Hamilton v Simeon Wines Ltd

[2011] SADC 195

DISTRICT COURT OF SOUTH AUSTRALIA

(Civil)

HAMILTON & ANOR v SIMEON WINES LTD & ORS

[2011] SADC 195

Judgment of His Honour Judge Lovell

21 December 2011

CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - HARSH AND UNCONSCIONABLE CONTRACTS AND STATUTORY REMEDIES

Whether plaintiffs who issued proceedings claiming a partnership loss without the consent of the other partners had standing to continue with the action - whether defendant had power to amend the contract from "time to time" - whether amendments purporting to apply for the Vintage Year 2006 had to be made before 30 September 2005 - whether the adoption by the defendant of an "end use" pricing scheme such that grape prices were reduced amounted to unconscionable conduct pursuant to s 51AA and s 51AC of the Trade Practices Act. Assessment of damages for breach of contract.

Held: 1) The plaintiffs had "standing" to bring the claims. 2) The defendant breached its contract with the plaintiffs. Damages assessed at $103,850 for the loss to the partnership. 3) The plaintiffs claims relating to unconscionable conduct dismissed.

Sale of Goods Act 1895 (SA) s 8; Trade Practices Act 1974 (Cth) s 51AA, s 51AC, referred to.
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337; Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99; McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; March v E and MH Stramare Pty Ltd (1991) 171 CLR 506; Sellars v Adelaide Petroleum NL (1994) 179 CLR 332; Malec v JC Hutton Pty Ltd (1990) 169 CLR 638; Blomley v Ryan (1956) 99 CLR 362 at 415; Fry v Lane (1885) 40 Ch D 312; Micarone v Perpetual Trustees Australia Ltd (1999) 75 SASR 1 at 708; Commercial Bank of Australia v Amadio (1983) 151 CLR 447; Australian Competition and Consumer Commission v Samton Holdings Pty Ltd (2002) 117 FCR 301; Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51; Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (No 2) (2000) 96 FCR 491; Australian Competition and Consumer Commission v Allphones Retail Pty Ltd (No 2) (2009) 253 ALR 324; Hurley v McDonald's Australia Ltd [1999] FCA 1728; Australian Competition and Consumer Commission v 4WD Systems Pty Ltd (2003) 200 ALR 491; Bropho v Human Rights & Equal Opportunity Commission (2004) 204 ALR 761; Burger King Corporation v Hungry Jack's Pty Ltd (2001) 69 NSWLR 558; Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; Thompson v Palmer (1933) 49 CLR 507; Je Maintiendrai Pty Ltd v Quaglia (1980) 26 SASR 101; Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298; Hungerfords v Walker (1989) 63 ALJR 210; Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653; Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64, discussed.

HAMILTON & ANOR v SIMEON WINES LTD & ORS
[2011] SADC 195

Background

1. The plaintiffs, Mr and Mrs Hamilton were partners in the Golden Heights Partnership. The partnership carried on the business of grape growers at a vineyard of 129 hectares near Waikerie in the Riverland of South Australia. Mr and Mrs Hamilton were entitled to one half of the share of the assets and income of the partnership. At the relevant time the other partners were the third and fourth defendants. The second defendant, Golden Heights Pty Ltd, conducted the business of the partnership. It acted as nominee and manager on behalf of all the partners.

2. The first defendant (Simeon) was a publicly listed company. It conducted a grape purchasing, grape crushing and wine making business.

3. The defendant entered into a contract with Golden Heights Pty Ltd to purchase each year, at a price to be determined each year, the grapes from the Waikerie property.

4. The plaintiffs allege that in the vintage year 2006 the defendant breached its contract with Golden Heights Pty Ltd as a result of which they suffered loss and damage. They also alleged that the value of their partnership interest was reduced.

5. Further and in the alternative, the plaintiffs allege that the defendant acted “unconscionably” in its dealings with Golden Heights Pty Ltd (and other growers) and they suffered loss and damage consequently.

6. The first defendant denied breaching the contract or acting unconscionably.

7. The other defendants were joined in the action for reasons described later in this judgment.

   Witnesses

8. There was no issue of credibility in relation to any witness. All witnesses did their best to tell the truth. I accept the evidence of all the witnesses unless I specifically say to the contrary. Generally speaking the summary of the evidence set out in the judgment are my findings.

   Summary of the evidence

   Evidence of Mark Eric Hamilton

9. The first plaintiff is a legal practitioner and principal of the legal firm Grope Hamilton Lawyers. He is married to the second plaintiff. They conduct a business in partnership with each other called Hamilton’s Ewell Vineyards.

10. Mr Hamilton started practice as a solicitor in 1978 in commercial practice. He described himself as a commercial law practitioner. His experience includes commercial litigation as well as “advising”.

11. In 1991 Mr Hamilton and his wife purchased the Siegersdorf Vineyard in the Barossa Valley and then through 1993 and 1994 purchased a number of other vineyards in the Barossa Valley and also the Eden Valley. In 1997 they purchased land near Naracoorte in South Australia and developed a vineyard. He did not play any role in the management of those vineyards. Some of the vineyards were leased out and the one in the south-east was run by a “contract manager”.

12. For a time the partnership owned a 50 per cent interest in what is known as the Golden Heights Estate partnership, the asset of which was a large commercial vineyard at Waikerie in South Australia. The vineyard has about 126 hectares of vines planted on the Golden Heights Estate having been established in 1997.[1] There were five varieties of grapes grown at the vineyard. The Deed for the purchase of the vineyard was signed on 24 December 2004 and settlement took place around late June 2005. Eventually the partnership disposed of its interests in the Golden Heights vineyard, settlement occurring on 31 May 2006. The Hamilton partnership funded the acquisition through a finance facility arranged with the ANZ Private Bank. Documents relating to the finance facility were contained within Exhibit P4.

    [1]    T 230.

13. By the time the Hamilton partnership bought into the vineyard, Golden Heights had a number of contracts for the sale of wine grapes to wineries. They had a contract with Banksia Wines (now part of the Lion Nathan Group), one with Taylors Wines at Auburn in the Clare Valley and one with Simeon Wines which later became part of McGuigan Simeon. The percentage of the vineyard grapes that was contracted to Simeon Wines was in the vicinity of 60 per cent.[2] Mr Hamilton said that he had been supplied with copies of those contracts at the time he purchased his interest.[3]

    [2]    T 230.

    [3]    T 122.

14. Around October 2005, the Hamilton partnership had a direct ownership or interest in around 1000 acres of vineyards. It formed the view that it should reduce the vineyard interest and as a result the partnership decided to sell its interest in Golden Heights Estate, it having only settled on that some months beforehand. Mr Hamilton made contact with Mr Michael Tilley who he knew had previously expressed an interest in owning Golden Heights Estate or an interest in it. Having contacted Mr Tilley to ascertain whether he had any interest, he spoke to his co-partners Mr Bill Marschall and Mr Peter Falcinella. It was initially agreed by the Golden Heights partnership that the whole vineyard could be sold to Mr Tilley. Mr Marschall was the person nominated to carry out the negotiations with him. As part of the negotiations, information was sent to Mr Tilley regarding the vineyard.[4]

    [4]    Exhibit P1 page 270.

15. Just before Christmas 2005, Mr Hamilton was informed that the negotiations with Mr Tilley on behalf of the whole partnership had not been successful. As a result of that, Mr Hamilton was invited by the other partners to sell his interest to Mr Tilley if he wished.[5]

    [5]    T 83.

16. Mr Hamilton made contact with Mr Tilley and met him over the Christmas period. The meeting occurred on 27 December 2005 at a café in North Adelaide.[6]

    [6]    T 84.

17. Mr Hamilton said that at the meeting, after some negotiations, they agreed on a price for the whole of the vineyard of $6.2 million; this meant that Mr Hamilton’s partnership interest of 50 per cent was $3.1 million. The vineyard was the only asset of the partnership. Mr Hamilton said that he and Mr Tilley “shook hands” after the price was agreed.

18. A Deed had been prepared in draft form on behalf of the partnership prior to Mr Hamilton negotiating direct with Mr Tilley for the sale of his 50 per cent share. On 3 January 2006, Mr Hamilton emailed Mr Tilley and enclosed an updated draft Deed.[7]

    [7]    Exhibit P2 pages 323-324.

19. The draft Deed contained a gross assumed value of the partnership interest in the sum of $3.1 million.[8] A copy of the email along with the draft Deed was also sent to Mr Costley a business associate of Mr Tilley’s.[9]

    [8]    Exhibit P2 page 328.

    [9]    Exhibit P2 page 337.

20. It was suggested to Mr Hamilton that, at the meeting of 27 December 2005, Mr Tilley had indicated that he and Mr Costley were interested in negotiating for the purchase of the 50 per cent interest but that they were only prepared to do so on the basis that it would involve a price struck by reference to a lesser value than the previous negotiations. Mr Hamilton did not believe that Mr Tilley said that.[10] Mr Hamilton was clear that Mr Tilley never put price expectations to him. It was suggested that, in that context, Mr Tilley had put a figure of $6.2 million, it being a figure less than what he and Mr Costley had been prepared to pay the previous year. Mr Hamilton denied that.

    [10]   T 139.

21. Mr Hamilton stated[11] that he had been told by Mr Marschall on Friday 23 December, that the last figure that he had put to Mr Tilley for the whole of the property was $6.5 million and that Mr Tilley had told him that they would not pay that amount for the whole property. He was mindful of that discussion when he spoke with Mr Tilley. Mr Hamilton put a figure of $6.35 million, Mr Tilley put $6.1 million and they agreed on $6.2 million and shook hands. Mr Hamilton stated that he would prepare a Deed reflecting what had been agreed and would deliver it to him, which he did within the next day or two. Mr Hamilton agreed that he knew Mr Tilley was negotiating on behalf of both himself and Mr Costley. He was aware that they had worked closely together and held other investments in the same industry. As far as Mr Hamilton was concerned the price was not something that was left for further negotiation.[12] He denied that Mr Tilley had indicated to him that Mr Costley was to run the final numbers and work out a final price. He believed that both Mr Costley and Mr Tilley had information available to them, namely as at 27 December 2005, in terms of forecast income. Mr Hamilton’s position was that Mr Costley had inspected the property and obtained information, most likely from Mr Falcinella or perhaps Mr Marschall, about the property and its income.

    [11]   T 140.

    [12]   T 141.

22. It was suggested to Mr Hamilton, looking at Exhibit P2 page 340, that draft financial accounts of the partnership were requested. Mr Hamilton thought what was more relevant was the yields that the vineyard had achieved over time rather than the financial accounts of the partnership. He thought that the financial accounts from the entity were not going to actually tell you anything that the purchaser did not already know and that it was not a prediction as to the future but rather a statement of past performance.[13]

    [13]   T 144.

23. Mr Hamilton was taken to an email from Mr Lee of Fisher Jeffries dated 14 February 2006, requesting information of the 2006 grape prices payable under the respective grape supply contract. Mr Hamilton agreed that a purchaser would want to know what the grape pricing was before settling under a contract and agreed that it was information that was “highly relevant to the operation of the vineyard”.[14] However he did say he regarded Mr Tilley and Mr Costley as formally locked into the sale price. He said he did not expect there to be any further negotiations on the price after 27 December 2005.[15] He agreed that he did not assert when Mr Costley and Mr Tilley attempted to actually negotiate on the price that there was any legal bar to them doing so.

    [14]   T 147.

    [15]   T 147.

24. After receiving the Deed mentioned earlier, Mr Costley responded to Mr Hamilton by email of 10 January 2006 and informed him that a copy of the Deed had been sent to their solicitors, namely Fisher Jefferies. Mr Costley also requested financial statements for the company in partnership as at 30 June 2005 and an updated “Quick Book” file for the period 1 July 2005 to 31 December 2005. Mr Costley also requested the name of the banker for Golden Heights.[16]

    [16]   Exhibit P2 page 338.

25. By email dated 10 January 2006, Mr Hamilton responded with the information requested.[17] On 18 January 2006, Mr Hamilton sent an email to Mr Costly that related, in part, to the preparation of the Deed. By this time neither Mr Costely nor Mr Tilley had raised any issue in relation to the figure of $6.2 million.

    [17]   Exhibit P2 page 344.

26. Mr Hamilton retained Mr John Kerr of Capital Strategies Pty Ltd to act on his behalf. He was a financial advisor to Mr Hamilton. By letter of 17 January 2006, Mr Costley communicated with Mr Hamilton regarding a number of outstanding matters and that letter was sent to Mr Kerr on 18 January 2006. The letter from Mr Costley to Mr Hamilton discussed the agreement between Mr Tilley and Mr Hamilton regarding the purchase price.[18] Mr Costley noted that the accounts for the partnership showed that the Commonwealth Bank of Australia debt to be greater than that initially conveyed to Mr Costley.

    [18]   Exhibit P2 page 351.

27. Mr Kerr became involved in the negotiation process. Mr Tilley retained the Adelaide law firm Fisher Jeffries to act for him. Mr A Lee was the solicitor involved.

28. On 27 January 2006, the defendant sent a letter to Golden Heights Estate Pty Ltd enclosing the year’s Vintage Price Advice.[19] The Vintage Price Advice referred to the concept of “end use” pricing. The partners of Golden Heights Estate Pty Ltd had a telephone conference about the matter.[20] As a result of receiving the Vintage Price Advice, Golden Heights responded by a letter which is, in effect, undated.[21] It is likely to have been sent before 5 February 2006.[22] Simeon Wines responded to that letter by correspondence dated 6 February 2006.[23]

    [19]   Exhibit P2 page 367.

    [20]   T 98.

    [21]   Exhibit P2 page 384.

    [22]   Exhibit P2 page 388.

    [23]   Exhibit P2 page 391.

29. On 5 February 2006, Mr Hamilton received a spreadsheet from Mr Falcinella relating to financial estimates for the 2006 vintage and the projected grape income. He had expressly requested Mr Falcinella to update the projected grape income taking into account what Simeon were saying they would pay for the grapes and specified in the Vintage Price Advice 2006.

30. Mr Hamilton said that he had received the 2006 Vintage Price Advice. Precisely when he received the document was not clear but it is likely that Mr Hamilton looked at a copy of it some time between 28 January 2006 and 6 February 2006.

31. On 14 February 2006, Mr Hamilton received an email from Mr Lee, solicitor at Fisher Jeffries, requesting copies of all correspondence from the three contracted wineries. Mr Falcinella sent that material to Mr Hamilton by fax dated 14 February 2006.[24] This information was supplied to Mr Lee of Fisher Jeffries.

    [24]   Exhibit P2 page 406.

32. On 17 February 2006, Mr Kerr sent an email to Mr Hamilton attaching a further draft of the Deed of Sale, the draft being dated 16 February 2006. The draft at that stage contained no change to the gross value of the partnership.[25]

    [25]   Exhibit P2 page 426.

33. Although it is not entirely clear as to when the material relating to the three contracted wineries was received by the prospective purchasers, a meeting was organised between Mr Tilley and Mr Kerr. Mr Kerr reported to Mr Hamilton once that meeting had been completed.

34. He advised Mr Hamilton that the prospective purchasers would no longer purchase the interest in the vineyard based on an assumed vineyard gross price of $6.2 million due to the lower than expected income due from McGuigan Simeon.[26]

    [26]   T 101.

35. A letter dated 24 February 2006 was sent to Mr Kerr by Mr Costley offering a “once only and final offer” based upon an all inclusive property valuation of $5.5 million less the fixed debt owed to the Commonwealth Bank of Australia at 30 April 2006. Mr Hamilton accepted that offer on behalf of his partnership. The acceptance was done by way of email from Mr Kerr to Mr Costley and Mr Tilley dated 24 February 2006.[27]

    Financing

    [27]   Exhibit P2 page 452.

36. As a result of the revised price and the amount owing to the Commonwealth Bank of Australia, the final price paid to Mr and Mrs Hamilton was $1.03 million. That amount was deposited into a premium cash management account with the ANZ by way of two deposits, the first being 31 May 2006 and the second 6 June 2006.

37. It was put into this account as an “offset account” until such time as the fully drawn advance which had been the method of financing the interest was rolled over. The account was paid out when the commercial bill was repaid partly using these particular funds and partly using a new fully drawn advance.[28]

    [28]   Exhibit P4 pages 56 and 57.

38. In addition, Mr Hamilton received some funds by way of income from the sale of grapes. Bank statements reveal that the sum of $140,000 was received and banked into the business loan account at the ANZ for Mr and Mrs Hamilton in the sum of $140,000.[29] In relation to that particular account, interest was charged monthly and Mr and Mrs Hamilton paid that from another account on a monthly basis. The money was taken from the trading account of Hamilton Vineyards which had an overdraft facility attached to it and it was this account which was used to pay the business loan account mentioned previously.

    [29]   Exhibit P4 page 59.

39. On 3 October 2006, Mr Hamilton received a further cheque for $140,000 being for the September grape income payment and he applied this to the business loan mentioned earlier. [30]

    [30]   Exhibit P4 page 61.

40. Eventually the business loan account was closed and the balance then outstanding (27 July 2007) was paid out by a further draw down on a fully drawn advance.[31] From that time on, interest was paid from his working overdraft on the fully drawn advance which included other borrowings. The interest was generally paid from Mr Hamilton’s overdraft facility as I mentioned earlier, but that changed in about September 2009 when that overdraft account was closed and Mr Hamilton, since then, has been transferring money into the account to meet the interest from a different account.[32]

    [31]   Exhibit P4 pages 65 and 110.

    [32]   T 108.

41. Under cross-examination Mr Hamilton conceded that, due to his involvement generally with vineyards, he was aware that grape prices throughout South Australia over the period from 1991 to 2005 varied quite widely.[33] Mr Hamilton made the point that the wine market is broken into segments and the grape prices from super premium wine to premium to commercial down to base commercial differs.

    [33]   T 113.

1. Mr Hamilton was aware that in the Riverland prices generally were declining, although his recollection was that in the 2004 vintage there were adequate prices to make a reasonable return on investment with a commercial style operation like the Golden Heights Vineyard. He was further aware that in February 2005, there was disputation between the grape growers and Simeon Wines in relation to the Vintage Price Advice.[34]

   [34]   T 120.

2. Mr Hamilton conceded that he knew that McGuigan Simeon was predominately a bulk wine producer but that it was attempting to build its branded sales. It had recently purchased Chateau Yaldara in the Barossa Valley. He agreed that branded and bottled wine commanded a higher per litre price in the market than bulk wine did. However, when questioned about whether wine sold for branded sales rather than bulk wine had an impact on the price of grapes to be paid, Mr Hamilton stated “the major determinate of grape pricing is the law of supply and demand not the individual wine makers ability to achieve a price point”.[35]

   [35]   T 125 line 9.

3. Mr Hamilton said that the expression bulk wine was not a satisfactory one. He said that it was a shorthand way of describing wine but it does not reflect necessarily on the quality of the wine that is being sold.

4. Mr Hamilton agreed that in the contract that Golden Heights had with Taylors Wines[36] the document itself says that “the grower intends to produce on the land specified … quality wine grapes and to sell them to Taylors Wines for use in the production of quality wine”. However, when questioned as to whether he knew the grapes being supplied to Taylors were to a different segment of the market than grapes supplied to Simeon’s, Mr Hamilton replied “No”.[37]

   [36]   Exhibit P1 page 32.

   [37]   T 123.

5. Mr Hamilton agreed that the Taylors’ contract contained a clause that had bonus payments.

6. Mr Hamilton accepted that he read the contract between Golden Heights and Simeon prior to purchasing his interest in the partnership. It appears that he did not study the Growers’ Manual.[38] The first time he saw the Growers’ Manual for the 2004/05 season was at a later time in 2008. Mr Hamilton stated that Mr Peter Falcinella managed the partnership affairs and he resided in Waikerie near the vineyard. He understood that in 2005 prices were a market driven price. He thought it was based on the law of supply and demand for grapes of the variety that they were selling to Simeon.

   [38]   T 130.

7. Mr Hamilton denied receiving the letter from the defendant to Golden Heights notifying of certain changes to the Growers’ Manual.[39] As at Christmas 2005, Mr Hamilton said nobody had notified him of suggested changes to the contract or the Growers’ Manual. No-one brought any proposed changes to his attention at that time.[40]

   [39]   Exhibit P1 page 225.

   [40]   T 133.

8. It was suggested to Mr Hamilton that part of the rationale for his partnership wanting to quit investment in Golden Heights in the second half of 2005, was a concern about grape prices and therefore the financial return on their investment. Mr Hamilton denied that that was a driving factor and as Mr Hamilton put it, it was “low on the pecking order”.[41] He stated that in the end they sold two vineyards and no more.

   [41]   T 137.

9. Mr Hamilton agreed that because of his knowledge of the interest and indeed an earlier offer made by Mr Tilley and Mr Costley regarding the Golden Heights interest, he saw them as potential acquirers of his interest.

10. In re-examination the position regarding the institution of these proceedings was discussed. Mr Hamilton stated that he drew the Statement of Claim and at a subsequent time the Statement of Claim was amended. Mr Hamilton stated that he had counsel retained when the first one was settled and also when it was subsequently amended although it was different counsel. He agreed that he issued the proceedings before sighting the correspondence from McGuigan Simeon which is undated but alleged to be October 2005, proposing the initial amendments to the Growers’ Manual 2005/06.[42]

    [42]   T 154.

    Evidence of Stephen John Costley

11. Stephen John Costley is a chartered accountant having obtained his qualification in 1980. He conducts his own accounting practice called DNK Taxation Business which amongst other things is involved in advising clients in the grape growing and vineyard industry. Currently Mr Costley has a 25 per cent interest in the Golden Heights Estate through associated entities. He, along with Mr Tilley, has interests in other vineyards and he is also involved with other investors.

12. Mr Costley stated that in 2004, he and Mr Tilley lodged an offer to purchase the Golden Heights Vineyard which they regarded as a blue chip investment. By that he meant a good quality vineyard that was efficiently run. It had good infrastructure and solid contracts to purchase the grapes. In particular Mr Costley was impressed by Mr Falcinella who managed the vineyard. At the time that he was initially interested in the vineyard he valued it at around $6.5 to $6.6 million.

13. In or about December 2005, he and Mr Tilley became aware of the fact that there was an opportunity to acquire the vineyard. Having obtained from Mr Marschall some information and then discussing the matter with Mr Tilley, he was still of the view that the investment was viable and that an offer should be made.[43] In particular, he had regard at that time to a document sent to him by Mr Falcinella which estimated the likely grape income for 2006.[44] Having reviewed the information, he was of the view that the value of the vineyard was around $6.3 million.[45] This was founded on an assumption of grape revenue of around $1.4 to $1.5 million.

    [43]   Exhibit P1 page 270ff.

    [44]   Exhibit P1 page 281.

    [45]   Exhibit P1 page 285.

14. Mr Costley said he received a letter by email from Mr Hamilton of 3 January 2006, and this letter confirmed the purchase price on a valuation of $6.2 million for the vineyard and enclosed a draft Deed of Sale of Partnership Interests.[46]

    [46]   Exhibit P2 page 323.

15. On 10 January 2006, Mr Costley emailed Mr Hamilton requesting further information as follows:-

    1      Financial statements for the Company & Partnership @ 30^th June 2005.

    2      Updated quick book file for the period 1^st July 2005 to 31^st December 2005.

    3      Contact with CBA, name and phone number.

16. Even though he had previously had some information, he wanted the information to close the gap between 2004 through to December 2005. He received that information from Mr Hamilton also on 10 January 2006. Mr Costley indicated that he intended to have discussions with the Manager of the Commonwealth Bank seeking clarification as to the current outstanding debts of the business.

17. On 17 January 2006, Mr Costley sent a letter to Mr Hamilton setting out a number of issues that still needed to be resolved. The second page of that letter[47] confirms the purchase price for the value of the whole of the vineyard at $6.2 million, but notes that the CBA debt had increased by $600,000 thus changing the net value of Mr Hamilton’s interest. It was around this time that Mr Costley retained Mr Lee from the legal firm Fisher Jeffries to act on his behalf.

    [47]   Exhibit P2 page 351.

18. Mr Costley received information from Golden Heights Estate regarding the potential prices for the 2006 vintage. He was aware that Simeon Wines had contracted to take over 60 per cent of the Golden Heights grapes.

19. Having received what was in effect the 2006 Vintage Price Advice from Simeon Wines in addition to the information from the other two wineries, Mr Costley recalculated the likely income for the Golden Heights partnership. He then performed a number of calculations.[48] He sent a memo to Mr Tilley enclosing a copy of the calculations.[49]

    [48]   Exhibit P2 page 441.

    [49]   Exhibit P2 page 440.

20. The recalculations (referred to as a cash summary) indicated that grape revenue would reduce by $400,000 on what they had assumed. He indicated in the memo that the reduced income could lead to the property “struggling to generate enough to meet existing operating [sic].”

21. Mr Costley stated in the memo, “Gross revenue reduced by one-third and will most probably continue into the next three years or so. Valuation of property must also reduce”.

22. The new calculations did not affect Mr Costley’s view that the vineyard was “blue chip”.[50] The new figures related to the short term viability.

    [50]   T 166.

23. The last part of the memo stated, “Could be potential at purchase price less the $1m, including all purchase costs and legal fees”. This referred to the purchase price referred to in the earlier correspondence of $6.2 million less $1 million. He was suggesting the property should be valued at $5.2 million.[51]

    [51]   T 166.

24. Mr Costley then had a telephone discussion with Mr Kerr. As a result of the discussion, Mr Costley sent the letter dated 24 February 2006 to Mr Kerr.[52] It referred to a “once and final offer” of $5.5 million.

    [52]   T 166, Exhibit P2 page 449.

25. The letter emphasised that there was a reduction in “gross grape proceeds of $400,000”. This in turn would have had an affect on the value the bank would put on the property.[53] Mr Costley had discussed the proposal with the bank who regarded it as “blue chip” with a good manager.

    [53]   T 167.

26. Mr Costley said that if Simeon had terminated its grape contract he would not have proceeded at that time with the acquisition.[54]

    [54]   T168.

27. Mr Costley said that the earlier calculations prepared before Mr Tilley spoke with Mr Hamilton had worked on the figure of $1.498 million for “revenue”. He considered the revenue figure important in any calculation of the amount he “might be prepared to pay for the vineyard”. It was relevant to the calculation of the “return on investment” figure which was one of the “key criteria” from his point of view.

28. Mr Costley did not consider that Mr Tilley would have committed him to a price at the meeting that Mr Tilley had with Mr Hamilton. Mr Costley did not consider that a decision was reached until the “legal contracts were in place”. It was his expectation that, whatever had occurred on 27 December 2005, he would have the opportunity to “redo” the due diligence and see whether it was a suitable investment.[55]

    [55]   T 172.

29. Mr Costley was aware that he would receive further information to ensure the price for grapes provided in December 2005 could be substantiated.[56] He and Mr Tilley were not acquiring the “income” from the 2006 harvest but the estimates were still relevant. He considered the other contracts when doing his calculations. In coming to his estimate of $1.095 million for the 2007 revenue he allowed for a marginal improvement in grape prices.

    [56]   T 173.

30. Mr Costley was asked in cross-examination to assume a price related to “district weighted average prices” instead of the information they had used to calculate the revenue.[57] On the assumptions contained within the question it would not have changed the action they took. He was re-examined on this topic.[58] He was asked to make different assumptions. He agreed that if there was a greater revenue that would have affected the negotiations.

    [57]   T 182.

    [58]   T 185.

31. Candidly Mr Costley said that the problems with the revenue “fell into our lap in terms of making a price”. He could offer a lower price during “horse trading”.[59]

    [59]   T 186.

    Evidence of Charles McKay Drew

32. Mr Drew has a degree in Agricultural Science and a Masters Degree in Agricultural Economics. He has also obtained a postgraduate certificate in arbitration and mediation. He currently works as an agricultural economics consultant.

33. In early 2006 he was appointed to provide an expert determination in respect of a dispute between Simeon and certain grape growers.[60] To assist in the determination he received materials and produced a report. He met with growers in both the Riverland and the Sunraysia area as part of the process. His report was tendered.[61] It was dated 13 April 2006.

    [60]   T 209.

    [61]   Exhibit P2 page 462.

34. Mr Drew agreed that he received the following documents:

    ·A standard form Grower Contract;

    ·The Simeon’s Wine Growers’ Manual 2005/06 (Manual);[62]

    ·The 2006 Vintage Price Advice.

    [62]   Exhibit P1 page 287.

35. Mr Drew had regard to clause 9.2 of the Growers’ Manual in relation to his appointment.

36. In paragraph 5.2 of his Determination he sets out the basis for his determination. He explained the Table 1 of his report.[63]

    [63]   Table 217.

37. Mr Drew identified material given to him by Simeon.[64]

    [64]   T 218, Exhibit P2 pages 548 and 549.

38. This was information he utilised in forming the opinion that “based on their data the price was reasonable”.[65] He did say there was other material that he had to work through as well.

    [65]   T 218.

39. Mr Drew was asked what he meant by the expression “MSWL can pay for grapes” in his report at paragraph 5.2. He said that he was working back from what the proceeds from the end products were taking off all the processing costs, margins and those sorts of things to determine a price they could reasonably pay for the grapes.

40. Mr Drew said that he relied to an extent on paragraph 9.2 of the Growers’ Manual. He said that 9.2 of the Growers’ Manual focuses on Simeon’s estimates of the market for what Simeon would pay having regard to their assessment of the market for wine grapes and wine. He thought that the focus was on Simeon rather than an overall assessment of the market.[66]

    [66]   T 223.

41. Mr Drew agreed that he met with the growers before formulating his report. He attended a number of meetings both in the Riverland and the Sunraysia area. He received letters, emails and faxes from various growers.

42. Mr Drew wrote a number of reports. His third report was dated 14 June 2006.[67] It was suggested to him that the earlier document that he had referred to was provided to him after he had prepared the first two reports but before he prepared his third report. Mr Drew was unable to be specific. A bundle of documents provided to Mr Drew were tendered by the defendant.[68] He thought he may have received that before preparing the first report.

    [67]   Exhibit P2 page 543.

    [68]   Exhibit D6.

    Evidence of Pietro Giovanni Falcinella

43. Mr Falcinella is a principal of B & P Falcinella Pty Ltd which company has a holding of 25 per cent interest in the partnership of Golden Heights. He conducts the management of the partnership business and was doing so in 2005. This was pursuant to an agreement between the partnership and another company of which he was the principal, namely Bundilla Management Services Pty Ltd. He also was involved in the management of the company Golden Heights Estate Pty Ltd. He was managing that company that 2005 and still does.

44. Mr Falcinella confirmed that the Golden Heights partnership has a vineyard of about 126 hectares of planted vines at Perry Road, Waikerie. He was involved in the vineyard from the start; he began the setup of the vineyard in 1997. Mr Falcinella said that he has been involved in the grape growing industry all of his life.[69]

    [69]   T 230.

45. Mr Falcinella confirmed that as at 2005 they had a number of contracts for the sale of the wine grapes. They had one with Banksia Wines (now part of the Lion Nathan Group). They had one with Taylors Wines at Auburn in the Clare Valley and also one with Simeon Wines. He thought about 60 per cent of their grapes were contracted to Simeon Wines.

46. As part of his management of Golden Heights Estate Pty Ltd he received a letter from McGuigan Simeon.[70] It was undated. He was not sure when he received that letter.[71] The letter referred to an attachment of a “marked up version of the Growers’ Manual”.

    [70]   Exhibit P1 page 225.

    [71]   T 231.

47. Mr Falcinella received the letter of 22 December 2005 addressed to Golden Heights Estate Pty Ltd from Simeon.[72] It appears that he received the document on 28 December 2005. He remembered this letter as it was the one “they responded to”.

    [72]   Exhibit P1 page 282.

48. He received a Growers’ Manual with the letter of 22 December 2005. The letter itself states “amendments are clearly marked on the enclosed version of the Growers’ Manual. The deletions and additions are clearly shown”.

49. Mr Falcinella said that when he saw the Growers’ Manual that had been marked, he was “confused by it all”.

50. Mr Falcinella said “every year there was some changes to the Growers’ Manual”.[73] Changes to the Growers’ Manual were something that had been “an ongoing problem”. He thought the growers had no say in any of the changes. If a grower did not have a contract to supply grapes to someone like Simeon they would have to go to the open market (spot market). There was an oversupply and a seller would be worse off out on the open market.

    [73]   T 235.

51. Mr Falcinella said he had passed the letter of 22 December 2005 to his other partners. He was unsure whether he passed the undated letter on.

52. Mr Falcinella received a letter dated 27 January 2006[74] addressed to Golden Heights Estate Pty Ltd from Simeon Wines. It related to and enclosed a copy of the 2006 Vintage Price Advice.[75]

    [74]   Exhibit P2 page 367.

    [75]   Exhibit P2 page 360.

53. Mr Falcinella drafted a response and as mentioned showed that to his partners Mr Hamilton and Mr Marschall. Copy of the letter that was sent to Simeon Wines was tendered.[76] The date on the letter is incorrect as it was clearly sent before March 2007.

    [76]   Exhibit P2 page 384.

54. A letter of 6 February 2006 from Simeon Wines acknowledges receipt of the letter objecting to the Vintage Price Advice.

55. A meeting was held between the growers and Mr Brian McGuigan at the Loxton Golf Club most likely on 24 January 2006. The letter written by Mr Falcinella refers to that meeting.

56. Following receipt of the letter of 6 February 2006, Mr Falcinella met with Mr Richard Byllaardt the national viticulture manager for Simeon Wines. This was a meeting about the vintage price guide although the topic was only discussed briefly because Mr Byllaardt said that he had no power “to negotiate any further prices and we should actually go to dispute resolution”. That is eventually what occurred.

57. Mr Falcinella identified a statement recording the supply of grapes by Golden Heights to Simeon in 2006.[77]

    [77]   Exhibit P3 page 80ff.

58. Mr Falcinella identified the contract between Golden Heights and Simeon Wines that was on foot in 2005.[78] He agreed that this had replaced a pre-existing contract and he had been involved in discussions and the change in the contractual arrangements with Mr Brian McGuigan. Mr Falcinella said in return for some litigation being discontinued further there was a change in the contractual arrangements and Simeon had agreed to those changes. One of the changes involved Simeon Wines giving Golden Heights permission to terminate at any given year prior to 30 September the contract for the coming vintage.

    [78]   Exhibit P1 page 48.

59. A bundle of documents were tendered regarding how the final contractual arrangement came to be.[79]

    [79]   T 245, Exhibit D7.

60. Mr Falcinella was unable to remember whether he discussed the response to the Vintage Price Advice specifically with Mr Hamilton.[80]

    [80]   T 248.

61. Mr Falcinella agreed that he was a member of the Grape Growers Association of which Mr Chris Byrne was a representative.[81] Mr Byrne was helping growers with the arrangements with wineries and disputes that arose with the wineries. Mr Falcinella agreed that he used Mr Byrne as a resource to help him during the period late 2005 into early 2006. Mr Byrne was representing growers who had contracts not only with Simeon. He was representing Riverland Grape Growers whatever winery was involved. Mr Falcinella denied that Golden Heights Estate use lawyers to assist in contractual arrangements.[82] One of the reasons for that was that there were really “no negotiations with wineries on contracts at that time. Wineries could come and give the grower the contract”.[83]

    [81]   T 253.

    [82]   T 255.

    [83]   T 255.

1. Mr Falcinella agreed that the letter that he wrote to Simeon’s objecting to various matters was most likely in response to the letter of 27 January 2006 and not the letter of 22 December 2005.[84]

   [84]   T 257.

2. Mr Falcinella said in relation to the letter of 22 December 2005 that he received it on 28 December 2005 which was over the holiday period. He said he thought the winery may have been shut down at that period as well but he could not remember whether he made any attempt to contact the office.[85] He agreed that they did not get legal advice and they ended up going to the Wine Grape Growers Association for advice. Mr Falcinella said he was concerned that if they did not agree with the amendments, Simeon would be entitled to terminate the Grower’s contract.[86] He was unable to remember whether he discussed that with any of his partners at the time.

   [85]   T 258.

   [86]   T 261.

3. Mr Falcinella agreed that the first letter that he was shown (and he couldn’t recall receiving a letter) referred to the Growers’ Manual section 8 “Grape payment and prices”. He agreed that in the letter there was a reference to the change in relation to the way red grape colour scores would be used. He also agreed that as he was looking at the letter whilst giving evidence that the second and third bullet points refer to 2004 shadowed pricing methodology that had regard to “end use”.[87] Mr Falcinella agreed that one of the amendments was to delete the date of 30 September as a date when the Growers’ Manual would be reviewed. He thought it was a possibility that he simply did not do anything with this October letter with its attachment.

   [87]   T 263.

4. Mr Falcinella remembered discussion about all of the partners selling the property to Mr Tilley.[88] During the course of those discussions, Mr Falcinella agreed that he may have mentioned potential changes to the Growers’ Manual and the Vintage Price Advice.

   [88]   T 265.

5. Mr Falcinella agreed that in relation to the 2005 Vintage Price Advice[89] there were a range of prices for both Merlot and the Shiraz variety. In relation to the 2004 Vintage Pricing Schedule he agreed that at least four of the red varieties were subject to a range of prices.[90] He agreed that he understood that the price would fall within the range determined by the colour score achieved by the grapes. The colour scores were determined by a vineyard assessment carried out by Simeon Wines in a week or so prior to the harvest occurring. Red varieties were taken around the start of March. He agreed that in the vintage years 2004 and 2005, Golden Heights would not know where within those ranges the varieties would fall. Mr Falcinella said that there was scope for adjustment after the colour scoring depending on the checks carried out at the point of delivery of the grapes at the winery.[91] They would receive a document at the weighbridge and he thought there would be no changes after that.

   [89]   Exhibit D8.

   [90]   T 268.

   [91]   T 270.

6. In relation to the 2006 Vintage Price Advice, Mr Falcinella agreed that a similar process was undertaken to the 2004 and 2005 vintages but not precisely the same. He agreed that at about the start of the harvest in 2006 he would have been told the category into which the grape varieties fell.[92]

   [92]   T 271.

   Evidence of Sandra Leslie Hathaway

7. Ms Hathaway was employed by the Phylloxera Grape Board of South Australia. She has been working there for 13 years and is the Manager of Information and Education Services. She has a first class Honours degree in psychology from Oxford and an Associate Diploma in Human Resources Management from the University of South Australia.

8. One of the surveys produced by the Board is a “utilisation and pricing survey”. The Board has been producing that survey since 1997 and it involves a survey of each year’s vintage. The survey collated the total tonnes produced from vineyards in each region and the State was divided into 15 grape growing regions. The survey included the average price paid for purchase for each of the tonnes of fruit. There was also planting information which came from a different source and there were also forecasts of future supply and demand which was obtained from the winemakers.

9. A survey form was sent to each winery on a mailing list that the Board completed; it had been built up over the years. The wineries are asked to fill in the form. They are asked to fill in the numbers of tonnes purchased, tonnes grown themselves and the total dollars paid for purchased fruit. The information is collected anonymously.

10. Ms Hathaway did about 90 per cent of the work herself in relation to the receiving and inputting of the data for the report and the computer team conducts the analysis. The 2006 survey was tendered.[93]

    [93]   Exhibit P3 pages 561-696.

11. That exhibit contained maps identifying the different wine regions and it included the vineyards in Waikerie within the Riverland region. The section dealing with the survey outcomes for the Riverland region formed part of the document.[94]

    [94]   T 275, Exhibit P3 page 669.

12. Ms Hathaway agreed that the process of preparing the utilisation and survey of 2006 was similar or the same as done for the years before. Survey extracts from the years 2000 through to 2006 were tendered.[95]

    [95]   T 280, Exhibit D9.

13. Ms Hathaway stated that the individual wineries do not provide break-downs for tonnages for the different arrangements they had. She just simply received a total. Winery grown was excluded from the calculation of the weighted average price because it was not purchased from independent suppliers.

14. She agreed that there was a statement in the narrative that “The average price should not be compared directly with the individual grower’s arrangement”.[96] She agreed that circumstances of the supplier or purchaser could vary.

    [96]   T 281.

    Evidence of John Leslie Kerr

15. Mr Kerr is the principal of Capital Strategies which is an independent corporate advisory practice. In January 2006, he was retained by Mr Hamilton in relation to the sale of his interest in the vineyard owned by Golden Heights Estate Pty Ltd. He had dealings with Mr Tilley, Mr Costley and the solicitor Mr Lee.

16. By email of 21 February 2006 to Mr Kerr, Mr Lee informed him that his clients were “horrified by the new grape prices that results in the vineyard making no profit”.[97] He foreshadowed a “price adjustment” and also to the “meeting tomorrow”.

    [97]   Exhibit P11.

17. Mr Kerr met with Mr Tilley on 22 February 2006. He made notes during the meeting. The notes were tendered.[98]

    [98]   Exhibit P2 page 448.

18. Mr Tilley took him through a brief history of the conduct between himself and Mr Hamilton that “gave rise to the initial agreement”. Mr Kerr said that Mr Tilley took him to the changed circumstances with respect to the 2006 vineyard pricing which was indicating a “loss” rather than the return they had anticipated. He was still keen but would require a price reduction. He was targeting a 10 per cent return. His note says that Mr Tilley was considering an offer of $5.2 million.

19. Mr Kerr sought instructions from Mr Hamilton who indicated he would accept a figure of $5.6 million. Before he could convey the offer he received the letter from Mr Costley dated 24 February 2006 making the “once only and final offer” of $5.5 million. Mr Hamilton instructed him to accept the offer.

20. Mr Kerr, who is also a chartered accountant, then explained his document “Proforma Calculation of Damages”.[99]

    The Defence Evidence

    [99]   Exhibit P4 page 1.

    Evidence of Mr Michael Heinz Noack

21. Mr Noack is currently the Chief Financial Officer of Australian Vintage Ltd formerly known as McGuigan Simeon Wines Ltd (Simeon). He has been CFO since 1995. Mr Noack confirmed that Brian McGuigan was the chief executive officer and in a practical sense the “head of the company”. Neil McGuigan was the chief production officer and Richard Byllaardt was the head of viticulture having responsibility for all the vineyards; he left the company a “few years ago”.[100]

    [100]  T 323.

22. The defendant is a grape grower, a grape purchaser and a wine maker.[101] It owns wineries in Loxton and at Buronga Hill.

    [101]  T 322.

23. Mr Noack said that bulk wine is sold in large amounts, from 200,000 litres to 5 million litres. It is sold to others who may put a brand on it. Around this time 75 per cent of their total volume was bulk wine. They could sell bulk wine, for example, to a supermarket chain who would brand it or another wine company.

24. As at 2004, the defendant had about 400 growers they purchased grapes from, 180 of those being in the Riverland. The defendant owned some vineyards. Mr Noack never had personal dealings with growers.

25. Apart from being the CFO, Mr Noack was also the company secretary and in that capacity attended board meetings. He also attended meetings of the “Stock Allocation Group”. It was an informal group. This group met to discuss the stock on hand and make decisions as to what should be sold.[102] It discussed what the likely sales would be and also looked at the “vintage plan”. This took into account the tonnage coming in and what the future estimated sales were likely to be. The stock position of the company was in his opinion critical due to its impact on working capital.[103]  He explained that if your “stocks are higher than your sales you are paying for the stock and your borrowings are higher”.[104]

    [102]  T 324.

    [103]  T 325.

    [104]  T 325.

26. Mr Noack thought that they had contracts with about 100 growers.

27. There was also a “group” called the “Pricing Group”. This group met to discuss likely market conditions for the following 12 months and to determine the best approach for the company.

28. Mr Noack candidly conceded that they were a “significant company, we try to keep our costs down and don’t have any significant structures.” They did not necessarily keep minutes of all the meetings.[105]

    [105]  T 324.

29. The Pricing Group included Brian McGuigan, Neil McGuigan and Richard Byllaardt. Occasionally “commercial” people would attend. He thought they would meet three to five times a year.

30. In 2004 the defendant had an “oversupply” of wine. The industry was growing “too many grapes”.[106] Oversupply was not just a problem they had; it was also a “broad problem”. Other wine companies were selling bulk wine to keep cash flow even.[107]

    [106]  T 327.

    [107]  T 327.

31. At a meeting of the Stock Allocations Group on 10 November 2004, it was noted that they would use a percentage of premium wines in their branded products. By reference to Exhibit D6, Mr Noack was able to identify that as at December 2005 the defendant had approximately 50 million litres of wine in their storage tanks “without a sale against it”.[108]

    [108]  T 330.

32. In relation to the Vintage Plan 2006, Mr Noack said that they would generally start preparing such a plan in September/October 2005 for the vintage in that year.[109]

    [109]  T 331.

33. Mr Noack confirmed, from the 10 November 2004 minutes, that the defendant, taking into account the unallocated stock from prior vintages as well as the wine from the 2004 vintage plan, had 57.4 million litres with “no home” (the equivalent of 76,000 tonnes of grapes). They did not have sufficient storage space and therefore had to find external storage space at a cost.

34. It was noted in the minutes that, as the 2005 Vintage Plan indicated an excess of 23 million litres, they had to reduce their intake. It was agreed they would not take 9,580 tonnes from “annual contracts”. These contracts related to “Sultana grapes”.

35. Importantly the minutes note:

    It was agreed that we would significantly reduce the Sultana intake from 24,000 tonnes to the tonnages required for ferments only. Replacement non varietal white wine would be made from red grapes converted to white wine. These red grapes would be sourced from owned/managed vineyards only.

36. Mr Noack related the first part to the plan to replace Sultana grapes with Chardonnay grapes. Further, as they had too many red grapes they would make white wine from them by crushing them and “take them off the skins”.[110]

    [110]  T 333.

37. There was reference in the minutes to the “Christian Deal”. Mr Noack was not familiar with the details other than nothing came of it.

38. As a result of the adjustments, the surplus was revised from 76,000 tonnes to 26,000 tonnes.

39. The Board met on 26 April 2005; the minutes of the meeting were tendered.[111] At the meeting it was resolved that:

    Develop a written strategy for the grape contract amendments for vintage 2006 and management of vintage 2006 grape purchasing for board approval (include legal, political and public relations).

    [111]  Exhibit P1 page 141.

40. Mr Noack said that at the time of this meeting no such strategy was in place. There was grave concern about the company’s stock levels. He thought there would have been a “write down” to a net realisable value (NRV).[112] As the stock was valued “too high” the accounts had to be adjusted to reflect what it could be sold for.

    [112]  Exhibit P1 page 144.

41. On 9 August 2005, Mr Noack received a fax from Mr Brian McGuigan relating to the topic of “unallocated stocks at 30^th June 2005”.[113]

    [113]  Exhibit P1 page 154.

42. Mr McGuigan stated that the “board had instructed me to ensure that we didn’t have carry over stocks prior to the 2006 vintage, even though we might need to sell our stocks at cost price.” Mr Noack could recall the company selling 20 million litres at 30 cents per litre. It was done to assist the working capital and reduce storage costs.

43. Mr McGuigan further stated that “this will enable us to take a ruthless attitude to grape price and refill our tanks with much cheaper juice thereby hopefully being able to sell that stock at a much better profit than emerged out of the 2005 vintage.” Mr Noack understood that to be a market price that represented a margin to them.[114] He said that Mr McGuigan “uses very colourful language”. He thought Mr McGuigan was being a “true optimist”. He noted that Mr McGuigan had put in the document “a lot of sales that did not eventuate”.[115]

    [114]  T 336.

    [115]  T 337.

44. Mr McGuigan also stated:

    I am aware as you are aware that we do have an excess of 2005 Chardonnay. As you know Neil and I have been developing a plan where by we will use Chardonnay this vintage as Dry White and using this mechanism we should be able to curtail the excess of Chardonnay.[116]

    [116]  Exhibit P1 page 155.

45. They had too much Chardonnay so it was used in “casks” and also the bulk wine market.

46. The Board met on 15 August 2005. It was noted in the minutes that: “The Managing Director stated that contracted growers will be paid next year on both a quality and end use scale”.[117]

    [117]  Exhibit P1 page 156.

47. Mr Noack was unable to recall any of the discussion at that meeting. He thought any discussion about pricing for the following year would have been preliminary.[118]

    [118]  T 338.

48. After the Board meeting Mr McGuigan sent Mr Noack an email dated 15 August 2005 (2.40 pm). It noted the concern of the auditors relating to the amount of stock being carried. This related to the net realisable value of the stock. There was also reference in the email to the “aggressive selling price” policy; this was a reference to his fax of 9 August 2005.

49. The Management Accounts for the year ended 30 June 2005 noted an unfavourable NRV adjustment in the 2005 result.[119]

    [119]  Exhibit P1 page 162.

50. The McGuigan Simeon Wines Consolidated June 2005 Accounts, were tendered.[120] Mr Noack said that this document was presented to the audit committee. It was management’s “check list” of all the company’s cash flow and cash positions. It also contained a summary of the stock on hand as at 30 June 2005[121]. Stock on hand had increased from approximately 177 million litres as at 30 June 2004 to approximately 215 million litres by 30 June 2005.

    [120]  Exhibit P1 page 175.

    [121]  Exhibit P1 page 179.

51. Mr Noack, with some assistance from Neil McGuigan, prepared the “Report on Stock as at 30 June 2005”.[122] This was a document that went to the audit committee.

    [122]  Exhibit P1 page 180.

52. The Board met on 1 November 2005. The topic of the “significant oversupply of both wine and grapes” was discussed. A paper entitled “Vintage 2006 and 2007” was tabled.

53. It was resolved:

    The Board being unanimously of the view that there is a significant oversupply of Australian wine, that the company will suspend until further notice any grape contracts which it is able to suspend on the basis of the existence of the clause referred to in the Board paper circulated ... The notices advising of such action are to be sent to the relevant growers as soon as reasonably practicable (subject to following the appropriate steps with regard to legal, management and public relations).

54. While Mr Noack was unable to estimate the number of contracts affected he thought that it amounted to about 50,000 tonnes of grapes not being purchased.[123]

    [123]  T 344.

55. In relation to the 2006 vintage, Mr Noack agreed he was part of the “pricing group” dealing with that issue. They met frequently as “it was a critical decision for the company”.[124] He was unable to be precise about the exact process the group undertook in relation to the production of the Vintage Price Advice 2006. The document was tendered.[125] Mr Noack agreed that he had a role in determining the prices; he was part of the decision making process for the final price.

    [124]  T 345.

    [125]  Exhibit P2 page 360.

56. Subsequent to the Vintage Price Advice 2006 being issued, he became aware that Mr Drew had been appointed to “determine” the dispute. He prepared documents for him.[126] Mr Noack said the documents he prepared for Mr Drew reflected the companies view on the industry generally but in particular the question of oversupply. It covered aspects of why, as they dealt with a lot of bulk wine, they were different to other wine companies. The documents also covered the company’s stock allocation, the upcoming vintage plan and evidence as to how they arrived at the prices for grapes.[127] These were documents the pricing group had regard to.

    [126]  Exhibit D6.

    [127]  T 346.

57. Further information was later provided to Mr Drew.[128] Mr Noack said that Mr Drew prepared three reports. The first two were “incorrect” and he needed to further clarify matters in the third report. The further information was provided prior to the final report.

    [128]  Exhibit P2 pages 546-551.

58. The documents established that as at December 2005 the defendant had 50,229,886 litres of unallocated wine. To be added to that was an excess of 23,388 tonnes of grapes forecast for the 2006 vintage.

59. Mr Noack also identified a document entitled “Determination of 2005 Grape Prices by MSWL” (that is a reference to the defendant).[129] Paragaph 3 of the document states:

    After assessing the market for the likely prices to be received for the various wine varieties, MSWL decided to issue one price advise [sic] for all grape varieties. This is based on the fact that within a brand range MSWL receives one price regardless of the variety. In terms of bulk wine prices this is also basically true, particularly in the current oversupply environment.

    [129]  Exhibit D6 tab 5 - “grape pricing”.

60. Mr Noack explained that at a branded level the defendant would receive the same price whether it was, for example, Chardonnay or Shiraz. This had not always been the case.

61. Also contained in the material was a document entitled “What is a percentage of bottled sales and what can we pay for bulk wine”. The document contained information relating to the market segments of the company’s business. In other words it showed what the company sold.[130] Paragraph 4 of the document contained a table showing the calculation of a value per tonne that the defendant could pay for grapes of $235.32. This value was reached by assuming, amongst other matters, a price received of 75 cents per litre and an EBIT margin (earnings before interest and tax) of 20 per cent. EBIT would reduce the 20 per cent a further 10-12 per cent leaving eight per cent after tax.

    [130]  T 350.

1. Mr Noack was unable to say when this document was prepared. He thought that it was likely to have been March/April 2006. As at September 2005 they did not know what the bulk wine prices were likely to be for 2006. As it transpired they sold 20 million litres at 30 cents per litre and a lot of chardonnay at 50-60 cents per litre.

2. A spread sheet headed “Calculation of Grape Costs for the 2006 vintage” was also part of the material sent to Mr Drew. This was based on a similar analysis as just discussed and helped determine what to pay the growers. It gave the defendant a basis to determine the prices for the E and D categories mentioned in the 2006 National Vintage Price Schedule-End Use Pricing. It assisted in allocating the brands that they sold to those categories.[131]

   [131]  T 353.

3. A grower would be told the category their wine came under and then the price could be determined by reference to that category.[132]

   [132]  T 354.

4. In the document headed “Grape pricing Dispute - Further information for Charles Drew”[133] it was noted that bulk wine prices had decreased from around 80 cents per litre to 50-60 cents per litre. This led to a revaluation of their stock on hand. It effectively meant that they had paid “too much for the grapes” At a selling price of 50 cents per litre the value per tonne was $87.32 (assuming an extraction rate of 740 litres/tonne) using the same method as mentioned above. In other words, if they had paid more than the figure of $87.32 for the grapes that would “eat into one or other of the cost items”[134]

   [133]  Exhibit P2 page 546.

   [134]  T 356.

5. Mr Noack explained how wine was allocated to the various price points from the Vintage Price Advice 2006.[135]

   [135]  T 357.

6. Mr Noack also explained the operation of the “spot market”. Wine companies take advantage of growers who do not have a contract to sell their grapes. They pay a low figure for the grapes, crush the grapes and sell the product in the bulk wine market.[136]

   [136]  T 356.

7. As the defendant is a listed company it has continuous disclosure requirements. In May 2006, they announced that the company would not be paying a final dividend for the year.[137]

   [137]  Exhibit P12.

8. The financial report of the defendant for the year ended 30 June 2006 demonstrated that in relation to the stock there was a write down of $29 million. The defendant made a loss of $11.5 million.[138] No dividend was in fact paid for that year.

   [138]  Exhibit P3 pages 703-746.

9. In the year ended 30 June 2007, the company made a loss of $5.9 million.[139]

   [139]  Exhibit P3 page 807.

10. Under cross-examination Mr Noack conceded that at the relevant time, as they were able to calculate the tonnage of grapes they were crushing, the “overheads” were fixed and therefore apportioned equally across the wine production.[140] He agreed “the single most important factor” in ensuring the costs of production were lower than their competitors was achieving a lower grape price.[141] Further he agreed that the “single biggest factor in determining the end cost of the wine product” was the grape cost.[142] The risks for their business were the grape costs and the eventual selling price of the wine. Mr Noack agreed that the defendant was best able to control its business risks if it could link its grape costs to the price of the wine. This was introduced for the 2006 vintage. I will refer to it as the “end use pricing plan”.

    [140] T 366.

    [141] T 368.

    [142] T 369.

11. Mr Noack thought that the changes to the Growers’ Manual would have been done by management without reference to the Board.[143]

    [143]  T 394.

12. Mr Noack confirmed that the Managing Director’s report of 21 April 2005[144] was considered by the Board at the meeting of 26 April 2005. The report states “We need to consider earlier action to secure lower average grape prices from vintage 06.” Mr Noack said the comment related only to the 2006 vintage.

    [144]  Exhibit P1 pages 134-140.

13. At the Board meeting of 25 May 2005, the strategy for the purchase of grapes was discussed and a strategy paper was to be presented to the Board. While he did not think it was likely that the Board discussed the 2005 expert determination specifically, Mr Noack agreed that the Board was kept informed of “the direction management was heading”.[145]

    [145]  T 397.

14. Mr Noack had little or nothing to do with the proposed changes to the 2005/06 Growers’ Manual. He conceded that the changes made to paragraph 9.2 of the document related to the question of the role of the expert when making a determination. Paragraph 9.2(d) introduced the concept of the “same end product”.[146]

    [146]  T 399.

15. The Vintage Price Advice 2006 contained the following statement:

    Growers should note that 95% of the wine sold by Simeon falls within either Category D or Category E with approximately 50% in each category. Consequently, most growers will receive a payment within the range of prices shown for Category D or Category E, depending on Simeon’s assessment of the quality of the grapes and Simeon’s requirements for products within these categories, according to Simeon’s vintage plan.

16. Mr Noack agreed that the statement was intended to convey the grower should expect that his wine will be in one of the categories D1-D4 or E1-E3. The pricing group indentified the different price points within categories D and E.[147] Prior to 2006, the defendant had not categorised its wines A-E. It did not do so after 2006. Before their determination during the 2006 vintage categories D and E did not “exist”.[148] The concept of end use continued after 2006.[149]

    [147]  T 421.

    [148]  T 454.

    [149]  T 456.

17. The defendant could trace a growers wine to a particular tank. They would know the “price of the tank”.[150]

    [150]  T 423.

18. Commercial wine means sold “to a bottle”. Bulk wine is sold in 23,000 litre bladders. It may end up in a bottle but not by them.[151] Commercial wine relates to a level of quality within the retail market. Category E is everything else. Cask wine is category E.

    [151]  T 424.

19. An enlarged version of the “Calculation of Grape Costs for 2006 Vintage” was tendered.[152] Having been taken through many of the “brands” identified in Exhibit P15, Mr Noack agreed that they used many products identified as category E items in their assessment of the category D prices. This was not done intentionally.[153] Mr Noack thought there must have been some miscommunication but that Mr Byllaardt would be best positioned to explain it.[154]

    [152]  Exhibit P15.

    [153]  T 431.

    [154]  T 431.

20. It was submitted by the plaintiffs that I should take into account the failure of the defendant to call further witnesses, such as Mr Byllardt, to explain the problem identified in Exhibit P15. The plaintiffs submitted that it was such significant matter that it “casts doubt on the very bona fides of the process”.[155] It was submitted that the process of creating the categories was arbitrary and was a façade intended to achieve the outcome which had been pre ordained.

    [155]  T 726.

21. I reject those submissions. It was not suggested by Mr Noack that Exhibit P15 represented a final position. It is not appropriate in my view to draw the inferences suggested by the plaintiffs. Exhibit P15 was simply part of a process that eventually led to the categories that appear in the 2006 Vintage Price Advice. The “categories” did not exist before 2006.

22. Further I agree with the defendant’s submissions that the effect of moving negative and low return products from category D to category E would have the effect of increasing the average for category D products and may have had the effect of actually increasing the average of category E products. This would not necessarily alter the overall weighted average.

23. Mr Noack agreed that, using the table in Exhibit D6 that $32 was the weighted average per tonne for category E grapes. For category D it was $265 per tonne. He agreed that all the items previously identified as category E but appearing as category D on the table had a reducing effect on the weighted average.[156]

    [156]  T 434.

24. By reference to the figures in Exhibit P15 including his hand written notations, Mr Noack agreed that the “crusade” by Mr Brian McGuigan to sell wine in the second half of 2005 had the effect of reducing the sale price per litre. That reduction in sale price was reflected in Exhibit P15 as the net sale prices were the prices used to calculate the figure for grape prices. [157]

    [157]  T 440.

25. Mr Noack agreed that by bringing into account interest as part of their EBIT they were “embedding” the grape price a figure that takes into account the way the company chose to finance its business.

26. Mr Noack agreed that the defendant made an assessment of its position in the marketplace and put in place a scheme of pricing which ensured, if their estimates of the selling price of wine were correct, they would return a profit.[158]

    [158]  T 445.

27. The 2006 Annual Report of the defendant was tendered.[159] This included the financial reports. Mr Noack conceded but for the large write down in the value of stock the defendant would have made a profit.[160] The “profit” would have been about $22 million. Mr Noack agreed that, at that time, the company was in a financially strong position. The defendant had a “total equity” of $339 million.[161]

    [159]  Exhibit P3 page 697ff.

    [160]  T 450.

    [161]  T 453.

    The Strategies of the Defendant

28. The plaintiffs made a number of complaints about the strategies adopted by the defendant. They were dealt with by Mr Noack both in evidence-in-chief and also cross-examination. There were three strategies in particular that the plaintiffs complained about. Mr Noack was an impressive witness. I accept his evidence. My discussion of the “strategies”of the defendant is, in effect, my findings. There was no challenge to the credit of Mr Noack or the documents upon which he relied.

    The “End Use Pricing” Plan

29. The plaintiffs complain about the strategy of “end use pricing” adopted by the defendant as evidenced by the 2006 Vintage Price Advice.

30. I find that the defendant was concerned about its “unallocated wine” stock in mid 2005. It put in place a strategy to reduce the amount of stock it was carrying and also a strategy to try and ensure it made a profit. It did so by introducing the “end use pricing” which had the effect of lowering the cost at which it would purchase grapes.

31. After the 2006 Vintage Price Advice was issued, the grape price was disputed by growers and that question was referred for “expert determination”. This was conducted by Mr Drew. As part of that process, the defendant sent information to Mr Drew. Mr Noack relied on some of those documents to explain the defendant’s strategy.

32. Mr Noack explained that the defendant, having assessed the market for the likely prices to be received for the various wine varieties, decided to issue one price advice for all grape varieties. Within the “brand range” it was receiving one price regardless of the variety. This had not always been the case, but it was at that time in the market.[162]

    [162] T 350.

33. Bottled wine represented 23 per cent of the defendant’s business. Bulk wine represented 60 per cent of its business with the balance being “Contract Processing” and “Austflavour”.

34. Mr Noack, by reference to Exhibit D6, explained the calculation of the grape price.

    Selling Price ($)                  0.75
    Less Winery Overheads     0.25
    Less Other Overheads        0.04
    EBIT (20 per cent)              0.14
    Net  0.32

35. Thus assuming EBIT (Earnings Before Interest and Tax) of 20 per cent, Simeon was left with 32 cents/litre of wine as the “cost of grapes”. Using a conversion factor of 740 litres/tonne grapes, a grape price of 32 cents x 740 = $235.32/tonne could be calculated.

36. Mr Noack explained that from the 20 per cent EBIT, interest and tax amounted to 12 per cent, leaving a net figure (profit) of eight per cent. The 75 cents/litre selling price is an assumption they made based on their experience.[163]

    [163] T 352.

37. Mr Noack, by using Exhibit D6 “Calculation of Grape Costs for 2006 Vintage” explained how the grape price calculation was performed by reference to the brands. A similar calculation of working back from a selling price, deducting the overheads and including a profit margin for the defendant was again used. The grape price per tonne was then calculated. This gave the defendant the basis for the determining prices for the D and E categories in the Vintage Price Advice 2006. Mr Noack conceded that a grower would not be able to determine what price category his grapes “fell into”. He would be told.[164]

    [164] T 354.

38. The price points by category (D and E) can be seen in Exhibit P2, page 548.

39. As mentioned, Mr Noack agreed that the single most important factor in achieving a wine cost per litre lower than their competitors was the “cost of grapes”. They ran their wineries at least as well as their competitors.[165]

    [165] T 369.

40. The strategy was designed to link grape price to the selling price of wine.[166]

    [166] T 372.

41. By utilising its expertise in estimating the sale price that it could achieve for wine and then linking the grape price to the sale price, the defendant hoped to eliminate a business risk.[167]

    [167] T 372.

42. Mr Noack did not agree that the price the defendant paid would be “disconnected from the market price”. He explained that the price was connected to the “bulk wine selling price” and, therefore, indirectly linked to the market price. He accepted there was no direct link.[168] In that sense, it was a move away from “the old market price philosophy”.[169] Mr Noack later said that the phrase had appeared in the submission to the 2004 and 2005 independent experts.[170] Thus the comment was there before “end use” was introduced.

    [168] T 375, T 376.

    [169] T 382.

    [170]  T 400.

43. Mr Noack agreed that there was no provision in that price for an allowance for the “market” price for grapes. As Mr Noack put it “it was determined that that was our market price”.[171] While it was “disconnected” to the market price for grapes it was connected the bulk wine selling price.[172]

    [171]  T 374.

    [172]  T 375.

    The “Sultana Replacement Plan”

44. This strategy was really part of the “end use pricing” plan but as it was referred to separately I will deal with it as part of Mr Noack’s evidence.

45. The defendant, as at 30 June 2005, had 18.4 million litres of unallocated Chardonnay stock. The average price per litre of the Chardonnay was $1.10.[173]

    [173] Exhibit P1 page 181.

46. The defendant devised a strategy to reduce their exposure to excess Chardonnay production arising from the 2006 vintage.[174] The strategy was to replace “uncontracted” Sultana grapes with contracted Chardonnay grapes for 2005 for vintage 2005 Sultana grape prices.[175] It therefore needed a “significant drop in the Chardonnay grape price”.[176] It anticipated that the price it paid for Chardonnay would be from around $350 per tonne to $250 per tonne.

    [174] Exhibit P1 page 202.

    [175] Exhibit P1 page 202.

    [176] Exhibit P1 page 182.

47. The Vintage Plan 2006 – Forecast 2005/06 “Non-varietal and neutral white”[177] predicted 18063 tonnes of grapes to be used. Ordinarily the products relating to those wines would be made from Sultana grapes.[178] The Chardonnay replacement plan was applied to produce those products.[179]

    [177] Exhibit D6 tab 5.

    [178] T 410.

    [179] T 411.

48. The unallocated Chardonnay held by the defendant as at 30 June 2005 (from other vintages) averaged $1.10 per litre. By paying around $200 per tonne for Chardonnay grapes in 2006 made it a “per litre value of 47 cents”. Combined then with the value of the unallocated but carried forward Chardonnay the average price came down to about 78 cents per litre.[180]

    [180] Exhibit P1 page 187.

49. The strategy therefore was to pay a price for Chardonnay in 2006, that when the cost was averaged over vintages it would be reduced significantly below $1.10.[181] The aim was to achieve sales at a higher cost but this was not achieved.[182] Exhibit P14 established that “a little under” 78 per cent of Chardonnay reported to have been acquired for $250 per tonne or less.[183] The 2006 Vintage Price Advice shows a “bottom price” in relation to category D4 of $250 per tonne.

    [181] T 414.

    [182] T 414.

    [183] T 418.

50. It is clear from the documents and Mr Noack’s evidence that this strategy began to be developed in about August 2005. The defendant submitted that, due to this plan, the categories D and E in the Vintage Price Advice 2006 were irrelevant as the price, for Chardonnay grapes at least, was pre-determined. The strategy was implemented as can be seen from the prices paid for Chardonnay grapes.

51. The defendant submitted that, in the circumstances it found itself in, the plan was commercially sensible. It had no obligation to “announce” it to the Growers.

    The “Expert Determination Plan”

52. The 2005 Vintage Price Advice showed that the defendant paid a single price for each variety apart from Merlot and Shiraz; these two grapes were subject to a colour assessment. Depending on the colour assessment the price was fixed.[184] There was a dispute about the grape prices fixed in the 2005 Vintage Price Advice and the matter was sent for determination by an expert. He increased the prices “across the board”.[185] In 2005 the defendant ended up paying more than it intended for the grapes. Mr Noack agreed that this was a matter of concern to the company.

    [184]  Exhibit P1 page 316.

    [185]  T 392.

53. I find that the proposed amendments were, in part at least, a response to the 2005 determination.

54. It was not disputed that the proposed amendments changed the criteria an “appointed expert” was to have regard to in making his determination. The significance of the amendments was disputed.

55. In the 2004/05 Growers’ Manual, clause 9.2 stated:

    9.2 Experts Role – Price Dispute

    In the case of a dispute pursuant to clause 8.1.1, the Expert will be directed to determine the disputed Price for the purposes of the agreement, by no later than 15^th February in the relevant Vintage Year, on the basis that the Price is the price which Simeon as a willing buyer would pay a willing seller for grapes offered for sale at the relevant time:

    (a)     which are of the same quantity and variety as the grapes in questions; and

    (b)which come from the same district and are of the same vintage as the grapes     in question;

    (c)which have the same qualities and characteristics as the relevant grapes; and

    (d)on the same terms and conditions

    having regard to Simeon’s assessment as to the market for wine grapes and wine and Simeon’s specific requirements for wine grapes in that Vintage Year based on that assessment of the market.

56. In the 2005/06 Growers’ Manual, incorporating the proposed amendments, clause 9.2 stated:

    In the case of a dispute pursuant to section 8.1.1, the Expert will be directed to determine whether the price per tonne offered for grapes in the Vintage Price Advice is reasonable having regard to the price which Simeon as a willing buyer would pay a willing seller for grapes offered for sale at the relevant time:

    (a)     which are of the same quantity and variety as the grapes in question; and

    (b)     which come from the same district and are of the same vintage as the grapes           in question; and

    (c)     which have the same qualities and characteristics as the relevant grapes; and

    (d)     which are to be used in the same end-product as the relevant grapes.

    having regard to Simeon’s assessment as to the market for wine grapes and wine and Simeon’s specific requirements for wine grapes in that Vintage Year based on that assessment of the market.

    If the Expert determines a price per tonne as set out in the Vintage Price Advice is reasonable, then that price will be final and binding. If the Expert determines that a price per tonne is unreasonable then the Expert will determine a reasonable price per tonne, having regard to the factors set out in the previous paragraph.

    The Expert will have no right to alter the price structure set out in the Vintage Price Advice or to determine a pricing methodology that is different to the methodology set out in the Vintage Price Advice or to alter the Vintage Price Advice in any other way.

1. Further, the report noted the plan by management to “sell the excess Chardonnay” at a price in excess of cost of $1.10 per litre. The report also noted the plan to replace 2006 Sultana grape purchases with 2005 Chardonnay for use in casks (6.4 million litres).

2. In October 2005, the letter from the defendant enclosing the Growers’ Manual with proposed changes “marked up” was sent to Growers including Golden Heights Estate Pty Ltd.

3. On 1 November 2005, the Board minutes record that the “company will suspend until further notice any grape contracts which it is able to suspend”.[246]

   [246] Exhibit P1 page 256.

4. On 22 December 2005, the defendants wrote to growers “renotifying” growers of the proposed changes and giving the growers a “chance to object”.

5. In January 2006, Mr Noack with others undertook the task of allocating products under product categories for the purposes of the 2006 Vintage Price Advice.[247]

   [247] T 421.

6. In January 2006, Mr Noack produced a document analysing sale price and costs for determination of the defendant’s required profit margin.[248]

   [248] Exhibit P15.

7. On 27 January 2006, the defendant sent a letter to growers enclosing the 2006 Vintage Price Advice.

8. Between 27 January 2006 and 6 February 2006 Golden Heights Pty Ltd sent a letter to the defendants objecting to the proposed amendments as well as the purported prices in the Vintage Price Advice.[249]

   [249]  Exhibit P2 page 382.

9. On 6 February 2006 the defendant sent a letter to Golden Heights Pty Ltd acknowledging receipt of the objection to the “Vintage Price Advice”.

10. On 13 April 2006 Mr Drew issued his first “Determination by an Independent Expert”.[250] He subsequently amended that Determination.

    [250]  Exhibit P2 page 462.

    Analysis of s 51AC(4) Submissions

    (a) The relative strengths of the bargaining positions of the acquirer and the small business supplier.

11. The plaintiffs submitted that the bargaining position of the defendant was “overwhelmingly” greater than that of Golden Heights Estate Pty Ltd and of any individual grower. The defendant accepted that the bargaining position of the parties was not equal: just not overwhelmingly so.

12. The defendant purchased approximately 140,000 tonnes of grapes from third party growers each year. It purchased grapes from about 400 growers. It had many “standard contracts”. As the defendant submitted, the effect of the defendant having a large number of standard contracts was to guarantee supply but locked the defendant into purchasing grapes regardless of market conditions such as “oversupply”.

13. However, I accept that the defendant was a major player in the Australian Wine Industry crushing about 14 per cent of all wine grapes throughout Australia.[251] It was a publicly listed company. Golden Heights Estate Pty Ltd sold between 60-70 per cent of its crop to the defendant.

    [251] T 322.

14. Based on the contract negotiations, Golden Heights Estate Pty Ltd was not an insignificant grower of grapes. Mr Hamilton sold his interest for 50 per cent of $5.5 million and it was regarded as a “blue chip” investment. Mr Falcinella was highly regarded in the industry and very experienced at running a vineyard. Mr Hamilton was and is a commercial lawyer. It could not be said in my view that those involved in the Golden Heights Partnership were inexperienced or naïve.

15. Further the contract had been entered into after resolution of other litigation against the defendant. The contract itself gave the defendant various powers including the power to amend (as already discussed). Both parties had the right to terminate for no reason.

    (b) Whether, as a result of conduct engaged in by the acquirer, the small business supplier was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the acquirer.

16. The plaintiffs’ submission involves the question of “end use” pricing which involved the defendant introducing a pricing system with the object of obtaining a profit after tax of eight per cent. I have already discussed this plan

17. In the Vintage Price Advice 2005, the defendant, as it was required to do by the Growers’ Manual, set a price for grapes (by variety) other than some red grapes. The red wine price was dependant on a “colour” score. The price for each colour score was fixed.

18. Thus, a grower knew before 15 January when the Vintage Price Advice was issued, what price would be paid for his or her grapes (subject to colour). The price was dependant to an extent on the defendant’s assessment of the market. At the time it issued the Vintage Price Advice 2005, the defendant had to assess the market and the likely price it would obtain for its wine.

19. A major difference between the 2005 and 2006 Vintage Price Advice was the time of the assessment. Under the 2006 Vintage Price Advice, the price paid by the defendant was not finalised until after 30 June of that vintage year. By that time, the defendant had assessed in which category a grower’s grapes were to be placed and, depending on the actual product within that category, the actual price to be paid per tonne within that category. The wording of the proposed change supports this position. Clause 8.1.1 was to be changed from “prices per tonne that Simeon Wines will pay in that Vintage Year” to “will set out the basis on which Simeon Wines will calculate the prices per tonne that it will pay”. It reserved the right to determine the exact price until later.

20. Mr Falcinella gave evidence that at the time of harvest he was told the category into which the grape varieties fell[252]. I assume from that he meant only the categories and not the actual “price points” within the categories. Thus he would have known the “range” for the grape price but not the final price.

    [252] T 271.

21. However it cannot be ignored that the 2004/05 Growers’ Manual stated that the prices offered are to be based on “Simeon Wines assessment as to the market for wine grapes and wine and Simeon’s specific requirements for wine grapes based on that assessment of the market”. Thus the proposed amendments did not suggest a dramatic shift from the earlier Growers’ Manual. It was not, for example, changing the grape price from a “market price” concept to an “end use” concept.

22. The plaintiffs argued that it was not a “legitimate” interest of the defendant to introduce a pricing system with an object of maintaining a profit after tax of eight per cent. This was particularly so in a market in “oversupply”. It was submitted that the plan was “at the expense” of growers. Further, the plaintiffs submitted that changing the “role” of the expert was not reasonably necessary to protect the legitimate interests of the defendant.

23. It was not disputed that the criteria the expert was to have regard to were changed by the proposed amendments. I have already discussed the Expert Determination plan. The significance of the amendments was disputed. In my view as discussed the amendments were significant.

24. The evidence demonstrates beyond any doubt that all the participants in the wine industry were facing significant pressures.

25. Prices had fallen for grapes (and indeed wine) over the previous few years.[253] It was not disputed that there was a declining export market, an “oversupply” of wine and generally declining prices for wine particularly bulk wine.

    [253] Exhibit D9, Phylloxera and Grape Industry Board Surveys.

26. Mr Noack stated:

    We look at our own stock levels, we look at the industry stock levels, we look at current bulk wine prices, we look at basically what our products are selling for, then we have to make an assessment of what those products are going to be sold for in perhaps 12 months time. Then we look at, “Well, these are our costs and this leaves so much to pay for grapes”.[254]

    [254] T 338.

27. I have already set out in detail Mr Noack’s evidence which I accept.

28. In my opinion the approach by the defendant was reasonably necessary for the protection of its legitimate interests.

29. I accept that this is only one factor to be looked at and should not be looked at in isolation. However, a business looking at its costs and attempting to build into its pricing structure a profit margin, by itself appears somewhat unremarkable.

30. I have not overlooked the submissions of the plaintiffs. I agree that the “end use” strategy had the effect of transferring some of the risk to the grower. If the defendant’s assessment of the price that it would receive for its wine was correct then it would receive the “built in” profit margin. If it received more for the wine its profit would increase. If of course it had over estimated the price it would obtain for the wine its profit would fall below eight per cent and indeed could amount to a loss. It would still have paid the same amount for the grapes.

31. Had the amendments applied to the 2007 vintage year (as I have found) Golden Heights could have considered its contractual position.

    (c) Whether the small business supplier was able to understand any documents relating to the acquisition or possible acquisition of the goods or services.

32. The letter sent by the defendant did not explain the reasons behind the defendant’s amendments. It foreshadowed a change in the methodology. In my opinion it had no obligation to explain to the growers the precise change. Indeed the earlier versions of the Growers’ Manual did not explain in any detail how it was that the defendant arrived at its grape prices.

33. Somewhat surprisingly Mr Falcinella appeared to be somewhat casual with the first letter he received from the defendant in October 2005. It appears that he did not pass it on to Mr Hamilton for his comments. However it does appear that the letter, which I infer was sent to a number of other growers, caused concern and indeed meetings were held in various locations with representatives of the defendant. It appears that the growers sought advice from there association. Exactly what was discussed at the meetings was not the subject of evidence but it was sufficient for the defendant to send a further letter and for them to extend the time for “objection”. Again it is not clear that the second letter was sent to Mr Hamilton before Christmas 2005. Given that Mr Falcinella was “managing’ the partnership business this is also somewhat surprising.

34. I do not accept that the changes “proposed” were not easily capable of understanding” due to its “presentation”.

35. I do not accept that the defendant entered into “an obvious scheme … to amend the Growers’ Manual in a way that a reader would not have any way to understand or analyse its plan for pricing until the Vintage Price Advice was issued”. Indeed such a criticism, if accepted, could be levelled at the earlier Growers’ Manual.

36. The December letter took the matter no further. I do not agree that in some way it was a cynical attempt by the defendant to get other growers to object to the amendments thus enabling the defendant to terminate the contracts.

37. Further, I do not accept that the 2006 Vintage Price Advice was not capable of being understood. I agree a grower was not able to determine exactly what price he was to receive for his grapes. At best the grower could only work out a range for his grape price.

38. That does not make the document one that cannot be understood. Indeed it was well understood by Golden Heights Pty Ltd that it was leading to lower prices as they objected and the matter was referred for “Expert Determination”.

    (d) Whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the small business supplier or a person acting on behalf of the acquirer in relation to the acquisition or possible acquisition of the goods or services.

39. I accept that Mr Noack and others within the defendant company had an appreciation that growers did not want to leave their “grapes on the vine”. Clearly, no business would want to be in a position where their “stock” was unsaleable. Of course, the defendant itself faced the prospect of being in possession of wine it could not sell, or not sell at a profit. Indeed, it had a large stock of “unallocated” wine.

40. I do not accept that the defendant made it clear that growers who did not accept the changes to the Growers’ Manual would likely have their contract terminated. There is no evidence before me that this in fact occurred.

41. I have already dealt with the question of whether the “October” letter was misleading. In my view it was not.

42. It was submitted that the October letter carried with it a connotation of quality based pricing when in fact the defendant had a “plan” to drive down the price to a predetermined level of $250 per tonne. This is a reference to the Sultana Replacement Plan. I have discussed that plan earlier in these reasons.

43. I accept the plaintiffs’ submissions about the timing and the effect of the plan. The price of the chardonnay grapes was pre determined.

44. As the defendant submitted however there was no obligation on the defendant to put the growers on notice about the plan. No doubt there was some confidentiality about the plan. If objected to (as indeed it was) the Vintage Price Advice, and therefore the methodology adopted by the defendant was subject to the scrutiny of an appointed expert.

    (e) The amount for which, and the circumstances in which, the small business supplier could have supplied identical or equivalent goods or services to a person other than the acquirer.

45. I do not accept the plaintiffs’ submission that this fact weighs heavily in favour of a finding of unconscionable conduct.

46. The market price was depressed for the sale of grapes. The fact that the “spot” market was likely to be depressed is a reflection (in part at least) of the market conditions. There was a substantial oversupply of grapes. The fact that the defendant had cancelled (as it was entitled to do) a number of contracts was an indication of the prevailing market conditions.

47. I do not accept that the conduct of the defendant deprived growers of a viable alternative for their grapes. The evidence shows that uncontracted growers were likely to obtain only the “spot” prices for their grapes. The evidence demonstrated that 10 per cent of the growers did not even harvest their grapes. It was a difficult market for growers in any event. It is hard to see what “viable” alternative was available to Golden Heights Pty Ltd or indeed any grower.

    (f) The extent to which the acquirer’s conduct towards the small business supplier was consistent with the acquirer’s conduct in similar circumstances between the acquirer and other like small business suppliers.

48. There is no doubt that the defendant treated all contracted growers in a similar manner. The plaintiffs submitted this “reflected its arrogance and disregard for fair dealing with its growers”.

49. The submission does not advance the plaintiffs’ case.

    (i)(i) The extent to which the acquirer unreasonably failed to disclose to the small business supplier any intended conduct of the acquirer that might affect the interests of the small business acquirer.

50. The defendant did not disclose the plan to pay $250/tonne for Chardonnay grapes. Nor did it disclose its plan to price grapes in a manner that preserved to it a profit after tax of eight per cent (if its estimate of the selling price was accurate).

51. I have already dealt with those matters.

52. The question is whether it “unreasonably failed to do so”.

53. The defendant made it clear in the proposed amendments that its method of “pricing” was going to change. It also made it clear from the amendments that its “end use” was going to be more prominent in its pricing structure. To that extent it was apparent that in a declining market for the price for wine, the price for grapes would decline as well. While it did not disclose precise details, it did indicate that 95 per cent of the grapes would be in the D and E categories.

54. In my view it did not unreasonably fail to do so.

    (i)(ii)         The extent to which the acquirer unreasonably failed to disclose to the small business supplier any risks to the small business supplier arising from the acquirer’s intended conduct (being risks that the acquirer should have foreseen would not be apparent to the small business supplier).

55. The plaintiff relied on the matters argued under the previous subsection. In addition, they relied on the fact that the defendant was selling some of its unallocated bulk wine in 2005 even if it meant a loss.

56. As discussed earlier, it was obvious from the proposed changes and the market conditions then existing that the defendant was linking the grape price to the “end use” product. That the defendant in those market conditions was going to pay less than the prices paid in 2005 was obvious.

    (j) The extent to which the acquirer was willing to negotiate the terms and conditions of any contract for the acquisition of the goods and services with the small business supplier.

57. The defendant did not negotiate. It was entitled to amend the contract and the Growers’ Manual. The only question was the vintage year to which the proposed amendments applied.

58. I accept the plaintiff’s submissions that the defendant did not intend to negotiate on price.

59. Once the prices were disputed, the Expert Determination provided the remedy. There was, as the defendant understood its contractual position, no requirement for it to negotiate.

    (k)    The extent to which the acquirer and the small business supplier acted in good faith.

60. The plaintiffs relied on the earlier submissions to establish a lack of good faith.

61. “Good faith” for the purpose of s 51AC has not been the subject of determination. The particular construction of the expression “good faith” is to be adapted to the particular statute or rule of law in which the words are used.[255]

    [255] Bropho v Human Rights & Equal Opportunity Commission (2004) 204 ALR 761.

62. In my opinion, in the context of this section the expression “good faith” embraces the concepts of an honest standard of conduct and an obligation not to act capriciously.[256]

    [256] Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558.

63. I do not accept that the expression “good faith” should necessarily be equated with the implied contractual term of “reasonableness and good faith”.

64. Factors incorporating the concept of “reasonableness” are to be found in other subsections of this section. Parliament chose not to use the expression in this particular subsection.

65. Nothing in the evidence establishes that the defendant acted in “bad faith”. That of course does not prove that the defendant acted in “good faith”.

66. Whilst it can be said that the defendant chose to take some “tough” commercial decisions the evidence does not establish that the defendant acted in a dishonest way to Golden Heights Pty Ltd or that it acted capriciously.

67. I have found that the defendant attempted to impose “amendments” on the growers including the Golden Heights partnership and therefore the plaintiffs. They were in error in doing so and therefore breached the contract. However the fact that they were in error in their interpretation of their legal rights does not of itself show that it acted with a lack of “good faith”.

68. In my view, although the defendant introduced or attempted to introduce some hard commercial decisions it did so in good faith.

69. In my view, the evidence does not establish that the defendant acted in other than good faith in promoting its own legitimate interests.

    Summary

70. The conduct of the defendant is in my view does not amount to unconscionable conduct. The whole industry was facing difficulties due to the problem of oversupply. The defendant had been facing the issue of “unallocated stock” problems although carrying a small amount of stock was not difficult for it. This amount of unallocated stock was however a problem. It devised a strategy for dealing with the problems. The strategy was aimed at reducing the price it paid for grapes consistent with the defendant’s assessment of the market. It did not specifically target Golden Heights Pty Ltd. The conduct was to apply to all similarly contracted growers. The fact that it tried to “build in” a profit margin for itself was unremarkable. Even then the strategy was dependent on its ability to assess the wine market correctly.

1. I accept that the strategies of the defendant were intended to benefit it at the expense and to an extent, the detriment of the growers including Golden Heights Pty Ltd. However the defendant’s behaviour was a legitimate response to what it perceived to be its problems at that stage.

2. I find that none of the factors taken individually or when looked at together establish that the defendant breached s 51AC of the Trade Practices Act. I find that the plaintiff has failed to establish that the defendant engaged in conduct that was, in all the circumstances, unconscionable.

   Equitable Doctrine

3. In my opinion, the plaintiffs have failed to establish that Golden Heights Estate Pty Ltd was in a position of special disadvantage. While there was a difference in their respective bargaining positions, the difference did not amount to a special disadvantage.

4. The terms of the contract were negotiated between the parties as a result of other litigation. It was a relatively large producer of grapes with competent members of the partnership. The plaintiff had failed to establish that the Golden Heights partnership was unable to make a worthwhile judgment about what was in their best interests.

5. The plaintiffs relied on the facts arising from their s 51AC submissions to establish that Golden Heights Estate Pty Ltd was at a special disadvantage. There was nothing in those matters taken together, that left Golden Heights Estate Pty Ltd at a special disadvantage.

   I do not intend to repeat the matters discussed in relation to the s 51AC claim other than to say in general those matters are also relevant to this claim as well. I find that the plaintiffs have failed to establish a “special relationship” and that under the equitable principle discussed the plaintiff has failed to prove that the defendant had knowledge of any special disadvantage and then unconscientiously exploited that disadvantage.

6. I reject the plaintiffs’ claim relating to the equitable doctrine of unconscionability.

   Summary of Findings

7. I find the defendant breached its contract with Golden Heights Estate Ltd. The partnership as a whole suffered a loss of grape income for the year. I assess the damages in the sum of $103,850.00. The plaintiffs had a 50 per cent interest in the partnership. I assess their damages in the sum of $51,925.00.

8. I dismiss the claim for the loss of value of the partnership interest. I dismiss the claims relating to equitable unconscionability (s 51AA) and s 51AC of the Trade Practices Act.

9. I will hear the parties in relation to the form of the orders, interest and costs.