GMA Garnet Pty Ltd & Anor v Barton International Inc

[2010] HCATrans 275

[2010] HCATrans 275

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Perth  No P23 of 2010

B e t w e e n -

GMA GARNET PTY LTD (ACN 009 344 227)

First Applicant

GARNET INTERNATIONAL RESOURCES PTY LTD (ACN 081 244 715)

Second Applicant

and

BARTON INTERNATIONAL INC (ARBN 009 475 138)

Respondent

Office of the Registry
  Perth  No P24 of 2010

B e t w e e n -

BARTON INTERNATIONAL INC (ARBN 009 475 138)

Applicant

and

GMA GARNET PTY LTD (ACN 009 344 227)

First Respondent

GARNET INTERNATIONAL RESOURCES PTY LTD (ACN 081 244 715)

Second Respondent

Applications for special leave to appeal

GUMMOW J
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

AT PERTH ON THURSDAY, 21 OCTOBER 2010, AT 10.33 AM

Copyright in the High Court of Australia

__________________

MR D.M.J. BENNETT, QC:   May it please the Court, I appear with my learned friend, MR J.A. THOMSON, for the applicants in P23 and the respondents in P24.  (instructed by Freehills)

MR B. DHARMANANDA:   If the Court pleases, I appear for the respondent in P23 and the applicants in P24.  (instructed by Clayton Utz)

GUMMOW J:   Is it convenient for you to deal with your application and your response to the cross‑application or would you prefer to do it sequentially?

MR BENNETT:   No.  Your Honours, we have agreed, subject to the Court’s view, that the two should be heard separately.

GUMMOW J:   Very well.

MR BENNETT:   We disagree on which should go first.  Without spending time on it, your Honour, we submit it is just more logical ‑ ‑ ‑

GUMMOW J:   You are listed first so you get on with it.

MR BENNETT:   If your Honour wishes me to go first I will.  The first matter to appreciate, your Honours is that the grant or refusal of special leave in either ought not to affect the grant or refusal of special leave in the other.

GUMMOW J:   Yes, we understand that.

MR BENNETT:   Yes.  They are completely separate issues.  Your Honour, it is convenient in P23 to start with the leading authority and then to take your Honour to the provisions of the contract.  The leading authority, of course, is Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 and it is the first case in our volume of authorities. The passage which is relied on is in the judgment of Justice Mason, as he then was, at page 607. Your Honours will see at point 3 of the page it is said:

But it is common ground that the contract imposed an implied obligation on each party to do all that was reasonably necessary to secure performance ‑ ‑ ‑

GUMMOW J:   Performance of what, though?  Its terms?

MR BENNETT:   That is the issue, your Honour.  He cites the passage from Mackay v Dick and then says this – this is the key passage, your Honour:

It is not to be thought that this rule of construction is confined to the imposition of an obligation on one contracting party to co‑operate in doing all that is necessary to be done for the performance by the other party of his obligations ‑ ‑ ‑

GUMMOW J:   Of his obligations?

MR BENNETT:   Yes, not to be confined to that.  That is supported by the statement of Chief Justice Griffith in Butt v M’Donald:

“It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract.”

That is put by way of contrast with performance of obligations.

CRENNAN J:   Something additional.

MR BENNETT:   Yes, your Honour.  His Honour then says in a passage which partially explains it:

It is easy to imply a duty to co‑operate –

at one extreme, we interpolate -

in the doing of acts which are necessary to the performance by the parties or by one of the parties of fundamental obligations –

At the one extreme it is easy where it is necessary to the performance of fundamental obligations then, and we interpolate at the other extreme, it is not so easy to make the implication where the act is necessary to enable the other contracted party to a benefit but not essential to the obligations and not fundamental.

CRENNAN J:   How does this relate to the complaint about blending?  Is it said that blending somehow deprives.

MR BENNETT:   Yes, your Honour.

CRENNAN J:   Yes.  Is related to a deprivation of the benefit in relation to the contract, is that how the argument goes?

MR BENNETT:   Yes, your Honour.  That is how the argument will ultimately go.  His Honour has put in this paragraph beginning, “It is easy” two extremes and said in the one, fundamental obligations it is easy; in the other, benefits, not so easy.  He does not deal with the middle case of obligations that are not fundamental.  Let me just show your Honours how this passage is dealt with.  First, the error in dealing with it appears at page 200 of volume 1 in paragraph 171 in the judgment of the plurality.  This is after dealing with some other arguments:

Finally, there is no scope for the appellants’ –

That is us –

submission that Barton was under a duty to cooperate to deliver the benefit of the Supply Agreement to GMA in accordance with the reasoning in Secured Income.  That implied duty only arises in aid of a right provided by the contract.

GUMMOW J:   What is wrong with that?

MR BENNETT:   The passage says that it is a general rule that ‑ ‑ ‑

GUMMOW J:   I think it is put against you, Mr Bennett, that what you are trying to do is to eke out from the Secured Income Case some principle that will enable you to imply a term which you could not imply under the ordinary rules of implication of terms.

MR BENNETT:   Yes, your Honour.  In a case where there was an express statement ‑ ‑ ‑

GUMMOW J:   …..you could not say that the parties would have agreed this.

MR BENNETT:   No, but in a case where there is an express statement of contractual purpose which presumably is there for a reason, not only in the contract but in the head contract ‑ ‑ ‑

CRENNAN J:   Do you mean the aspirational aspects of ‑ ‑ ‑

MR BENNETT:   Yes, your Honour.  Your Honour uses the word “aspirational” but it is a clear statement of purpose which we submit is there for a reason and it is easy to imply terms and support of that type of matter than otherwise.  Of course here, what it is pitted against is an implication because if your Honours go to the ‑ ‑ ‑

GUMMOW J:   We are talking about 4.2, are we not?

MR BENNETT:   Yes, your Honour.  Now, 4.2 is at page 305 of volume 2.

GUMMOW J:   The opening words of 4.2 explain the reason for the grant of a concessional rate.

MR BENNETT:   I am sorry, your Honour, I have the wrong clause.  I am sorry, 2.5, which is the previous page.  If your Honours go to 2.5 on page 304 your Honours will see, after setting out some obligations which really arise in my learned friend’s application, the last sentence says:

The Buyer must not use the GMA Garnet name or logo on, or in connection with, the distribution or sale of any garnet which is not 100% Product –

That on its own might give rise to a negative implication that blending is permitted because it suggests that there may be some product which is not 100% product.  It is that negative implication which has to be pitted against the express statement of purpose at the beginning of ‑ ‑ ‑

GUMMOW J:   It is an exception to the grant in the immediate and preceding sentence?

MR BENNETT:   Yes, in one sense it is an exception to the grant.  In another sense it is a separate obligation, but whatever it is it does not expressly say that one can blend.  What it says is that – it seems to imply that there may be blended garnet and how it is to be dealt with if it is.

GUMMOW J:   The grant.  The concluding words of the sentence “and the Seller grants”.  If the grant is necessary to effect the obligation to brand, is it not?

MR BENNETT:   Yes, it is, your Honour.  It is an exception to that.  What is done against us is to take from the exception to the grant an implication that one can blend, which otherwise is not prohibited, I accept that, and then to say that means you can avoid the whole benefit conferred by the purpose in clause 4.2 by blending everything and then you totally avoid the obligation to brand and defeat the purpose in 4.2.  That is the way we ultimately get there.

May I just return to Secured Income. It is significant to see how – we say that there is an error in the paragraph at page 200 but we also say that the respondent makes a totally different error in construing what Justice Mason says and that appears at page 247 of volume 2 where your Honours will see that what they say is that in paragraph 32:

(c)a distinction must be drawn between obligations which are fundamental under a contract and contractual benefits which are not fundamental to the contract . . . 

(d)there is an implied obligation to do all that is necessary so that fundamental obligations under a contract are performed . . . 

(e)if a contractual benefit is not fundamental to the contract, the question of whether there is an implied obligation to co‑operate to ensure that the contractual benefit is obtained depends on the intention of the parties -

It sets up a false comparison between, again, the two extremes, without dealing with the middle but it is a different way of dealing with Justice Mason’s passage.  We have two different ways put up of dealing with it.  We say one reads it in accordance with its terms and that it says what it says about benefit.  That is an important matter.  It is an important passage which arises regularly in contract cases.  The case raises it squarely because one has to see whether an express statement of contractual purpose in relation to the conferring of a benefit overrides an implied negative implication in an exception.  That raises it squarely.

There is a short discussion of the principle by your Honour Justice Gummow in a case called Service Station Association Ltd v Berg Bennett (1993) 45 FCR 84, which is at tab 2 of volume. Your Honour there refers to the passage in Secured Income with approval and then gives an example from a New York case where there was an obligation to provide all of a particular by‑product in manufacture to the other party and the question of whether one could avoid that by simply ceasing manufacture.

GUMMOW J:   The big debate, I think, in 1993 was as to good faith requirements, was it not?

MR BENNETT:   Yes, that is a separate aspect, your Honour, which does not arise in this case.  That is the first and the major special leave point which we rely on.  The second one concerns the use of surrounding circumstances.  Here, again, the rule is clearly expressed in Codelfa Construction v State Rail Authority (1982) 149 CLR 337 at 352. That is case 3 in our volume. Your Honours see that Justice Mason, as he then was, expressed what he describes as “The true rule” at point 2 on page 352. He says:

The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning.  But it is not admissible to contradict the language of the contract when it has a plain meaning.  Generally speaking facts existing when the contract was made will not be receivable . . . unless they were known to both parties, although, as we have seen, if the facts are notorious –

and so on.  That principle has been under attack recently in a number of State courts.  I will not take your Honours to the cases in detail but the case which sets out the controversy most clearly is a case called Franklins Pty Ltd v Metcash Trading Ltd.  I hand to your Honours copies of that, if your Honours wish it.

GUMMOW J:   What is the citation, Mr Bennett?

MR BENNETT:   It is (2009) 264 ALR 15. As far as we can find, it does not seem to be in the New South Wales Law Reports. What that case does is to analyse in some detail some recent High Court cases and say in this case there was not much of an ambiguity and in that case there was not much of an ambiguity. Therefore, there is no longer a requirement for ambiguity. That appears at pages 24 to 25, paragraphs [14] to [18]. Your Honours see the heading “The lack of need for ambiguity before resort is had to legitimate surrounding circumstances”.

Now, none of the High Court says they cite, and I will not take your Honours to it, say that but they are cases where they look at the contracts and say, in effect, “Well, we do not find much of an ambiguity there”.  They say in [17] none of those cases discussed the tension referred to in the passage in Codelfa.  That is the approach that has been taken in New South Wales.

In Western Australia the Full Court in an unreported case called Home Building Society Ltd v Pourzand [2005] WASCA 242 - all that is relevant there is that the court said there is doubt about it at paragraph 26 where, having referred to the cases I have just mentioned, they say:

There remains some uncertainty as to whether evidence of surrounding circumstances can be used as an aid to the interpretation of a contract only if it is ambiguous.

There is a discussion about it.  What we say here is this, we put it as a dilemma.  Either that is wrong, the remarks of Justice Mason in Codelfa remain the law, or if they are right and you do not need ambiguity any more there is a real tension between that and the statement, the mantra if one likes, that one cannot use surrounding circumstances to contradict the terms of the contract.  If there is no ambiguity that is all one can be using it for.

GUMMOW J:   How does this bear upon the construction of this clause here, this controversy which you see?

MR BENNETT:   Because, your Honour, at page 238 of volume 2 the respondent sets out the three circumstances – the three surrounding circumstances – which led it not to conclude that the statement of purpose in 4.2 had the effect for which we contended.  The first was a concern by the parties that Barton would not undertake to be a distributor – I am sorry, that is the second.  The first is the concern that there might be a breach of the Trade Practices Act in relation to restricting sale into particular countries and the third, that in the past there had been cases where there had been blending for niche applications.  I will not take your Honours to this in the application for time reasons.  In paragraph 44 of our submissions we show why each of those is not particularly obvious.

The question is, to what extent can one look at that sort of surrounding circumstance not to construe an ambiguity but to alter, to remove in this case, the express statement of purpose.  We submit that you

cannot do that.  The case is a good vehicle for it because the statement of purpose is so clear.  Now, the legal problem is this.  If one says that one can use extrinsic evidence where there is no ambiguity, one is necessarily allowing it to be used to contradict the express terms of the contract.

GUMMOW J:   Suppose the Full Court did not really need this supplementary material to support its conclusion – suppose its conclusion was correct, anyway, as to the construction of 2.5.

MR BENNETT:   Your Honour, if that were the case the point would not arise but it arises on the case as it stands at the moment.  The same applies to the third and minor issue concerning damages.  All I want to say about that is that if one got – the two lower courts did not to deal with damages because they found against us on this issue.  If the Court was in our favour it would be a simple matter to remit it for that.  It involves a question of law as to which of two measures is appropriate in this case and there is no dispute about quantum.  The dispute is about which of the two is appropriate.  For those reasons, your Honours, we submit that this is an appropriate case for leave on one or both of the two points, particularly the first one.

GUMMOW J:   Thank you.

MR DHARMANANDA:   Thank you, your Honour.  Your Honour, clause 4.2 of the supply agreement simply does not impose any contractual obligation on BII, as I will call my client, to market the garnet in North America, nor does the clause confer any contractual benefit on GMA.  The clause, in its first sentence, simply contains a joint acknowledgement of the wish to promote distribution of garnet in North America, that wish being GMA’s wish, Mr Bennett’s clients.  Clause 4.2 also confers a contractual benefit on my client.  It provides that my client can get concessional prices for up to 50,000 tonnes per financial year if BII ships the garnet to and discharges the garnet in North America.

So even though there might be a significant issue which requires this Court’s deliberations on the width of what Justice Mason said in Secured Income, GMA’s argument as to obligations under clause 4.2, in our submission, simply did not get off the ground because it records nothing more than an aspiration, as the Full Court put it.  It is recording an acknowledgement of a wish.  It does not generate contractual rights or benefits.

That is so because there is simply no benefit contractually asserted in the clause.  Instead, the right conferred by clause 4.2 is on my client and that right was a part of the consideration that my client was to receive in the break up of the partnership between BII and GMA’s holding company, GIRL.  When my client’s 50 per cent interest was sold to GIRL the garnet mine was sold for $18 million together with this supply agreement where we were to receive concessional prices for the long term until 2017.

So nothing in the supply agreement indicates that the consideration that BII had to provide for concessional prices under the clause, clause 4.2, was the acceptance of an obligation to market product in North America.  There are further points that support that construction.  If my clients fail to ship and discharge the only consequence is that they have to repay the difference between the prime customer price and the concessional price and that is expressly provided in clause 7.3 of the contract and that is at application book 311 to 312. 

Hence, any suggestion that an obligation should be implied and imposed on BII to market the garnet in North America simply does not have a foothold in the opening words of clause 4.2 and that idea is in fact inconsistent with clause 7.3.  To suggest that the obligations in clause 4.2 have to be read harmoniously, and this is a point made in the applicant’s submissions at paragraph 20 on page 256, that is one thing.  That may be accepted, but harmony does not supply a reason for inferring an obligation which does not exist into clause 4.2.

The content of any obligation under clause 4.2 is not shaped by the obligation to brand under clause 2.5, another limb in my friend’s argument.  Clauses 2.5 and 4.2 operate in quite different circumstances.  In particular, clause 2.5 imposes a branding obligation even with product that is not shipped and discharged in North America and even if product is not bought at concessional prices and that is the subject matter of clause 4.2.  Clause 2.5 imposes an obligation in certain limited circumstances.  Clause 4.2 gives my client a right rather than an imposing obligation.  It does not impose an obligation in terms.

The fact that BII can blend product and then distribute it indicates that the parties did not objectively intend to impose any obligation to market product on my client because on blending BII cannot brand and that is the implication that arises from clause 2.5, which my friend has accepted.  Once it is understood that BII can wholly avoid branding product by blending all the garnet with other garnet it is all the more clear that clause 4.2 does not create a contractual benefit or assert a contractual purpose, whatever that concept might entail.

The fact that the principal agreement and the supply agreement were negotiated with the express aim of avoiding competition law implications makes it plain why no marketing obligation was imposed.  That is set out in our submissions.  Now, if I can come ‑ ‑ ‑

CRENNAN J:   That is going to surrounding circumstances.

MR DHARMANANDA:   It is, your Honour, but I will come to that point in a moment.

CRENNAN J:   Yes.

MR DHARMANANDA:   If I could turn to Secured Income.  In Secured Income Justice Mason did not draw a distinction between contractual obligations and contractual purposes.  That is, in our submission, a misreading of what Justice Mason said.  What his Honour said was that if a contractual entitlement or benefit is not fundamental it is a matter of considering the contract to see if the parties manifested an intention to require the other contracting party to impliedly do what was reasonably necessary to ensure that that non‑fundamental benefit, if I can put it that way, was received.

The starting point is contractual construction, not the imposition of terms by an application and we would say a false application of what Justice Mason said in Secured Income.  So the principle is not that whenever there is an identified contractual purpose the law imposes obligations for those purposes to be fulfilled regardless of the contract’s express terms.  That is why in the case that my friend has already referred to, in Service Station Association v Berg Bennett, Justice Gummow held that it is impossible to use as a springboard the implied obligation to co‑operate, to impose obligations that the parties simply did not agree.

In Wigand, the case that my friend has also taken you to, the relevant contractual benefit was the right to get the by‑product from beer production.  That was the heart of the contract.  That was the subject matter of the contract and it was for that reason that the court said that that contractual entitlement had to be given effect to and their production could not be stopped so that the by‑product was not deliverable to the contracting party.

That is entirely different from the imposition of an obligation to market when that is not an obligation generated by the contract at all.  An acknowledgement by both parties of one party’s wish does not require contractual obligations to be supplied to oblige the other party to perform obligations to make the wish come true.  Secured Income simply does not go that far. 

If I could deal with the surrounding circumstances point.  There are just three short points that I need to make here.  First, the task of construction is approached objectively but in context.  The background and the purpose are objects of the transaction and are relevant to that objective inquiry.  The idea that surrounding circumstances should be confined to matters that a reasonable person would regard as obviously relevant is without merit, in our submission, for a number of reasons.

First, the approach fails to appreciate the task of construction is determined objectively but in context and in that regard could I refer to Justice Brennan’s judgment in Codelfa (1982) 149 CLR 337 which is in the applicant’s bundle at tab 3. If I could take your Honours to page 401 around about point 3 in the second paragraph, the third sentence:

The meaning of a written contract may be illuminated by evidence of facts to which the writing refers, for the symbols of language convey meaning according to the circumstances in which they are used.

Context is always relevant to the objective inquiry of contractual construction. 

Secondly, your Honours, on this point, the test of obviousness that is postulated by my friends is difficult to apply and that is in itself a reason for it not being an acceptable test for one can ask what features of a particular surrounding circumstance makes that particular background fact relevant to the construction process?  Why is that an obvious fact and why are other facts not obvious?  In any event, in relation to a point that Justice Gummow raised, the Full Court reached its conclusions without regard to the background facts and ‑ ‑ ‑

GUMMOW J:   This appears at paragraph 156?

MR DHARMANANDA:   At paragraph 155 and 156, your Honour, yes.  Last, your Honours, if I can deal quickly with the damages and restitutionary question.  The first point to be made is that was not the subject matter of any discussion either in the court below or by the trial judge.  Our submission is the true measure of loss flowing from a breach of any obligation to market is lost flowing from that breach.  The measure of damages is not the benefit received by my client in apparent return for the promise to market. 

So if the aim of damages is to put the party in the position as if the breach had not been committed, that position would not be reached by ordering the repayment of the difference between the prime price and the concessional price.  Damages would be properly calculated by reference to what loss, if any, GMA suffered by reason of a failure to market the product in North America.  Last, on the restitutionary front, even if it were accepted that restitution can sometimes be claimed ‑ ‑ ‑

GUMMOW J:   Restitution of what?

MR DHARMANANDA:   Their proposition is, as I apprehend my friend’s argument, restitution of the benefit we received by reason of the concessional price, so the difference between prime price and the concessional price.  Our submission is that even if one could get ‑ ‑ ‑

GUMMOW J:   Some notion of profit, is it?

MR DHARMANANDA:   The assertion is that the gain that we received ought not to be kept by us because we breached the contract.  That is the assertion.

CRENNAN J:   By not marketing, selling and distributing in North America.

MR DHARMANANDA:   Precisely, your Honour.

CRENNAN J:   Yes.

MR DHARMANANDA:   Our answer to that is, even if you accept restitution would be available in that contractual situation, Rothmans ‑ ‑ ‑

GUMMOW J:   It would have to be an action for money had and received, would it?

MR DHARMANANDA:   Yes, your Honour, but Roxborough v Rothmans (2001) 208 CLR 516 on which my friends rely, that case enables the money had and received claim to be made if and only if the relevant consideration is severable. In this case, the facts of the case are that the entitlement under clause 4.2 to get concessional prices was indeed part of the consideration that my clients received for parting with 50 per cent share in the garnet mine through the shareholding. So it is not possible to segregate out the benefit that we allegedly received in breach of contract and say that that is capable of being recovered as a money had and received claim. May it please your Honours, those are our submissions.

GUMMOW J:   Thank you.

MR BENNETT:   If your Honours please.  In relation to my friend’s first and last point which is this apportionment of the consideration, can I just remind your Honours that at page 284 in volume 2 in the principal agreement which covered a number of agreements including this one, 2.3(a) provides:

that it is the composite transaction evidenced by the Settlement Documents that reflects the consideration –

One cannot take one bit here and one bit there and say the concessionary price is in consideration of the transfer of the interest.  It is everything for everything.  While I am on that page I should also show your Honours that the reference to us wishing “to promote distribution” appears at 2.3(b) on page 284 in the principal agreement as well as in 4.2 of the main agreement. 

My learned friend submits that looking at 2.5 and 4.2 together there is no relationship.  The point simply is that the purpose of promoting distribution of product in North America is completely unachieved if it is not branded in some way.  Obviously, if one just sells a bulk product there is no promotion of the particular source.

In relation to the second point, so far as obviousness is concerned, we propound that test as a means of revolving the tension between, on the one hand saying, as the recent cases suggest, you do not need ambiguity any more and on the other hand saying, but you cannot contradict the written contract.  There is a tension there and our suggestion fits very comfortably with the law of implied terms because that is really what one is doing.  If one looks at surrounding circumstances, to add or subtract something or change something that is not in the contract or it is not a case of ambiguity, then one is very close to the law of implied terms.  The reference to obviousness and the officious bystander fits comfortably with that closeness.

Finally, in relation to the damages matter I do not want to debate that on the special leave except to say this that in Bowen Investments which is in our volume of authorities, I think at tab 4, there is a reference to the fact that - the mere fact that damage to one party does not flow from a breach or cannot be quantified from a breach is not a licence to the other party to commit the breach.

Here we submit it is a clear case where the apportionment of restitution is appropriate.  It is easy to apportion.  Clause 4.2 says because we want to get the reputation in North America we are giving them this discount in the product that goes to North America.  If they then say but because of the implied negative implication in the exception to 2.5, we can blend, then of course they totally avoid that and so we submit it is clearly severable.  Those are the submissions in reply, your Honours.

GUMMOW J:   Thank you, you proceed to the second application.

MR DHARMANANDA:   Your Honour, clause 2.5 is to be found at page 304.  Clause 2.5 of the agreement provides that in certain specified and limited circumstances BII has to brand 100 per cent product with the GMA Garnet name and log.  BII was given a non‑exclusive license to use that name and logo for that purpose.  Clause 2.5 does not, expressly in its terms, impose any obligation on BII to package garnet before it is sold or distributed, and that point is important, hence both of the constructions which are apparently open as to the proper construction of clause 2.5 arise as a matter of imputation of contractual intention or by implying an obligation that is not express.  The two available constructions are first, the clause obliges BII to brand if, when 100 per cent product is distributed or sold, the product ‑ ‑ ‑

GUMMOW J:   Just look at the opening words of 2.5:

All garnet purchased under this Agreement and distributed or sold by the Buyer –

It does not say to whom.

MR DHARMANANDA:   It does not, your Honour.

GUMMOW J:   No.

MR DHARMANANDA:   What our submission in relation to that is, “distributed or sold” carries with it the idea that it is distributed or sold to ultimate customers.

GUMMOW J:   I know.  It is not what it said.

MR DHARMANANDA:   But in our submission, because the obligation is a branding obligation, there would be little or no point to require a party to brand if there is an internal sale where there is no retraction of any third party customer.  The commercial purpose of the provision is to present the product to ultimate buyers.  That is our submission on that.  Your Honour is perfectly correct; the object of the obligation is not specified expressly.

CRENNAN J:   Why is not the purpose simply GMA has the purpose that Barton has the obligation for branding rather than, say, GMA itself?

MR DHARMANANDA:   Yes, your Honour, but one still, in our submission, has to determine what is the commercial object of that?  GMA does not want branding for branding’s sake, in our submission; GMA wants branding so that, in line with my friends have been saying, and contrary to what we say, about the connection between clauses 2.5 and 4.2, so that there is a marketing benefit received.

CRENNAN J:   So that there is indicia in the course of trade, but you can have trade at all different levels, of course.

MR DHARMANANDA:   You can, your Honours, but in our submission, what it does not target is an internal trade, if I can put it that way.

CRENNAN J:   Why not?  I mean you could have a chain of distribution which involves internal sales and somewhere down the track you get sales in the open market.

MR DHARMANANDA:   A reason for that, your Honour, is that in this case ‑ ‑ ‑

GUMMOW J:   You see normally you might expect that the seller will want to, as the originator, make sure that the mark is put on then.

MR DHARMANANDA:   From the start, yes, your Honour.

GUMMOW J:   This is some relaxation in that system.

MR DHARMANANDA:   Yes, your Honour, but the point I was going to make is a finding of fact of was made that as at the time of the entry into this agreement it was well understood that the relevant marketer was not BII, the applicant, but rather its related entity, BMC, and, in our submission, that is highly relevant to the question as to what objectively the parties intended.  That finding, your Honours, is at application book 42 at paragraph 132. 

So, in our submission, on its proper construction, the clause does not impose a packaging obligation.  It imposes a branding obligation so that the clause imposes an obligation to brand 100 per cent product when that product is distributed or sold in packaged form.  There are a number of reasons for that which are covered in our submissions and they include these. 

First, GMA Garnet under the supply agreement can be purchased in bulk, and when purchased in bulk the prices are cheaper.  Secondly, garnet is an industrial product capable of sale in bulk, as the sale from GMA to my client…..itself demonstrates.  The clause is limited in scope; it only applies when 100 per cent product is distributed or sold so, in our submission, the clause does not operate when 100 per cent is distributed or sold in loose bulk form and the clause does not operate when 100 per cent product is the subject of an internal sale from BII to BMC, the entity that was known to be the entity that distributed the garnet in North America.

The Full Court purported to apply the principles in Butt v M’Donald (1896) 7 QLJ 68 at 70 to 71, namely that there is an implied obligation that a party to a contract must ensure that the other party does what is required to ensure contractual benefits are received by the other and those findings are made at page 182 paragraphs 98 to 101 and also Justice Buchanan, application book 214 to 215, paragraph 209. The Full Court said that this meant that BII was required to package 100 per cent product before distributing or selling such product. In our submission that was a misapplication of Butt v M’Donald as approved by Justice Mason in Secured Income.

It is important to understand the precise scope of the principle in Butt v M’Donald.  In that case what was held was that the seller of the butcher shop, having agreed to sell what was effectively a fixture, could not later say that because they were fixtures the sale could not be effected.  The relevant contractual benefit was expressly the entitlement to the fixture, and an implication was made as to title.  That is far removed from an imposition of an extra contractual obligation purportedly by the application of Butt v M’Donald.  The first question is always whether such a benefit is within clause 2.5. 

The principle that a party must do what is reasonably necessary for the other party to receive contractual benefits has to be understood with some precision, in our submission.  The principle does not permit the conferring of new contractual benefits by implication on the basis that the new contractual benefit is necessary for an existing narrower contractual obligation to be fulfilled. 

If the express contractual obligation is narrow, Butt v M’Donald will not supply what is a missing larger or different obligation.  Here, the express obligation was an obligation to brand 100 per cent product with the GMA Garnet name and logo.  There is no express obligation to package product first.  The principle from Butt v M’Donald cannot supply the obligation that is missing, so in our submission the Full Court erred in using Butt v M’Donald to supply that extra contractual obligation.

The reason why, and I think my friend and I are on idem on this point, the reason why this is a special leave issue is that the proper boundaries and scope of Butt v M’Donald, as picked up by Justice Mason in Secured Income, needs authoritative articulation by this Court. Further, given clause 2.5’s focus on product identification to ultimate customers, and that was indeed the subject of a finding by the court at paragraph 48, page 170, it was not intended to apply, in our submission, to internal sales in bulk from BII to its related entity, BMC. The commercial object of clause 2.5 was identification to ultimate customers.

A proposition that clause 2.5 is construed properly by limiting its operation to BII and not to BMC on the basis that there would be some disincentive to unbag garnet once it is packaged by BII in accordance with clause 2.5, in our submission fails, and that is the point made by the Full Court at paragraph 51, page 170.  In our submission, that proposition fails for these reasons.  Once it is seen that that parties knew that BMC would distribute or sell to ultimate customers, it is incorrect to identify a would‑be disincentive as a sufficient explanation for the confined construction of the clause.  The parties would not have proceeded on the basis of such an indirect disincentive, but would objectively have intended that BMC would brand.

GUMMOW J:   These were parties not, one might say, with a history of co‑operation between themselves.

MR DHARMANANDA:   No, your Honour.

GUMMOW J:   What is the significance of that?

MR DHARMANANDA:   Your Honour, the significance of that is that in relation to this clause ‑ ‑ ‑

GUMMOW J:   It might be thought that they were meaning to be held to the words that were hammered out, and that was it.

MR DHARMANANDA:   Yes, your Honour, that is why there is the rectification claim that was made for once it is seen that both parties knew that BMC was the marketer, or the distributor, or seller of the product, then in our submission, an error might have been made in the clause and that is how we would put it in response to your Honour’s question. 

As to the disincentive argument there would be simply be no disincentive if my friends are right and the clause only bites at the BII level and not further, for if BMC, the distributor or seller, received an order for bulk product, or for blended product, then it would simply sell in bulk, or blend and sell, destroying the object of clause 2.5.  So in our submission, the construction put on the clause by the Full Court simply increases costs without meeting its commercial object. 

Another point put against us is that BMC is a separate corporate entity.  We accept that, but that is not the point; the issue still remains that the parties manifest an intention that the obligation to brand would apply on an internal sale from BII to BMC.  In our submission, the answer is no, once it is accepted that the object of the clause was to ensure product identification in the eyes of ultimate customers. 

There is a separate point on that.  Also a sale or distribution by – and that is the word used in the clause – the buyer, includes, in our submission, a sale using the related entity, BMC.  In that event, did the parties

objectively intend that the clause would be breached on a sale by the vehicle used to effect distribution?  In our submission, no. 

A catchcry was used in the court below that “all” in clause 2.5 means all and that is why the construction that my friends contend for is correct.  In our submission, the word “all” cannot and does not mean everything sold or distributed because clause 2.5 is expressly qualified so that only particular garnet, namely 100 per cent product, when sold or distributed, has to be branded.  So it is narrower than the “all” that opens the clause.  Secondly, the use of the word “all” in the clause does not indicate that all 100 per cent product, when sold in loose bulk, has to be branded.  The use of the word “all” does not indicate that the parties agreed that an obligation to package was imposed on BII. 

Also the fact that the clause permits blending of garnet before sale or distribution, in our submission, indicates that the obligation to brand in the clause could easily be avoided and that is an indication that the clause was not objectively intended to impose a wider obligation implicitly requiring all of the product to be packaged, branded and sold. 

Your Honours, on rectification, the point is a very narrow one and it is simply that on the pleaded case and in the material that we have put on in tabs 4 and 5, the pleadings are before your Honours, but the effect of our submission is, on the pleaded case, on the facts pleaded by the applicants, they pleaded a common continuing intention which BII admitted relevantly.  It was too late for them to then abandon that admitted fact and that is why the Full Court erred in saying that the rectification ordered by the trial judge should not have ordered.  May it please your Honours, those are our submissions.

GUMMOW J:   Yes, Mr Bennett.

MR BENNETT:   If your Honours please.  Your Honours, on the first point in relation to packaging, we would submit it is a very simple application of the ratio of Butt v M’Donald.  It is nothing to do with purpose; it is to perform a contractual obligation.  If I agree to sell a real property and I do not own it, obviously I have to get it in.  Now, one can put it in two ways.  One can say there is an implied obligation on me to acquire that real property so I can pass title to the other party, or one can say, no the only obligation is to transfer the real property and if I try and say in answer, “I cannot because I do not own it”, the replication to that answer is, “Well, you can get it in by buying it”.

It can be done either way, either as an implied term or as saying it is not an excuse, but here the clause specifically says that in certain cases there has to be branding.  Everyone agrees that you cannot brand unless it is packaged.  You cannot brand individual grains, everyone agrees on that, and that is said in a number of places.  It is obvious.  Therefore, an obligation to brand where some of the product is not packaged must mean there is an obligation to package and brand.  It is a straight application of the ratio of Butt v M’Donald and we submit that is very simple, very straightforward and really virtually incontestable.

My friend sort of conflates Butt v M’Donald by talking about contractual benefits. This is not concerned with the contractual benefit aspect.  It is concerned with the express term aspect.  The second aspect of my friend’s argument concerns the obligation to brand where it is sold to the co‑subsidiary and, as in the first case, we just say, well “all” means all; that is the word.  My friend says “all” does not mean all because it does not apply to blended product, but if one reads 2.5, what it says is:

All garnet purchased under this Agreement and distributed or sold by the Buyer which is 100% Product –

The frame of reference is only 100 per cent product, that is unblended product, and the obligation in relation to that product is “all”.  “All” is to be branded, which we say involves bagging as well, and it applies whosoever you sell it to, and I will not let this application take your Honours to all the cases about corporate veils and so on, but there are many cases where different companies in groups just have to be treated as separate companies and we will mention a few of those on the appeal if it becomes necessary, but it is an obvious proposition.

My friend relies on the fact that we knew that product was going to be sold to BMC, but the answer is so what?  The rectification claims have both fallen away for different reasons; no one proved any continuing intentions about that and ours failed, as it should have, at the trial, and there was no appeal ‑ ‑ ‑

GUMMOW J:   Is rectification still alive on the application against you, as you understand it?

MR BENNETT:   I do not think it is covered in my friend’s grounds, I am not sure.  But we would say both were clearly correctly rejected.  There were different claims, of course.  Our rectification claim said there is still an obligation on BII when it sells to BMC to brand, but there are also two obligations.  One is to ensure that BMC does not unbrand and the other is, if it breaches the first obligation and sells it to BMC unbranded, it has an obligation to ensure that BMC brands.  That was our rectification.

We did not prove continuing intention.  We failed as we should have.  We did not appeal against that.  My friend seems to suggest that in some

way a failure to appeal against something is changing the facts and seeking to argue something that was not argued below and so on.  That is just not the case, particularly when it is appreciated that we always said, at trial and on appeal, that BII had an obligation to brand on sales to BMC, and that is just not inconsistent with knowing that sales are to BMC.

Indeed, if the parties know that all sales are going to be to BMC, the facts do not go quite that high, but if they went that high that would be all the more reason for saying the parties have expressly said if BII sells.  So they have expressly covered the precise situation.  In answer to the question your Honour asked earlier, my learned friend is correct ‑ ‑ ‑

GUMMOW J:   I think at page 260.

MR BENNETT:   At 264 one of his grounds of appeal is that the ‑ ‑ ‑

GUMMOW J:   Yes, (4) and (5).

MR BENNETT:   Yes.  Really there is nothing of any general importance in relation to that or, indeed, into any of my learned friend’s points.  They are all specific to the contract and to the specific facts.  For those reasons, your Honour, we submit that (a) the points are clearly wrong and (b) there is nothing special about them, and for both reasons, special leave to my friend should be refused.

GUMMOW J:   Thank you.  We will take a short adjournment.

AT 11.36 AM SHORT ADJOURNMENT

UPON RESUMING AT 11.41 AM: 

GUMMOW J:   As for application P23/2010 our conclusions are as follows.  With respect to the construction of clause 4.2 of the supply agreement dated 31 March 2005, the subject of this special leave application, the Full Court of the Federal Court correctly held that the text was expressed in the language of aspiration rather than any legal obligation upon which there could then operate the statement of principle in Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 607 to 608. The result was that the respondent did not act in breach of clause 4.2 by blending the garnet supplied by the seller.

This conclusion respecting clause 4.2 did not depend upon consideration of the surrounding circumstances and common understandings.  Accordingly, there is no occasion for consideration by this Court of Franklins Pty Ltd v Metcash Trading Ltd (2009) 264 ALR 15 and Home Building Society Ltd v Pourzand [2005] WASCA 242. Special leave is refused with costs.

As to application P24/2010, the applicant contests the construction placed upon clause 2.5 of the supply agreement.  There is insufficient reason to doubt the construction given that provision by the Full Court and to doubt the treatment by the Full Court of the rectification issue to warrant a grant of special leave.  Accordingly, special leave is refused with costs.

AT 11.44 AM THE MATTERS WERE CONCLUDED