Galati Nominees Pty Ltd v Potato Marketing Corporation of Western Australia - [2016] WASCA 27

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

TITLE OF COURT : THE COURT OF APPEAL (WA)

CITATION: GALATI NOMINEES PTY LTD -v- POTATO MARKETING CORPORATION OF WESTERN AUSTRALIA [2016] WASCA 27

CORAM: McLURE P
NEWNES JA
CORBOY J

HEARD: 14 DECEMBER 2015

DELIVERED : 10 FEBRUARY 2016

FILE NO/S: CACV 164 of 2015

BETWEEN: GALATI NOMINEES PTY LTD
Appellant
AND
POTATO MARKETING CORPORATION OF WESTERN AUSTRALIA
Respondent

ON APPEAL FROM:
Jurisdiction              :  SUPREME COURT OF WESTERN AUSTRALIA
Coram  :TOTTLE J
Citation  :POTATO MARKETING CORPORATION OF WESTERN AUSTRALIA -v- GALATI [2015] WASC 430
File No  :CIV 2545 of 2015

Catchwords:

Contract - Marketing of Potatoes Act 1946 (WA) - Agreement to resolve overplanting disputes - Interlocutory injunction restraining planting in excess of domestic market entitlement - Stay application based on mediation/arbitration clause - Fresh evidence - Whether a prima facie case of breach of an enforceable agreement - Balance of convenience - Effect on competition - Adequacy of undertaking - Turns on own facts

Legislation:

Commercial Arbitration Act 2012 (WA), s 5, s 7, s 8, s 9, s 17
Competition and Consumer Act 2010 (Cth), s 2B, s 2C, s 45
Competition Policy Reform (Western Australia) Act 1996 (WA), s 15, s 51
Marketing of Potatoes Act 1946 (WA), s 19, s 22, s 22B, s 23, s 24, s 26, s 32
Property Law Act 1969 (WA), s 10
Trade Practices Act 1974 (Cth), Pt IV

Result:

Leave to adduce additional evidence refused
Appeal dismissed

Category: B

Representation:

Counsel:

Appellant: Mr D H Solomon & Ms L M Retallack
Respondent: Ms P C Cahill SC & Ms F Vernon

Solicitors:

Appellant: Solomon Brothers
Respondent: Kott Gunning

Case(s) referred to in judgment(s):

John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451
Savcor Pty Ltd v The State of New South Wales (2001) 52 NSWLR 587

McLURE P
: This is an appeal from the grant by

Tottle J of interim injunctions restraining the appellant, Galati Nominees Pty Ltd, from selling ware potatoes in excess of the domestic market entitlement (DME) allocated by the respondent, the Potato Marketing Corporation of Western Australia (PMC), to Antonino Galati for the periods from 1 July 2015 to 3 October 2015 (Pool 1) and from 4 October 2015 to 2 January 2016 (Pool 2).
On 14 December 2015 this court dismissed the appeal and ordered Galati Nominees to pay PMC's costs of the appeal. These are my reasons for joining in those orders.
PMC is a statutory corporation created by the Marketing of Potatoes Act 1946 (WA) (the Act) with responsibility for regulating the production and marketing of potatoes grown for human consumption (known as 'ware' potatoes) in Western Australia.
Before detailing the factual background, it is necessary to have an understanding of the scope and operation of the Act. The Act prohibits the delivery and sale of potatoes within Western Australia to anyone other than PMC or its agents (s 22).
All potatoes delivered by growers to PMC or its agents are vested in and become the property of PMC (s 24). On the vesting of potatoes in PMC, a grower acquires a claim for compensation for those potatoes in accordance with the provisions of the Act unless a contract between the grower and PMC otherwise provides (s 24).
All commercial producers or growers (hereafter 'grower(s)') of potatoes must be registered with PMC and must only plant potatoes in land specified in an area licence issued by PMC (s 22B).
For the purposes of potato marketing, the period between 1 July and 30 June is referred to as a 'season' and each season is divided into four periods of 13 weeks, referred to as 'pools'. For each pool, PMC submits a statement to the Minister setting out the estimated tonnage of potatoes and area to be licensed needed to satisfy anticipated domestic demand (the estimated tonnage) (s 26(2)). Once approved by the Minister, the estimated tonnage is advertised as the quantity of potatoes required to be accepted by PMC in that pool period.
In advance of each pool, the estimated tonnage and licensed area is broken down and allocated to growers. Each grower is allocated a DME for a pool and an area licence. The DME is the amount PMC is required to accept from the grower. The grower is prohibited from planting outside the licensed area but is not prohibited from growing more than the DME. The grower who produces more than his DME bears the risk that actual domestic demand will not exceed anticipated demand. See s 23(4).
Potatoes are delivered by growers to PMC or agents appointed by PMC for that purpose (s 19(3), s 22(2)). PMC had appointed five agents, including Galati Nominees.
For each pool PMC submits to the Minister a statement recommending a price per tonne for potatoes delivered and accepted for sale in a pool and, if approved by the Minister, that price becomes the 'pool price' (s 32).
PMC prepares a weekly quota, issued seven days in advance, which specifies the quantity and variety of potatoes that growers may deliver in the week identified in the quota and the quantity and variety of potatoes that each grower will have available for delivery to merchants in that week.
PMC's primary objective in regulating the marketing pools is to match supply of locally grown potatoes to demand. It aims to align production to within +/- 5% of demand. The allocation of DMEs is of fundamental importance in enabling the level of supply to match demand.
Under s 19(3) of the Act PMC has the power to appoint any person on such terms and conditions as are, and to the extent and in the area that is, agreed between PMC and that person, to act as the agent of PMC to take deliveries from growers, to act as a grading and packing merchant, to sell or distribute potatoes, or to perform any other specified function on behalf of PMC. Under s 19(4), the appointment of a person as an agent by PMC may from to time be amended or revoked by PMC.
At all material times Galati Nominees was the holder of a Permit to Act as a Wholesale Potato Merchant (Packing and Grading) (Packing Permit) and a Permit to Act as a Wholesale Potato Merchant (Distributor) (Distributor Permit). The Packing Permit authorised Galati Nominees to receive delivery of potatoes from such sources as PMC may from time to time direct and all potatoes received were to be washed, brushed, graded and packed. The Distributor Permit authorised Galati Nominees to, inter alia, accept delivery of potatoes for distribution to potato retailers and other specified persons. Both permits end with the sentence 'The Permit Holder, as attested by the execution hereof, hereby agrees to the terms and conditions on which the permit is granted'.
Mr Galati is a registered grower. In respect of each pool, he was issued with an area licence and a certificate of DME. Mr Galati delivers all potatoes grown by him to Galati Nominees. Galati Nominees supplies potatoes to the Spud Shed outlets that are owned by a company of which Mr Galati is a director and shareholder and to Coles.
Mr Galati is a long‑time opponent of the regulated potato market and had been prosecuted for overplanting in 2010 and 2011. Against a background of disputation, PMC, Mr Galati and Galati Nominees entered into an agreement dated 26 July 2013 to resolve all ongoing disputes (the Agreement). Galati Nominees' Packing Permit and Distributor Permit are together referred to in the Agreement as 'the Agency Arrangement'.
By cl 2.1 of the Agreement, Mr Galati agreed to deliver all ware potatoes grown by him or on his behalf to Galati Nominees. Clause 3.1 of the Agreement relevantly provides:
The parties agree to include the following as amended and additional terms to the Agency Arrangement, with respect to Galati Nominees' acceptance, refusal or sale of Ware Potatoes:
(a)Galati Nominees agrees to accept any and all Ware Potatoes delivered to it by Galati, unless it has obtained the prior written consent of the PMC to refuse a delivery;
(b) …
(d) …
(e)in relation to any particular Pool, Galati Nominees must not sell Ware Potatoes delivered to it by Galati that are in excess of the DME allocated to Galati for that Pool.
Mr Galati admitted that he planted and harvested potatoes in excess of his area licences and DME certificates in the 2014/2015 season.
In April and June 2015 respectively, PME issued Mr Galati with area licences and DME certificates for Pools 1 and 2 of the 2015/2016 season. Mr Galati's entitlements for Pool 1 was a planting area of 50.40 ha and a total of 1,918 tonnes of potatoes. In respect of Pool 2, the planting area was 27.83 ha and a total of 1,049 tonnes of potatoes.
Mr Galati admitted that he planted and harvested potatoes in excess of his area licence and DME certificates for Pools 1 and 2 of the 2015/2016 season. The position of Galati Nominees at the hearing below was that, unless restrained by an injunction, it would sell all the potatoes delivered to it by Mr Galati in the Pool 2 period.
PMC had received expressions of concern from other growers of potatoes about the conduct of Mr Galati and Galati Nominees. An oversupply of potatoes in Pools 2, 3 and 4 of the 2014/2015 season, which had an adverse effect on PMC's income and the price paid to growers, was attributed to Mr Galati's overplanting.

Interlocutory proceeding

By letter dated 14 September 2015, PMC's solicitors gave notice to Mr Galati and Galati Nominees of PMC's intention to commence court proceedings and seek injunctive relief if suitable undertakings were not proffered by Galati Nominees. The proceedings were commenced on 30 September 2015 following the breakdown of negotiations to settle the dispute. An application for an urgent interlocutory injunction was first brought on for hearing on 1 October 2015. The primary judge made directions for the filing and service of submissions and affidavits. At an adjourned hearing on 7 October 2015, Galati Nominees gave an undertaking not to sell potatoes in excess of Mr Galati's DME entitlement for Pool 1 and Pool 2 until 11 November 2015.
By the time of the hearing of the interlocutory injunction application on 30 October 2015, Mr Galati and Galati Nominees had made an informal application for a stay of the proceedings, relying on cl 12 of the Agreement which provided for mediation followed by arbitration. The primary judge concluded that cl 10.4 of the Agreement preserved the availability of the remedy of an injunction to restrain a threatened breach of the Agreement and on that basis refused the stay.
For the purpose of determining whether there was a serious question to be tried, the primary judge reached the following provisional conclusions. First, cl 3.1(e) of the Agreement is promissory in nature and supported by consideration moving from all parties. Accordingly, cl 3.1(e) imposes an enforceable contractual obligation on Galati Nominees not to sell in any pool period more potatoes delivered to it by Mr Galati than he is permitted to grow by his DME for that period.
Second, there was a serious question to be tried on an alternative basis relied on by PMC, being to restrain breaches of the Act. The primary judge said:
In this case, Mr Galati and Galati Nominees have made no secret of their desire to operate outside of the law (as presently constituted by the Act and the Regulations) in relation to the production and marketing of potatoes and their intention to do so unless restrained. If not restrained, Mr Galati and Galati Nominees intend to disregard the present regulatory system in an extensive and systematic way. Mr Galati, and no doubt others, considers that the Act should be repealed immediately but that does not entitle him or Galati Nominees to disregard the Act [116].
Mr Galati and Galati Nominees contended below that cl 3.1(e) contravened s 45(2) of the Competition and Consumer Act 2010 (Cth) (CCA) and its equivalent in the Competition Code, being the Schedule Version of Pt IV of the Trade Practices Act 1974 (Cth) contained in a note in the Competition Policy Reform (Western Australia) Act 1996 (WA) (Competition Reform Act). Section 45(2)(a)(ii) prohibits a corporation from giving effect to a provision of a contract, arrangement or understanding that has the purpose, or has or is likely to have the effect, of substantially lessening competition. The primary judge held that the evidence before him provided an inadequate basis for drawing a conclusion that the enforcement of the restraint in cl 3.1(e) would substantially lessen competition [123].
As to the balance of convenience, the primary judge was satisfied that if Galati Nominees was not restrained from selling potatoes grown by Mr Galati in excess of his relevant DMEs, PMC would not be able to regulate the market for potatoes effectively in accordance with the Act. In particular, there was a real risk that other growers and merchants who had operated in compliance with the Act would follow Mr Galati's lead and operate without regard to the provisions of the Act, carrying with it the risk of disorderly de facto deregulation. He also noted that the public interest in its wider sense suffers if a scheme established by law is contravened by persons who decide unilaterally that the scheme should not apply to them.
The primary judge concluded that PMC had a relatively strong case on each basis upon which it relied and that the balance of convenience favoured the grant of an injunction.

The fresh evidence application

There are nine grounds of appeal and an application by Galati Nominees for leave to adduce additional evidence in the appeal. In particular, Galati Nominees seeks leave to adduce nine additional affidavits in support of a claim that, following the grant of the injunction on 11 November 2015, it had been unable to obtain sufficient quantities of the type and quality of potatoes it needed to supply the Spud Shed stores and Coles. This is a departure from Galati Nominees' position at the injunction hearing which was that the grant of the injunction would increase the price of potatoes at the Spud Shed stores, not that there would be a shortage of supply.
PMC opposes the application to adduce the additional evidence, relying on information in seven responsive affidavits. Those affidavits cast serious doubt on the accuracy and completeness of the evidence on which Galati Nominees relies for its claim of a shortage of supply. This court is unable to resolve the extensive conflicts in the evidence, which in any event goes solely to the balance of convenience. In those circumstances, the proper course is to refuse Galati Nominees' application for leave to adduce additional evidence.

Refusal of stay application - ground 1

Galati Nominees claimed that the primary judge erred in not ordering the proceedings to be stayed. The focus of the primary judge and the ground of appeal is on cl 10.4 and cl 12.1 of the Agreement.
Clause 12 of the Agreement relevantly provides:
12.1Mediation
Unless otherwise provided in this Agreement, any dispute or difference whatsoever arising out of or in connection with this Agreement shall be submitted to mediation …
12.2Arbitration
If the dispute or difference is not settled within 30 days of the submission to mediation … it shall be and is hereby submitted to arbitration …
12.3Continue to perform
Notwithstanding the existence of a dispute or difference each party shall continue to perform its obligations pursuant to this Agreement.
Clause 10 deals with default of the Agreement. It identifies what constitutes an event of default by Mr Galati or Galati Nominees, provides for the service of a default notice (cl 10.2) and identifies PMC's rights upon an event of default (cl 10.3) which include affirming the Agreement or terminating any or all of the Agreement, the appointment of Mr Galati as a commercial producer and Galati Nominees' Packing Permit and/or Distribution Permit. Clause 10.4 deals with the 'preservation of other rights' and states:
Subject to the terms of this Agreement, if a party breaches (including repudiates) this Agreement, nothing in this clause will prejudice the right of the other party to recover damages or exercise any other right or remedy available to it at law, including to an injunction to restrain a breach or threatened breach of this Agreement.
The primary judge relied on cl 10.4 as the source of PMC's right to obtain injunctive relief from the court.
Clause 12.2 of the Agreement is an arbitration agreement within the meaning of that term in s 7 of the Commercial Arbitration Act 2012 (WA) (Arbitration Act). Section 5 of the Arbitration Act provides that in matters governed by that Act, no court must intervene except where so provided by that Act. Under s 8(1) of the Arbitration Act a court before which an action is brought in a matter which is the subject of an arbitration agreement must, if a party so requests not later than when submitting the party's first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and avoid, inoperative or incapable of being performed.
I do not understand Galati Nominees to contend that the primary judge was required to refer the dispute to arbitration under s 8(1). In any event, there is no evidence that Galati Nominees requested the dispute to be referred to arbitration not later than when submitting its first statement on the substance of the dispute or indeed at any other time. Accordingly, it is unnecessary to determine whether cl 12.2 is 'inoperative' until after the mediation contemplated by cl 12.1. There are different views on this subject at first instance in New South Wales: Savcor Pty Ltd v The State of New South Wales (2001) 52 NSWLR 587 and John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451.
In any event, s 9 of the Arbitration Act provides that it is not incompatible with an arbitration agreement for a party to request, before or during arbitral proceedings, from a court an interim measure of protection and for a court to grant the measure. An interlocutory injunction is an interim measure under s 17 of the Arbitration Act.
As I understand it, Galati Nominees' claim is that cl 12.1 has primacy over cl 10.4. Clause 12.1 of the Agreement does not in terms or effect oust the jurisdiction of the court in relation to the proceedings. Nor does cl 12.1 make compliance with mediation a condition precedent to the enforcement of rights under the Agreement. Absent a stay order, the parties remained free to engage the jurisdiction of the court as PMC has done. In this case, Galati Nominees cannot rely on cl 12.1 as the source of an entitlement to a stay because of its defiant repudiation of the connected obligation in cl 12.3 to continue to perform its obligations under the Agreement. Its stated position was that unless restrained by an injunction it would continue to breach cl 3.1 of the Agreement.
The primary judge was correct to refuse a stay. Ground 1 is devoid of merit.

No prima facie case of a binding obligation - grounds 2 and 3

Galati Nominees claimed the primary judge erred in concluding that there was a serious question to be tried on the matter of whether cl 3.1(e) of the Agreement was an obligation that bound it. To get to this conclusion, Galati Nominees sought to make good a number of propositions as follows. First, the Agreement is not a deed because it was not executed by PMC as a deed in accordance with s 10(1) of the Property Law Act 1969 (WA) (PLA) and was not delivered to Galati Nominees until executed as a deed. Second, the Agreement is not a binding and enforceable contract because there was no evidence that it was executed by PMC in accordance with s 10(3) of the PLA; there was no consideration for Galati Nominees' promises; and the effect of cl 3.1, including cl 3.1(e), is to vary the effect of a unilateral appointment of Galati Nominees by PMC pursuant to s 19(3) of the Act and does not impose a promissory obligation.

The primary judge is correct, for the reasons he gives, in concluding on a provisional basis that cl 3.1(e) is promissory in nature and not merely an incident of the appointment of Galati Nominees as PMC's agent pursuant to the Act and that the Agreement is supported by consideration moving from PMC and Galati Nominees. Although there is no direct evidence that the Chairman of PMC who signed the Agreement had express authority to do so, the evidence supports an inference that PMC adopted or ratified the Agreement which has been performed by both parties since its execution in 2013. Ground 2 is without merit.

Merit of alternative basis - ground 4

Galati Nominees claimed the primary judge erred in reasoning that because PMC had standing to bring proceedings to further its statutory functions, an injunction could issue without the existence of a cause of action. This ground is without merit. The primary judge's reasons relate to Mr Galati and Galati Nominees. Mr Galati had admitted being in breach of his statutory obligations under s 22B of the Act, which breach constitutes an offence (s 22B(3)). As to Galati Nominees, it is apparent from the reasons as a whole that the primary judge relied on the fact that cl 3.1(e) also effected an amendment to its Permits which derived their force and effect from s 19(3) of the Act. In any event, there is an arguable case that Galati Nominees was in breach of s 22(2) of the Act, it not being authorised to sell potatoes delivered to it by Mr Galati in excess of his DME allocation. Ground 4 should be dismissed.

Substantial lessening of competition - ground 5

Galati Nominees claimed the primary judge erred in holding that there was inadequate evidence to conclude that the grant of an interlocutory injunction was likely to result in a substantial lessening of competition in a market. It says the primary judge should have held that it was likely that the purpose or effect of cl 3.1 of the Agreement, alternatively PMC's conduct in applying for injunctive relief to give effect to cl 3.1, was for the purpose or was likely to have the effect of substantially lessening competition in the retail market for potatoes in Western Australia by reducing price competition in that market.
There was no challenge to the validity of the Act or its operation. Any claim of invalidity would have to address s 15(1)(d) and s 51 of the Competition Reform Act and s 2B and s 2C of the CCA.
As is clear from the report of the Economic Regulation Authority (ERA) dated 28 July 2014, it is the terms and operation of the Act that is the source of any adverse effect on competition in the retail market for potatoes in Western Australia. In particular, the ERA notes that it is PMC's functions under the Act that restrict competition in the market for ware potatoes, including determining the quantity and colour of potatoes produced, issuing licences to grow potatoes, setting the price that growers will receive and acting as the monopoly seller of potatoes to the wholesale market [7.3.1]. Against that background, the primary judge was correct to conclude that there is an inadequate evidentiary basis for drawing an inference that the enforcement of cl 3.1(e) would substantially lessen competition in the market. Ground 5 should be dismissed.

Alternative statutory remedy - ground 6

Galati Nominees claimed the primary judge erred in not refusing the injunction on the grounds that PMC had the adequate alternative statutory remedy of termination of Galati Nominees' appointment as its agent under s 19(4) of the Act and that the injunction was in effect seeking final relief rather than to preserve the status quo pending trial.
Termination of the appointment under s 19(4) would not be an adequate alternative remedy. Galati Nominees' position was that unless restrained by an injunction it would sell all of the potatoes delivered to it by Mr Galati in the Pool 2 period [5].
The practical effect of the interlocutory injunction was to grant final relief in respect of Pool 2. That relief was appropriate having regard to the very short period in which the injunction operated, the strength of PMC's case, Galati Nominees' admission of breach, its intention to persist in the conduct and the public interests identified by the primary judge. Ground 6 should be dismissed.

Undertaking as to damages - ground 7

Galati Nominees claimed the primary judge erred in holding that if PMC is not successful at trial Galati Nominees and its related entities will be protected by their right to call upon PMC's undertaking as to damages in circumstances where such damages would not be capable of precise quantification. It was said that the Spud Shed operators would have to increase their prices, resulting in loss of sales and damage to their goodwill. I am not persuaded that there will be any unusual obstacles or significant difficulties in quantifying the loss. However, even if there were difficulties, they would not be sufficient to justify the refusal of the injunction. Ground 7 should be dismissed.

Strength of case and balance of convenience - grounds 8 and 9

Galati Nominees claimed the primary judge should have refused to grant relief on the basis that PMC did not establish to a sufficiently high level of assurance that it would succeed in being granted that relief at trial. This claim is without merit. The primary judge's provisional assessment was that PMC had a relatively strong case on each of the alternative bases on which it relied. That is a conservative assessment. The only proven consequence of the interlocutory injunction was that Galati Nominees would have to purchase potatoes from growers other than Mr Galati at higher prices for a short period. The primary judge was satisfied there was a real danger that if Galati Nominees was not restrained, PMC would not be able to regulate the market for potatoes effectively and in accordance with the Act, with the real risk of disorderly de facto deregulation. The role of the courts in our democracy is to uphold and enforce valid laws of the State. Having regard to all relevant matters that

inform the exercise of the discretion to grant an interlocutory injunction, the primary judge acted appropriately. Grounds 8 and 9 should be dismissed.

NEWNES JA: The reasons of McLure P reflect my reasons for joining in the orders.
CORBOY J: I agree with McLure P.