Lindsay-Owen v Associated Dairies Pty Ltd

[2000] NSWSC 1095

CITATION:	Lindsay-Owen v Associated Dairies Pty Ltd [2000] NSWSC 1095
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 3968/00
HEARING DATE(S):	16 & 17 October and 9 & 10 November 2000
JUDGMENT DATE:	10 November 2000
PARTIES :	Gregory Hamilton Willoughby Lindsay-Owen (P) Associated Dairies Pty Limited (D1) Jeanette Blanche French (D2) Ruth Lindsay (D3)
JUDGMENT OF:	Hamilton J

COUNSEL :	M J Stevens (P) D M Loewenstein (D1-3)
SOLICITORS:	P A Somerset & Co (P) Kitamura & Associates (D1-3)
CATCHWORDS:	CONTRACTS [126] - General contractual principles - Discharge - Impossibility of performance - In what cases performance excused - Contract giving pre-emptive right to purchase land, stock and equipment and statutory milk quota of dairying business - Abolition of milk quota.
LEGISLATION CITED:	Dairy Industry Act 1979 Dairy Produce Act 1986 (Cth)
CASES CITED:	Brisbane City Council v Group Projects Pty Ltd (1979) 145 CLR 143 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 Davis Contractors Ltd v Fareham UDC [1956] AC 696 Laws of Australia tit Contracts Section 7.8 Discharge [42], Martin Davies, J L R Davis and M P Ellinghaus
DECISION:	Contract frustrated.

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

HAMILTON J

FRIDAY, 10 NOVEMBER 2000

3968/00 GREGORY HAMILTON WILLOUGHBY LINDSAY-OWEN v ASSOCIATED DAIRIES PTY LIMITED & ORS

JUDGMENT

1    HIS HONOUR: These proceedings arise out of a contract between the plaintiff and the defendant, that is embodied in a deed dated 23 April 1994, called the Clydesdale Dairy Farm Deed ("the deed"). Prior to the execution of the deed there had been disputes among various parties concerning its subject matter. The present plaintiff had commenced proceedings against the first defendant in the Federal Court, which had not proceeded to finality. Those proceedings, and the disputes between the parties generally, were settled by the deed. By the deed the first defendant granted rights of pre-emption to the plaintiff over what was called "the business". The terms of the deed granting those rights were perhaps a little unconventional but, in essence, the effect of the deed was to provide by clauses 2.2 and 2.3 respectively, that, if the first defendant proposed to sell the business at auction, he should give the plaintiff 21 business days of notice of that auction and, if the sale were to be by private treaty, it should communicate to the plaintiff the price at and the terms and conditions on which it proposed to sell the interest, so that he might himself purchase on those terms if he desired.2    The deed contained the following definitions in cl 1.1:

“’Business’ means the dairy farming activity carried on by the Clydesdale Grantor [the first defendant], the Clydesdale Dairy Farm and the milk quota attached to the dairy farming activity.
...
‘Clydesdale Dairy Farm’ means the land comprised in Certificate of Title Folio Identifiers … with improvements, equipment and stores.”

Various drafts and other matters of negotiation, were put to me as casting some light on the meaning of these definitions, as they come to be considered in this case. However, in my view, there is no ambiguity or uncertainty in the definitions which would make appropriate to be taken into account in the process of interpretation any extrinsic evidence, much less evidence of actual negotiation between the parties.

3    It seems to me clear enough that the business is defined as comprising three elements, the dairy farming activity, the land and equipment and the milk quota. The milk quota was a quota, fixed under the provisions of the Dairy Industry Act 1979 (“the DIA”), of milk which could be supplied into the drinking milk market, about the significance of which more will be said in due course. It seems to me that the deed did impose an obligation on the defendants, or more specifically the first defendant, not to sell the constituent parts of the business in a piecemeal way but to sell the business, if it were minded so to do, as a whole and in a fashion which gave the plaintiff the opportunity to exercise the pre-emptive rights conferred on him.

4    During the period since 1994, some milk quota has been sold and some dairy cattle have been sold by the first defendant. It is not contended by the plaintiff that the sale of some quota, or the sale of some cattle, by the first defendant in the course of conducting the dairy farming activity, is prohibited by the terms of the deed. But the plaintiff, as I have already suggested, contends that the sale of all the enterprise in pieces, is a breach of the deed and one which the Court ought restrain to protect his contractual pre-emptive rights. The defendants, at this stage, have evinced an intention to sell all the cattle separately and either to retain the land, or to sell it to another purchaser, or other purchasers. The first defendant also intends to sell separately, or certainly claims to have the right to sell separately, the land, or pieces of it and the equipment. It says that, in effect, as it makes each sale it will offer the relevant cattle, land or equipment to the plaintiff, in a fashion which will honour his right of pre-emption. The plaintiff, as I have said, says that if the first defendant proceeded in that way, it would not honour the right of pre-emption and would be in breach of the term, upon the true construction of the contract, that the business should be offered as a whole. The present interlocutory regime is that, in exchange for the plaintiff's undertaking as to damages, the first defendant has been restrained from proceeding to sell all the dairy cattle separately from the land and equipment.

5    The major event which has supervened since the deed was entered into is that in 2000 the New South Wales Parliament has amended the DIA, effective as at 1 July 2000, so as to abolish the quota scheme. Perhaps the best way of stating the effect of the quota scheme, for the purposes of this litigation, is to turn to the evidence that has been given as to the effect of that abolition in relation to the business. Mr French, the secretary of the first defendant, in his affidavit sworn 27 September 2000, deposed as follows:

“8 The dairying industry was, until 1 July 2000, a State regulated industry as a result of which (inter alia) a milk production quota system operated. The quota system guaranteed to a milk producer a price for the milk produced under the terms of the quota. Milk from Clydesdale Dairy was supplied to National Foods Milk Ltd (“National Foods”) under the quota system.
9 The milk quota system ceased upon the de-regulation of the dairy industry on 30 June 2000 and all milk quotas were cancelled. Thereafter milk producers had the opportunity of supplying milk to milk processors under individual contracts. The price for milk sold under contract was initially mooted by National Foods at 29 cents - 31 cents per litre, a price at which Clydesdale Dairy could not produce milk profitably. Ultimately, National Foods elected to offer Dairy Farmers a two tiered pricing system for, respectively, contracted milk and un-contracted milk. Under that system, contracted milk equated to milk under the former quota system except that the price is fixed by National Foods; un-contracted milk equates to milk surplus to the volume subject to quota under the former quota system. The price for all milk (quota and excess of quota) supplied pursuant to quota under the former quota system, was on average 42 cents per litre. The price for contracted milk has been set at 31.5 cents per litre; the price for un-contracted milk has also been set at 31.5 cents per litre until 1 October 2000 when the price for un-contracted milk will reduce to 15.4 cents per litre.”

6 There is no dispute that at the time the New South Wales amending legislation was passed (New South Wales being the last State to pass the legislation abolishing subsidisation of drinking milk) a Federal assistance scheme came into operation. That is a complicated scheme, the operation of which, both generally and in relation to the subject operation, is far from entirely clear. The scheme was principally embodied, by amendment, in the Dairy Produce Act 1986 (Cth) ("the DPA"), although there is other associated legislation. So far as the evidence goes, the effect in relation to the business of that legislation is stated as follows in Mr French's affidavit:

“Under the Federal Structural Adjustment Program, a payment will be made to Clydesdale Dairy based on the total milk supplied to National Foods during the year ending 30 June 1999. This payment will be made by 32 quarterly instalments and is, on my understanding, not compensation for the deregulation of the industry but a gratuitous payment to enable milk producers to reconstruct their businesses with some Federal Government support whereas the milk quotas were a State controlled matter. It is taxable as income.”

I have not gone and do not intend, to go in detail into that legislation. A quick survey of the legislation, with the assistance of counsel (and I am particularly indebted to Mr Mark Stevens, of counsel for the plaintiff, in this regard) shows that the benefit of the payments certainly does not run automatically with the land and does not necessarily pass to a purchaser of the land, or of the dairy farming activity, with the sale or transfer of the land or business. The quantum of the payments and their relation to the price of milk lost as a result of the termination of the subsidy scheme simply does not appear from the evidence.

7    Equally, one is not able to tell from the evidence, what change there is, or will be, to the profitability of the business by reason of the change in the legislation. In the evidence which I have quoted, Mr French broadly and baldly alleges, that milk will not be able to be profitably produced at this dairy as a result of the changes. Although it was admitted into evidence, I am not prepared to act upon a statement so general and unsubstantiated. What little hard evidence there is of the profitability of the enterprise is a statement of the overall profit or loss made by the first defendant during the seven years from 1994 to 2000 both inclusive. That shows substantial losses in four years and substantial profits in three years, including the 2000 year. There is some suggestion on the evidence that the years in which there was a profit were years in which cattle were sold and profit made on the sale. It is, of course, even now, less than five months since the changed regime came into operation. It is not possible to come to any conclusion at all on the evidence on the change of profitability of the company, or its operation of the dairy farming activity as a result of the legislative changes which have occurred.

8    Mr Loewenstein, of counsel for the first defendant, objected to evidence on the subject matter of profitability, brought forward late by Mr Stevens, on the ground that it was hearsay evidence and that the expert who had provided the information was not available for cross examination. He said that, if the evidence were admitted, he would need time to understand it for the purposes of cross examination and to answer it if necessary. However, since I am of the view that the material brought forward by the first defendant has not established anything material as to a change in profitability, there is no need to grant the plaintiff an opportunity to apply for an adjournment to permit this material to be dealt with and the absence of opportunity will make no difference to the determination of the proceedings.

9    Whilst there is a debate as to the proper construction of the agreement, Mr Loewenstein contends, as I have already said, that, upon a piecemeal sale of the elements of the business, there would be no breach of contract by the first defendant on the proper construction of the agreement contained in the deed, a proposition which is controverted on the plaintiff's part.

10    The first question which arises is a question of construction of the agreement. It is contended, on behalf of the first defendant, that there would be no breach of its obligations if the elements within the business are sold separately, provided that the plaintiff is afforded an opportunity to exercise a right of pre-emption over each element as it is sold. The plaintiff on the other hand contends that, by reason of the grant of the right of pre-emption in respect of the business combined with the tripartite definition of the business, there must arise an obligation not to sell the elements of the business separately but to dispose of them together at the same time. In my view the latter contention is correct and the first defendant is under an obligation to dispose of the business as a whole. The promise to allow the plaintiff the right to purchase the whole imports an obligation not to dispose of the elements separately.

11 In light of this conclusion, the central argument in this case becomes whether the agreement has been frustrated by the legislative change which has supervened. In the circumstances of this agreement and its operation, so far as they are made known to the Court, the general principles relating to frustration are not controversial. There is a useful general discussion of the modern law by Martin Davies, J L R Davis and M P Ellinghaus in the Laws of Australia tit Contracts Section 7.8 Discharge [42] ff. In Davis Contractors Ltd v Fareham UDC [1956] AC 696 Lord Radcliffe said at 728 - 729:

“By this time it might seem that the parties themselves have become so far disembodied spirits that their actual persons should be allowed to rest in peace. In their place there rises the figure of the fair and reasonable man. And the spokesman of the fair and reasonable man, who represents after all no more than the anthropomorphic conception of justice, is and must be the court itself. So perhaps it would be simpler to say at the outset that frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.
There is, however, no uncertainty as to the materials upon which the court must proceed. ‘The data for decision are, on the one hand, the terms and construction of the contract, read in the light of the then existing circumstances, and on the other hand the events which have occurred’ (Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd, [1944] AC 265, 274 - 275, per Lord Wright). In the nature of things there is often no room for any elaborate inquiry. The court must act upon a general impression of what its rule requires. It is for that reason that special importance is necessarily attached to the occurrence of any unexpected event that, as it were, changes the face of things. But, even so, it is not hardship or inconvenience or material loss itself which calls the principles of frustration into play. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.”

His Lordship's words have been adopted, or treated as correctly stating the law, in authoritative decisions in Australia: Brisbane City Council v Group Projects Pty Ltd (1979) 145 CLR 143 at 161; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 357, 377.

12    In the cases, contracts have been held to be frustrated where the subject matter is destroyed, or radically changed in nature by supervening events. In the end a value judgment must be made by the Court. Questions of the degree of change of the situation must be taken into account. It is not only the absolute impossibility of performance that will effect a frustration: see Codelfa Construction Pty Limited v State Rail Authority of New South Wales supra where, on a railway construction project, disturbed residents obtained an injunction restraining 24 hour working, which had been contemplated by the parties under the contract.

13 The provisions of the Frustrated Contracts Act 1978 have no relevance to the decision of the question before me.

14    Mr Loewenstein puts the defendants’ arguments in two ways. He says that the business by definition, contains three elements, one of which is the milk quota. If the quota is abolished and that element destroyed, it can no longer be said that the tripartite entity, which was the subject of the contract, exists. He says, alternatively, that, even if it cannot be said that the business, as defined, no longer exists, nonetheless, there is such a radical change in the circumstances, that the obligation thereafter continuing cannot be taken to be the obligation which the first defendant undertook. It is important to note in this regard that, upon what I have held to be the correct construction of the contract, an obligation is placed upon the first defendant to retain all three elements of the business, or only to seek to dispose of them at the one time. He says that the obligation to retain those elements, including the continuation of the dairy farming activity, is a quite different obligation, in circumstances where the subsidy scheme has been abolished.

15    Mr Stevens, on the other hand, whilst conceding that the change is a considerable one, points to cases where radical changes in profitability caused by changing circumstances have not been taken to change the essential nature of the obligation, so that the contract cannot be taken to have been frustrated. He says that what we have got here, before and after the legislative change, is a working dairy farm which produces milk and buys and sells cows. The fact that the milk is sold into a radically different market and that, indeed, the price of dairy cattle may be substantially changed by the difference in the milk market, does not affect the nature of the obligation in a way which will attract the doctrine of frustration. He points out that, after the legislative change, as before, the first defendant, for the purposes of the business owns land, owns cows, grazes cows on the land, produces milk, sells milk and buys and sells cows. He points out that, if this produces a change or fluctuation in the profitability of the business, that is not of itself a new situation, if one looks at the history of profits as set out in the evidence.

16    The question is a nice one and the Court, as I have said, must make a value judgment. I have said that no conclusion can actually be drawn as to the change in profitability since the legislation, but the price differential, which is apparent from the evidence and which is not contested, is a radical one and it seems to me that in a real way the whole market, into which milk is sold in this State, is radically changed. The obligations imposed by the deed, as I have already said, include an obligation to dispose of the dairying activity, the land and equipment and the quota (now abolished) together. It seems to me that the obligation imposed by that clause, in the context of the change, are radically altered.

17    There is one other matter to which I need to advert. Mr Stevens has also made submissions, by reference to the authorities, which deal with the question of whether or not the parties should be taken as having contemplated the change which has occurred, or its possibility, at the time of the entry into the contract. In some cases, the parties have made provision for the consequences where some changes occur, but not others. In those cases, one can sometimes draw the inference that the parties' intention was, if disadvantage arose from some contemplated change, that the disadvantage should lie where it falls, in accordance with other provisions of the contract. Sometimes, as here, there is no provision as to what will occur in the light of the future circumstance which has arisen.

18    Commodity subsidy schemes have not been unusual in the 20th century. I suppose it is correct to say that, where they are implemented by legislation, there must always be the possibility that the legislation may be amended or repealed. However, in my view, there is nothing in the evidence that would suggest that the abolition of the quota scheme was, or ought to have been, in the contemplation of the parties at the time the deed was entered into more than six years ago, or to infer that it was their intention that in the light of such a change the contractual provisions should remain in force, any loss or disadvantage remaining where the contractual provisions cause it to fall.

19    The result of my consideration is that I have come to the conclusion that the agreement embodied in the deed, so far as it is unperformed, has been frustrated by the supervening event of the abolition of the quota subsidy scheme.

…oOo…

20    The question of costs has been debated before me. Clearly the defendants have been substantially successful in the proceedings. In the end that was on the issue of frustration. Mr Stevens has made some submissions about the costs of the first day, on the basis that the frustration issue had not really arisen at that time. However, I do not think this is a case in which the costs can conveniently be divided up, even to the extent of dividing out a separate element in respect of an interlocutory application, although at the end of the first day an interlocutory injunction was, in fact, granted. There was a misunderstanding generally, as to whether the matter was on that day proceeding on an interlocutory, or final, basis. In the end I granted short term interlocutory relief, on the basis that I should myself give the matter an early final hearing, which I have now done. A great deal of what occurred on that first day was the reading into evidence of the affidavits and presentation of the material generally, which has formed the body of evidence upon which I have determined the case on its final hearing. I do not think, in the circumstances, there is any element which can usefully be separated out for separate consideration as to costs and the correct result is that the defendants should have their costs generally. Short minutes should be brought in before me incorporating any orders that are deemed appropriate arising out of this judgment, and they should embody a costs order in the above terms.

…oOo…

Last Modified: 03/27/2001