this question otherwise.

“Whether on or about 12 July 2001 [Franklins] and [Metcash] agreed to vary the Revised Agreement in the manner alleged in sub-par (e) of par 3 of the Amended Defence. This alleged variation is called ‘the First Clarification/Variation’ in the Amended Defence.”

35 What transpired at a meeting on 12 July 2001 is very much in issue, but only in the context of Metcash’s rectification and estoppel claims. If there was any agreement or understanding reached at that meeting, and if such agreement or understanding operated to vary any previously existing contract between the parties, that agreement or understanding itself was superseded as a binding contract by operation of the "entire agreement clause" in the Supply Agreement.

36 For the reasons previously given, in my opinion this question is irrelevant and I decline to answer it.

“Whether in or about July 2001 [Franklins] and [Metcash] agreed to vary further the Revised Agreement in the manner alleged in sub-par. (f) of par. 3 of the Amended Defence. This alleged variation is called ‘the Second Clarification/Variation’.”

37 Again, what transpired in discussions between the parties after the 12 July meeting is much in contest. For the reasons I have already given, any agreements or understanding reached in those discussions are relevant only to Metcash’s claims for rectification and estoppel. Whether the discussions had the effect of amending any previous contracts is irrelevant. I decline to answer this question.

“What effect did the execution of the formal Supply Agreement have on:
(a) the Agreement;
(b) the Revised Agreement; and
(c) the Revised Agreement as varied by the First and Second Clarifications/ Variations
especially having regard to the terms of Clause 14.2 thereof.”

38 Metcash's submissions as to clause 14.2 respond to Franklins’ submissions that the clause bars Metcash’s defences founded on estoppel, rectification and under the Trade Practices Act: see Metcash’s written submissions 10 October 2006, paragraphs 117-124. I will, of course, deal with these submissions in the course of discussing those defences. However, as far as I can see, Metcash does not submit that clause 14.2 was ineffective to deprive any previously concluded binding agreement of further legal effect after execution of the Supply Agreement.

39 I have set out clause 14.2 at paragraph 26 above. Although the clause does not expressly refer to "contracts or agreements" – arguably suggesting that the parties had never intended any previous agreements to be legally binding – nevertheless, the words “understanding”, “warranties” and “commitments” are wide enough to include legally binding contracts.

40 Accordingly, as I have indicated above, I conclude that if there were in existence as at 14 September 2001 any legally binding agreements between the parties relating to supply, those agreements were superseded and deprived of further legal effect by execution of the Supply Agreement.

“Whether upon the true construction of the formal Supply Agreement [Franklins] was obliged to pay a Purchase Price that was calculated by deducting any applicable Case Deals and Ullage Allowances from and adding Profit Margins, Service Fees and any applicable GST to a Wholesale Price being:

(a) [Metcash]’s ‘Wholesale 5’ price;

(b) the Supplier’s wholesale list price for the Product in the State or Territory in which the Business was located at the time of [Metcash]’s delivery of that Product to [Franklins] less ‘warehouse allowances’ and ‘trade, distributor and cash discounts’ provided to [Metcash] by that Supplier; or
(c) the Supplier’s wholesale list price of the Product in the State or Territory in which the Business was located at the time of [Metcash]’s delivery of that Product to [Franklins] less all ‘allowances’ and ‘discounts’ (including rebates) provided to [Metcash] by that Supplier.”

41 There are two limbs to the parties’ cases on construction of the Supply Agreement. The first is concerned with the ordinary meaning of the words in the definition of “Wholesale Price”. The second arises from Metcash's contention that certain words in that definition have a special meaning commonly accepted in the supermarket wholesale and retail industry and must bear that meaning in the Supply Agreement, so that general words in the critical clause are limited by the special meaning of the words which follow.

42 In the somewhat unusual circumstances of this case, the distinction between the two limbs of the parties’ submissions is a little blurry because, as will appear shortly, on the facts as I have found them the contracting minds of both parties, viz., Mr Reitzer for Metcash and Messrs Summers and Zelinsky for Franklins, in fact had the same understanding of the overall effect of the definition of Wholesale Price and, in addition, understood certain words in that definition in the sense attributed to them by the industry. Paradoxically, however, giving certain words in the definition their industry accepted meaning does not lead, as a matter of pure construction, to a meaning for the whole definition which both parties understood it to have. Ultimately, therefore, the Supply Agreement, must be rectified. However, to explain how I have come to that conclusion, it is necessary to trace through the arguments on pure construction.

43 As I have mentioned, the focus of the debate between the parties is the definition of “Wholesale Price”, which is the principal factor in the calculation of the price at which Metcash was to sell goods to Franklins under the Supply Agreement. Clause 4.3(a) provides that Franklins will purchase goods from Metcash at “the Purchase Price”. The definition clause, clause 1.1, defines “Purchase Price” as meaning “Wholesale Price”, plus or minus certain amounts in three different circumstances. The definition clause defines “Wholesale Price” as follows:

“

Wholesale Price

for a Product means Metcash’s “Wholesale 5” price for that Product, being the Supplier’s wholesale list price for that Product in the State or Territory in which the Business is located at the time of Metcash’s delivery of that Product to [Franklins], less all allowances and discounts (such as trade discounts, distributor allowances, warehouse allowances, bulk buy allowances and cash discounts) provided to Metcash by the Supplier.”

44 Clause 4.4 is entitled “Calculation of Purchase Price, Rebates and Transport Costs”. Subparagraph (a) provides:

“Metcash will invoice [Franklins] for Products as follows:

PURCHASE PRICE =

*Wholesale Price*	(ie ‘Wholesale 5’ price for the State or Territory in which the Business is located, less warehouse allowances and trade, distributor, and cash discounts provided to Metcash by that Supplier)
*LESS*	Case Deals (clause 4.6) (if applicable)
*LESS*	Ullage Allowance (if applicable)
*ADD*	Profit Margin (if applicable)
*ADD*	Service Fee (if applicable)

The above is then multiplied by the prevailing rate of GST at the time of making the taxable supply where the supply of Product is a taxable supply.”

45 Clause 4.4(a) contains a definition of "Wholesale Price" which differs in its wording from the definition in clause 1.1:

– in clause 1.1 "Wholesale 5" is explained as “being the Suppliers’ wholesale list price … less all allowances and discounts (such as trade discounts, distribution allowances, warehouse allowances, bulk buy allowances and cash discounts)…” ;

– by contrast, in clause 4.4(a) “Wholesale 5” is not explained but there is to be deducted from it specified allowances and discounts which include four out of the five allowances and discounts referred to in clause 1.1 – i.e. “bulk buy allowances” are omitted from clause 4.4(a).

46 In his Short Outline of Submissions (8 September 2006) Mr Simpkins states his argument on the first limb of his construction case with admirable conciseness:

“14. The differences between the two definitions [in clause 1.1 and clause 4.4(a)] are:–

a. The starting point – Metcash’s Wholesale 5 for clause 4.4 but the Supplier’s wholesale list price for the Definition [in clause 1.1] ;

b. The deduction of four identified allowances and discounts for clause 4.4 but the deduction of all allowances and discounts ‘(such as trade discounts, distributor allowances, warehouse allowances, bulk buy allowances and cash discounts)’ for the Definition.

15. Unless resolved by a process of construction, therefore, the amount ostensibly required to be invoiced is different from the amount required to be paid.”

16. The common feature of both definitions of the price is that they intend to start with the Metcash’s ‘Wholesale 5’ price. Where they differ is in how they describe what this is.

17. Metcash contends that the obligation to pay a price was, properly construed, an obligation to pay according to a calculation that started with Metcash’s ‘Wholesale 5’ price. The words which attempt to describe what this is but do so in conflicting ways can be read out of the contract: Fitzgerald v Masters (1956) 95 CLR 420, 426-7. The same result can be achieved by giving precedence to the substantive term over the definition.

18. Resort to the surrounding circumstances known to both parties (see the facts referred to in the section on rectification below) support the construction contended for and are admissible for that purpose: see

(2004) 218 CLR 451.”

47 In essence, Metcash submits that “Wholesale Price” is defined to mean “Metcash Wholesale 5”, being such price described as “Wholesale 5” as Metcash in fact applied to sales of goods to its customers as at 14 September 2001. It submits that that intention emerges from clause 4.4(a) and that the clause 1.1 definition must be disregarded to the extent that it is inconsistent with the definition clause 4.4(a).

48 Mr Reitzer described "Wholesale 5" thus:

“We

have a basic selling price in our system called ‘Wholesale 5’. We also refer to that as the ‘net net stripped cost’. We take the combined volume of all independent supermarkets that buy from us and negotiate as best we can with manufacturers and take the discounts that apply to warehouse buys, quantity purchases, trade discounts and the cash discount to arrive at what we call the ‘net net stripped cost’. This is in our computer and as internal Metcash jargon is called ‘Wholesale 5’. That price is our selling price to all our supermarket customers, whether IGA or other brands, like Foodland, or customers that don’t operate under a brand or banner. This is the only way we work. We have a very old legacy system. The whole organisation is built around the Wholesale 5 price. The only way we can raise an invoice with any customer is to base it around the charging of Wholesale 5.

…

‘Net net stripped cost’ starts with the supplier’s list price but is then reduced by warehouse allowances, trade discounts, quantity buy discounts and cash discounts that appear on the invoice. In other words, the usual discounts that appear on the manufacturer’s invoice are deducted from the manufacturer’s wholesale list price.

…

We also do marketing for franchise customers like IGA. We collect what I call the ‘merchandising or trading terms’ from manufacturers. These monies are not reflected in the Wholesale 5 price. These are confidential trading terms that do not appear on the manufacturer’s invoice. In other words, there is of course a raft of discounts, rebates and co-op moneys that we collect that are not in Wholesale 5. They relate, amongst other things, to advertising moneys, confidential rebates and growth rebates.”

49 Franklins submits that:

– the definition of Wholesale Price in clause 1.1 is the governing definition, the definition in clause 4.4(a) being "an abbreviated definition": Written Submissions 28 September 2006;

50 I am unable to accept Metcash's submissions on the first limb of the construction argument, for the following reasons.

51 First, accepting as I do Mr Reitzer's evidence as to what "Wholesale 5" meant to Metcash itself, I cannot agree that clause 4.4(a) provides that "Wholesale Price" means, for the purposes of the Supply Agreement, nothing more or less than Metcash’s "Wholesale 5" price. "Wholesale 5", according to Mr Reitzer, is a "net net stripped cost" – that is, it is a price to Metcash’s customers arrived at after deducting from the suppliers’ list price the published allowances and discounts. However, clause 4.4(a) states that "Wholesale Price" is Wholesale 5 less further allowances and discounts. The words of clause 4.4(a) suggest that, in addition to the published allowances and discounts deducted in arriving at Wholesale 5, other allowances and discounts are to be deducted in arriving at Wholesale Price for the purposes of the Supply Agreement.

52 Second, if the definition of Wholesale Price in clause 1.1 intends to equate Wholesale Price merely with Wholesale 5 and intends to state what Wholesale 5 is, the definition of Wholesale 5 is incorrect because Wholesale 5 does not deduct all allowances and discounts, but only some, i.e., those which are published.

53 Accordingly, acceptance of Metcash’s argument that Wholesale Price means, as a matter of construction, no more or less than Wholesale 5, requires one to accept that both definitions of Wholesale Price, in clause 1.1 and clause 4.4(a), were wrong. I do not think one can do this purely as a matter of construction because the definitions can be accommodated together, as I shall show. But, in truth, as I have found as a fact, both definitions are wrong and must be rectified.

54 Purely as a matter of construction, I do not think that there is any necessary and intractable inconsistency in the definitions of “Wholesale Price” in clause 1.1 and clause 4.4(a). Clause 4.4(a) states that there are to be deductions from Wholesale 5 (which already deducts published discounts and allowances). Clause 4.4(a) can be regarded as contemplating further deductions from Wholesale 5, i.e., discounts and allowances which are not published. Such a reading of clause 4.4(a) would be consistent with a reading of the clause 1.1 definition which gives to the phrase “all allowances and discounts” a meaning which includes all allowances and discounts, whether published or confidential.

55 I turn now to the second limb of the construction argument, which arises from Metcash’s contention that certain words in the definition of Wholesale Price in the Supply Agreement “either have no clear meaning without explanation or … had a particular meaning to the parties”: written submissions 28 September 2006, para 8.

56 Metcash says that “trade discounts, distributor allowances, warehouse allowances, bulk buy allowances and cash discounts” in the clause 1.1 definition are all phrases which do not have any clear meaning on their face and require explanation. Metcash says, at least for the purpose of its construction argument, that that explanation is provided by an “industry meaning”, that is, a commonly accepted meaning of those phrases in the industry in which the parties operated. Metcash submits that each of the discounts and allowances specified in the definition of Wholesale Price is accepted in the industry as a published discount, not a confidential discount, so that the phrase “all allowances and discounts” of which the following particular discounts and allowances are given as examples should also be understood as meaning “all published allowances and discounts”.

57 Franklins does not deny the existence of any relevant “industry” but says that the specific allowances and discounts referred to are not generally understood in the industry as being confined to published allowances and discounts. However, it says that, even if they are so confined, the specification of such allowances and discounts does not cut down the generality of the phrase “all allowances and discounts” of which the specified allowances and discounts are said to be examples.

58 I will deal first with the question whether the particular allowances and discounts specified in the clause 1.1 definition of Wholesale Price were understood in “the industry” as being confined to published allowances and discounts. The “industry” here must mean the industry or trade in which both Franklins and Metcash engaged, that is, the industry of wholesale supply of goods and services to supermarket retailers.

59 It is well established that oral evidence can be given of a special meaning which words in a contract bear. The principles are summarised by McHugh JA in Vince Coles Pty Ltd v Skischufabrik Dynafit (NSWCA unrep. 28 October 1985, BC8500453):

“When evidence is admitted to prove that words in an agreement have a special trade or locality meaning, it is because their use in an agreement made in that locality, or with reference to a matter in that trade, raises a presumption that the parties have contracted in accordance with that special meaning:

(1832) 3 B & Ad 728 at 732;

(1844) 7 M & G 729 at 744;

(1859) 12 Moo PCC 361 at 399;

(1860) 3 El & E1 306 at 319;

[1973] 2 NSWLR 879 at 889. The presumption arises from the parties' knowledge, or the notoriety, of that meaning in the locality or trade;

at 733;

at 315-16. The presumption is one of fact, not of law, and may be rebutted:

(1836) 5 A & E 302. The terms of the agreement may show that the parties did not intend to contract in accordance with the special meaning:

(1858) 7 E & B 266 at 274;

at 320-21. Proof that one or both parties were ignorant of the special meaning of the words in the trade or locality will rebut the presumption:

;

(1839) 10 Ad & E 27. Moreover, unless the meaning is both certain and notorious, no presumption arises. In

at 745, Tindell CJ said that ‘the evidence ought to have been clear, cogent, and irresistible’….”

60 In Vince Coles, the trial judge accepted that the person who had made the subject agreement on behalf of one of the contracting parties did not understand the expression in question to have the special meaning for which the other party contended. This finding of fact was not challenged on appeal. McHugh JA said:

“Accordingly, no presumption against the wholesaler could arise. In

at 399 the Judicial Committee said:- ‘When evidence of the usage of a particular place is admitted, to add to or in any manner to affect the construction of a written contract, it is admitted only on the ground that the parties who made the contract are both cognisant of the usage, and must be presumed to have made their agreement with reference to it. But no such presumption can arise when one of the parties is ignorant of it’.”

61 The witness principally relied upon by Metcash to prove “special meaning” was Mr Gary Tempany. Mr Tempany is the Group Manager of Merchandise and Marketing. The principal witness relied upon by Franklins to rebut Mr Tempany’s evidence was Mr Peter Dove, a buyer with Franklins having long experience in the industry.

62 The first difficulty about the evidence of Mr Tempany and Mr Dove is that neither of them was the relevant mind, nor did he form part of the relevant mind, of Metcash and Franklins respectively in making the Supply Agreement. Both witnesses were middle management executives. Neither had authority to conclude any terms of the Supply Agreement and neither gave instructions as to the drafting of the Supply Agreement. The authority to negotiate and conclude the Supply Agreement on behalf of Metcash rested at all times with Mr Reitzer. After initial discussions in which Mr Summers participated and in which he set the parameters of agreement as far as Franklins was concerned, it was Mr Zelinsky who had authority to conclude the agreement on behalf of Franklins, although he remained subject to the direction of Mr Summers.

63 Accordingly, as Kirchner v Venus (supra) and Vince Coles (supra) demonstrate, even if I am persuaded by the evidence of Mr Tempany and Mr Dove that the allowances and discounts specified in the clause 1.1 definition of Wholesale Price had a “specialised meaning” in the industry, the presumption that Mr Reitzer, Mr Summers and Mr Zelinsky all knew and understood the words in that sense may be rebutted. As it transpires, I have come to the conclusion that Messrs Reitzer, Summers and Zelinsky all understood that the specific examples of discounts and allowances included in the definition of Wholesale Price were in fact published discounts and allowances so that, as a matter of the common understanding of the parties, those words did have a particular meaning for the purposes of construing the Supply Agreement: see below. It is not necessary, therefore, to find whether, in addition, the words in question had a special meaning in the industry. Nevertheless, because the matter was argued at length, I will set out my conclusions.

64 In his witness statement, Mr Tempany said:

“ Trade discount: a trade discount is the standard discount given by a supplier to purchasers of their product in the industry.

Warehouse allowance: a warehouse allowance is a discount that is given to the whole trade by a supplier any time that goods are taken into a warehouse, as distinct from the goods being delivered direct to the retail store.

Quantity buy allowance: a quantity buy allowance is an allowance that is provided by suppliers to any purchasers that purchase a certain quantity of the supplier’s product.

Settlement Discount: a settlement discount (sometimes referred to as a cash discount) is a discount given to any purchaser in the trade for payment within certain expressly stated time frames. (Trade discounts, warehouse allowances, Quantity buy allowances and Settlement discounts are usually published by suppliers in their standard price lists to the trade. They are non-confidential discounts provided by suppliers.)”

65 In cross examination, Mr Tempany said that “settlement discount” was synonymous with “cash discount”. “Quantity buy allowance”, as explained in Mr Tempany’s written statement, would appear to have the same meaning as “bulk buy allowances”, which is the term appearing in the clause 1.1 definition, although Mr Tempany did not say so expressly because he was not asked.

66 Mr Dove’s evidence was coloured by the fact that he had previously worked for David’s Holdings, from which Metcash had acquired its business. In that circumstance, Mr Dove had become familiar with what was comprised in Wholesale 5 and, I think, he tended to assume that what was familiar to him was familiar to everyone. For example, he was prepared to ascribe knowledge of the constituent elements of Wholesale 5 to Mr Summers and to Mr Zelinsky but, when pressed to give particulars of any circumstances from which their knowledge was evident to him, he could not do so: T740.22-.58.

67 However, Mr Dove had also had considerable experience in the industry with employers other than David’s Holdings and Franklins. He agreed that “warehouse allowance” was accepted in the industry as referring to a published allowance. His definition of “quantity buy allowance” would seem to equate with “bulk buy allowance” referred to in the clause 1.1 definition. He agreed that a “quantity buy allowance” was a published discount. He said in cross examination that he regarded “distributor allowance” as probably meaning “distribution allowance”, which was a published allowance.

68 In his witness statement, Mr Dove said of “cash discounts”

“13. In my opinion, the expression ‘cash discounts’ includes ‘early payment discounts’, ‘prompt payment discounts’ and ‘settlement discounts’, but may include other types of discount although I’m not aware of any. Some ‘cash discounts’ are ‘confidential’ and some are ‘published’, however they are most ‘off-remittance’. Sometimes ‘published’ ‘cash discounts’ are displayed on the invoice (although not taken ‘off invoice’).

14. The terms ‘cash discount’ and ‘settlement discount’ have a universally accepted or generally understood meaning in the retail/ grocery industry and the meanings are as I have stated them. In my opinion, ‘early payment discounts’ and ‘prompt payment discounts’ do not have a universally accepted or generally understood meaning in the retail/grocery industry.”

69 However, in cross examination, Mr Dove said:

“Q. You have told us in your statement that the expression ‘cash discounts’ can include early payment discounts, prompt payment discounts and settlement discounts; correct?
A. That's correct.

Q. Do you mean by giving that evidence that, depending upon the context, someone can be referring to either an early payment discount or a prompt payment discount and a settlement discount and describe it as a cash discount?
A. That's correct.

Q. Of those discounts that I just referred to, some of them I think you tell us in your statement are confidential and some of them are published?
A. That's correct.

Q. Is the early payment discount confidential or published?
A. I am not familiar with the term.

Q. Is the prompt payment discount confidential or published?
A. I am not familiar with that term.

Q. Is the settlement discount published?
A. Yes.

Q. So of those terms is the only term you are familiar with settlement discount and does it, according to your understanding, mean published discount?
A. That's correct.

Q. Does that mean that every time you have heard someone referring to a cash discount, in your experience at least, it has been a reference to the settlement discount?
A. That's correct.

Q. Which is a published discount?

A. That's correct.”

70 I accept that when “cash discount” is referred to in the industry, it is understood to mean a published discount. It follows that I accept that all of the discounts and allowances which are given as examples in the clause 1.1 definition of Wholesale Price are understood in the industry to be published, not confidential. The next question is whether that fact compels the conclusion, as a matter of pure construction, that the phrase “all allowances and discounts” in the clause 1.1 definition means “all published allowances and discounts”. I have earlier referred to the ultimate utility of this question – see paragraph 63 – but the question should be answered nonetheless. I do not think that, by reference to the specialised meaning of the relevant words in the industry, the definition of Wholesale Price in the Supply Agreement can be construed to accommodate the parties’ common intention as to the whole effect of the definition, for the following reasons.

71 Metcash submits that because all of the examples given in the phrase “(such as …)” are ejusdem generis, i.e., they are all published allowances and discounts, it follows that the preceding phrase “all allowances and discounts” is of the same genus. Franklins submits that the words in brackets are given only by way of non-exhaustive example and cannot be construed to limit the generality of the phrase of which they are said to be examples.

72 The point is, I think, neatly illustrated by the decision of the House of Lords in Ambatielos v Anton Jurgens Margarine Works [1923] AC 175. A charter party contained the following clause:

“Should the vessel be detained by causes over which the charterers have no control, viz., quarantine, ice, hurricanes, blockade, clearing the steamer after the last cargo is taken over, etc., no demurrage is to be charged and lay days not to count.”

73 The Court of Appeal and the House of Lords (by majority) held that the general words “causes over which the charterers have no control” were not limited by the words which followed. At 182, Viscount Cave LC said:

“My Lords, it is desirable first to look at the frame of the clause in question. It begins by a general hypothesis or condition: ‘Should the vessel be detained by causes over which the charterers have no control.’ There is no question that, if the condition had stopped there, this case would fall within it; for it is found that the general strike which detained the vessel in each case was something over which the charterers had no control. But those words are followed by the other words which I have cited beginning with ‘viz.’ and ending with ‘etc’; and the question is whether that addition is sufficient to cut down and limit the effect of the preceding general words and to confine the operation of the clause to the particular cases stated in the added words and cases of a similar kind – in other words, whether the added words are defining and limiting words, or are simply added in order to provide examples of what is meant by the general words, but not to cut them down.

Now, my Lords, I find myself very much in agreement with what was said by the learned Master of the Rolls, and was repeated in the argument of Sir John Simon here to-day. It is not right first to consider the effect of the word ‘viz.’ by itself, and then to consider whether that effect is altered by the later occurrence of the expression ‘etc.’ You must consider the two together; and, if you do that, I think the effect of what I have called the added words is this, that the draftsman shows an intention, first, of giving examples of what the general words mean and cover, and, secondly (and this is equally important), of showing to those who read the clause, by the use of the word ‘etc.,’ that those examples are not intended to cover the whole ground, that they are not intended to be exhaustive, but, that the general principle is still to include all the other cases which fall within its general terms. In other words, the clause must be read as referring to all causes over which the charterers have no control, in particular to the five causes specified, but also to all other cases which fall within the general words. That is the meaning which for myself I should give to the clause.”

74 Viscount Finlay was of the same view, for essentially the same reasons: see at 187. Lord Atkinson agreed with Viscount Cave and Viscount Finlay. Lord Sumner dissented, but only because he was of the view that the abbreviation “viz” (i.e. videlicet) means “that is to say”, which could not be interpreted to mean “for example”. His Lordship went on to say, at 189:

“I admit at once that if it meant ‘exempli gratia’ there would be an end of this matter and the appeal would fail.”

75 The reasoning of all Law Lords in Ambatielos is apt to the present case. If the clause 1.1 definition of Wholesale Price had omitted the words in brackets then there could have been no argument that “all allowances and discounts” meant just that, and included confidential as well as published allowances and discounts. However, the general words are followed by brackets – which in themselves indicate that what follows is by way of an aside – and then the words “such as” appear. The phrase “such as”, ordinarily understood, means that what follows is not intended to be an exclusive definition and that other examples of the general words may also be given: see e.g. per Thorp J in K B Furniture Ltd v Tauranga District Council [1993] 3 NZLR 197, at 205.5.

76 Applying similar reasoning to the present case, I do not think that the fact that the examples in brackets given in the clause 1.1 definition are all published allowances and discounts limits the word “all” in the preceding general phrase so that “all” means “some” or requires the insertion of the qualifier “published” after the word “all”.

77 For these reasons I am of the opinion that, as a matter purely of construction, Wholesale Price as defined in the (unrectified) Supply Agreement requires the deduction from the suppliers’ list price of all allowances and discounts received by Metcash, whether published or confidential. By reference to the Agreed Issues, the answer to Question 7 is as in paragraph 7(c).

“If the answer to Question 7(a) is yes, whether any, and if so, what, allowances and discounts were included in the calculation of [Metcash]’s ‘Wholesale 5’ price on the proper construction of that term.”

78 As a matter of pure construction of the unrectified Supply Agreement, this question does not arise in view of the answer to Question 7(c).

“If the answer to Question 7(b) is yes, what ‘warehouse allowances’ and ‘trade distributor and cash discounts’ were required to be deducted on the proper construction of those terms.”

79 As a matter of pure construction of the unrectified Supply Agreement, this question does not arise in view of the answer to Question 7(c).

“If the answer to Question 7(c) is yes, what ‘allowances’ and ‘discounts’ were required to be deducted.

80 For the reasons given above, the answer to this question, as a matter of construction of the unrectified Supply Agreement, is: all allowances, discounts and rebates received by Metcash from a supplier referable to goods supplied by Metcash to Franklins.

“In particular, for the purposes of any affirmative answer to any of Questions 7(a), 7(b) or 7(c) whether discounts, allowances or rebates described as:
(a) “Centralisation Rebate”;
(b) “Warehouse Efficiency Rebate”;
(c) “New Line Fees”;
(d) “Over and Above allowance”;
(e) “Incentive Targets”;
(f) “Early Payment Discount” or “Prompt Payment Discount”,
were required to be included in the proper calculation of the Purchase Price for the purposes of the Supply Agreement.”

81 As a matter of construction of the unrectified Supply Agreement, all of the discounts, allowances or rebates specified are to be included in the proper calculation of the Purchase Price.

“Whether any of (and, if so, which) the Agreement, the Revised Agreement, the Revised Agreement as varied by the First and Second Clarifications/Variations or the formal Supply Agreement was varied on or about 6 March 2003 as alleged in sub-par.(i) of par. 3 of the Amended Defence. This alleged variation is called ‘the Third Variation’.”

82 There is no dispute that, after execution of the Supply Agreement, Metcash collected and retained for itself a confidential allowance received from suppliers in respect of volumes sold to Franklins, called a “Redistribution Allowance”.

83 By February 2003, Mr Zelinsky had become concerned about Metcash’s retention of the Redistribution Allowance in circumstances to which I will come shortly. Franklins’ position was that under the terms of the Supply Agreement, Metcash was not entitled to keep this allowance for itself.

84 On 24 February 2003, Mr Zelinsky raised these concerns with Mr Reitzer in a meeting at which only the two of them attended. Mr Zelinsky asserted that Metcash was not entitled under the Supply Agreement to retain the Redistribution Allowance. Mr Reitzer rejected that assertion. On 27 February, Mr Reitzer had a meeting with Mr Summers, who also expressed concern about the issue. Mr Reitzer says that he believed that Mr Summers was raising with him the possibility that the business relationship between Franklins and Metcash was at risk if the issue was not resolved in Franklins’ favour.

85 Mr Reitzer’s evidence about these meetings attributes to Mr Zelinsky and Mr Summers admissions which support Metcash’s claims for rectification and estoppel. Mr Reitzer’s evidence is denied. I will return to it shortly in the context of discussing Metcash’s claims for rectification and estoppel.

86 On 6 March 2003, a meeting took place between Messrs Zelinsky, Perlov and Korb, representing Franklins, and Messrs Reitzer, Jablonski and Tempany, representing Metcash. What was said at the meeting is disputed but, in summary and in so far as is presently relevant, Franklins asserted in strong terms that Metcash was not entitled under the Supply Agreement to retain the Redistribution Allowance. Metcash asserted precisely the opposite. However, by the conclusion of the meeting Mr Reitzer agreed to refund to Franklins the Redistribution Allowance which had been collected to date in respect of goods ordered from suppliers for on-sale to Franklins. Mr Reitzer confirmed this agreement by a letter to Mr Zelinsky on 7 March 2003. In that letter, Mr Reitzer made it clear that he had agreed to the refund, not because he believed that Franklins was entitled to it under the Supply Agreement, but rather as a concession to preserve the goodwill and continuity of the business relationship between Metcash and Franklins.

87 By paragraph 3(j) of its Amended Defence, Metcash pleads an oral agreement between the parties made on 6 March 2003 whereby the Supply Agreement was amended so that Metcash was no longer to be entitled thereunder to retain the Redistribution Allowance. This contention is advanced to conform Metcash’s action in accounting to Franklins for the Redistribution Allowance with its contention that the Supply Agreement entitled it to retain that allowance. Metcash does not wish its refund of this confidential allowance to be seen as an admission that the Supply Agreement did not entitle it to keep all confidential allowances, either as a matter of construction or by reason of rectification or estoppel.

88 It is quite clear from the undisputed evidence that there was no common intention of the parties on 6 March 2003 to amend the Supply Agreement by whatever agreement had produced the refund to Franklins of the Redistribution Allowance. Franklins’ stated position was that it was already entitled to the Redistribution Allowance under the terms of the Supply Agreement. Metcash’s stated position was that it was making the refund purely as a gesture of goodwill and for no other consideration.

89 In those circumstances, amendment of the Supply Agreement was the furthest thing from both parties’ minds. The answer to Question 12 is “no”.

“If either of Questions 7(b), 7(c) or any part of Question 11 is answered yes, whether [Franklins] is estopped from advancing contentions in these proceedings in conformity with those affirmative answers by reason of the facts, matters and circumstances referred to in pars. 16 to (33) of the Amended Defence.”

90 Paragraphs 16 to 33 of the Amended Defence are as follows:

“16. On or about 20 April 2001 the Defendant informed the Plaintiff that:–

(a) The Defendant supplied products to independent grocers at a price it called ‘Wholesale 5’;

(b) The ‘Wholesale 5’ price included some but not all of the discounts made available by Suppliers;

(d) The Defendant was prepared to consider supplying products to the Plaintiff at the ‘Wholesale 5’ price.

Particulars

The communication was oral and took place at a meeting including Sean Summers and Dave Robins for the Plaintiff, and Andrew Reitzer and Edwin Jankelowitz for the Defendant.

17. On or about 1 May 2001 the Defendant informed the Plaintiff that:–

(a) The Defendant was prepared to supply products to the Plaintiff only at the ‘Wholesale 5’ price;

(b) The ‘Wholesale 5’ price did not include all discounts, allowances and rebates provided by Suppliers to the Defendant.

Particulars

The communication was oral and took place at a meeting including Sean Summers and Aubrey Zelinsky for the Plaintiff , and Andrew Reitzer and Michael Jablonski for the Defendant.

18. On or about 17 May 2001 the Defendant sent a proposed letter of agreement to Aubrey Zelinsky on behalf of the Plaintiff that contained the following in respect of pricing:–
Metcash will charge [Franklins] at Wholesale 5.
Wholesale 5 is the current supplier wholesale cost less all trade discounts, warehouse allowances, bulk buy allowances and cash discount.

19. On or about 24 May 2001 the Defendant sent a proposed letter of agreement to Aubrey Zelinsky on behalf of the Plaintiff that contained the following in respect of pricing:–
Metcash will charge [Franklins] at Wholesale 5.
Wholesale 5 is the current supplier wholesale cost less all trade discounts, warehouse allowances, bulk buy allowances and cash discount.

20. On or about 24 May 2001 the Plaintiff orally agreed to the terms set out in the letter from the Defendant of that date.

21. By letter dated 31 May 2001, the Plaintiff’s solicitors caused a revised proposed letter containing amendments that as at 31 May 2001 had not been seen by the Plaintiff to be sent to the Defendant that, inter alia, revised the pricing wording from that contained in the Defendant’s letters of 17 and 24 May 2001.

22. On 14 June 2001 the Revised Agreement was entered into.

23. At no time prior to entry into the Revised Agreement did the Plaintiff inform the Defendant that:–

(a) The Plaintiff was not prepared to purchase products from the Defendant at the ‘Wholesale 5’ price;

(b) The Plaintiff required the Defendant to account to the Plaintiff for any discounts, allowances or rebates not included in the ‘Wholesale 5’ price;

(c) The revised pricing wording was intended by the Plaintiff to effect a change of substance;

(d) The revised pricing wording was intended by the Plaintiff to have the effect that the Plaintiff would pay a price other than the ‘Wholesale 5’ price;

(e) The revised pricing wording was intended by the plaintiff to have the effect that the Plaintiff would be entitled to require the Defendant to account to the Plaintiff for discounts, allowances or rebates not included in the ‘Wholesale 5’ price.

24. On or about 12 July 2001 the Plaintiff and the Defendant orally agreed that:–

(a) Although the ‘Wholesale 5’ price the subject of the Revised Agreement did not include the ‘Terms Adherence’ discount, the Defendant would nevertheless account to the Plaintiff for such discount in respect of the Plaintiff’s volumes every 6 months;

(b) the ‘Wholesale 5’ price the subject of the revised Agreement did not include the discounts, allowances and rebates describe as:–
(i) ‘Coop Deferred’;
(ii) ‘Coop In Lieu’;
(iii) ‘State Rebate’;
(iv) ‘House Brands’;
(v) ‘Central/Redist’;
(vi) ‘Slow Moving Rebate’;
(vii) ‘Direct/X-dock/Early Pay’;
(viii) Coop O&A; and
(ix) National Rebate,
and the Defendant would not account to the Plaintiff for any of them.

(c) If the Defendant obtained a discount for making a payment to a Supplier sooner than required by that Supplier’s normal terms of trade, the Defendant would retain such benefit but not take such early payment into account in calculating the ‘Payment Terms’ for the purposes of the Revised Agreement;

Particulars

The agreement was made at a meeting attended by Aubrey Zelinsky and David Ramsden for the Plaintiff and Andrew Reitzer, Michael Jablonski and Anthony Abdallah for the Defendant.

25. In or about July 2001 the Plaintiff and the Defendant agreed that:–

(a) the ‘Wholesale 5’ price the subject of the Revised Agreement would only include published discounts described as:–
(i) ‘Trade Discount’;
(ii) ‘Warehouse Allowances’;
(iii) ‘Quantity Buy Allowance’; and
(iv) ‘Settlement Discount’;

(b) The Defendant would retain and not pass on to the Plaintiff the discounts, allowances and rebates described as:–

(i) ‘Central/Redist’;

(ii) ‘Slow Moving Rebate’; and

(iii) ‘Direct/X-dock/Early Pay’;

regardless of whether they were calculated by reference to the Plaintiff’s volume or not;

Particulars

The agreement is contained in, evidenced by or to be inferred from:–

(a) communications between the Plaintiff and the Defendant at and following the meeting of 12 July 2001 in respect of the production of a jointly authorised document to be shown to suppliers;

(b) the laminated document bearing both companies names and headed ‘Metcash Supplier Arrangements regarding [Franklins]’ dated July 2001 (‘the Laminated List’);

(c) the use thereafter by the Plaintiff and the Defendant of the Laminated List.

26. From in or about July 2001 the Plaintiff and the Defendant to the knowledge of each other conducted business in accordance with the Laminated List.

27. The Supply Agreement was entered into on 14 September 2001 to formalize the Revised Agreement.

28. At no time after entry into the Agreement and prior to entry into the Supply Agreement did the Plaintiff inform the Defendant that:–

(a) The Plaintiff was not prepared to purchase products from the Defendant at the ‘Wholesale 5’ price;

(b) The Plaintiff required the Defendant to account to the Plaintiff for any discounts, allowances or rebates not included in the ‘Wholesale 5’ price other than the ‘Terms Adherence’ discount;

(c) The revised pricing wording was intended by the Plaintiff to effect a change of substance;

(d) The revised pricing wording was intended by the Plaintiff to have the effect that the Plaintiff would pay a price other than the ‘Wholesale 5’ price;

(e) The revised pricing wording was intended by the Plaintiff to have the effect that the Plaintiff would be entitled to require the Defendant to account to the Plaintiff for discounts, allowances or rebates not included in the ‘Wholesale 5’ price.

29. In the premises, the Plaintiff by its conduct represented (‘the Representations’) that:–

(a) The Plaintiff intended to and would purchase products from the Defendant at the ‘Wholesale 5’ price;

(b) The Plaintiff did not require the Defendant to account to the Plaintiff for any discounts, allowances or rebates not included in the ‘Wholesale 5’ price other than the ‘Terms Adherence’ Discount;

(c) The revised pricing wording required the Plaintiff to pay the ‘Wholesale 5’ price;

(d) The revised pricing wording did not entitle the Plaintiff to require the Defendant to account to the Plaintiff for discounts, allowances and rebates not included in the ‘Wholesale 5’ price;

(e) The business of the Plaintiff and the Defendant would be conducted in accordance with the Laminated List.

30. Acting in reliance upon the Representations, and induced thereby, the Defendant entered into the Revised Agreement and the Supply Agreement.

31. At all material times after entry into the Revised Agreement and the Supply Agreement the Plaintiff and the Defendant to the knowledge of each other conducted business in accordance with the Laminated List.

32. Further, or alternatively, at all material times the Plaintiff and the Defendant have acted in their dealings with each other and others (to the knowledge of each other) on the common assumption that:–

(a) The Plaintiff was obliged to pay the Defendant the ‘Wholesale 5’ price for products supplied by it to the Plaintiff;

(b) The Defendant was entitled to the benefit of any discounts, allowances or rebates described as:–
(i) Centralisation Rebate’;
(ii) ‘Warehouse Efficiency Rebate’;
(iii) ‘New Line Fees’;
(iv) ‘Over and Above Allowance’;
(v) ‘Incentive Targets’;
(vi) ‘Early Payment Discount’ or ‘Prompt Payment Discount’;

(c) The business of the Plaintiff and the Defendant was to be conducted in accordance with the Laminated List.

33. In the premises, the Plaintiff is estopped from contending that the Revised Agreement and the Supply Agreement:–

(a) required the Plaintiff to pay anything other than the ‘Wholesale 5’ price;

(b) entitles the Plaintiff to require the Defendant to account to it for any amounts received by way of discounts, allowances or rebates described as:–

(i) ‘Centralisation Rebate’;

(ii) ‘Warehouse Efficiency Rebate’;

(iii) ‘New Line Fees’;

(iv) ‘Over and Above Allowance’;

(v) ‘Incentive Targets’;

(vi) ‘Early Payment Discount’ or ‘Prompt Payment Discount’.”

91 It will be seen that by these pleadings Metcash:

– traces the whole history of negotiations and discussions antecedent to the execution of the Supply Agreement;

– says that prior to the execution of the Supply Agreement a binding agreement was reached between the parties and that the Supply Agreement merely “formalised” that earlier agreement;

– asserts that the prior agreement defined Wholesale Price in a manner inconsistent with the meaning subsequently expressed in the definition in the Supply Agreement, on its true construction;

– importantly, does not assert that prior to the execution of the Supply Agreement, Franklins explicitly represented to Metcash that anything in the Supply Agreement, especially the definition of Wholesale Price, did not mean what it said or that, whatever the Supply Agreement provided, the “real definition” of Wholesale Price was as had been previously agreed;

– asserts that the representations alleged in paragraph 29 of its Amended Defence arose by inference from Franklins’ failure to inform Metcash that Franklins’ understanding of Wholesale Price was not the same as Metcash’s, and that Franklins understood and intended that the Supply Agreement provide that all discounts and allowances be deducted from the suppliers’ list price;

92 Although Metcash’s claim for an estoppel is said to found upon “representations”, in my view, on the facts pleaded, it is in truth founded on the alleged existence of an agreement between the parties made prior to the Supply Agreement in terms which are said to be inconsistent with the Supply Agreement.

93 Before coming to the facts upon which Metcash’s claim is founded – many of which are hotly disputed – it is convenient to make some general observations. First, even if there was some understanding or agreement between the parties prior to the execution of the Supply Agreement as to what “Wholesale Price” meant, Franklins relies upon clause 14.2, the “entire agreement clause” to which I have earlier referred and which, for convenience, I set out again:

“All previous negotiations, understandings, representations, warranties, memoranda or commitments in relation to, or in any way affecting, the subject matter of this agreement, including the letter from Metcash to [Franklins] dated 14 June 2001 (and countersigned by [Franklins]) are merged in and superseded by this agreement.”

94 It is worth repeating here a number of judicial remarks on the effect of a formally concluded written contract on a claim that an estoppel arising from previous agreements or discussions prevents a party from relying upon the words of that contract. In a passage frequently quoted, McLelland J said in Johnson Mathey Ltd v A C Rochester Overseas Corp (1990) 23 NSWLR 190, at 195:

“In my opinion the parol evidence rule operates to exclude evidence of an estoppel by convention alleged to arise from pre-contract negotiations. In substance an estoppel by convention is in the nature of an agreement. There is no less reason in principle that such an agreement be treated as superseded by the subsequent written contract than that any other agreement arrived at during pre-contract negotiations be so treated. Furthermore it would be subversive of the policy on which the parol evidence rule is founded, and would unduly shake the security of written contracts, if proof were permitted of such alleged estoppels. As Mason J said in

in relation to the rule excluding proof of the actual, as opposed to the presumed, intention of the parties (at 352):

‘… 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.’

It would be a serious threat to the stability of commercial relationships and dealings if parties who, after lengthy and intricate negotiations, deliberately recorded their agreement in permanent written form, were subject to the risk of having that permanent written record yield to the inherently less reliable evidence of oral statements made during the course of negotiation, given possibly many years after the event when witnesses may have become unavailable, and when memories may have faded or become distorted by subsequent occurrences and changing perceptions of self- interest.

…

In my view, reasons of principle and policy combine to exclude evidence of alleged estoppels by convention or any other agreements or understandings arising in the course of pre-contract negotiations which culminate in a written contract, except in proceedings for the rectification of the written contract, when the established requirement, as a condition of obtaining relief, of clear and convincing proof of a common intention of the parties not reflected in the written document, provides the necessary degree of security of the written contract .

I would therefore exclude on general principles the evidence of precontract negotiations for the purpose of proving an alleged estoppel by convention.

But in the present case the provisions of art 18.9 provide an additional reason for rejecting any such alleged estoppel. The effect of such clauses as this (to which it is convenient to refer as ‘entire contract’ clauses) has been considered in numerous cases ….

The effect of any particular clause will of course depend on its own terms and context, but in general it may be said that except in the case of fraud, and subject to any statutory provision, an ‘entire contract’ clause will bind the parties in accordance with its terms, properly construed. Such a clause itself gives rise to an estoppel by convention which excludes any antecedent estoppel which might otherwise have had effect.”

95 This passage has been endorsed by Miles CJ in Skywest Aviation Pty Ltd v Commonwealth of Australia (1995) 126 FLR 61, by Bryson J in Australian Co-operative Foods Ltd v Norco Co-operative Ltd (1999) 46 NSWLR 267, and by Young CJ in Eq in C.G. Mal Pty Ltd v Sanyo Office Machines Pty Ltd [2001] NSWSC 445, and in Arnot v Hill-Douglas [2006] NSWSC 429 at paras [78]-[80], [87]. The observations of Bryson J in Australian Co-operative Foods v Norco are particularly apt. In that case it was alleged that discussions and conduct between the parties prior to the execution of a formal agreement gave rise to an estoppel which prevented the plaintiff from enforcing the agreement according to its terms. At p 279, his Honour said:

“Even if there were a factual basis for an estoppel, whether viewed as an estoppel by convention or a promissory estoppel relating to the manner in which rights under cl 8.4 would be exercised, the estoppel could not be enforced because the new licence agreement is as its terms show intended to be a comprehensive written expression of the parties' agreement, so that its provisions cannot be qualified by evidence of the terms of the parties' negotiations. The estoppels here contended for would be inconsistent with the express terms of cl 8.4 in that they would qualify the power which it confers, and they would be directly contrary to the terms of cl 22.

In these respects I follow the views of McLelland J in

(1990) 23 NSWLR 190. I regard McLelland's views as well founded on the principle of giving effect to the formal, final and considered expression of the parties' contractual intention; the fact that they chose writing to express that intention shows the relative weight they attributed to earlier arrangements and understandings. The view expressed by McHugh JA (dissenting) in

(1986) 7 NSWLR 170 and acted on by Rolfe J in

(1991) 24 NSWLR 146 does not, in my respectful opinion, accord appropriate weight to indications of finality and completeness which the parties give when they adopt formal written expression. The judgment of McLelland J was followed by Miles CJ in

(1995) 126 FLR 61: see at 102-106. I respectfully differ from the view of Rolfe J in

and follow the views expressed by McLelland J in

. I regard McLelland J's view as well founded in principle and I do not regard the decision of the Court of Appeal in

as having established the views expressed by McHugh JA (at 193). My adherence to this view has been reinforced with the passage of time and accumulation of experience of this and many other forensic endeavours to set up estoppels out of the circumstances or terms of pre-contractual exchanges; the evidence offered is often extensive, discursive and inconclusive and, where it is of any value at all, clearly of less value than the considered written expression. Poorly based and incompletely considered forensic attempts to set up pre-contractual estoppels are unfortunately common, and in most cases they are quite unuseful and very wasteful of resources.”

96 The primacy of a formal and written contract over understanding or agreements reached between parties in the course of prior discussions or negotiations is emphasised in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (supra) at paras 33 to 35:

“[33] The respondents each having executed a loan agreement, each is bound by it. Having executed the document, and not having been induced to do so by fraud, mistake, or misrepresentation, the respondents cannot now be heard to say that they are not bound by the agreement recorded in it. The parol evidence rule, the limited operation of the defence of non est factum and the development of the equitable remedy of rectification, all proceed from the premise that a party executing a written agreement is bound by it. Yet fundamental to the respondents’ case that the operative agreements between the parties were wholly oral, and reached earlier than the execution of the written agreements, was the proposition that the written agreements subsequently executed not only may be ignored, they must be. That is not so. Having executed the agreement, each respondent is bound by it unless able to rely on a defence of non est factum, or able to have it rectified . The respondents attempted neither.

[34] There are reasons why the law adopts this position. First, it accords with the ‘general test of objectivity [that] is of pervasive influence in the law of contract’. The legal rights and obligations of the parties turn upon what their words and conduct would be reasonably understood to convey, not upon actual beliefs or intentions.

[35] Secondly, in the nature of things, oral agreements will sometimes be disputable. Resolving such disputation is commonly difficult, time-consuming, expensive and problematic. Where parties enter into a written agreement, the court will generally hold them to the obligations which they have assumed by that agreement. At least, it will do so unless relief is afforded by the operation of statute or some other legal or equitable principle applicable to the case. Different questions may arise where the execution of the written agreement is contested; but that is not the case here. In a time of growing international trade with parties in legal systems having the same or even stronger deference to the obligations of written agreements (and frequently communicating in different languages and from the standpoint of different cultures) this is not a time to ignore the rules of the common law upholding obligations undertaken in written agreements. It is a time to maintain those rules. They are not unbending. They allow for exceptions. But the exceptions must be proved according to established categories. The obligations of written agreements between parties cannot simply be ignored or brushed aside.”

151 In his witness statement, Mr Ramsden supports Mr Zelinski’s evidence and, in particular, he says that Mr Zelinsky said words to the effect: “Any discounts or rebates Metcash is able to negotiate on Franklins’ volume is for Franklins’ account”. Mr Jablonski’s evidence supports Mr Reitzer’s evidence, particularly as to statements by Mr Reitzer that Metcash would be collecting and retaining discounts referable to Franklins’ volumes which Franklins would not be able to collect for itself.

152 In my opinion, the evidence given by all witnesses in relation to what was said at the 12 July meeting is a combination of fragmentary recollection and reconstruction influenced by firm beliefs in the merits of the parties’ respective cases. However, I think that the evidence of Messrs Reitzer and Jablonski is more reliable. It is consistent with what appears in the “pie chart”, with the document which resulted from the meeting (the “laminated list”) and with Mr Summers’ own structure of the agreement of the parties as recounted in his letter of 4 March 2003.

153 The parties agreed at the meeting that there should be a document, jointly produced, which, in Mr Reitzer’s words, could be given to suppliers to “show them how our relationship works, and what money goes where”.

154 Ultimately a document was produced to be shown to suppliers. It was laminated (presumably to preserve it from wear and tear) and has come to be referred to frequently in the proceedings as “the laminated list”. Under the logos of Metcash and Franklins, the document states:

“ Metcash supplier arrangements regarding [Franklins]

[Franklins] to Collect
Co-op
New Line Fees
Advertising Allowance
National Rebate (incl. AAW)
State Rebate
Retail Ullage
Space Management
Over & Aboves

Metcash Passed on to [Franklins]

List	$10.00
Less Published Discounts
Trade Discount	$1.00
Warehouse Allowances	$1.00
Quantity Buy Allowance	$0.50
Settlement Discount	$0.50
Wholesale (5)	$7.00
Less Wholesale Ullage	$0.01

Metcash retain – not passed on to [Franklins]

Direct /Cross Docking / Early Payment Discount

Centralisation / Redistribution Allowance

Slow Moving Rebate”

155 Franklins contends that the laminated list supports its assertion that the “pie chart meeting” on 12 July agreed that confidential discounts negotiated by Franklins on it own volumes of goods ordered from suppliers would be retained by it and that all confidential discounts which Metcash raised in respect of Franklins’ volumes would also be passed on to Franklins, namely, by deduction from the calculation of Wholesale Price. I do not agree. I prefer the evidence of Messrs Reitzer and Jablonski as to what was said at the “pie chart meeting”, for the following reasons.

156 The laminated list makes as clear as possible by way of a worked example how Franklins is to be charged under the Supply Agreement: list price less published discounts – in other words, Metcash’s Wholesale 5 price. In addition, Franklins is to negotiate and collect its own confidential discounts on its volumes. But there are certain additional discounts – clearly, referable to volumes including Franklins’ volumes otherwise they would be irrelevant to all parties concerned – which Metcash is to obtain but is not to pass on to Franklins.

157 That this last category of discounts comprised discounts for which Franklins would not be eligible and that they would be retained by Metcash was revealed in the “pie chart” presented to Franklins’ executives at the 12 July meeting. The pie chart noted with an asterisk certain discounts received by Metcash and explained: “Franklins will not be able to collect”. Mr Reitzer explained at the 12 July meeting why Franklins would not be able to claim such discounts, for example, because it did not have a warehouse facility.

158 If it had been agreed at the 12 July meeting that these additional confidential discounts would be passed on to Franklins even though it could not have otherwise obtained them, there would not have appeared on the laminated list the items under the heading “Metcash retain – not passed on to [Franklins]”.

159 There is no doubt that the laminated list was used by Franklins as well as by Metcash in the conduct of its business. No one suggested that the laminated list was compiled in order to deceive suppliers as to the true agreement between Metcash and Franklins. It should be accepted that Franklins regarded as accurate the statements in the laminated list as to how published and confidential discounts were to be collected and dealt with pursuant to the terms of the Supply Agreement.

160 I conclude that the laminated list strongly corroborates the evidence given by Messrs Reitzer and Jablonski as to what transpired at the 12 July meeting. In addition, it strongly supports Metcash’s case as to what the parties understood and agreed was to be comprised in the calculation of Wholesale Price under the Supply Agreement.

161 On 13 July 2001, Mr Hunter sent a further draft of the Supply Agreement to Blake Dawson Waldron for consideration. The definition of “Wholesale Price” in the draft is as follows:

“

Wholesale Price

means ‘Wholesale 5’ for each Product being the current wholesale list price of the manufacturer of the relevant Product applicable as at the date the Product is delivered to [Franklins] less all allowances and discounts provided to Metcash by Manufacturers.”

162 It is to be noted that this definition does not incorporate the wording of the definition of Wholesale Price in the letter of 14 June 2001, which had been signed by Mr Reitzer and Mr Zelinsky as representing the agreed terms. Importantly, the draft omits the descriptive words in the 14 June definition “(such as trade discounts, distribution allowances, warehouse allowances, bulk buy allowances and cash discount)”. The definition says merely that there are to be deducted from suppliers’ list prices “all allowances and discounts provided to Metcash by Suppliers”.

163 There is no evidence explaining why, in this draft, Mr Hunter changed the wording of the definition of “Wholesale Price” which had appeared in the 14 June letter.

164 On 1 August 2001, Ms Ho of Blake Dawson Waldron sent to Mr Hunter a copy of the draft Supply Agreement, marked up to show the amendments which Franklins sought. The definition of Wholesale Price is considerably changed, to bring it back into line with the definition in the 14 June letter in that there are re-introduced the words in brackets which had appeared in the 14 June letter definition. The definition in the Blake Dawson Waldron draft reads:

“

Wholesale Price

for a Product means Metcash’s ‘Wholesale 5’ price for that Product, being the Supplier’s wholesale list price at the time of [Franklins’] order for that Product, less all allowances and discounts (such as trade discounts, distributor allowances, warehouse allowances, bulk buy allowances and cash discounts) provided to Metcash by the Supplier.”

165 The Blake Dawson Waldron draft introduced a new clause 4.15 as to the calculation of the purchase price which was, so far as is relevant, as follows:

“ Calculation of Purchase Price, Rebates and Transport Costs

(a) Metcash will invoice [Franklins] for Products as follows:

PURCHASE PRICE =

Wholesale Price	(i.e. ‘Wholesale 5’ price less warehouse allowances and trade, distributor, and cash discounts provided to Metcash by that Supplier)
*LESS*	Case Deals (clause 4.13) (if applicable)
*LESS*	Ullage Allowance (if applicable)
*ADD*	Profit Margin (if applicable)
*ADD*	Service Fee (if applicable)

The above is then multiplied by the prevailing rate of GST at the time of making the taxable supply where the supply of Product is a taxable supply.”

166 Mr Hunter responded to the Blake Dawson Waldron draft by letter dated 7 August 2001. He made a number of comments about the suggested amendments. The only comment he made about the definition of Wholesale Price was that it should be changed “to reflect such price at the time of delivery (not order) as this is the way the computerised system operates”. There was no comment about the new clause 4.15.

167 Ms Ho and Mr Hunter met on 8 August 2001 to discuss the draft Supply Agreement. Another draft of the Agreement was sent by Mr Hunter to Blake Dawson Waldron on 29 August 2001. The definition of Wholesale Price was amended to incorporate the suggestion which Mr Hunter had made in his letter of 7 August.

168 There were further exchanges of e-mails between Mr Hunter and Ms Ho concerning amendments to the draft Supply Agreement but none of them concerned any amendment to the definition of Wholesale Price.

169 A further draft Supply Agreement was prepared by Ms Ho and forwarded to Mr Hunter on 11 September 2001. None of the changes related to the definition of Wholesale Price. Again, there was an exchange of e-mails about proposed changes but none of them affected the definition of Wholesale Price.

170 The Supply Agreement was formally executed by the parties on 14 September 2001.

171 Franklins’ understanding that the calculation of Wholesale Price as defined in the Supply Agreement deducted only published discounts did not change from the time of Mr Reitzer’s letter of 17 May to the time of execution of the Supply Agreement: that proposition is demonstrated by what Mr Summers wrote about the definition of Wholesale Price in his letter of 4 March 2003.

172 It is appropriate now to discuss fairly briefly the circumstances in which Mr Summers’ letter of 4 March came to be written and what transpired at the 6 March 2003 meeting. I have discussed one aspect of this meeting under Question 12 above.

173 In my view, it is not necessary to go into a great deal of detail about the 6 March 2003 meeting because, apart from the critical admission made by Mr Summers in his 4 March letter as to the meaning of Wholesale Price, what otherwise occurred in March 2003 between the parties is of no assistance in ascertaining the parties’ common intention when they executed the Supply Agreement in September 2001.

174 As I have earlier noted, it is clear that by the beginning of 2003 Franklins had become aware that the size of the confidential discounts being retained by Metcash, as revealed in the laminated list, were larger than Franklins had appreciated at the time that the Supply Agreement was executed. Mr Summers’ letter of 4 March sets out the real basis of Franklins’ complaint. After referring to the various terms of the Supply Agreement, including the definition of Wholesale Price (as I have set out in paragraph 117), Mr Summers says:

“Following the commencement of our trading with you, certain issues became contentious and the first one concerned payment terms.
…
The second major area of contention has been the issue of ‘redistribution allowances’. Likewise, this manifested itself post the contract being drawn and was presented to us by you on the basis of being a ‘handful’ of suppliers that amounted to ‘five eighths of nothing’ who have this agreement with Metcash. Given the relatively insignificant way it was presented to Aubrey, he agreed that you could continue with these arrangements that you had in place. During the course of our discussions, you informed me that redistribution allowances in fact applied to approximately 3 pages of suppliers and that in total, you had deducted approximately $2.1 million. Of this, you believe that only $600,000.00 was applicable to Franklins, as the balance was subject to negotiations that existed prior to your commencing supplies to Franklins.

This amount of money in the first instance certainly does not represent ‘five eighths of nothing’ and secondly, cuts right across the statement as presented as a ‘handful of suppliers’. When we have raised this with your executives individually, they have told us to come forward with any evidence that we may have and they will assess it on a case by case basis. If Metcash have deducted, we will be reimbursed. I certainly do not believe that our understanding ever was on a ‘catch us if you can’ basis and we believe that we are entitled to a full list and disclosure of suppliers where redistribution allowances have been deducted.

The current status quo, therefore, leaves us with three main issues to be dealt with:–

…

Redistribution Allowance

We need to establish precisely what Metcash has deducted in terms of redistribution allowances and

have discussion as to the reason for the exclusion of this allowance in Wholesale Five. The significance of the amounts of money involved demand this

. Once we have established these principles, we then need to establish repayment of these funds to Franklins, as it was clearly never the intention that the profit margin enjoyed by Metcash would be in excess of 1.5% as agreed by us. This practice has been tantamount to ‘double dipping’ as a source of remuneration on our volumes.”

175 The last paragraph is particularly revealing. In view of the large amount of money involved in the Redistribution Allowance, Mr Summers wishes to explore “the reason for the exclusion of this allowance from Wholesale 5”. In other words, Mr Summers acknowledges that the Redistribution Allowance, being a confidential discount, was not a discount to be deducted in calculating the Wholesale Price under the Supply Agreement, but he wishes to revisit that state of affairs in further negotiations because his real complaint is that Metcash is making more profit out of the Supply Agreement than Franklins had anticipated.

176 In the light of the evidence which I have discussed, I make the following findings and draw the following inferences:

– as at the date of execution of the Supply Agreement the parties had agreed that Franklins would be charged for its volumes at Metcash’s Wholesale 5, which deducted from suppliers’ list prices only published discounts and allowances and this was the sense in which both parties understood Wholesale Price in the clause 1.1 definition in the Supply Agreement;

– the parties had agreed that Franklins would negotiate and collect from suppliers its own confidential discounts on its own volumes of goods;

– the parties had agreed that Metcash would negotiate for and retain confidential discounts on the combined volumes ordered for itself and Franklins but only in respect of the kinds of discounts that Franklins would not be able itself to obtain from suppliers because, for example, those discounts depended on the purchaser having warehouse facilities or redistribution facilities, which Metcash had but Franklins did not have;

– because Franklins could not obtain these discounts for itself in its own negotiations with suppliers and because it believed the discounts to be of relatively insignificant value – “five eighths of nothing” is a phrase referred to by Franklins – it did not consider it worthwhile to endeavour to compel Metcash to account for them;

– after the Supply Agreement had been executed, Franklins came to believe that the “five eighths of nothing” confidential discounts which Metcash was retaining were in fact worth a considerable sum of money. When Mr Zelinsky and Mr Summers confronted Mr Reitzer with this fact and Mr Summers threatened to bring the parties’ business relationship to an end, Mr Reitzer, to keep the relationship on foot, agreed to refund the Redistribution Allowance;

“all discounts and allowances”

“the definition of ‘Wholesale 5’ price that I recall Reitzer using … was as per the definition of ‘Wholesale Price’ in the Supply Agreement”

177 For the reasons I have given, I am satisfied by proof which I regard as clear and convincing that, although the definition of Wholesale Price in the Supply Agreement does not, as a matter of construction, require only published discounts to be deducted from the suppliers’ list prices, nevertheless this was the actual agreement and intention of the parties at the time that they executed the agreement.

178 The discrepancy between the Supply Agreement as a matter of construction and the true agreement of the parties should not be remedied by recourse to principles of estoppel, in accordance with the authorities to which I have referred in paragraphs 94 to 96 above. Rather, the proper remedy is rectification of the Supply Agreement.

“Whether the formal Supply Agreement ought to be rectified and, if so, in what manner.”

179 In deciding whether Metcash’s claim for rectification of the Supply Agreement has been made out, I have taken into account the principles which have been helpfully collected and summarised in the judgment of Einstein J in Hudson Investment Group Ltd v Australian Hardboards Ltd [2005] NSWSC 716, at [216]-[217], and in the judgment of White J in Muriti v Prendergast [2005] NSWSC 281, at [105], [132]-[137].

180 I have found that both parties, as at the time of execution of the Supply Agreement, had the common intention and understanding that the discounts to be deducted in calculating Wholesale Price, as defined in the Supply Agreement, would be only published discounts. The parties did not make a mistake in the drafting of the words of the definition by omitting the word “published” by some oversight or typographical error. Rather, I infer that the omission was due to the fact that both regarded the word as inherently implicit in the definition, so that the qualification “published” went without saying. The parties did not appreciate that, looked at later through the eyes of lawyers, the words of the definition of Wholesale Price did not have the meaning which they intended them to have. It was in this sense that the parties’ intentions miscarried by mistake, i.e. for want of proper expression.

181 Franklins has made much of the fact that Metcash did not call as a witness Mr John Hunter, its General Counsel who was responsible for drafting the Supply Agreement on behalf of Metcash. Franklins says that Mr Hunter ought to have been called to explain how the mistake occurred.

182 However, as I have said, I do not think that the mistake was one susceptible of explanation by the person who drafted the document. I infer that the lack of proper expression of the parties’ common intention became apparent only when Franklins subsequently realised that the words of the definition of Wholesale Price, read literally, did not mean what the parties thought they had meant. The failure of Metcash to call Mr Hunter is, therefore, in my view, of no significance where there is otherwise clear and convincing proof of what the parties’ relevant intention was at the time of execution of the Supply Agreement.

183 A claimant for rectification must be able to show clearly the form in which the contract ought correctly to be expressed in order to reflect the true agreement of the parties. In its Amended Cross Claim, Metcash puts forward a number of alternative amendments to the Supply Agreement. However, the appropriate amendment is simply to insert the word “published” before “allowances” in the phrase “less all allowances and deductions” in the clause 1.1 definition of Wholesale Price. That is the order which I will make.

184 As the Supply Agreement has now been terminated, it is not necessary to go through the rest of the document so as to conform its wording with the rectified definition of Wholesale Price. The Court has found what was the true agreement of the parties and the relief to be granted will follow as a consequence of that finding.

“Whether [Franklins] contravened Section 51AA of the Trade Practices Act 1974 in the manner contended for in par. C30 of the Amended Cross Claim and, if so, whether the formal Supply Agreement ought to be varied and, if so, in what manner and/or whether damages should be paid by [Franklins] to [Metcash] by reason of such contravention.”

185 Because the Supply Agreement is to be rectified, this question does not arise.

“If the formal Supply Agreement is unable to be so rectified or varied, whether [Franklins] engaged in misleading and deceptive conduct within the meaning of Section 52 of the Trade Practices Act in respect of the meaning and intended operation of the formal Supply Agreement in the manner contended for in par. C29 of the Amended Cross Claim.”

186 Because the Supply Agreement is to be rectified, this question does not arise.

“Whether it was an implied term of the formal Supply Agreement
that:
(a) [Metcash] would do all things reasonably necessary to give to [Franklins] the benefit of the formal Supply Agreement; and/or
(b) [Metcash] would act in good faith in its dealings with [Franklins] under the formal Supply Agreement.”

187 Because the Supply Agreement is to be rectified, this question does not arise.

“If Question 17 is answered yes, whether such implied terms (or either of them) obliged [Metcash] to deduct the Discounts or Volume Discounts (both as defined in the Amended Summons) in the calculation of the price payable by [Franklins] to it under the formal Supply Agreement.”

188 Because the Supply Agreement is to be rectified, this question does not arise.

“Upon the true construction of the formal Supply Agreement and, in particular, Clauses 2.6 and 4.3 thereof, as at the commencement of these proceedings, what rights did [Franklins] have to inspect and take copies of the business books and records of [Metcash], in particular those documents relating to or evidencing discounts, allowances and rebates received by [Metcash] in respect of goods purchased for on-sale to [Franklins].”

189 Clause 2.6 of the Supply Agreement provides:

“ Metcash to keep records of Products purchased, etc

(a) During the Term, Metcash must keep accurate records of all transactions relating to [Franklins] and its related bodies corporate, including Products, volume, price and date of purchase, and must make available to [Franklins] those records and allow [Franklins] to make copies of those records on 24 hours notice or other time agreed between the parties.

(b) Metcash must continue to make available to

the records referred to in clause 2.6(a), and allow

to make copies for the longer of 10 years after the termination of this agreement, or if any tax investigation or other legal proceedings are instituted during this period, until such investigation and any ensuing legal action, or other legal proceedings, and appeals are concluded.”

190 Clause 4.3 provides:

“ Purchase Price

(a) [Franklins] will purchase the Products from Metcash at the Purchase Price.

(b) Metcash will, on written notice by

, substantiate to

within 7 days that it has provided all allowance, or discount, and paid all money owing to

when due, and allow access by

officers to such of Metcash’s records as they reasonably require (including taking copies) to satisfy themselves that all allowance, discount, payment when due, has been provided or made.”

191 Clause 10.5 provides:

“ Effect of termination

Termination of this agreement however brought about:

(a) will not affect rights that accrue before that date;

(b) Clauses 2.6 and 2.7 will survive termination and be binding on the parties for the periods provided in those clauses; and

(c) Clauses 13 and 14 will survive termination and be binding on the parties.”

192 On 4 February 2005, Franklins’ solicitors sent to Metcash a letter requesting inspection of records in the following terms:

“Pursuant to clause 2.6 of the Supply Agreement, Franklins hereby provides at least 24 hours’ notice as required by that clause that Franklins will attend the offices of Metcash at 9am on Tuesday 8 February 2005, for the purpose of inspecting records of transactions relating to Franklins, and making copies thereof, including but not limited to:

1. all trading terms and other agreements between Metcash and all suppliers to Metcash in relation to products supplied by any supplier to Metcash for on-supply to Franklins under the Supply Agreement;

2. all records in respect of dealings between Metcash and all suppliers to Metcash in relation to products supplied by any supplier to Metcash for on-supply to Franklins under the Supply agreement;

3. all records (including banking or financial institution statements or other financial records) in respect of payments made by all suppliers to Metcash in relation to products supplied by such supplier to Metcash for on-supply to Franklins under the Supply Agreement, including payments in respect of ‘off-invoice’ discounts, allowances and/or rebates;

4. all agreements with Westgate and/or Lindsay Bros Transport, and any other records in respect of Westgate an/or Lindsay Bros Transport, relating to the cost of transportation of products supplied to Metcash for on-supply to Franklins, and supplied by Metcash to Franklins, under the Supply Agreement.”

193 Metcash has refused to grant inspection of the documents sought by Franklins. It does not dispute that Franklins’ rights of inspection under clause 2.6 have survived termination of the Supply Agreement. However, Metcash disputes the extent to which clause 2.6 gives a right of inspection of the documents which Franklins has requested.

194 The documents which Franklins seeks to inspect would encompass those disclosing:

– how the published discounts passed on to Franklins under the definition of Wholesale Price in the Supply Agreement were calculated;

– how any confidential discounts and rebates negotiated by Franklins directly and deducted under clause 4.5 and 4.6 were calculated;

195 Reduced to its essentials:

– Franklins’ submission is that all three categories of documents fall within the description in clause 2.6 “records of all transactions relating to [Franklins] ” ;

“relating to”

196 The issue depends on the scope of the phrase “relating to”. It is a phrase of the broadest compass. It very often gives rise not only to problems of construction but to problems of application, for example, whether those words in a subpoena, by reason of their width, place an oppressive burden on a stranger to litigation.

197 In my opinion, in this case as in many other contexts, the scope of the phrase “relating to” must be ascertained by reference to the purpose of the provision in which it is found. Clause 2.6, and clause 4.3, are clearly intended to provide a means whereby Franklins can vouch and verify for itself that it has received from Metcash all that it is entitled to receive by way of deductions and allowances. A transaction with a supplier giving rise to a deduction or an allowance which Franklins is not entitled to receive under the Supply Agreement is not, in my opinion, a transaction “relating to” Franklins.

198 I suspect that in some, perhaps many, cases it might be difficult to separate information about a purchase order into neat compartments for inspection purposes, namely, information relating to discounts to be passed on to Franklins and information relating to discounts to be retained by Metcash. However, this difficulty is a practical difficulty, not a difficulty in the construction of the clause itself.

199 In my opinion, Metcash’s construction of the scope of clause 2.6 is correct. Which particular documents demanded by Franklins’ letter of 4 February 2005 fall within the scope of the clause and which do not is something which I am unable to determine on the present state of the evidence. Which particular information sought in any of those documents is information which Franklins is entitled to inspect and which is not is, likewise, a matter which I cannot now determine. I would expect that, in the light of the answer which I have given to this question, the parties will be able to work out a satisfactory mechanism for inspection which protects the rights of both parties. At one stage during the hearing, the parties mooted the appointment of a mutually acceptable auditor, who would preserve confidentiality in delivering a report. That seems a very sensible and pragmatic course.

“Whether the demand made by the solicitors for [Franklins] to [Metcash] by letter dated 4 February 2005 was a valid demand for the purposes of either Clause 2.6 or 4.3 of the formal Supply Agreement and, if not, whether the filing of the Summons herein constituted such a valid demand.”

200 This question has been dealt with in the answer to the previous question.

“Whether [Franklins] is estopped from exercising any rights to inspect [Metcash]’s books and records which it may have had under the formal Supply Agreement by reason of the facts, matters and circumstances pleaded in par. 34 of the Amended Defence.”

201 In paragraph 34 of the Amended Defence, Metcash asserts that Franklins is estopped from asserting a right to inspect records relating to confidential discounts to be retained by Metcash by virtue of an oral agreement to that effect made between the parties in April 2001.

202 In view of the construction which I place on clause 2.6 of the Supply Agreement, I do not think that that issue now requires determination.

203 However, I am of the opinion that, if any such agreement was made in April 2001 as alleged, it was superseded by execution of the Supply Agreement and that no estoppel can now be founded upon it, for the reasons explained in paragraphs 94 to 96 above.

Orders

204 I will stand the proceedings over for a short time to enable the parties to bring in Short Minutes of Order setting out the relief to be granted at this stage of the proceedings and making provision for the determination of the issues which remain outstanding. I will then hear the parties as to costs.

– oOo –

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Citations

Franklins Pty Ltd v Metcash Trading Ltd [2007] NSWSC 242

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Taupau v HVAC Constructions (Queensland) Pty Ltd [2012] NSWCA 293

CITATION:	Franklins Pty Ltd v Metcash Trading Ltd [2007] NSWSC 242
HEARING DATE(S):	11-15, 18-22, and 29 September 2006; further written submissions 5 and 10 October 2006, and 1 November 2006.
JUDGMENT DATE :	21 March 2007
JURISDICTION:	Equity Division Commercial List
JUDGMENT OF:	Palmer J
DECISION:	Rectification of contract ordered.
CATCHWORDS:	CONTRACT – CONSTRUCTION – Supply Agreement between wholesale and retailer – meaning of definitions – whether certain words had special meaning in industry – whether ejusdem generis rule applicable – meaning of “such as”. - RECTIFICATION – Whether parties had common intention not correctly expressed in contract.
LEGISLATION CITED:	Trade Practices Act 1974 (Cth) – s.51AA, s.52, s.87
CASES CITED:	- Ambatielos v Anton Jurgens Margarine Works [1923] AC 175 - Arnot v Hill-Douglas [2006] NSWSC 429 - Australian Co-operative Foods Ltd v Norco Co-operative Ltd (1999) 46 NSWLR 267 - Beale v Government Insurance Office of New South Wales (1997) 48 NSWLR 430 - C.G. Mal Pty Ltd v Sanyo Office Machines Pty Ltd [2001] NSWSC 445 - Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 - Housing Commission of New South Wales v Tatmar Pastoral Co Pty Ltd [1983] 3 NSWLR 378 - Hudson Investment Group Ltd v Australian Hardboards Ltd [2005] NSWSC 716 - Johnson Mathey Ltd v A C Rochester Overseas Corp (1990) 23 NSWLR 190 - K B Furniture Ltd v Tauranga District Council [1993] 3 NZLR 197 - Kirchner v Venus (1859) 12 Moo PCC 361 - Mifsud v Campbell (1991) 21 NSWLR 725 - Muriti v Prendergast [2005] NSWSC 281 - Skywest Aviation Pty Ltd v Commonwealth of Australia (1995) 126 FLR 61 - Vince Coles Pty Ltd v Skischufabrik Dynafit (NSWCA unrep. 28.10.1985, BC8500453)
PARTIES:	Franklins Pty Ltd – Plaintiff Metcash Trading Ltd – Defendant
FILE NUMBER(S):	SC 50018/05
COUNSEL:	L.G. Foster SC, Ms S. Fendekian – Plaintiff J.B. Simpkins SC – Defendant
SOLICITORS:	Blake Dawson Waldron – Plaintiff Freehills – Defendant