Koondoola Pastoral Company Pty Ltd v Woodlawn Pastoral Pty Ltd

[2009] NSWDC 327

CITATION:	Koondoola Pastoral Company Pty Ltd v Woodlawn Pastoral Pty Ltd [2009] NSWDC 327
HEARING DATE(S):	12-13 November 2009, 18 November 2009
JUDGMENT DATE:	9 December 2009
EX TEMPORE JUDGMENT DATE:	2 December 2009
JURISDICTION:	District Court - Civil
JUDGMENT OF:	Sidis DCJ
DECISION:	Orders in accordance with the Short Minutes of Order signed and dated 9 December 2009 Verdict and judgement for the plaintiffs as set out in paragraph 1 Verdict and judgement for the cross-defendants on the cross-claimant’s cross claim as set out in paragraph 2 Paragraph 3 noted and the exhibits are returned as noted in paragraph 4
CATCHWORDS:	CONTRACT FOR SUPPLY OF WATER - Construction of terms - Whether provisions totally in writing - Partly express oral or partly implied - Whether frustrated by less than anticipated water flows
LEGISLATION CITED:	Water Management Act 2000
CASES CITED:	BP Refinery (Westernport) Pty Limited v Hastings Shire Council 52 ALJR 20 Codelfa Construction Pty Limited v State Rail Authority of New South Wales 149 CLR 337 Davis Contractors Limited v Fareham Urban District Council [1956] AC 696 National Carriers Limited v Panalpina (Northern) Limited [1981] AC 675 Toll (FGCT) Pty Limited v Alphapharm Pty Limited 219 CLR 165
PARTIES:	Koondoola Pastoral Company Pty Ltd (Plaintiff/Cross-Defendant) Woodlawn Pastoral Pty Ltd (Defendant/Cross-Claimant)
FILE NUMBER(S):	337/2008
COUNSEL:	S J Stanton and L Wilson (For the Plaintiff/Cross-Defendant) M Hadley (For the Defendant/Cross-Claimant)
SOLICITORS:	Hargraves Solicitors (For the Plaintiff/Cross-Defendant) Cassidys-Morrison & Teare Barristers & Solicitors (For the Defendant/Cross-Claimant)

JUDGMENT

1 The parties in this matter were engaged in farming activities on adjoining properties in the Finley region of South-Western New South Wales.

2 Koondoola Pastoral Company Limited farmed land owned by Mr Charles Tootell. Each of Koondoola and Mr Tootell were joined as plaintiffs and they are collectively referred to in these reasons as the plaintiffs.

3 The Flanagan family operated a dairy farm on land owned by Woodlawn Pastoral Company Pty Limited.

4 The transactions between the parties that were the subject of these proceedings related to the supply of water by the plaintiffs to the defendant. Their water supply transactions commenced in December 2006 and continued intermittently until October 2008. They took place during a period of severe drought, the result of which was that irrigation allocations to the defendant from the Murray River were reduced to zero. Without water from rain or river, the defendant was unable to grow pasture or other feed for its herd of dairy cattle. Its options were to source water elsewhere or to purchase feed.

5 Between December 2006 and February 2007, March 2007 and May 2007, October 2007 and February 2008, and March 2008 and May 2008 the defendant purchased water from the plaintiffs. The water was metered and the rate paid to the plaintiffs was $250 per mega litre. The plaintiffs’ water source was a spear point bore situated close to the boundary with the defendant’s property.

6 Records kept by Mr Marcus Flanagan for the defendant indicated average flows of 1.67 mega litres per day in 2006, 2007 and 1.5 mega litres per day in 2007 to 2008. In July 2008 Marcus Flanagan approached Mr Tootell with a proposition that would enable the defendant to draw water from the bore for 12 months from July 2008. They entered into discussions following which it was agreed that the defendant would pay the plaintiffs $110,000 plus GST in 12 monthly instalments, and in return in the 12 month period from July 2008 to July 2009 the defendant would pump from the bore, have the use of a lucerne paddock, a 51 hectare area on Mr Tootell’s land and the use of the pivot irrigator on the lucerne paddock. Water for the irrigator was to come from the bore.

7 Marcus Flanagan prepared a lease proposal that was signed by himself and Mr Tootell and dated 24 July 2008. The term of the agreement commenced on 15 July 2008. Monthly instalments were payable on the 15th of each month in arrears. The defendant made three monthly payments up to 15 October 2008. During that period flows from the bore were lower than achieved in the two earlier periods of water purchases. Upgrading and repair works were commissioned by the plaintiffs at a cost of about $26,000 but thereafter the bore produced water at no greater rates than 1.2 to 1.3 mega litres a day.

8 The defendant expended funds fertilising and spraying the lucerne paddock.

9 In October 2008 Marcus Flanagan advised Mr Tootell that the defendant did not propose to make further payments and did not propose to take any further water. Marcus Flanagan proposed that each party bear its own losses of the allegedly failed arrangement and put forward some alternative proposals that were rejected by the plaintiffs.

10 The plaintiffs sued to recover the balance due under the lease proposal. The defendant denied liability and counter-claimed for losses allegedly suffered as a consequence of the failed lease proposal.

11 The essential dispute between the parties centred on the question of whether their bargain included an express or an implied condition concerning the minimum rate of flow of water that would be delivered by the bore. No term to that effect was included in the lease proposal.

12 The issues were;

(1) was the whole of the agreement between the parties contained in the lease proposal document dated 24 July 2008?

(2) if not, was it an express oral condition of the contract that the bore would supply a specified minimum quantity of water over the 12 month period of the arrangement between the parties?

(3) if not, was there an implied condition of the lease proposal that the bore would supply a specified minimum quantity of water over the 12 month period of the lease proposal?

(4) if not, was the failure of the spear point bore to deliver water at the specified rate either a breach of the lease proposal entitling the defendant to terminate the contract and recover damages, or a failure of a condition so fundamental to the commercial arrangement between the parties that it resulted in frustration of the contract so that the loss lay where it fell.

Issue 1 – The Entire Agreement

13 The plaintiffs argued that the lease proposal set out the entire agreement between the parties and that the parol evidence rule prevented the admission of evidence concerning the intentions of the parties at the time the contract was entered into.

14 The lease proposal was not prepared by a professional draughtsman. It was prepared by Marcus Flanagan after discussion with Mr Tootell. It contained a degree of detail specifying the parties, the land that was the subject of the agreement, the consideration to be paid and the instalments in which they were to be paid. It dealt in detail with the obligations of each party for the costs of operating and maintaining the centre pivot irrigator, the bore motor and the bore pump. It made provision for water to be supplied for domestic purposes to Mr Tootell’s house. It made provision for the use and storage on the plaintiff’s land of water supplied through allocations to the defendant from the Murray River when and if they were restored.

15 While the document therefore contained a considerable degree of detail, it was apparent that it was prepared by an inexpert draughtsman.

16 I accepted the evidence of Marcus Flanagan that it was prepared with a view primarily to documenting the discussions with Mr Tootell that reflected the change in responsibility for the operating costs of the equipment to be used.

17 The document was deficient in that it failed to contain a number of provisions that would be obvious to a person experienced in the preparation of agreements of this nature. For instance, it contained no provisions governing the exercise of the option provided for in the document. These were not sophisticated commercial operators accustomed to trading on the basis of standard form or written contracts as in the cases relied upon by the plaintiff of Codelfa Construction Pty Limited v State Rail Authority of New South Wales 149 CLR 337 and Toll (FGCT) Pty Limited v Alphapharm Pty Limited 219 CLR 165.

18 For this reason I concluded that the lease proposal did not incorporate the whole of the agreement between the parties and that the contract was partly written and party oral. For the same reason I admitted evidence concerning the alleged express oral condition.

Issue 2 – Express Oral Condition

19 The precise term of the alleged oral condition was difficult to determine from the pleadings.

20 In paragraph 5 of the cross-claim it was pleaded that the condition provided for was that the bore would supply at least 500 mega litres steadily over a 12 month period. Paragraph 7 pleaded that the bore would supply ground water at approximately the rates delivered during the periods in 2006 to 2007 and 2007 to 2008 when the defendant purchased water from the plaintiffs. In paragraph 7 it was pleaded that the condition provided that the water supply from the bore during the months of July to November would be at least as much and was expected to be greater than during other months of the year.

21 Paragraph 10 expressed the condition in terms that the total annual amount payable under the agreement was attributed as to one hundred thousand dollars to the available ground water and ten thousand dollars to the use of the plaintiffs’ land.

22 In support of its claims in contending this term, the defendant relied upon the evidence of Marcus Flanagan, his brother Nicholas Flanagan and his father Lawrence Flanagan concerning discussions that took place at the defendant’s premises on 8 July 2008. They alleged that Mr Tootell stated that the bore would produce 500 mega litres of water per annum, that it would do so easily or with no troubles at all or you will have nothing to worry about. Marcus Flanagan claimed that he told Mr Tootell that: The basis for the agreement is 500 mega litres of water to be supplied, and if you have no doubts it will produce it then we should be able to do business. Marcus Flanagan said on this basis he offered $200 per mega litre and $10,000 per annum for the lucerne paddock and that Mr Tootell agreed to this.

23 Marcus Flanagan said he noted in the defendant’s farm diary on 8 July 2008 the following: Discussed leasing Charlie’s block with him. He said spear should keep pumping at the same rate of 500 megs for year. Sowed wheat with 80 kilograms of DAP. There is 125 acres under pivot.

24 Marcus Flanagan said he made a further entry on 10 July 2008 as follows: Charlie dropped in. Discussed leasing lucerne and spear. He assured me we would get 500 meg over 12 month period as the best months are July to October because of rest in middle of the year. Must do lease proposal for him.

25 The lease proposal that was signed on 24 July 2008 made no reference to the rates of flow of water from the bore. It contained no guarantee by the plaintiff of a minimum quantity of water to be supplied. Mr Tootell denied that he gave any assurance concerning the rate at which water might flow from the bore. He denied that the rate of flow was even discussed.

26 There were a number of reasons why I preferred the evidence of Mr Tootell to that of the defendant’s witness on the question of this alleged express oral condition. They included the plausibility of Mr Tootell’s evidence that he could never guarantee 500 mega litres a year because his licence to operate the bore was limited to four hundred mega litres. There was a licence document that formed part of Exhibit A that suggested that between October 2008 and October 2010 the limit was in fact 300 mega litres. In the absence of clear evidence I would not construe an agreement in terms that would put a licence holder in breach of the terms of a water licence and potentially in breach of the Water Management Act 2000.

27 There was further plausibility in Mr Tootell’s evidence that at the time of entry into the lease proposal the Finley area was in the grip of a 1:100 year drought and that no one knew what rainfall might be forthcoming to replenish the aquifer that was the source of the water.

28 Marcus Flanagan acknowledged in his affidavit that a drop in the water table was a common problem in the area and that a number of spear point bores in the area had dried up in recent years including the bore on the defendant’s property.

29 Further, there was implausibility in the evidence of the defendant’s witnesses that diary entries were made in July 2008 referring only to flows of 500 mega litres per annum when other significant features of the leasing arrangement were discussed. Those features related to the changes and responsibilities for the costs of operating the pump, the allocation of responsibilities for the operation of the centre pivot irrigator on the lucerne paddock and for the costs of maintenance and repair of the bore motor and pump.

30 The document also imposed an obligation on the defendant to provide water to the Tootell dam and set out the amount and the manner of payment of the consideration for the arrangement. These latter features, though insufficiently significant to be noted in the diary, were expressly included in the lease proposal document. In contrast, the minimum quantity of water to be supplied was said to be the basis for the agreement and was apparently of such significance that it was written up in the diary but it was omitted from the written document.

31 Marcus Flanagan claimed that he prepared a budget on the basis that the defendant would receive 500 mega litres from the bore over the 12 month period. He agreed that this budget was never shown to the plaintiff.

32 The diary entries, if genuine, could have provided persuasive evidence in support of the defendant’s claim but they were not referred to in Marcus Flanagan’s affidavit that were signed as late as 11 November 2009, one day before the hearing commenced.

33 The claimed commitment to the minimum flow was not referred to in two undated documents addressed to Mr Tootell at the time the defendant withdrew from the agreement. The first, on page 19 of exhibit A, stated that the bore did not yield water supply at previously experienced levels or at the 500 mega litre figure that was the basis of Marcus Flanagan’s budget at the time of signing the lease proposal. The second, page 20 of exhibit A, repeated that the bore failed to perform to a standard budgeted for. This document expressly stated that it was not Mr Tootell’s fault that production had dropped. One might expect an accusation of breach of warranty at this point.

34 An allegation of misrepresentation of expected flows was first referred to in a document dated 4 November 2008 that was not addressed to Mr Tootell. That document appeared at page 17 of exhibit A. There was no reference in this document however to any representation by Mr Tootell that a minimum flow of 500 mega litres would be provided.

35 Quantification of the claimed misrepresentation was first raised with Mr Tootell in a letter from the defendant’s solicitor dated 8 December 2008.

36 As to the contention that $100,000 of the consideration for the arrangement related to the cost of the water based on $200 per mega litre, it was said that this was the rate paid on two prior occasions when water was drawn by the defendant from the bore after allowing for $50 for the cost of operation and maintenance of the equipment. This contention was rejected by the plaintiffs for a number of reasons. Mr Tootell said the lucerne paddock was worth $30,000 per annum to him if he grew a crop on it, and therefore leasing it for $10,000 would have been uneconomic. He said the centre pivot irrigator was a valuable piece of equipment that was worth $300,000. This evidence was not challenged.

37 Mr Tootell also said that sales of water in the area at this time recorded average prices per mega litre considerably higher than $200. He attached to his affidavit material to support this assertion. He claimed that there were other nearby property owners to whom water could have been sold at higher prices than $200 per mega litre. Again, Mr Tootell’s evidence was plausible.

38 Effectively there was no acceptable explanation for the absence of reference in the document to what was regarded by all three of the defendant’s witnesses as the basis of the agreement, namely the supply of 500 mega litres of water at $200 per mega litre. It was the defendant’s responsibility to satisfy the court on the balance of probabilities that the claimed representation was made and that it formed an express oral condition of the agreement with the plaintiffs.

39 For the reasons stated, the defendant failed to provide acceptable evidence to discharge that responsibility. I therefore reject the claim that there was an express oral condition of the agreement between the parties concerning the minimum quantity of water to be supplied.

Issue 3 – Implied Condition

40 The law demands that a number of features be met before a court is in a position to imply additional conditions into a bargain arrived at between the parties to a contract. The onus of satisfying the court that these conditions have been met rested on the defendant.

41 In BP Refinery (Westernport) Pty Limited v Hastings Shire Council 52 ALJR 20 at 26 the High Court set out the following essential requirements before an implied condition will be imported into a contract:

(1) the asserted condition must be reasonable and equitable;
(2) it must be necessary to give business efficacy to the contract;
(3) no term will be implied if the contract is effective without it;
(4) it must be so obvious that it goes without saying; and
(5) it must not contradict any express term of the contract.

42 In Codelfa, Mason J added a further requirement, namely that the asserted term was one that the parties would have agreed to if they had turned their mind to it. Mason J also noted the difficulty in identifying with certainty the asserted term. He said it was not enough to say that it was reasonable to imply the term. It was necessary that the BP Refinery tests be satisfied.

43 I was not satisfied that the defendant had established that the necessary conditions were met.

44 The matters raised by Mason J in Codelfa presented particular difficulty to the defendant. Mr Tootell presented cogent reasons why, if asked, he would not have agreed to a provision that guaranteed a minimum level of ground water flow.

45 There was no evidence that the supply of water on prior occasions involved any warranty concerning the level of supply. All that could be said was that it provided evidence of flows received during certain months of the year in 2007 and 2008. Further, the agreement was that the defendant would have water from the bore subject to the retention by the plaintiffs of sufficient water to maintain adequate supply of domestic water for the Tootell household.

46 That the bore failed to supply water at rates considered adequate by the defendant did not suggest that the asserted condition was reasonable and equitable or that the condition was essential to give business efficacy to the contract or that the contract was ineffective without it.

47 I reject the claim therefore that any condition relating to the rate of flow of ground water should be implied into the contract.

Issue 4 – Breach or Frustration

48 In the circumstances it was not necessary to consider the issue of whether the failure to supply water at a minimum level constituted a breach of the agreement entitling the defendant to terminate it.

49 Principles of law concerning the doctrine of frustration were considered at length by members of the High Court in Codelfa. They adopted the principles established in the House of Lords in Davis Contractors Limited v Fareham Urban District Council [1956] AC 696 where Lord Radcliffe at 729 said:

Frustration occurs whenever the law recognises that, without default of either party, a contractual obligation has become incapable of being performed because of circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract … It is not this that I promised to do.

50 Lord Justice Atkin quoted Lord Simon of Glaisdale in National Carriers Limited v Panalpina (Northern) Limited [1981] AC 675 at 700 to the effect that whether a contract was frustrated depended upon there occurring a supervening event that changed the rights and obligations under the contract so significantly from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to their contract in the new circumstances.

51 In Codelfa the High Court noted the emphasis throughout the authorities in deciding whether the doctrine of frustration was to be applied was not governed by considerations of hardship, inconvenience or material loss. They required a change in circumstances that was unexpected or not reasonably contemplated by the parties that was so significant that the obligations to be performed would be substantially different from those of which the parties contracted.

52 Applying these principles to the current case, I concluded that the doctrine of frustration did not apply.

53 One of the obligations on the plaintiffs provided for in the lease proposal was that ground water was to be provided from the shallow bore on Mr Tootell’s land. However it was not the only obligation. The document provided also for the use of the lucerne paddock and irrigator and provided for the use of channels on Mr Tootell’s land for water flow and water storage if water allocations in the Murray River were restored.

54 Marcus Flanagan in his affidavit stated that the ground water was not significant to the use of the lucerne paddock because the cost of running the pivot irrigator was such that he did not intend to use it. Nor could it be said that the provision for the use of the channels on the Tootell land depended upon groundwater flows. Most significantly, however, it could not be said that the reduction in flows from the bore was unexpected or not reasonably contemplated. Farming is a commercial activity that is beset by unexpected events, particularly of those arising from fire, flood or drought. In this case, the event was drought, a condition current and known to the parties at the time of execution of the agreement.

55 It would not have been possible at that time to predict with certainty that the drought would not continue to the point suspected by Marcus Flanagan to be the cause of the problem, namely that the reduction in ground water flows from the plaintiff’s bore resulted from a drop in the water table. This had occurred to his knowledge with other bores in the area including one on the defendant’s property. No greater certainty could be given to any prediction that the drought might break and that significant rainfall might be experienced so that groundwater from the bores would not be required by the defendant.

56 I could therefore not reasonably conclude that the reduction in flows was an unexpected event or represented a risk that could not reasonably have been contemplated by the plaintiffs or the defendant at the time the lease proposal was entered into.

57 The result therefore is that I find that the defendant was in breach of its contract with the plaintiff when it terminated the arrangement on 15 October 2008 and there will be a verdict for the plaintiffs on their claim. There will be a verdict for the plaintiffs on the cross-claim. The matter will be stood over to 9.30 on 9 December 2009 to deal with claims in respect of interest and costs and to make final orders.

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