Global AM Trading LLC ARBN 134 988 202 v Pan Macmillan Australia Pty Ltd ACN 001 184 014
[2012] NSWSC 1512
•10 December 2012
Supreme Court
New South Wales
Medium Neutral Citation: Global AM Trading LLC ARBN 134 988 202 v Pan Macmillan Australia Pty Ltd ACN 001 184 014 [2012] NSWSC 1512 Hearing dates: 12.11.12, 13.11.12, 14.11.12 Decision date: 10 December 2012 Before: Nicholas J Decision: Pars 36, 37
Catchwords: CONTRACT - construction - agreement between publisher and service provider for sale and distribution of its publications - service provider required to invoice and deliver the publications to customers - service providers required to assume risk of bad debt for all sales of publications - whether risk extended to bad debts for sales for which the publisher was responsible - no question of general principle Cases Cited: Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99
Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184
Wilkie v Gordian Runoff Ltd Ltd [2005] HCA 17; (2005) 221 CLR 522Category: Principal judgment Parties: Global AM Trading LLC ARBN 134 988 202 - plaintiff
Pan Macmillan Australia Pty Ltd ACN 001 184 014 - defendantRepresentation: Counsel:
R M Foreman - plaintiff
B Coles QC/D Neggo - defendant
Solicitors:
Minter Ellison - plaintiff
Macpherson & Kelley - defendant
File Number(s): 12/97370
Judgment
These proceedings concern the claim by the plaintiff (Global) against the defendant (Pan) for payment of the amount $909,835.78 alleged to be payable under a sale and distribution agreement made on 8 May 2008 (the agreement).
The relevant background is uncontroversial and is summarised as follows.
Global is a company incorporated according to the laws of the State of Missouri, United States of America. It is a related company of Andrews McMeel Publishing, LLC (Andrews McMeel), a publisher in the United States of America of:
(a) general nonfiction trade, cookbook, gift, puzzle and humour books; and
(b) calendars.
Since about 1 January 2009 Andrews McMeel has conducted its business in Australia through Global, neither of which have warehouse or distribution facilities in Australia.
In February 2007 Andrews McMeel issued a request for proposal (RFP) for what was called 'fulfillment services' and 'book trade sales representation' to Macmillan Publishing Services, a business division of Pan. The general manager of Macmillan Publishing Services is Mr Mark Haldane. Pan responded to the RFP and in due course Pan and Andrews McMeel executed the agreement on 8 May 2008.
By a deed of variation dated 1 January 2009, Andrews McMeel and Pan agreed that all references to Andrews McMeel in the Agreement would be replaced by Global. It is agreed by the parties that nothing turns on the change of entity.
Global publishes the books, calendars and other publications the subject of the agreement and ships them to Australia. These products are marketed to wholesalers and retailers in Australia and New Zealand. Pan invoices the purchasing wholesalers and retailers, delivers the products to them, and collects payment from them.
The genesis of the current dispute lies in the February 2011 voluntary administration of the REDgroup Retail group of companies, which operated well-known bookstore chains in Australia including 'Angus & Robertson' and 'Borders'. Also relevantly within this corporate group was a business trading as 'Calendar Club'. Pan invoiced and delivered calendars to Calendar Club under the agreement. Calendar Club's effective insolvency resulted in a bad debt of $909,835.78. The central issue in the proceedings is which of the parties must bear the risk of the bad debt under the agreement.
The agreement
In the agreement Global is referred to as the "Publisher" and Pan as the "Service Provider". The relevant provisions are the following:
"INTRODUCTION
...
(C) The Publisher and the Service Provider wish to enter into an agreement to record the agreement by the Service Provider, for the Service Provider to sell and distribute the books and other publications of the Publisher on the terms contained in this Agreement.
...
1. Definitions and Interpretation
...
'Customer' means all persons to whom the Publications are sold and distributed by the Service Provider including Major Chains in accordance with this Agreement;
...
'Gross Sales Turnover' means all sums invoiced by the Service Provider to Customers in respect of the Publications (excluding any GST or other sales tax on the Publications);
...
'Major Chains' means the retail operations identified on the Sixth Schedule;
...
'Net Sales Turnover' means Gross Sales Turnover less any credits given to Customers;
...
'Publications' means all books, calendars, audio cassettes, multimedia products and specialty products, in all formats currently published or to be published or distributed by Publisher in the Territory ...
...
'Services' means those services to be performed by the Service Provider as set out in the Second Schedule;
...
2. Appointment of Sole Service Provider
2.1 The Publisher appoints the Service Provider as its sole and exclusive provider of the Services for the Publications throughout the Territory in accordance with the terms and conditions of this Agreement. The Service Provider agrees to provide the Services in accordance with the terms and conditions of this Agreement. Publisher also appoints the Service Provider as the primary sales representative for sales of Publications to bookstores in the retail book channel in the Territory. Publisher retains responsibility for all sales to wholesale customers (those which intend to resell the Publications to retail bookstores) and for all sales to the retail gift channel. Publisher shall also retain all responsibility for sales of calendars into the Major Chain channel for national group purchases. Set forth on the Sixth Schedule is the list of Major Chains for which Publisher shall have sales responsibility. The sales activities of Service Provider described herein are hereby included in the description of Services.
...
5. Liability
5.1 Until delivered to the Service Provider (to MDS or other premises nominated by the Service Provider) by the Publisher under this Agreement, risk of loss or damage to inventory of Publications will be born [sic] by the Publisher. Upon such delivery, risk of loss or damage to the inventory of Publications will be born [sic] by the Service Provider.
5.2 When the Publications have been received into the Service Provider's warehouse or other premises nominated by the Service Provider, the Service Provider will be responsible for ensuring that the Publications are insured against fire, theft, flooding and all other perils at all times ...
...
6 Duties of the Service Provider
6.1 The Service Provider will provide the Services at a reasonable standard of skill and care in accordance with best commercial practice and at a level of skill and care at least commensurate with the skill and care used by Service Provider with respect to its own products and to the products of others for which Service Provider provides services.
...
6.7 In accordance with the First Schedule the Service Provider will pay to the Publisher the amount shown as due in respect of sales of the Publications less:
(a) the charges to which the Service Provider is entitled under clause 8 and the First Schedule;
(b) any packing, carriage, despatch, or other charges for which the Service Provider is entitled to be reimbursed under this Agreement
7. Title to the Publications
The Service Provider acknowledges that each of the Publications remains vested in the Publisher until such time as the Publications are invoiced by the Service Provider to Customer. The Publications then vest in the Service Provider as owner. Risk and title passes from the Service Provider to the Customer when the Customer has paid for the Publications in full or sold and disposed of the Publications in the ordinary course of business.
...
8.2 The Publisher will ensure that sufficient quantities of the Publications are delivered to the Service Provider to enable the Service Provider to provide the Services.
...
10. Service Provider's Fees
10.1 In consideration of the Services the Publisher will pay the fees and disbursements to the Service Provider as set out in the First Schedule.
...
10.7 The Service Provider will keep accurate records and accounts of all transactions and enquiries relating to the Services ...
...
THE FIRST SCHEDULE
Flat and Variable Fees
1. The Service Provider will pay to the Publisher in respect of any accounting period the Net Sales Turnover less the charges that the Service Provider is entitled to under this Schedule (hereafter referred to as the 'Net Payment'.) The Net Payment will be made eighty (80) days from the end of the month in which the sales generating the Net Turnover are billed to customers. The Publisher acknowledges and agrees that the 80 days EOM payment term is subject to any special dating or marketing program adjustments that the Publisher may provide to certain of its customers. With respect to customers who have special payment arrangements with the Publisher that extend such customers' payment obligations beyond the Service Provider's standard terms, the Service Provider may hold back from its Net Payment, the sum of the monies attributable to sales billed to such customers under the special payment arrangements from and after the time of notice to Service Provider of the special arrangement until such time as the customer is required to pay under such special payment arrangements, regardless of whether Service Provider has received payment from the applicable customers. The Service Provider may not hold back any amounts to reflect late or delinquent payments from such customers for any period prior to the date upon which Publisher first extended the payment obligations. Publisher shall promptly notify Service Provider of each such date. The Service Provider shall promptly notify the Publisher of any customers that have been granted extended dating but have not made timely payment of amounts due. The Service Provider shall be obligated to use commercially reasonable efforts to timely collect these outstanding balances and shall not withhold payment from the Publisher without prior notification to the Publisher. The Publisher will cooperate and assist the Service Provider, if necessary, to effect payment or resolution of any delinquent amounts.
1.1 The Service Provider shall manage the complete credit and collection cycle for the sale of the Publications. The Service Provider shall maintain credit limits and exercise control over account status in accordance with its standard credit policies. The Service Provider shall have the right to place a sale on hold or deny credit if an account does not meet the Service Provider's standard credit requirements. The Service Provider shall use the same standards in determining credit limits and administering the credit and collection process for the Publications as it does with sales of its own products. The Publisher will provide the Service Provider with a list of its 6 largest customers, and the Service Provider will use its best endeavours to notify the Publisher if such customers are placed on hold or denial.
1. 2 Except as provided in clause 1.3, the Service Provider will assume all risk of bad debt for all sales of Publications. Except as otherwise provided herein, the Service Provider will assume all costs of credit administration and collection, including costs of legal fees.
1.3 The Publisher will have the right to sell the Publications to an account to which the Service Provider refuses to extend credit, or which the Service Provider has put on credit hold (hereafter referred to as a "Rejected Account''). The Service Provider will give the Publisher reasonable notice that an account has become a Rejected Account. The Service Provider will provide the Publisher periodic reports with respect to Rejected Accounts and accounts that may potentially become Rejected Accounts and will respond to the Publisher's queries with respect to any such accounts on an as needed basis. If the Publisher elects to sell to a Rejected Account, the Publisher will provide the Service Provider with written notice of its decision and will assume the credit risk and the pro-rata collection costs (including legal fees), if any, associated with any orders placed after the account has become a Rejected Account and will be liable for the outstanding amounts owed to the Service Provider by such Rejected Account for its purchases of the Publications following the date upon which the account becomes a Rejected Account. The Service Provider will have the right to deduct from the Net Payment due to the Publisher any past due amounts for the Publications owed to the Service Provider by a Rejected Account that the Publisher elects to sell to. The Service Provider will perform collection activities and provide fulfilment for all of the Publisher's sales to the Rejected Accounts.
...
2. In consideration of the performance of the Services by the Service Provider under this Agreement the Publisher will pay to the Service Provider:
(i) Calendar rate 9.85% of the Gross Sales Turnover where the supply of Publications are from the Service Provider's warehouse, for the distribution component of the Services; and
(ii) Book and Gift rate 10.35% of the Gross Sales Turnover where the supply of Publications are from the Service Provider's warehouse, for the distribution component of the Services; and
(iii) 7% of Returns value for actual physical Returns (exclusive of Affidavit Returns) processed by the Service Provider; and
(iv) 5% of returns value for actual physical Returns (Exclusive of Affidavit Returns) processed by pulping or accumulated as seconds.; and (v) twenty cents ($0.20) per line item for Affidavit Returns; and
(vi) 10.5%of Net Sales Turnover for the selling component of the Services.
2.1 In respect of that part of the Gross Sales Turnover which is invoiced by the Service Provider to Customers where the supply of Publications are made directly to the Customer from sources other than the Service Provider's warehouse, the Publisher will pay to the Service Provider $150 per invoice which will include debt collection unless clause 1.3 is applicable.
...
THE SECOND SCHEDULE
Services in the Territory
...
3. Receive returns and prepare all necessary documentation relating to such returns.
4. Receive orders from the Publisher, its agents or direct from the Customer.
5. Invoice, pick Publications, pack and despatch, and deliver orders.
6. Record, administer and invoice back orders and subscription orders.
7. Maintain records in the Service Provider's sales ledger and credit control.
8. Collect and allocate cash to the appropriate sales ledger accounts.
...
11. Provide sufficient information with respect to sales, returns, credits and adjustments, and inventory transactions in the Service Provider's standard form as set out in the Seventh Schedule.
..."
Relevantly, the sixth schedule includes:
"Major Chains
The major chain accounts and respective sales representatives by product line are as follows:
Account Name
Calendar Product
Book & Gift Product
Angus & Robertson Co
Publisher
Service Provider
Angus & Robertson Franchisees
Service Provider
Service Provider
Australia Post
Publisher
Publisher ..."
In evidence were copies of invoices sent to customers by or on behalf of Pan. An example (Ex B, p 628) was an invoice issued by Macmillan to Angus & Robertson on 9 July 2010. It included the following note:
"Under Macmillan's Sales Terms, Macmillan retains property in the Goods until full payment is received.
In the event you default on payment of any individual Invoice or on the total debt you owe to Macmillan, Macmillan reserves the legal right to enter your premises and repossess the Goods".
In Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 Bathurst CJ (Macfarlan, Meagher JJA agreeing) said:
"52 The principles underlying the construction of written contracts are well established and it is not necessary to deal with them at length. A contract is to be construed by reference to what a reasonable person would understand by the language in which the parties have expressed their agreement having regard to the context in which the words appear and the purpose and object of the transaction: Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22]; Toll (FGCT) Pty Limited v Alphafarm Pty Limited [2004] HCA 52; (2004) 219 CLR 165 at [40]; International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151 at [53]. At least in the case of ambiguity, resort can be had to the surrounding circumstances known to the parties in interpreting the particular provision: Codelfa Construction Pty Limited v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 352; Western Export Services Inc v Jireh International Pty Limited [2011] HCA 45; (2011) 282 ALR 604."
In Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99, pp 109-110 Gibbs J said:
"It is trite law that the primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another. If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, "even though the construction adopted is not the most obvious, or the most grammatically accurate", to use the words from earlier authority cited in Locke v. Dunlop, which, although spoken in relation to a will, are applicable to the construction of written instruments generally; see also Bottomley's Case. Further, it will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument. Finally, the statement of Lord Wright in Hillas & Co. Ltd. v. Arcos Ltd., that the court should construe commercial contracts 'fairly and broadly, without being too astute or subtle in finding defects', should not, in my opinion, be understood as limited to documents drawn by businessmen for themselves and without legal assistance (cf. Upper Hunter County District Council v. Australian Chilling and Freezing Co. Ltd.)."
In construing an agreement preference is given to a construction which supplies a congruent operation to the various components of the whole (Wilkie v Gordian Runoff Ltd [2005] HCA 17; (2005) 221 CLR 522, par 16). The proper approach to be taken requires that its several provisions be considered in the context of the whole, and not in isolation.
Consideration
The amount in issue, $909,835.78 is the amount invoiced by Pan to entities within the Calendar Club for the sales of calendars. As the relevant entities have been placed in external administration it is not anticipated that the invoices will ever be paid. Under clause 2.1 Global retained all responsibility for the sales. Global claims that under clause 1.2 First Schedule, Pan is required to assume the risk of bad debt for all sales of publications including the sales of the calendars, regardless of whether Global retained responsibility for such sales. Pan denies liability, essentially on the ground that, upon its proper construction, the application of clause 1.2 First Schedule is confined to sales to customers as defined, being those to whom publications are sold and distributed by Pan in accordance with the agreement. Pan argues that as it was not responsible for the sales it was not required to assume the bad debt risk for them.
Pan's submissions were along the following lines. The requirements of the first schedule should be read harmoniously with clause 2.1 which provides for the division of functions between, and the allocation of responsibility for sales to, the parties. It was put that under clause 2.1 Pan is appointed to provide the defined services. Pan is also appointed as the primary sales representative for sales of publications to retail book stores, whilst Global retains responsibility for all sales to wholesale customers, and for sales of calendars to the major chains listed in the sixth schedule. It is put that the expressions "responsibility for all sales" and "all responsibility for sales of calendars" should be understood to involve the carriage of the transactions, including the bearing of any loss or bad debt arising from the default of Global's customers.
It was then put that the First Schedule contains the mechanism for calculating the amount Pan is required under clause 6.7 to pay Global in respect of sales of the publications. The amount is referred to in clause 1, as the "Net Payment" which is the "Net Sales Turnover" less specified charges. "Net Sales Turnover" means "Gross Sales Turnover less any credits given to customers", and "Gross Sales Turnover" means all sums invoiced by Pan to customers in respect of the publications. Incorporated in these terms is the word "Customer" which means "all persons to whom the Publications are sold and distributed by [Pan] including Major Chains in accordance with this Agreement". Thus it was put that the net payments to be made by Pan are to be calculated with regard to the net sales turnover which relates to sums invoiced to customers to which Pan has both sold and distributed the publication. It was put that the various provisions of the First Schedule (particularly clauses 1 and 2) should be understood as applicable to invoices for only those sales for which Pan itself had responsibility. It followed that as it was Global, not Pan, which was responsible for sales of calendars (clause 2.1) invoices for sales made by Global were not relevant to the amount of the net payment, although Pan may have distributed these products as part of the services. Senior Counsel for Pan summarised its case this way (T p 113, ll 19-24):
"...the reality is your Honour that this is a one line case. Sole sales responsibility for all calendars means exactly what it says. And Pan [sic: apparently a mistake for Global] simply cannot, in the face of that allocation, eke out of the context a clause in there for a different purpose regulating the position governed by the first schedule to say that by some bizarre and happenstance outcome it is able to shift the risk of bad debts from its customers to its own distributor."
For Global it was submitted that in clause 1.2 First Schedule, except in the case of a rejected account under clause 1.3, the phrase "will assume all risk of bad debt for all sales of publications" should be given its ordinary, unambiguous meaning which is to require the assumption of bad debt risk for all sales, regardless of the allocation of responsibility for the different categories of sales under clause 2.1. It was put that in clause 2.1 the scope of the responsibility for sales to wholesale customers, and for calendars, allocated to Global should be understood to be confined to the sending out of sales representatives, marketing, and negotiating trading terms and, under this agreement, did not extend to the completion of a transaction under which title was transferred to a customer. It was put that the words on which Pan relied had no bearing on Pan's obligation to make payments to Global under clause 6.7 and the First Schedule, or as to which party bears the risk of bad debts.
It was submitted that support for this interpretation is found in clause 6.7 and the First Schedule which require Pan to pay the amount due in respect of all sales irrespective of the party responsible for them, calculated with reference to the sums invoiced by Pan to customers as defined. The language of clause 1 and clause 2 of the First Schedule shows that Pan's obligations are in respect of all sales of publications, which is consistent with the operation of clause 7 by which ownership of the publications vest in Pan when the customer is invoiced, and, accordingly, with the definition of the term "Customer".
It was put that Pan's obligation to pay Global under clause 6.7 and clause 1 of the First Schedule is the same irrespective of which party had responsibility for sales to the customer in question, thus clause 2.1 had nothing to do with the bad debts issue. All customers, irrespective of which party was responsible for sales, were invoiced by Pan. Accordingly, it was logical to define the customer as the person to whom the publications were sold and distributed by Pan. The payment regime under the First Schedule is calculated with regard to the sums invoiced by Pan to customers. It follows, so it was put, that the assumption of risk by Pan provided for in clause 1.2 First Schedule is in respect of bad debt for all sales of publications and, necessarily, for sales made to all customers.
Determination of the central question in this case turns upon the relationship between clause 2.1 and the First Schedule, particularly clause 1.1 and clause 1.2 thereof.
The underlying purpose of the agreement as recorded in recital C is for Pan to sell and distribute the books and other publications of Global on the terms contained in it. The publications, as defined, include all books and calendars currently published, or to be published or distributed by Global in Australia and New Zealand. The term "Customer" means all persons to whom the publications are sold and distributed by Pan including major chains. In my opinion, these provisions evidence the intention of the parties that Pan is to carry out the sale and distribution of all Global's publications.
Under clause 2.1 Pan was appointed as Global's sole and exclusive provider of the services set out in the second schedule for all of its publications, and Pan agreed to provide them. Within the clause a distinction is made between the requirement that Pan provide the services and requirements as to sales activities. Pan is appointed as Global's primary sales representative for sales of its publications to retail book stores, whilst Global retains responsibility for all sales to wholesale customers, and for sales of calendars into the major chains listed in the sixth schedule. It also provides that "the sales activities" of Pan as described are included in the description of services. The sixth schedule lists what are described as "the major chain accounts and respective sales responsibilities by product line" and allocates with reference to each store account which party has responsibility for the sales of calendars, and, separately, for the sales of books and gifts. In my opinion, taken in context, the expressions "responsibility for all sales", "all responsibility for sales", and "sales responsibilities" in clause 2.1 and the sixth schedule should be understood to refer to the ordinary sales activities which would be undertaken by a sales representative acting for the parties in, for example, marketing the product, and negotiating terms. This, in my opinion, gives a common sense operation to the clause by which, in substance, Pan is appointed as the representative for sales to bookstores, whilst Global continues to represent itself for sales to other customers. It follows, in my opinion, that these activities or responsibilities were not intended to extend to, or involve, the completion by one party or the other of the sales transaction with a customer. As the provisions earlier referred to make plain, Pan undertakes to effect the sale and distribution of all Global's publications irrespective of which party undertook the associated sales activities. As the following analysis shows, this interpretation is congruent with the operation of other relevant provisions of the agreement.
The arrangement proceeds on the basis that Global will ensure that sufficient quantities of the publication are delivered to Pan to enable it to provide the services (clause 8.2). Until delivered to Pan's warehouse, risk of loss or damage to the publications will be borne by Global; upon delivery such risk will be borne by Pan which becomes responsible for insuring the publications against loss or damage (clauses 5.1, 5.2).
By clause 7 it is provided that each publication remains vested in Global until such time as it is invoiced by Pan to the customer. Thereupon title vests in Pan as owner. Risk and title passes from Pan to the customer when the customer has paid for the publication in full or has sold and disposed of it in the ordinary course of business. Relevantly, clause 19 provides that no relationship of employer and employee, principal and agent, or a partnership or joint venture between the parties is created by the agreement.
The services which Pan agreed to provide (second schedule) in respect of orders include invoicing, packing and despatching, and delivery (par 5); the maintenance of records in its sales ledger, and credit control (par 7); and the collection and allocation of cash to appropriate sales ledger accounts (par 8).
The operation of clause 7 has the effect that all publications are to be taken as having been sold and distributed by Pan irrespective of which party acted as sales representative for the transaction. Upon the issue of the invoice to the customer title passed from Global to Pan. Global no longer owned the publication. Pan became the party by which the sale and transfer of ownership to the customer is completed, and to which the amount invoiced is payable. Pan, not Global, is the creditor to which the customer is liable, and title remains vested in Pan until the customer has paid in full, or sold and disposed of the publication in the ordinary course of business. The terms of the invoice referred to in par 10 above is an example of the practical application of this clause.
Under clause 6.7, Pan is required to pay Global in respect of sales of the publication in accordance with the first schedule. As its language is unqualified, the scope of the obligation may be reasonably understood to require payment for all sales of all publications.
Clause 1 First Schedule requires payment of an amount referred to as the net payment which is a sum calculated with regard to all sums invoiced by Pan to customers in respect of the publications (the gross sales turnover) less any credit given to customers. Clauses 1.1, 1.2 and 1.3 First Schedule establish a comprehensive and detailed scheme for credit control, collection, and the assumption of risk of bad debt. Their terms are expressed in ordinary and unambiguous language.
Clause 1.1 relates to the management by Pan of the complete credit and collection cycle for the sale of the publications (defined to mean all publications). Pan's obligations include matters involving the maintenance of credit limits, the control over accounts, and the administration of the credit and collection process.
Relevantly, clause 1.2 provides:
"Except as provided in clause 1.3, the Service Provider will assume all risk of bad debt for all sales of Publications."
The phrase "all risk of bad debt for all sales of Publications" should be given its natural and ordinary meaning. Having regard to the definition of "Publication" it is evident that the risk of bad debt extends to the risk for all sales of all publications. The only qualification to the extent of the risk is the exception provided in clause 1.3.
Clause 1.3 is in respect of rejected accounts, which are those to which Pan refuses to extend credit, or has put on credit hold. In these circumstances the effect of the sub-clause is that Global has the right to sell publications to a rejected account and, if it elects to do so, it will assume the credit risk and the pro-rata collection costs associated with any orders placed after it became a rejected account.
In my opinion the regime under clauses 1.1, 1.2, 1.3 operates harmoniously with clause 7 whereby the parties have intended that, when invoiced, the customer becomes liable to Pan, not Global, as the creditor. Furthermore, the effect of clause 19 establishes that Pan is collecting and receiving payment on its own behalf, and not as agent for Global. Nothing in the agreement envisages the exercise by Global of control over credit policies, credit limits, or that it undertakes account management or credit control in respect of sales for which it is responsible under clause 2.1. Once it is understood that Pan is the party to which invoiced sums are to be paid, and that all customers when invoiced become indebted to Pan, it is consistent with commercial commonsense that the parties have agreed for Pan to assume all risk of bad debt.
For these reasons, contrary to Pan's submissions, and with regard to the terms of clause 2.1, I find no support for the proposition that the application of clauses 1 and 2 of the first schedule, particularly clause 1.2, should be confined to customers to which Pan has both sold and distributed the publications.
Accordingly, I hold that under clause 1.2 First Schedule Pan is required to assume the risk of bad debt for all sales of publications, including the sales of calendars invoiced to Calendar Club the subject of Global's claim in these proceedings.
Conclusion
I propose to make declarations in terms of those sought in the amended summons namely:
(1) A declaration that upon the proper construction of the sale and distribution agreement dated 8 May 2008 (agreement) the defendant must pay to the plaintiff the amounts determined by clause 6.7 and the First Schedule of the agreement without any deduction for bad debts other than in circumstances where the defendant has first given reasonable written notice of a rejected account pursuant to clause 1.3 of the First Schedule and the plaintiff elects to sell to that rejected account.
(2) A declaration that the defendant was not entitled to deduct or retain the sum of $909,835.78 from the payment made to the plaintiff pursuant to clause 6.7 of the agreement on or about 14 December 2011.
I also propose to order judgment for Global in the amount of $909,835.78.
The parties are directed to bring in short minutes to give effect to these conclusions. As the questions of interest and costs remain outstanding, absent agreement, the parties should have the opportunity to make submissions on these issues. Accordingly, the parties are directed to arrange with my associate by 4pm 12 December 2012 for the matter to be relisted for the purpose of hearing any argument.
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Decision last updated: 10 December 2012
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