McMahon v National Foods Milk Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

No 3841 of 2008

ANTHONY JOHN McMAHON and McMAHONS DAIRY PTY LTD (ACN 102 840 773)	Appellants
	v
NATIONAL FOODS MILK LTD (ACN 051 192 272)	Respondent

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JUDGES:	NETTLE, NEAVE and DODDS-STREETON JJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	21 May 2009
DATE OF JUDGMENT:	25 June 2009
MEDIUM NEUTRAL CITATION:	[2009] VSCA 153
JUDGMENT APPEALED FROM:	[2008] VSC 208 (Hargrave J)

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CONTRACT – Interpretation – Exclusivity – Whether Licensed Distributor Agreement conferred exclusive right to sell milk in defined territory – Implied term – Whether exclusive right to sell milk in defined territory reasonable and necessary to give Licensed Distributor benefit of agreement.

RESTRAINT OF TRADE – Covenant not be involved in competitive business during term of Licensed Distributor Agreement or for six months thereafter – Whether applicable to acts preparatory to commencement of competitive business – Whether binding on director of covenantor .

GUARANTEE AND SURETY – Discharge of – Whether guarantee discharged by novation of guaranteed obligations.

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APPEARANCES:	Counsel	Solicitors
For the Appellants	Mr P M J Bick QC with Mr R J Harris	Settle Legal
For the Respondent	Mr N J O’Bryan SC with Mr C E Shaw	Deacons

NETTLE JA:

This is an appeal from a judgment given in the Commercial and Equity Division for damages of $1,262,004.04 for breach of Licensed Distributor Agreements and pursuant to attendant guarantees.

The facts

The facts as found by the judge below were that:

1) On or about 6 September 2000 the respondent National Foods Milk Limited (‘National Foods’) entered into a written ‘Heads of Agreement’ with the McMahon’s Milk Pty Ltd (‘McMahon’s Milk’) and a guarantee executed by the first appellant (‘Mr McMahon’).

2) There were terms of the Heads of the Agreement inter alia as follows:

1.4 Licensed Distributor Agreement
a)This agreement is subject to the terms of the Licensed Distributor Agreement and a breach of this agreement will amount to a breach of the Licensed Distributor Agreement.
b)In the event of a conflict between the terms of this agreement and the terms of the Licensed Distributor Agreement, the terms of this agreement will prevail.

2 ENTRY INTO AGREEMENT
The Parties will enter into an agreement at a later date in the same terms as this Heads of Agreement specifying the Volume Area and the Licence Fee.

3 LICENCE OF VOLUME
3.1 Licence
On the Volume Acquisition Date, National Foods will licence the Volume[1] to McMahon [scil. Mc Mahon’s Milk].
[1]‘Volume’ was defined as ‘the right to distribute Products in the Volume Area’ and ‘Products’ was defined as ‘the products of National Foods’ detailed in Appendix 5 of the Licensed Distributor Agreement.

3.2 Licence Fee
In consideration of the licence to it of the Volume, McMahon will pay National Foods the Licence Fee. The Licence Fee will be calculated as follows:
($0.04 x v) x 60[2]
[2]These numbers had been written in hand and initialled by the parties.

where v = the number of litres sold in the Volume Area by McMahon during the first four weeks after the Volume Acquisition Date.

3.3 Payment of Licence Fee
a)The Licence Fee will be paid in monthly instalments of the amounts determined by National Foods and set out in the schedule.
b)Within 14 days of the end of each month of the Term in which an instalment of the Licence Fee is payable, National Foods will invoice McMahon for the instalment of Licence Fee payable for that month.
c)McMahon must pay the invoices referred to clause 3.3(b) within 14 days of the date of invoice.

3.4 Default on Monthly Payment
a)If McMahon does not pay an invoice referred to in clause 3.3(b) within 14 days of the date of invoice, the outstanding amount will bear interest at the Default Interest Rate calculated on a monthly basis on the amount outstanding.
b)Interest will be due and payable monthly in arrears on each Interest Payment Date on which the invoice referred to in clause 3.3(b) remains outstanding.

…
10 GUARANTEE
In consideration of the parties entering into this agreement, the Guarantor [scil Mr McMahon] guarantees the payment of all sums payable by McMahon under this agreement referred to in clauses 3.3 and 3.4. This guarantee will be a continuing guarantee and will not released by any neglect or forbearance on the part of National Foods or any time or other indulgence granted to McMahon by National Foods.

3) At the same time as it executed the Heads of Agreement, National Foods entered into a written Licensed Distributor Agreement with McMahon’s Milk, of which the obligations were secured by a Guarantee and Indemnity executed by Mr McMahon.

4) The Licensed Distributor Agreement contained terms inter alia as follows:

2         RIGHTS GRANTED
2.1      Grant
In consideration of the Licensed Distributor observing its obligations under this Agreement National Foods grants to the Licensed Distributor in respect of the Territory and on the terms set out in this Agreement:
a) a licence to use the System,[3] to operate the Licensed Distributorship[4] and to use the Marks[5] and other associated marks or logos together with the right to sell and deliver the Products;
[3]‘System’ was defined as ‘the method of sale, distribution and marketing developed by National Foods and used in or in connection with the sale, distribution and marketing of the Products’.
[4]‘Licensed Distributorship’ was defined as ’the business conducted by the Licensed Distributor using the System pursuant to the rights granted to it by this Agreement’.
[5]‘Marks’ was defined as ‘applications and registrations under the Trade Marks Act 1995 (Cth), symbols, insignias, distinctive designs and features described in Item 2(a) of the Schedule including or excluding any other trade marks as subsequently amended.
b)   the right to trade and advertise as a licensed distributor of the Products and use of the System;
c)   the benefit of National Foods’ accounting and management knowledge and experience in the sale, marketing and distribution of the Products; and
d)     all other rights and benefits accruing to the Licensed Distributor by virtue of this Agreement.

...
2.3 Exclusivity
Subject to the provisions of this Agreement and in particular this clause 2 the rights granted to the Licensed Distributor are to be exclusive to the Licensed Distributor for the Territory.

…
5 PRICE AND TERMS OF TRADE
5.1 Price, Price Adjustments, Rebates and Allowances
National Foods will sell to the Licensed Distributor those Products ordered by the Licensed Distributor at the prices set out in National Foods’ then current price list and in accordance with National Foods’ standard trading terms, pricing adjustments, rebates and allowances at that time, including the State Specific Terms and Conditions relating to the state in which the Territory is located.

…
7         CUSTOMERS
7.1      Trade Customers
a)   The Licensed Distributor has the sole and exclusive right to service Trade Customers[6] on behalf of National Foods.
[6]‘Trade Customer’ was defined as ‘persons selling the Products in the Territory details of which Trade Customers are set out in Appendix 8 and such other person that may be added to Appendix 8 during the Term’. There were no persons set out in Appendix 8.
…

7.2 Household Customers
a) The Licensed Distributor has the sole and exclusive right to service Household Customers[7] on behalf of National Foods.
[7]‘Household Customer’ was defined as ‘domestic Customers living in those streets in the Territory details of which are set out in Appendix 10 and such other streets that may be added to Appendix 10 during the Term’. There were no details of streets set out in Appendix 10.
…

7.3 National Food Customers
a) The Licensed Distributor must not sell or deliver to or otherwise deal with National Foods Customers except to the extent directed or requested in writing by National Foods and then only in accordance with the terms and conditions relating to the delivery of Products to National Foods Customers, details of which are set out in the Manuals.
…

…
9.3 Continuing obligations
a) Conduct of the Licensed Distributorship
i.provide the services and deliver the Products required by this Agreement;
ii.exercise its best endeavours and efforts in the conduct of the Licensed Distributorship and promote the mutual interests of National Foods and the Licensed Distributor;
iii.not engage in any business other than the Licensed Distributorship at the Premises or otherwise unless authorised in writing by National foods; and
iv.provide such services and employ such employees as is required [sic] to ensure the proper operation of the Licensed Distributorship’

…

23.6 Payment
a) Subject to correction of any errors in an account, the Licensed Distributor will pay the net sum stated in the accounts sent by National Foods under clause 22.2 within 21 days after the date of the account and will otherwise abide by such terms as to the payment of the Licensed Distributor accounts that may be agreed between National Foods and the Licensed Distributor in writing.
…

23.16   No Competition
a)   The Licensed Distributor must not, without the prior written approval of National Foods, be involved in any capacity during the Term (whether as a joint owner, partner, agent, adviser, employee, the Licensed Distributor, director, shareholder or otherwise) in any business involving the purchase, sale, distribution or marketing of any product similar to any of the Products
b)   For the period set out in Item 11 of Schedule 1, the Licensed Distributor must not be involved in any such capacity in any business involving the purchase, distribution or marketing of any product similar to the Products within the Territory.
c)   For the period set out in Item 11 of Schedule 1, the Licensed Distributor must not solicit orders of any product similar to any of the Products from any Customers.[8]
[8]‘Customer’ was defined as ‘any person to which the Licensed Distributor distributes the Products in the Territory during the Term including Trade Customers, Household Customers and National Foods Customers.’

5) The Guarantee and Indemnity provided that:

I, ANTHONY JOHN MCMAHON, of [address] (‘the Guarantor’) … in consideration of you consenting to the granting of the rights within the Licensed Distributorship and executing the Licensed Distributor agreement at my request and upon the terms and conditions set out therein DO HEREBY GUARANTEE to you:
1.Payment of all monies, fees and outgoings payable by the Licensed Distributor as therein described pursuant to or in consequence of the said Licensed Distributor agreement on the days and times and in the manner appointed thereby.

2.Due and prompt performance and observance of any and all covenants obligations terms and conditions on the part of the Licensed Distributor to be performed or observed pursuant to the Licensed Distributor agreement or any other agreement referred to therein.

3.That I will not act in a manner which, if I was the Licensed Distributor, would be a breach of the Licensed Distributor agreement by the Licensed Distributor, and accordingly I guarantee my own due and prompt performance and observance of any and all covenants obligations terms and conditions contained in the Licensed Distributor agreement or any other agreement referred to therein.

This Guarantee will be a continuing Guarantee and will not unless specifically provided in writing be released by any partial payment or by any neglect or forbearance on the part of yourself or any time or other indulgence granted to me, nor shall you be required to first demand payment from the Licensed Distributor as this Guarantee will operate as an independent agreement which is in no way dependent upon the terms of any other agreement. I covenant to indemnify you and keep you indemnified from and against all actions proceedings costs damages expenses claims and demands whatsoever for or in respect of the non payment of the said monies fees or outgoings or any part thereof or the breach non-performance or non observance of any of the said covenants of conditions or anything relating thereto.
I acknowledge that you have entered into the Licensed Distributor agreement with the Licensed Distributor, being a company owned and controlled by me, for my benefit, and acknowledge accordingly that this Guarantee is to be construed in the widest possible terms so that you are as protected as you would have been had I actually been the Licensed Distributor myself.

6) After execution, the Heads of Agreement, the Licensed Distributor Agreement and the Guarantee and Indemnity were novated by conduct with the effect that M P McMahon Pty Ltd (‘M P McMahon’) assumed all of McMahon’s Milk’s rights and obligations under the Licensed Distributor Agreement and the Guarantee and Indemnity were transformed so as thenceforth to apply to M P McMahon’s obligations under the novated Licensed Distributor Agreement as it had previously applied to McMahon Milk’s obligations under the Licensed Distributor Agreement.

7) Until shortly before 1 January 2003, M P McMahon performed all of its obligations under the Licensed Distributor Agreement.

8) Late in 2002, Mr McMahon told Mr Paul Pino of National Foods that he was taking over the family milk business, until then conducted through M P McMahon, and that he would henceforth be conducting the business through a new company, McMahon’s Dairy Pty Ltd (‘McMahon’s Dairy’), and he asked Mr Pino what needed to be done about that at National Foods’ end. That led to Mr McMahon filling out a new credit application in the name of McMahon’s Dairy and a guarantee of McMahon’s Dairy’s obligations to pay for Products supplied on credit. Mr McMahon faxed those documents to National Foods under cover of a fax header sheet as follows:

M. P. McMAHON PTY LTD
A.B.N. 71 004 293 430

TO:                Britt
FROM:          Tony McMahon        DATE: 27.12.02
SUBJECT:       Name change
MESSAGE:
Britt please note as from 30/12/02 we will be trading as McMahons Dairy P/L ACN 102 840 773.
Thank you
Tony McMahon

9) Thereafter, all invoices and other statements relating to the licensed distributor account previously in the name of M P McMahon were sent to McMahon’s Dairy and all correspondence from McMahon was on McMahon’s Dairy letterhead. National Foods commenced invoicing McMahon’s Dairy for milk sold and delivered and for licence fees and received payments from McMahon’s Dairy.

10) The judge held that, taking the evidence as a whole and looking at it objectively, it was to be inferred that the parties had thereby agreed to a second novation of the Licensed Distributor Agreement whereby McMahon’s Dairy assumed all of M P McMahon’s rights and obligations under the Heads of Agreement and the Licensed Distributor Agreement and that Mr McMahon agreed to ‘the continuation of his guarantees of the whole of the commercial arrangements between National Foods and his companies which were the subject of the novation’.[9]
[9]Reasons, [266].

11) On 13 August 2002 Mr McMahon wrote to Mr Pino complaining about an unlicensed National Foods distributor, Butlers, being ‘allowed to deliver a competitor’s milk “into contra outlets”.’ On 17 February 2003 he made a similar complaint about other distributors selling competing products to customers in the Territory. In April 2003 McMahon’s Dairy ceased paying monthly licence fees due under the Heads of Agreement[10] due to the presence and canvassing of other National Foods distributors in the Territory and, on 22 August 2003, Mr McMahon wrote to Robert Foley, the new account manager at National Foods, as follows:
[10]The judge referred to the licence fee as being payable under the Distributors Agreement.

Please note that I have suspended payments for my LDI agreement due to the presence and active canvassing of other Pura[11] distributors in my zone. I have taken this step due to the inaction of National Foods to remedy the situation, and will be proceeding to claim back all previously paid LDI charges in the near future. For the record.[12]
[11]The trade name of National Foods milk.
[12]Reasons, [139].

12) At much the same time, McMahon’s Dairy began delivering Pura milk products to customers outside the Territory. Mr McMahon said that he did this ‘to bolster my volume as I was being deprived of a massive amount of volume by National’s failure to terminate Moonya [Farm]’.

13) On 20 January 2004 Mr McMahon confirmed that his position remained as set out in his letter of 22 August 2003 and, in response to National Foods’ allegations that he was acting in breach of agreement, the next day he wrote to Mr Ewers of National Foods as follows:

I am interested that you are threatening to terminate our agreement. It is a pity that you haven’t taken such a strong stand against Moonya, who have been undermining my area for the entire length of our agreement, you have failed to act against them to protect a licensed distributor.

14) In a meeting with Mr Ewers on 3 June 2004, Mr McMahon said that he would not pay outstanding licence fees ‘until Moonya [Farm] is sorted out’ and he complained about the ‘loss of sales and lack of protection’. Not long after that National Foods began negotiations to purchase the Moonya Farm business and so to overcome the problem, but that was not completed before relations between National Foods and Mr McMahon finally broke down.

15) On 29 October 2004, Mr Wooller of National Foods told Mr McMahon that National Foods had decided to terminate Moonya Farm. But after that Moonya took legal advice that National Foods was bound to give reasonable notice of termination to Moonya Farm and that reasonable notice was not less than six months. National Foods determined not to give notice immediately because of the poor state of health of the principal of Moonya Farm. National Foods, however, also deliberately omitted to inform Mr McMahon of its decision not to give Moonya notice of termination. The judge found that Mr Wooller made a conscious decision not to do so because he considered that National Foods’ chances of securing payment of outstanding milk charges and licence fees from Mr McMahon, and persuading Mr McMahon to sign a new Licensed Distributor Agreement to take effect when the then current agreement expired on 20 August 2005, would be compromised if Mr McMahon knew that Moonya had not been given notice.

16) In late May 2005, Mr McMahon called Mr Wooller and asked him if National Foods had terminated Moonya Farm’s right to distribute Pura milk products in the Territory. Mr Wooller replied that it had not and that ‘you have not signed your renewal contract and until you do we are not prepared to cut Moonya’.

17) On 5 July 2005 National Foods wrote to Mr McMahon withdrawing its then current offer of a new Licensed Distributorship Agreement and proposed three options in lieu: a revised form of distributorship agreement; alternatively, a 12 month extension of the current Licensed Distributorship Agreement; or, alternatively, that the McMahons cease to be entitled to distribute Pura milk products from midnight on 20 August 2005 ‘or such other date from which it is clear that you will not be entering into [a new distributorship agreement] (as the case may be)’.

18) Mr McMahon wrote back that ‘I am still considering my options, and will decide prior to the expiry date what my options will be’. In fact, however, he had by then commenced assisting his adult sons to establish their own business for the purposes of distributing Sungold[13] products in the Territory in competition with Pura products, and had determined that he would retire from the milk distribution business and limit his involvement to assisting his sons in their new venture.

[13]The trade name of the Warrnambool Cheese & Butter Factory Co Ltd.

19) On 22 July 2005 he wrote again to National Foods that he was ‘still not fully convinced that [he could] sign a new agreement’ and referred to poor treatment by National Foods, but he said that ‘all is not lost’ and that ‘I think that perhaps a 12 month extension of the current agreement could be possible if you are able to agree to the following conditions’. The suggested conditions included a full refund of all licence fees and the judge determined that Mr McMahon did not believe that National Foods would agree to them. His Honour found that Mr McMahon was instead stringing National Foods along while assisting his sons to get themselves established to compete against Pura products when the Licensed Distributor Agreement expired on 20 August 2005.

20) On 25 July 2005 Mr McMahon made application to Sungold in the name of McMahon’s Dairy for a $1 million credit limit account for the purchase of Sungold milk products for distribution and nominated himself as the person authorised to bind McMahon’s Dairy and signed a guarantee of the credit account. At that stage, his sons were yet to incorporate their new company, McMahon’s Dairy Products Pty Ltd, and the judge found that Mr McMahon was in effect acting on their behalf with a high level of involvement in assisting them to set up their business to compete with National Foods.

21) On or about 25 July 2005 Mr McMahon told National Foods that he would provide a final answer as to whether he would continue as a distributor of Pura milk products, although in fact he had by then already determined that he would not continue with National Foods.

22) On 29 July 2005 National Foods began ‘surveillance’ on the McMahons’ operations in the lead up to 15 August 2005.

23) By 8 August 2005, McMahon’s Dairy was three weeks’ overdue in paying for milk deliveries, in a sum of $233,812.95, and that led to National Foods sending employees into the market to ascertain whether the McMahons had commenced distributing products other than Pura.

24) On 11 August 2005, National Foods wrote to all Pura customers of McMahon’s Dairy in the Territory informing them that if National Foods and the McMahons failed to agree on an extension to the Licensed Distributor Agreement, a representative would be in touch with customers to ascertain their needs.

25) On 12 August 2005, Mr Wooller of National Foods received reports from a member of his field operations team that Tony McMahon had been involved in approaches to his existing Pura customers and had sought to have them purchase Sungold products. In evidence, Mr McMahon admitted that he was involved in canvassing his Pura milk customers to ‘swing them across to Sungold milk on the weekend commencing on Friday 11 August 2005 and concluding on Sunday the 13^th’.

26) National Foods treated those acts as a breach of the Licensed Distributor Agreements[14] entitling it to terminate the agreements forthwith. By letter dated 15 August 2005, it informed Mr McMahon that it considered that his conduct was an abandonment of the Licensed Distributorship Agreements, and conduct in breach of clauses 23.2 (prohibition on delivering competitor’s products) and of clause 23.16(a) (prohibition on being involved in any way in the purchase, sale, distribution or marketing of any products which are similar to Pura milk products), and that it terminated the Licensed Distributorship Agreements forthwith. It also reminded Mr McMahon of his obligations under clause 23.16(b) (prohibition on being in any way involved in a competing business for six months following termination) and demanded payment of $1,003,900.50 unpaid licence fees and for milk products sold and delivered.

[14]A second Licensed Distribution Agreement was executed when the Territory was expanded.

The issues in the appeal

The issues in the appeal are more limited than those with which the judge had to deal at trial They are:

1) Grounds 1 to 5: Whether the Licensed Distributor Agreements conferred an exclusive right to sell Pura milk products in the Territory.

2) Ground 6: Whether National Foods’ conduct in permitting other distributors to continue to distribute Pura milk products in the Territory breached an implied term of the Licensed Distributor Agreements to do all things necessary for McMahons to have the benefit of that for which it had contracted.

3) Grounds 7 to 9: Whether there was a collateral agreement binding National Foods within a reasonable time to prevent Moonya Farm selling Pura products in the Territory.

4) Grounds 10 and 11: Whether Mr McMahon acted in breach of clause 23.16 of the Licensed Distributor Agreements.

5) Ground 12: Whether the guarantee given by Mr McMahon in the Heads of Agreement applied post the novations to the obligations of M P McMahon and later McMahon’s Dairy.

Grounds 1-5: Exclusive rights

The principal issue at trial was the question of exclusivity. Attention was centred on the McMahons’ allegation that National Foods granted McMahon’s Milk, and thus M P McMahon and McMahon’s Dairy under the first and second novations, the exclusive right to distribute National Foods’ Pura milk products in the Territory for the duration of the Licensed Distributor Agreements. The McMahons contended that the words ‘together with the right to sell and deliver the Products’ which appear in clause 2.1(a) should be read disjunctively from the other words in that clause, and thus be understood to have conferred an additional exclusive right to sell which was independent of the licences to use the System.

The judge rejected that contention, on the basis that:

when read in the context of the agreement as a whole and the surrounding circumstances, the words ‘together with’ mean ‘in connection with’, or ‘in conjunction with’, and do not mean ‘in addition to’. When read as a whole, clauses 2.1(a) and 2.3 grant exclusive licences, to use the ‘System’, to operate the ‘Licensed Distributorship’ and to use the ‘Marks’ (and associated marks or logos), in connection with the marketing, sale and delivery of ‘the Products’ in the McMahon territories. There is no grant of an exclusive right to sell and deliver Pura milk products in the McMahon territories.

In his Honour’s view, the other aspects of the Licensed Distributor Agreement which supported that construction were that:

The recitals to the licensed distributor agreement describe the ‘extensive knowledge and expertise’ of National Foods in the marketing, distribution and sale of milk products, describe the intellectual property rights of National Foods and associated goodwill, describe the ‘unique system for the marketing, distribution and sale of [National Foods’] milk and dairy products’ and recite that National Foods has agreed to licence the Licensed Distributor to use that ‘unique system’. These recitals are consistent with my interpretation of the rights granted by clause 2.1(a) and clause 2.3 of the licensed distributor agreement.
… the provisions of clauses 7.1 and 7.2 of the licensed distributor agreement [also] support the interpretation which I prefer. Clause 7.1(a) grants ‘the sole and exclusive right to service Trade Customers on behalf of National Foods’. Clause 7.2(a) grants ‘the sole and exclusive right to service Household Customers on behalf of National Foods’. This language is specific and is to be contrasted with the lack of any similar grant of an exclusive right to service all ‘Customers’ as defined. Trade Customers and Household Customers are defined terms, by reference to specific customers or classes of customers mentioned in the appendices to the agreement. The agreement defines ‘Customer’ as ‘any person to which the Licensed Distributor distributes the Products in the Territory’. There is no grant of a sole and exclusive right to service ‘Customers’. Indeed, when the agreement is read as a whole, the defined term ‘Customer’ is used in the context of defining the obligations of the Licensed Distributor towards Customers[15] or to define the rights and obligations of National Foods in respect of Customers.[16] The term ‘Customer’ is not used in connection with granting any rights to the Licensed Distributor.

[15]For example, clauses 9.3, 10.3, 10.5, 23.1 to 23.4, 23.9.

[16]For example, clauses 21(a), 23.8, 23.12 to 23.14.

The judge also considered that the preferred interpretation of clause 2.1(a) derived support from the surrounding circumstances, inasmuch as:

the parties well knew that National Foods had existing arrangements with other distributors, which entitled those distributors to sell and deliver Pura milk products within the McMahon territories, [and, the judge said] it would be unreasonable to attribute to the parties an understanding that National Foods was nevertheless granting the McMahons an exclusive right to sell and deliver Pura milk products within the McMahon territories from the commencement of the licensed distributor agreement.

Under cover of Grounds 1 to 5 counsel for the appellants contended that the judge’s reasoning was erroneous: the result of giving too much weight to the fact that both parties ‘well knew’ of National Foods’ arrangements with other distributors and thereby concluding that the parties could not reasonably have intended that National Foods was to confer on McMahon an exclusive right to sell and deliver National Foods milk products in the Territory.

I do not accept that contention. It is trite law that, although evidence of surrounding circumstances may not be used to contradict the language of a written contract if the meaning of the written language is clear, evidence of surrounding circumstances is admissible to assist in the interpretation of a contract if the language is ambiguous or susceptible of more than one meaning.[17] Here there was a degree of ambiguity or susceptibility to more than one meaning which arose from the reference in clause 2 of the Licensed Distributor Agreement to a right to sell and the statement in clause 3 of the agreement that the rights conferred by clause were to be exclusive to the Licensed Distributor for the Territory. To a large extent, the ambiguity or uncertainty was capable of resolution by construing the agreement as a whole. As the judge observed, once the grant of the right to sell was read in the context of the whole of the Licensed Distributor Agreement, it was tolerably clear that it was not intended to be an exclusive right to sell as opposed to a right to sell as the sole Licensed Dealer. But the judge was right to test the results of that analysis against the surrounding circumstances in the manner which he did.
[17] Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 352 (Mason J); Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235, [11]-[13] (Spigelman CJ); Morton v Elgin–Stuczynski (2008) 19 VR 294, 300 [29]-[30].

To that may be added that the Heads of Agreement, which was executed at the same time as the Licensed Distributor Agreement, and provided in clause 1.4(b) that, to the extent of any inconsistency between the two instruments, the Heads of Agreement would prevail, evidently contemplated that National Foods had the right to continue to supply customers which it was supplying directly at the time of entry into the agreements, and to choose when and if it would ‘transfer’ those direct customers to the McMahons. Thus, Clause 6.1 of the Heads of Agreement provided that:

National Foods may at any time decide to cease its direct supply of Products to its customers within the Volume Area. These customer will be added to the relevant Licensed Distributor Agreement as Customers in the appropriate category.

Consequently, if there were any doubt about the propriety of referring to surrounding circumstances in the manner which the judge did (and in my view there was not), clause 6.1 of the Heads of Agreement would equally support the conclusion that it would be unreasonable to attribute to the parties an understanding that National Foods was granting the McMahons an exclusive right to sell and deliver Pura milk products within the McMahon territories from the commencement of the Licensed Distributor Agreement.

Ground 6 - Implied term

Under Ground 6, counsel for the appellants argued that, since it was common ground that the Licensed Distributor Agreement imposed an implied obligation on National Foods to co-operate and do all things reasonable and necessary to enable McMahon’s Dairy to have the benefit of the Licensed Distributor Agreement,[18] the judge erred in holding that National Foods’ actions in continuing to supply other distributors in the Territory was not a breach of the Licensed Distributor Agreement.
[18]Mackay v Dick (1881) 6 App Cas 251, 263; Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596, 607.

I reject that argument. Once the judge found that the agreement did not confer on the McMahons an exclusive right to sell Pura products in the Territory, the idea of an implied obligation to act as if the agreement did confer such a right was bound to fail. Such an obligation was not necessary in order to give the agreement business efficacy[19] - it was perfectly capable of operating as a Licensed Distributor Agreement without an exclusive right to sell milk. And since McMahon did not contract for an exclusive right to sell Pura milk products in the Territory, it could not be said that it was necessary to imply such an obligation in order to give McMahon the benefit of the thing for which it had contracted.[20]
[19]BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings (1977) 52 ALJR 20, 26; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 347.
[20]Australis Media Holdings Pty Ltd v Tesltra Corp Ltd (1998) 43 NSWLR 104,124-5; Far Horizons Pty Ltd v McDonald’s Australia Ltd [2000] VSC 310, [128].

Alternative proposed Ground 6 – Breach of IP rights

At the outset of oral argument, counsel for the appellants sought leave to amend the notice of appeal to substitute for Ground 6 a new ground to the effect that, if the Licensed Distributor Agreement did not give McMahon’s Dairy the exclusive right to sell Pura milk products in the Territory, it was plain that the Licensed Distributor Agreement conferred an exclusive right to use the System as defined in the Territory, and that National Foods had breached that exclusive right by allowing other distributors to use the System in the Territory.

In support of the application for leave to amend, counsel for the appellants argued that, inasmuch as the System was defined as ‘the method of sale, distribution and marketing developed by National Foods and used in or in connection with the sale, distribution and marketing of the Products’,[21] and was known to include certain intellectual property rights such as Pura logos, sales promotion techniques and accounting practices for the promotion and sale of Pura milk products, it should be inferred that any other distributors selling Pura milk in the Territory would have to make use of at least some part of the System, and so for National Foods to allow that to occur must have been a breach of the agreement.
[21]Licensed Distributor Agreement, clause 1.1.

In my view, that application for leave should be refused. The point was never pleaded or dealt with in evidence in chief or in the cross-examination of National Foods’ witnesses, or advanced in submissions at trial, except for this passing reference in final address:

COUNSEL (for the McMahons): …Just stopping there of course. An exclusive licence to use the marks and logos is completely inconsistent with the propositions which have been put by the plaintiff in relation to prior contractual rights continuing of other distributors, wholesale distributors in particular, to sell Pura products with associated marks and logos and to use the associated marks and logos in the course of their distribution business. It is said that - - -
HIS HONOUR: So the idea is that someone such as a wholesale distributor or an un-contracted person such as Moonya would have to drive round with a blank truck (indistinct) a logo on it.
HIS HONOUR: Without a logo on it.

COUNSEL:               Yes that’s right, and couldn’t hand out point of sale material and so on to promote the distribution within the zone, and that is plainly inconsistent with the terms of the WDAs that - - -
HIS HONOUR:        That might or might not. That may well be exactly what they did – drove around in either a blank truck or one which had Sungold on the side of it or something. We don’t know.
COUNSEL:               As I say, if we look at the WDAs I think we will find the answer to that, your Honour. Although of course the evidence is that the WDAs were not uniform and that each differed.
But in any event the construction which is put as we understand it is that all that is exclusive is the licence combined with the right to sell and deliver….

Given that the point which is now sought to be made would plainly turn upon evidence which was never given let alone considered below, I consider that it is too late to allow the leave which is sought.[22]
[22]Suttor v Gundowda (1950) 81 CLR 418, 438; Coulton v Holcombe (1986) 162 CLR 1, 7; Geelong Building Society (in liq) v Encel [1996] 1 VR 594, 604-608 (Tadgell J) Whisprun v Dixon (2003) 200 ALR 447 [51]-[52].

In case, it is thought, however, that the McMahons are thereby deprived of a chance of substantial relief, I add that it seems to me most unlikely that the point would have succeeded. I assume for the sake of argument that some unlicensed distributors could have used one or more of the techniques comprising the System. The apparent banality of the processes involved in selling milk suggests that it is not unlikely. But it would by no means necessarily follow that National Foods thereby breached the Licensed Distributor Agreement. To my mind, the definition of ‘System’ in clause 1.1 of the Licensed Distributor Agreement implies a concatenation of techniques and intellectual property assembled by National Foods and made available as such. Thus for a non-licensed party to make use of one or even a number of such techniques could still fall a long way short of making use of the System, even if National Foods knew of and encouraged the non-licensed distributor to use that one or number of techniques. A fortiori, if National Foods had no or inadequate knowledge of what was done.

Grounds 7-9: Collateral agreement

Turning to Grounds 7 to 9, the judge found that, although National Foods did not promise to prevent the unlicensed distributor, Moonya Farm, distributing Pura milk products in the Territory, National Foods may have undertaken to Mr McMahon to use its best or reasonable endeavours to remove Moonya Farm from the Territory and transfer the volume distributed by Moonya Farm to the McMahons. But the judge denied the McMahons any relief for breach of that undertaking because, his Honour said, it was not the case which was pleaded:

The evidence of Mr Byrne establishes only that he informed Tony McMahon, in an endeavour to have him sign the agreements and become a licensed distributor, that National Foods would endeavour to remove all other distributors, including Moonya, from the McMahon territories and to transfer the volume distributed by those distributors to the McMahons. This evidence may be consistent with a promise by National Foods to use its best (or reasonable) endeavours to achieve that result. However, no such case was pleaded. As I have said, the collateral contract alleged is in absolute terms, subject only to the implied requirement to bring about the removal of Moonya as a competitor within a reasonable time. Taking the evidence as a whole, I find that National Foods did not promise Tony McMahon that National Foods would ensure that Moonya was removed as a competitor within the McMahon territories, either within a reasonable time or at all.

At first sight, that may appear to be an unduly restrictive interpretation of the McMahons’ pleadings. The case in collateral contract advanced in the McMahons’ defence and counterclaim was that:

… in or about September 2000 NFML and MMPL entered an agreement (‘the collateral agreement’) whereby in consideration of MMPL entering into the HOA [Heads of Agreement] and the LDAs [Licensed Distributor Agreements] …NFL [the respondent] warranted to MMPL that it would within a reasonable time from the entry of the HOA and the LDAs ensure that Moonya Farm would during the term of the HOA and the LDAs be prevented from selling NFML products in the zones allotted to MMPL under the LDAs.[23]
…
…NFML has breached the collateral agreement by after the expiration of a reasonable time from the entry of the HOA and the LDAs with such breach

continuing during the term of the HOA and LDAs permitting Moonya Farm to sell NFML products in the zones allotted to MMPL under the LDAs.[24]

Consequently, for McMahon to prove that National Foods undertook to use best or even reasonable endeavours to prevent Moonya Farm selling Pura products in the Territory, and, despite the undertaking, that National Foods continued to supply Moonya Farm throughout the term of the LDAs, might be thought to have gone fairly close to establishing the case alleged.

[23]Defence and Counterclaim [42A].

[24]Defence and Counterclaim, [43A].

On closer examination, however, it seems that in all probability there was a significant difference between, on the one hand, endeavouring ‘to remove … Moonya from the McMahon territories and [transferring] the volume distributed by [Moonya Farm] to the McMahons’ and, on the other hand, merely ‘ensur[ing] that Moonya Farm would … be prevented from selling Pura milk products in the [McMahon Territories]’; the apparent point of distinction being that the former would have necessitated buying out Moonya Farm’s business in order to acquire its volume and transfer it to the McMahons whereas the latter would have required National Foods ceasing to supply Moonya Farm but without the advantage of acquiring Moonya Farm’s volume.[25]
[25]It is not without significance that Moonya sold products other than National Foods products.

Further, despite the point of distinction being identified in the course of the trial, the McMahons never sought to put their case on the latter basis. Near to the conclusion of the evidence, the judge pointed out to counsel for the McMahons that, if it were sought to allege that National Foods was in breach of an obligation to use reasonable endeavours to remove Moonya Farm from the Territory, the McMahons would need to amend their pleadings to make that allegation. Counsel for the McMahons at that point disavowed any intention of so reformulating his case and stated that he had resolved to confine this part of the McMahons’ cause to one of failure by National Foods to remove Moonya Farm within a reasonable time. The judge even left open the opportunity for counsel to apply to make a further amendment to the pleadings to accommodate the point at a later stage if needs be, and spoke of the possibility of a short addendum to the case to accommodate that possibility. Yet no such application was ever made, and as the judge later explained in his reasons:

In these circumstances, the full extent of the endeavours by National Foods to terminate Moonya’s right to distribute Pura milk products in the McMahon territories was not investigated at trial, and was not subject of final submissions.[26]
[26]Reasons, [290].

Obligation to use best or reasonable endeavours to remove Moonya Farm?

At one point in oral argument before us, counsel for the appellants submitted that it could be seen from the transcript of the trial that the McMahons were unfairly hoisted on the petard of their pleadings and that, despite the way in which the matter was handled below, it was in the interests of justice that the appellants should now be permitted to argue that National Foods undertook to use best or reasonable endeavours to remove Moonya Farm from the Territory, which would have required no more than National Foods giving reasonable notice (scil. six months’ notice) to Moonya Farm on the first day of the Licensed Distributor Agreement.

I am not persuaded by that submission. It does not appear to me that the McMahons were prevented by their pleadings from pursuing the case which they sought to make. As I have endeavoured to explain, the judge adverted to the need to amend the pleadings, and counsel for the McMahons chose to reject that course; presumably, because of what appears to be the difference between an undertaking to use reasonable endeavours to buy out and transfer Moonah Park’s volume to the McMahons and an undertaking to terminate supplies to Moonya within a reasonable time without transferring Moonya Park’s volume to the McMahons.

In any event, as was observed in Whisprun v Dixon,[27] it would be inimical to the due administration of justice if, on appeal, a party could raise a point that was not taken at the trial unless it could not possibly have been met by further evidence at the trial. As was there said, nothing is more likely to give rise to a sense of injustice in a litigant than to have a verdict taken away on a point that was not taken at the trial and could or might possibly have been met by rebutting evidence or cross-examination. Even when there is no question of further evidence, it may not be in the interests of justice to allow a new point to be raised on appeal, particularly if it will require a further trial of the action. Not only is the successful party put to expense that may not be recoverable on a party and party taxation but a new trial inevitably inflicts on the parties worry, inconvenience and an interference with their personal and business affairs. A fortiori where, if the point had been taken at trial, it is probable that there would have been a good deal of further evidence given on the point.
[27](2003) 200 ALR 447, 461 [51].

In my view, that is sufficient reason to refuse to allow the appellants to raise the point for the first time on appeal. But I add that, even if the appellants were permitted to raise the point, I think that it would fail.

As I say, because it was not a point in issue at trial, there was no occasion to consider whether Mr Byrne’s statement as to endeavouring to remove Moonya Farm from the McMahon territories could be conceived of as an undertaking independent of his stated intention to transfer the volume distributed by Moonya Farm to the McMahons, or whether it should be seen as a single conception of buying out Moonya’s business in order to acquire Moonya Farm’s volume and transfer it to the McMahons. As matters stand, however, the plain and ordinary meaning of the language of the undertaking suggests that it is more likely than not to have been the latter. And, if it were the latter, it is unlikely that National Foods’ failure to give Moonya Farm six months’ notice of termination would have amounted to a breach of the undertaking. As the evidence stands, the probable result of simply terminating the supply of Pura products to Moonya Farm is that Moonya Farm would have gone straight to another milk supply company for its milk and thereafter maintained if not increased its volume of sales in the Territory in competition within the McMahons.[28] As I see it, that would have been directly contrary to the objective and understanding which the McMahons and National Foods appear to have had in view.
[28]Reasons, [51]-[58].

Obligation to terminate Moonya Farm within reasonable time?

Counsel for the appellants argued in the alternative, consistently with the appellants’ case below, that the judge should have construed the undertaking as one to remove Moonya Farm from the Territory within a reasonable period, and he submitted that there was uncontroverted evidence that a reasonable period was six months. It followed, in counsel’s submission, that National Foods had breached the Heads of Agreement by failing to terminate Moonya Farm as a distributor within six months after the commencement of the McMahon Licensed Distributor Agreement and that the judge was in error in not so finding.

Dealing first with the question of whether the agreement should have been construed as one to terminate Moonya Farm’s distributorship within a reasonable time, the thrust of the McMahons’ argument was that, if one construes the conversation between Mr Byrne and Mr McMahon by reference to what honest and reasonable business persons would have understood it to mean, there can be no doubt that they would have understood it as an undertaking to stop supplying Moonya Farm within a reasonable time. To treat it, as the judge did, as something which rested only in best or reasonable endeavours was, in counsel’s submission, to add a layer of complexity and unreality which in the real world of business would be regarded as fanciful.

That submission is not persuasive. The judge decided the issue on the basis of a careful analysis of the evidence. As his Honour pointed out, it included the slides presented to Mr McMahon by Mr Mead of National Foods, transition summaries and the evidence of Mr McMahon, Mr Pino and Mr Byrne. In that connexion, the slides were opposed to the McMahons’ contention. As the judge observed, they did not contain a promise of exclusivity and they referred to the continuation of other distributors of Pura milk within the Territory for an indefinite period.[29]
[29]Reasons, [226].

The transition summaries were arguably a little more helpful to the appellants’ cause. They were presented after the slides and showed all of the volume of non-licensed distributors being assigned to the McMahons, after entry into the agreements. But, as the judge noted, although Mr McMahon could recall the transaction summaries, there was no evidence as to the circumstances in which they were presented to him. More significantly, they spoke only in terms of what was ‘proposed’ and contained no promise that all the volume of non-licensed distributors would be transferred to the McMahons. There was nothing said in the slides as to when it might be achieved.

So far as Mr Mead’s evidence was concerned, the judge said that he did not doubt that Mr Mead had spoken to Mr McMahon in terms of an intention to achieve a situation in time whereby there would be ‘as minimal amount of distributors in that area’ as could be achieved. That was consistent, the judge said, with the content of the slides. But the judge did not accept that Mr Mead had promised that the McMahons would be granted exclusive access to the Products within the Territory and, as to anything which Mr Pino may have said, Mr McMahon’s evidence was that he had not relied upon it (in the sense of regarding it as binding).

The appellants relied principally on the statement by Mr Byrne to Mr McMahon that National Foods intended to obtain as much exclusivity for licensed distributors within their territories as could be obtained. But for reasons already set out, the effect of that evidence fell short of a promise to ensure that Moonya Farm was removed as a competitor from the McMahon territories during the term of the Licensed Distributor Agreement. As his Honour explained:

I accept that Mr Byrne’s statements related to National Foods’ intended conduct, and that obtaining as much exclusivity for licensed distributors within their territories as could be obtained was an important aim of the licensed distributor concept which National Foods was endeavouring to establish. However, taking the evidence as a whole, I find that Mr Byrne stated to Tony McMahon that National Foods ‘would be seeking to negotiate the departure of Moonya’ and that, if National Foods was unsuccessful in negotiating to buy the whole of the Moonya business, National Foods ‘would try other means commercially to arrange for them to leave the area’. These statements fall short of a promise to ensure that Moonya was removed as a competitor from the McMahon territories during the term of the licensed distributor agreement.
…
This finding and conclusion is reinforced by the fact that there is no contemporaneous written record of the suggested collateral contract. Tony McMahon is an experienced businessman. If a promise to remove Moonya as a competitor had been made, as opposed to statements that National Foods would endeavour to do so, it is likely that he would have insisted that the promise be documented. Such a promise would be of at least equal importance to the commercial terms which were set out in Mr Pino’s letter of 24 July 2000 and annexed to the initial heads of agreement.
Moreover, if a promise to the effect alleged had been made to Tony McMahon, he is likely to have articulated the promise, and complained of a breach of it, at an earlier stage than the complaints made by him. Although I accept that, with the passage of time, Tony McMahon became ‘obsessed with Moonya’, the evidence of his conduct subsequent to his entry into the licensed distributor agreements does not support the collateral agreement contended for.[30]

[30]Reasons, [237]-[241].

With respect, I see no error in any of that part of his Honour’s analysis. Looking at the documentary evidence and testimony as a whole, it is tolerably clear that National Foods were bent on a plan, called the ‘Project 3 Cows’, which National Foods outlined to Mr McMahon in order to induce him commit to the Licensed Distributor Agreement. That plan was to have but one Licensed Distributor in each Territory and thus to buy out other existing distributors and transfer their volumes to the sole Licensed Distributor. In those circumstances, it is improbable that what National Foods said to Mr McMahon was intended or understood to mean that National Foods would forthwith give six months’ notice of termination to other distributors in the Territory. As has been seen, the most likely result of doing that would have been to drive those other distributors to competing milk supply companies and thereby maintain if not increase competition against the Licensed Distributor in the Territory. Hence, for National Foods to have to have adopted such a course may well have breached its undertaking to endeavour to buy out the other distributors and transfer their volumes to McMahon. I am conscious of the added dimension comprised of Mr Byrne’s statement to Mr McMahon that, if National Foods was unsuccessful in negotiating to buy the whole of the Moonya business, National Foods ‘would try other means commercially to arrange for them to leave the area’. Perhaps, that statement is to be interpreted as meaning that, if all else failed, National Foods would resort to the ultimate sanction of simply ceasing to supply Moonya Farm. But as the judge said, such statements fell short of a promise to ensure that Moonya Farm would be removed as a competitor from the Territory during the term of the Licensed Distributor Agreement. And there was simply no evidence as to whether all else had failed.

Counsel for the respondent submitted that the law is reluctant to allow a party to escape the consequences of a written agreement[31] and that, by contending for the collateral agreement which the appellants assert, the appellants were trying to escape from the consequences of the Licensed Distributor Agreement. In case it matters, I should say that I am not persuaded that is right.
[31]Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471, 483 (Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ); Real Estate City v Moustafa [2005] VSCA 181, [36] (Ormiston JA)

The collateral agreement for which the appellants argued was not inconsistent with the operative provisions of the Licensed Distributor Agreement. It did not contradict them but instead added something for which the operative provisions did not provide.[32]
[32]Cf. Hoyt’s Pty Ltd v Spencer (1919) 27 CLR 133, 139, 147; Maybury v Atlantic Oil Co (1953) 89 CLR 507, 517; Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1, 11.

Admittedly, Clause 33 of the Licensed Distributor Agreement contained a broadly drafted merger provision in these terms:

This Agreement controls the entire agreement and understanding between the parties as to the subject matter of this Agreement and merges all prior discussions amongst them. Neither party will be bound by any conditions, definitions, warranties or representations with respect to the subject matter of this Agreement other than as expressly provided in this document. The execution of the Agreement by a party provides an absolute irrevocable release from all claims whatsoever that the other party may have against the first party arising under any other agreement between them or between them and any other party, relating to the subject matter of this agreement (other than any agreement relating to the licence of milk volume), aside from any trading debts outstanding as at the date of execution.

Generally speaking, such a provision is taken to exclude evidence of extrinsic terms.[33]

[33]Hope v R.C.A. Photophone of Australia Pty Ltd (1937) 59 CLR 348, 362-3; Johnson Matthey Ltd v AC Rochester Overseas Corp (1990) 23 NSWLR 109, 196.

But, as was observed by Peden and Carter in an article entitled Entire Agreement – and Similar – Clauses,[34] because proof of a collateral contract is an exception to the parol evidence rule, a merger provision should not be permitted to stand in the way of proof of a collateral contract unless the merger provision is clearly expressed to have that effect. I do not consider that clause 33 is sufficiently clearly expressed to have the effect of preventing proof of the collateral contract for which the McMahons contended.
[34](2006) 22 JCL 1, 7.

It seems that the view which has been taken in England is that a merger provision should generally be treated as applying to agreements which might otherwise operate as collateral contracts.[35] And at one level, the logic of that approach is appealing. If business persons were asked as a matter of principle what is meant by an entire agreement clause, they would probably reply that it means what it says. Shorn of surrounding circumstances, the idea that an entire agreement clause should not be taken to extend to a collateral contract because the latter is a separate contract would possibly be thought of as quaint. But lawyers must beware of generalities. In an age of contractual development which puts contextual interpretation ahead of formalism, each case is unique. The question in each case is what the merger clause in question ‘would convey to a reasonable person having all the background knowledge which would reasonably have been available to the

parties in the situation in which they were at the time of the contract’.[36] And so, as Peden and Carter conclude:

Ultimately, the resolution of the issue must depend on intention as to the scope of the entire agreement clause. Arguably, if the clause refers expressly to collateral contracts that should be sufficient statement of intention that a collateral contract may not be put forward [as] an additional express term of the bargain. But if there is no express reference to collateral contracts, it seems odd to regard a clause in the main agreement as effective to prevent enforcement of the collateral contract. At least in cases where the alleged collateral contract was contemporaneous with the main contract, it would seem logical to infer that the parties intended the collateral contract to operate because otherwise the very reason why one party entered into the main contract- the willingness of the other to enter into the collateral contract – would count for nothing.[37]

[35]Inntrepeneur Pub Co (GL) v East Crown Ltd [2000] 2 Lloyd’s Rep 611, 614; Deepak Fertilisers and Petrochemicals Corp v ICI Chemical & Polymers Ltd [1999) 1 Lloyd’s Rep 387; and see Mitchell, Entire Agreement Clauses: Contracting Out of Contextualism (2006) 22 JCL 3, 222.

[36]Maggbury Pty Ltd v Hafele Australia Pty Ltd (2002) 210 CLR 181,188.

[37](2006) 22 JCL 1, 8.

I do not overlook that a statement must be promissory in order to amount to a collateral contract, and that courts in this country have been reticent about treating pre-contractual statements as promissory.[38] But as the judge seems to have found, the circumstances here tend to imply that the statements were promissory. In my view, too, it is likely that the statements were intended to be relied on and were in fact relied on by the McMahons or, to put it more accurately, that is the proper conclusion objectively to be discerned.
[38]JJ Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435, Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1; and see Seddon and Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9^th Aust Ed [10,6]; Shepperd v Council of Ryde (1952) 85 CLR 1, 13; Futuretronics International Pty Ltd v Gadzhis [1992] 2 VR 217, 232; Nassif v Fahd [2007] NSWCA 269, [28] (Bryson AJA).

It is true, as counsel for the respondent submitted, that allegations of collateral contract have often been dismissed on the basis that, if the parties truly intended the alleged collateral promise to be binding, they would have set it out in their written agreement. But that is not a principle of law. The test is what was said and done and how it would be discerned objectively – and the fact is that business people are not infrequently inclined to trust other business persons who make promises to them to the point that they do not insist upon having those promises reduced to writing. If such situations are to be looked at objectively with an informed knowledge of all of the circumstances, the honest and reasonable business person observer may not hesitate to conclude that a deal had been done.

In the result, if National Foods had failed to use its best or reasonable endeavours to buy out Moonya Farm and transfer Moonya Farm’s volume to the McMahons, I consider that the appellants might have had a case. The failure to use reasonable endeavours to achieve that end would have been a contravention of an undertaking upon which entry into the Licensed Distributor Agreement appears to have been based. But the fact remains that no such case was ever alleged, still less proved. Despite the fact that Moonya Farm remained as an unlicensed distributor for the whole of the Licensed Distributor Agreement, it was not alleged and, on the evidence there is nothing to say, that National Foods failed to use reasonable endeavours to buy Moonya Farm out.

Consequently, I agree with the judge that the case in collateral contract failed.

Grounds 10 and 11: Breach of non-competition covenant before termination of the Licensed Distributor Agreement

The judge’s findings pertinent to whether McMahon’s Dairy breached clause 26.3(a) of the Licensed Distributor Agreement were as follows:

On 25 July 2005, Tony McMahon made application to The Warrnambool Cheese & Butter Factory Co Ltd for a credit account to purchase [Sungold] milk products for distribution. The application was for a $1,000,000 credit limit and was made in the name of McMahons Dairy. Tony McMahon nominated himself as the ‘primary contact’ for all dealings with Warrnambool Cheese & Butter, as the person authorized to bind McMahons Dairy and signed a guarantee of the credit account.
Although much of the evidence was hearsay, and some was disputed by Tony McMahon, Tony McMahon did admit being involved in some of the approaches. It was put to Tony McMahon that he was actively involved in canvassing his Pura milk customers ‘to swing them across to Sungold milk on the weekend commencing on Friday 11 August and concluding on Sunday the 13^th’. Tony McMahon acknowledged attending some of these customers’ premises. He disputed that he was ‘actively involved’ but conceded that he ‘had limited involvement’. It is unnecessary, at this stage, to determine the extent of Tony McMahon’s involvement. For present purposes, it is sufficient that he was involved in the approaches to his existing customers for Pura milk products for the purpose of encouraging those customers to order Sungold milk products.
[O]n 15 August 2005, the McMahons prepared a circular letter for delivery to their customers. The letter is in the following form:
McMAHON’S DAIRY PRODUCTS PTY LTD...
Dear Valued Customer,
After 60 years of distributing Pura Milk, (formerly National Foods, now San Miguel an overseas company), our family company has been forced in to making a change. San Miguel/National Foods have failed to supply us with a satisfactory long term contract, therefore we feel that we do not have a future with this company.
We have decided to join forces with an Australian owned and operated company, Warrnambool Cheese and Butter, who manufacture Sungold Milk Products. Warrnambool Cheese and Butter is the oldest surviving Australian Dairy Company having been established for over 117 years. They have been providing employment and support for many employees, distributors and farmers during this period.
Sungold Milk guarantee us competitive prices & better use by dates with their range of award winning products.
By changing our supplier to Sungold Milk, we are able to pass onto you, the customer, the benefit of better pricing and better codes.
As an incentive to our loyal customers, we are offering a further 5cpl off the already low price for the next three months. Credits will be given for ALL milk returned for the next three months.
Personalized service is guaranteed Special Promotions for the Sungold Brand Sponsorships.
Any problems please do not hesitate to call the office on [...] and we will either answer your queries or arrange for someone to come out and visit you
Regards
FAMILY & STAFF AT McMAHON’S DAIRY

His Honour held that:

The conduct of Tony McMahon in assisting his children to promote the sale of Sungold milk products to customers of McMahons Dairy, in the period prior to 15 August 2005, constituted a clear breach of cl 23.16(a) of the licensed distributor agreement, which provides:
(a) The Licensed Distributor must not, without the prior written approval of National Foods, be involved in any capacity during the Term (whether as joint owner, partner, agent, adviser, employee, the Licensed Distributor, director, shareholder or otherwise) in any business involving the purchase, sale, distribution or marketing of any product similar to any of the Products.[39]

[39]Emphasis in original.

Counsel for the appellants attacked that conclusion at two levels. He submitted that, upon its proper construction, clause 23.16(a) applied only to involvement in an existing business and that the conduct in which Mr McMahon was involved before 15 August 2005 was merely preparatory to the commencement of his children’s business, which had not then come into existence. Alternatively, counsel contended, even if Mr McMahon’s conduct amounted to being involved in a prohibited business, it was Mr McMahon’s conduct, not the conduct of McMahon’s Dairy, and so it was not a contravention of clause 23.16(a) by McMahon’s Dairy.

(i) Acts merely preparatory to the commencement of business

The first point is not without some difficulty. Although the judge made no reference to relevant authority, there are a number of cases in which the meanings of clauses like clause 23.16 have been considered, and the results are hardly uniform. For example, in Batts Combe Quarry Ltd v Ford[40] the English Court of Appeal held that a covenant not to ‘assist in carrying on or be engaged concerned interested or employed in the business of a quarry’ was wide enough to prohibit the covenantor engaging in preliminary acts of providing capital and conducting negotiations necessary to enable the business later to be carried. Lord Greene MR (with whom Du Parcq LJ concurred) said:

Mr. Blanco White argued that the words 'assist in carrying on or be engaged concerned interested or employed in the business of a quarry' cannot, on their true construction, refer to what he described as preliminary acts necessary to enable the business to be carried on. He argued that no such business as is referred to in the covenant existed during the stages of the purchase of the quarry and installation of the machinery, and that, for the purposes of this covenant, the business of quarry owners carried on by the sons must be treated as having begun not earlier than when they first began to extract stone from the quarry. It seems to me, however, having regard to the scope and intention of such a covenant, that that is to place far too narrow a construction on the words. The first phrase that requires attention is 'assist in carrying on'. I should have thought that those words were wide enough to cover a person who provides the necessary capital to enable a business to be carried on. It is not merely the equipment of a business which is brought about by the provision of capital, but its whole life…
Quite apart, however, from the words 'assist in carrying on', there are other words here which appear to me to cover the case. In my view, in doing what he did, the father was 'concerned in' the sons' business. The word 'concerned' is of quite general import. Clearly it cannot be limited to 'concerned' in the sense of financial interest or of being an employee of the business. Again, I can see no more effective way of being concerned in a business than by providing the capital necessary to establish it, and the word 'concerned' seems also to cover the assistance given by the father in the course of the negotiations. Again, I think that the words 'employed in the business' cover the acts of the father in connection with those negotiations. The part that he took in those negotiations, representing his sons during their necessary absence on other work, was that of an agent or employee. The acquisition of machinery and its installation was part of the business activities of the sons, and, as their representative, he negotiated in that matter and gave advice. In my opinion, the word 'employed' is sufficient to cover what he did.[41]

[40][1943] Ch 51.

[41]Ibid 52-4.

Contrastingly, in Pioneer Concrete Services Ltd v Galli[42] Brooking J, whose judgment was affirmed on appeal, held that a covenant not to ‘directly or indirectly … carry on or conduct or be engaged in or be concerned or interested in any of’ specified types of specified businesses’ did not extend to prohibiting acts preparatory to the prohibited businesses and, if did, that it would be unenforceable as an unreasonable restraint of trade.
[42][1985] VR 675.

According to Brooking J, much may depend upon the nature of the business sought to be protected, the period of restraint, the nature of the preparatory acts in question, whether the acts in question are likely to harm the protected business and whether the prohibited business, though not in existence at the time that the acts are committed, has come into existence by the time that action is brought. Thus, as his Honour observed:

What constitutes a breach of a covenant broadly similar to [clause 26.3] may at times be a question of degree, when one is considering whether a business was in existence, but a noteworthy difficulty about the case made by the present plaintiffs is that of saying by what stage the defendant's acts taken together were sufficient to amount to a breach. The statement of claim alleges that each of the acts complained of was a breach, but the case was rather argued on the basis of cumulative effect.[43]

[43]Ibid 690. See also WPS Enterprises Pty Ltd v Radford (2009) 253 ALR 596, 613 [74].

In this case, however, it seems to me that the judge was right to say that Mr McMahon’s acts amounted to him being involved in the children’s business contrary to clause 23.16(a). For here, as in Batts Combe Quarry, the new business (although not in existence at the time the acts were committed) had come into existence by the time the action was instituted. The acts in question were committed a very short time before that business began. And those acts were calculated to harm National Foods’ business by taking customers away from Pura milk products and steering them towards the competing Sungold offerings. I do not say that all of Mr McMahon’s acts were necessarily a breach of the covenant. For example, I do not consider that the mere preparation, as opposed to delivery, of the letter to clients, would have amounted to a breach. Additionally, as in Pioneer v Galli, there may be some difficulty in saying by what stage Mr McMahon’s acts taken together were sufficient to amount to a breach. On the other hand, I am inclined to think that the act of applying for the Sungold credit facility and providing a guarantee of the facility may have been sufficient in itself to amount to a breach and, even if that were not so, I consider that taken in conjunction with the acts of canvassing for Sungold products Mr McMahon’s actions would surely have summed to the critical mass of breach some time before termination of the agreement on 15 August 2005.

For the sake of completeness, I also note that Clause 23.16(a) does not appear to be ex facie illegal and that its illegality was not raised on the pleadings. Consequently, I have assumed that it was valid.[44]
[44]See and compare North Western Salt Co Ltd v Electrolytic Alkali Co Ltd [1914] AC 461, 469; Potato Producers Co-operative Ltd v Pavone [1962] VR 231; Australian Capital Territory v Munday (2000) 99 FCR 72, 73-75, 93-94; Heydon, The Restraint of Trade Doctrine, 3^rd Ed, 38.

(ii) Whether Mr McMahon’s conduct was the conduct of McMahon’s Dairy

Counsel’s second point is more easily disposed of although, in my view, for somewhat different reasons to those which appealed to the judge.

The judge dealt with the point as follows:

It was submitted on behalf of the McMahons that Tony McMahon’s assistance to his sons was not conduct of McMahons Dairy and, therefore, was not prohibited by clause 23.16(a). There is no merit in this submission. Reasonable persons in the position of the parties would understand clause 23.16(a) to extend to prevent the principal natural person behind McMahons Dairy, Tony McMahon, from engaging in a competing business. Commercial commonsense dictates that this is so. The words in parenthesis in clause 23.16(a) make the commercial intent of the clause plain. McMahons Dairy could only act as ‘adviser’, ‘employee’ or ‘director’ by the actions of a natural person.[45]

[45]Reasons, [248].

Read literally, that would not be correct. Regardless of what reasonable persons might or might not think about the subject, a covenant in restraint of trade is in the first place to be construed in accordance with the natural and ordinary meaning of its words. According the natural meaning of the words of clause 23.16(a), it applies only to ‘the Licensed Distributor’ (which was McMahon’s Dairy). Clause 9.1 and Item 9 in the Schedule identified Mr McMahon as the ‘Key Person’ having authority to liaise with National Foods, conduct negotiations and enter into any agreement on behalf of the Licensed Distributor. The Licensed Distributor Agreement thereby recognised Mr McMahon as a different person to the Licensed Distributor, albeit related to the Licensed Distributor. In those circumstances, if clause 23.16(a) had been intended to apply to Mr McMahon, it is to be expected that it would have provided expressly for application to the Principal Person or at least, as is common in clauses of this kind, to directors of the Licensed Distributor. The absence of any indication of that kind points strongly against a construction which in effect would require one to read in words of extension which are plainly not there.[46]
[46]Cf Thompson v Goold & Co [1910] AC 409, 420; BP Refinery (Western Port) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, 280.

That impression is confirmed by appendix 3 to the Licensed Distributor Agreement, which provides that:

That I [Mr McMahon] will not act in a manner which, if I was the Licensed Distributor, would be a breach of the Licensed Distributor agreement by the Licensed Distributor, and accordingly, guarantee my own due and prompt performance and observance of any and all covenants obligations terms and conditions contained in the Licensed Distributor agreement or any other agreement referred to therein.

Since the execution of the guarantee was provided for in clause 44 of the Licensed Distributor Agreement, and was executed at the same time as the Licensed Distributor Agreement, the two instruments may be treated as a single transaction and so as a single document for the purposes of construction.[47] So construed, there is really no room for reading ‘Licensed Distributor’ in clause 26.3 of the Licensed Distributor Agreement as including Mr McMahon.
[47]Re Clark’s Refrigerated Transport Pty Ltd (In Liq) [1982] VR 989, 996.

Of course, because McMahon’s Dairy was a corporation it was only ever able to act by its organs and, since Mr McMahon was the sole director of the company, McMahon’s Dairy was for all intents and purposes only ever able to act through Mr McMahon.[48] Plainly, whatever Mr McMahon may have done in his capacity as director of the company would be something to which clause 26.13 was capable of applying and, if it amounted to the sort of involvement which was prohibited by clause 23.16, the breach would be established.[49]
[48]Ford, Principles of Corporations Law, 13^th Ed, [4.110].
[49]R v Goodall (1975) 11 SASR 94, 101, Hamilton v Whitehead (1988) 166 CLR 121, 128; Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424, 445 [46].

Despite Mr McMahon’s position as an officer of the company, however, it remains that he was able to act on his own behalf if he chose to do so and that, if he had so acted, it would not have been a breach by McMahon’s Dairy of clause 23.16(a) (albeit, that it may have breached the personal obligation imposed on Mr McMahon by appendix 3 to the Guarantee). An officer of a company may act in more than one capacity.[50] Salomon’s[51] case itself is authority that it makes no difference that the company is in effect what is sometimes called a one-man company. And so as Cozens-Hardy MR said in The Gramophone and Typewriter Ltd v Stanley:[52]

The fact that an individual by himself or his nominees holds practically all the shares in a company may give him the control of the company in the sense that it may enable him by exercising his voting powers to turn out the directors and to enforce his own view as to policy, but it does not in any way diminish the rights or power of the directors, or make the property or assets of the company his, as distinct from the corporation’s. Nor does it make an difference if he acquires not practically the whole, but absolutely the whole, of the shares. The business of the company does not thereby become his business. He is still entitled to receive dividends on his shares, but no more. I do not doubt that a person in that position may cause such an arrangement to be entered into between himself and the company as will suffice to constitute the company his agent for the purpose of carrying on the business, and thereupon the business will become, for all taxing purpose, his business. Whether this consequence follows is in each case a matter of fact.

[50]Lee v Lee’s Air Farming Ltd [1961] AC 12, 24-28; Peatev Federal Commissioner of Taxation (1964) 111 CLR 443, 480.

[51]Salomon v Salomon & Co [1897] AC 22.

[52][1908] 2 KB 89,95-96; see also Wilcox v Federal Commissioner of Taxation (1988) 79 ALR 267, 274.

In case it matters, I am inclined to think that he was acting in his capacity as director. As it happens, however, the point has turned out to be of little consequence. We were told in the course of argument that National Foods did not in the end seek damages for of any breach of clause 26.13(a) committed before termination of the Licensed Distributor Agreement. In those circumstances, I do not stay to consider the subject any further.

Breaches of clause 23.16 alleged to be committed after termination

Acts committed after termination are in a different category. National Foods alleged that they were productive of substantial damage.

Clauses 23.16(b) and (c) of the Licensed Distributor Agreement provided that:

(b)For [six calendar months after the expiration or termination of this agreement], the Licensed Distributor must not be involved in any such capacity in any business involving the purchase, distribution or marketing of any product similar to any Products within the Territory.[53]
(c) For [six calendar months after the expiration or termination of this agreement], the Licensed Distributor must not solicit orders of any product similar to any of the Products from any Customers.

[53]Emphasis added.

The judge found that the following conduct committed by Mr McMahon after termination of the Licensed Distributor Agreement constituted breaches by both Mr McMahon and McMahons Dairy’s of clause 23.16(b):

First, … Tony McMahon who made the application to Warrnambool Cheese & Butter for a credit limit to enable his sons to commence purchasing and distributing Sungold milk products in competition with the Pura Milk products of National Foods. In that application, Tony McMahon nominated himself as the primary contact, and warranted that he had authority to bind ‘the Customer’ in all dealings with Warrnambool Cheese & Butter. Tony McMahon also guaranteed the account. During the six month period following termination of the licensed distributor agreement, and beyond, the account name under which Tony McMahon’s sons traded with Warrnambool Cheese & Butter remained as McMahons Dairy Pty Ltd…
Second, there is the continuing effect of the circular letter delivered by the McMahons to their customers on 15 August 2005 which is signed ‘FAMILY & STAFF AT McMAHON’S DAIRY’. As I have said, that letter was obviously written in an endeavour to persuade customers to continue dealing with the McMahons, on the assumption that they will be dealing with Tony McMahon and his family.
Third, Tony McMahon admits that he attended at the Royal Deli Café and the Wattle Valley Convenience Store on 20 August 2005, after termination of the licensed distributor agreement, and supplied free samples of Sungold milk to customers outside those premises. Further, Tony McMahon attended at the Grange Convenience Store accompanied by Paul Pino on 29 August 2005, and offered Sungold milk products to the proprietors of that store.
Fourth, on 16 August 2005, the day following the termination of the licensed distributor agreement, a full page advertisement appeared in the ‘Hume Moreland Leader’, a newspaper circulating in the McMahon territories, advertising Sungold milk products. The full page advertisement was in colour depicting a wide range of Sungold milk products, with bold type taking half the page stating:

C’MON,

ASK

FOR

Sungold

BY NAME!

The full page advertisement directs trade enquiries to McMahons Dairy in the following terms:

For deliveries of Australian owned Sungold call ...

McMAHONS DAIRY [phone number].[54]

[54]Reasons, [169]-[172].

The appellants argued below that the acts in question were undertaken by Mr McMahon on his own behalf ‘as a father helping out his child’ and not as director of McMahon’s Dairy. But the judge rejected that argument on two bases.

The first, his Honour said, was that:

For the same reasons as I have given concerning the breach by McMahons Dairy of clause 23.16(a), these submissions on behalf of McMahons Dairy should be rejected. When read as a whole, clause 23.16 has the obvious commercial purpose of preventing the Licensed Distributor from competing with National Foods for the supply of milk products during the term of the licensed distributor agreements and for a period of six months thereafter. It would be wholly uncommercial to interpret clause 23.16 in the manner contended for by the McMahons. The McMahons interpretation would permit the natural person in effective control of the Licensed Distributor, and to whom the goodwill of the business of the Licensed Distributor attached in the market place, to simply incorporate a different corporate entity and compete with National Foods. I have no hesitation in rejecting this interpretation. Clause 23.16 applies to the conduct of Tony McMahon in all the circumstances. As I have said, there is no doubt that he was involved in the business of McMahon’s Dairy Products Pty Ltd after the termination of the licensed distributor agreement. At the very least, he was an ‘adviser’ to that business. Indeed, he does not dispute that this was so. His own evidence is that he was assisting his sons in setting up and conducting their business in competition to National Foods within the McMahon territories.[55]

[55]Reasons, [254] (emphasis added).

Secondly, his Honour observed:

Further and in any event it was McMahons Dairy, the Licensed Distributor, which established the trading account with Warrnambool Cheese & Butter and nominated Tony McMahon as the ‘primary contact’ for all dealings with Warrnambool Cheese & Butter. In addition, Tony McMahon guaranteed the account. Although it appears that the business of distributing Warrnambool Cheese & Butter products (Sungold products) has been conducted by McMahon’s Dairy Products Pty Ltd, a company in which Tony McMahon has no interest, the evidence establishes that the trading account is still in the name of McMahons Dairy Pty Ltd and, as appears above, I infer that the account remains guaranteed by Tony McMahon. In these circumstances, McMahons Dairy Pty Ltd is in breach of clause 23.16 because it has acted as an agent of McMahon’s Dairy Products Pty Ltd or has been ‘otherwise’ involved in its business.[56]

[56]Reasons, [255].

I disagree with the first of those propositions. As explained when dealing with the alleged breaches of clause 23.16(a), I do not accept that clause 23.16 applied to such if any of Mr McMahon’s acts as were not committed by him in his capacity as director of McMahon’s Dairy, or otherwise on behalf of that company. Nor do I consider that there is anything particularly remarkable or unlikely about a restraint of trade clause like clause 23.16, which in terms applies only to a corporate covenantor, being construed as applying only to the corporate covenantor; and thus as leaving free an officer of the corporate covenantor to commit acts on his own behalf, albeit that if committed on behalf of the corporation they would amount to a breach of the covenant. Were it otherwise, there would be no need for a provision like clause 3 of the Licensed Distributor Agreement in terms rendering Mr McMahon personally liable for acts committed on his own behalf which, if committed on behalf of McMahon’s Dairy, would have been a breach of clause 23.16.

No doubt a covenantor will not be permitted to evade a covenant by acting under a title or through a company which is ‘a mere veil for the covenantor’s own activities, or by using a nominee’.[57] As a rule, therefore, a covenant in restraint of trade will be read as applying as much to acts committed by the covanantor by means of a corporate alter ego or other agent as to acts committed by the covenantor him or herself.[58] But properly understood, that rule is simply an application of the elementary principle of agency that acts done by an agent are considered to be the acts of the principal: qui per alium facit per seipsum facere videtur. It does not require or warrant treating a covenant which, in terms, is binding only upon a corporation as extending to the acts of a sometime officer of the corporation who does not act as or on behalf of the corporation and in which the corporation has no part. Once again, that would require the reading in of words which are not there.
[57]Heydon, The Restraint of Trade, 3^rd Ed 311.
[58]Gilford Motor Co Ltd v Horne [1933] Ch 935, 956.

With respect, however, I agree with his Honour’s second proposition. For once it is seen that it was McMahon’s Dairy which pledged its credit to fund the operations of McMahon’s Dairy Products Pty Ltd and, it might be added, ran advertisements and distributed letters inviting its customers to purchase their milk from McMahon’s Dairy Products Pty Ltd, there really could not be any doubt that McMahon’s Dairy acted in breach of clause 23.16(b) and, I should have thought, also 23.16(c).

As Lord Greene, MR held in the Batts Combe Quarry Case, acts of a covenantor in providing capital and negotiating and giving advice are a breach of the covenant not to be concerned or employed in a business, at least if the business has come into existence by the time that action is brought. And as I observed when dealing with clause 23.16(a), the advertisements and other acts of canvassing were calculated to harm National Foods’ business by taking customers away from Pura milk products and steering them towards Sungold.

Ground 12: Guarantees

I earlier set out clause 10 of the Heads of Agreement whereby Mr McMahon agreed with National Foods to guarantee the payment of all sums payable by McMahon under clauses 3.3 and 3.4 of the Heads of Agreement, and the Licensed Distributor Agreement guarantee whereby Mr McMahon guaranteed payment of all monies, fees and outgoings payable by the Licensed Distributor and the due and prompt performance and observance of any and all obligations on the part of the Licensed Distributor to be performed or observed pursuant to the Licensed Distributor Agreement.

The judge held that, by reason of the first and second novations, Mr McMahon should be taken to have agreed to the continuation of his guarantees as guarantees of the whole of the commercial arrangements between National Foods and those of the McMahon companies which were the subject of the novations. As the judge put it:

In my view, once it is inferred that the parties agreed to a novation of the arrangements between them, it should also, as a matter of business commonsense and avoiding any narrow or pedantic approach, be inferred that Tony McMahon agreed to the continuation of his guarantees of the whole of the commercial arrangements between National Foods and his companies which were the subject of the novation.
This is particularly so in circumstances where Tony McMahon requested the second novation and indicated a clear intention that his guarantee should continue to apply to the trading arrangements under the licensed distributor agreement by executing a fresh guarantee when he submitted the credit account application form. There is no reason to suppose that he intended any

different result in connection with his guarantee of the licence fees due under the heads of agreement.
In all the circumstances, I infer that both novations were subject to the agreement of the parties that Tony McMahon’s guarantee would continue to apply to the whole of the trading relationship between the McMahons and National Foods. In these circumstances, neither the first novation nor the second novation should be taken to have discharged Tony McMahon’s guarantee. Each novation was for his benefit and at his request.[59]

[59]Reasons, [266]-[268].

Under Ground 12, counsel for the appellants argued that the judge was wrong in holding that Mr McMahon’s obligations under clause 10 of the Heads of Agreement extended to the obligations of M P McMahon and McMahon’s Dairy under the novated Licensed Distributor Agreements. He submitted that there was nothing in the Heads of Agreement which provided for or contemplated the guarantee extending to the obligations of any ‘transferee’ or ‘assignee’ of the principal debtor or any new principal debtor consequent upon a novation.[60]
[60]See and compare Williams v Frayne [1937] 58 CLR 710, 715-6.

Further, in counsel’s submission, the judge’s finding that there was an implied agreement to that effect was wrong in law, in that it diverged from accepted legal principle that the novation of a principal debt discharges a guarantor from liability for the principal debtor’s obligations; and, in point of fact, was belied by Mr McMahon’s execution of a fresh guarantee for the milk debt at the time of the second novation, which, counsel said, was patently inconsistent with the existence of an implied intention that Mr McMahon remain liable as guarantor by way of novation.

I see no error of law in the judge’s conclusion that there was an implied agreement that the guarantee under clause 10 of the Heads of Agreement should apply to the substituted debtors.

The substitution of M P McMahon for McMahon’s Milk and, later,

McMahon’s Dairy for M P McMahon, could only be achieved by ‘novation’[61] constituted, in the case of the first substitution, by contract between National Foods, McMahon’s Milk and M P McMahon that M P McMahon should be substituted for McMahon’s Milk as the Licensed Distributor; and, in the case of the second substitution, by contract between National Foods, M P McMahon and McMahon’s Dairy that McMahon’s Dairy should be substituted for M P McMahon as the Licensed Distributor.
[61]Tolhurst v The Associated Portland Cement Manufacturers (1900) Ltd [1902] 2 KB 660, 668; using the term ‘novation’ in the second sense adumbrated by Lord Selbourne LC in Scarf v Jardine (1882) 7 App Cas 345, 351; see also Olsson v Dyson (1969) 120 CLR 365, 388-389 (Windeyer J).

Similarly, Mr McMahon’s obligations under clause 10 of the Heads of Agreement could only be extended to the obligations of M P McMahon and McMahon’s Dairy by novation[62] constituted by contract between National Foods and Mr McMahon, in the case of the first substitution, that he be discharged of his obligations to guarantee the performance of McMahon’s Milk in consideration of assuming the obligation to guarantee the performance of M P McMahon and, in the case of the second substitution, that he be discharged of his obligations to guarantee the performance of M P McMahon in consideration of assuming the obligation to guarantee the performance of McMahon’s Dairy.
[62]In the first sense adumbrated by Lord Selbourne LC in Scarf v Jardine (1882) 7 App Cas 345, 351

As a matter of law, however, there is nothing to preclude a court from inferring the existence of a contract from the acts of the parties, as well as or in the absence of words, and so from the totality of the dealings between the parties.[63] Hence, as matter of law, there is nothing to preclude inferring the existence of a contract of novation from conduct such as, for example, the conduct of a creditor in apparently accepting the liability of a new debtor in substitution for the old.[64] And as was pointed out by the New South Wales Court of Appeal in Tszyu v Fightvision Pty Ltd; Fightvision Pty Ltd v Onisforou,[65] the principle that no narrow or pedantic approach is warranted when searching for contractual intention in commercial arrangements[66] applies equally when searching for an intention to novate.
[63]Empirnall Holdings Pty Ltd v MachonPaull Partners Pty Ltd (1988) 14 NSWLR 523, 528; Vroon BV v Foster’s Brewing Group Ltd [1994] 2 VR 32, 82; cf Riseda Nominees Pty Ltd v St Vincent’s Hospital [1998] 2 VR 70; Cheshire & Fifoot’s Law of Contract 9^th Aust. Ed [3.5]; Branir v Owston Nominees (No 2) (2001) 117 FCR 424, 525 [369].
[64]Fightvision Pty Ltd v Onisforou; Tszyu v Fightvision Pty Ltd (1999) 47 NSWLR 473, [74]-[76]; Cheshire & Fifoot’s Law of Contract, 9^th Aust Ed [8.49].
[65]Ibid [86].
[66]The Council of the Upper Hunter County District v Australian Chilling and Freezing Co Pty Ltd (1968) 118 CLR 429, 437 (Barwick CJ).

I agree with the judge, therefore, that it was open as a matter of law to infer from the conduct of the parties that National Foods, McMahon’s Milk and M P McMahon agreed to the first novation; that National Foods, M P McMahon and McMahon’s Dairy agreed to the second; that National Foods and Mr McMahon agreed at the time of the first novation that his guarantee under clause 10 of the Heads of Agreement would thenceforth extend to the obligations of M P McMahon; and that they agreed, at the time of the second novation, that his guarantee would thenceforth extend to the obligations of McMahon’s Dairy.

It was submitted that the judge may have been wrong to characterise the first and second substitutions as novations. The concern was based on the statement of Sackville AJA in Valstar v Silversmith; Valstar v Van Veizen[67] that ‘[f]or novation to occur, all parties to the old arrangement must be parties to the new contract’. Counsel suggested that, because McMahon’s Milk ‘dropped out’ as a result of the first substitution and M P McMahon dropped out as a result of the second, it could not be said in this case that all the parties to the old arrangements were parties to the new contract.
[67][2009] NSWCA 80 [26].

In my view, that concern is misplaced. It is clear in principle, and with respect it is apparent from the authorities to which Sackville AJA referred, that the only point his Honour was making was that, in order for a party to be discharged from obligations by way of novation, that party must be party to the novation - in the sense of being party to the agreement that a new contractor will assume that party’s obligations in consideration of that party being discharged. There is no disconformity between Sackville AJA’s statement of the law and the judge’s analysis in this case.

Counsel for the appellants prayed in aid the principle of suretyship enunciated by Denman J in Holme v Brunskill,[68] and applied by the High Court in Ankar Pty Ltd v National Westminseter Finance Australia) Ltd,[69] that any departure by a creditor from the suretyship contract which is of such a character as to affect the surety in any way by substantially or materially altering the risk will discharge surety. He submitted that it must follow from the novations of the principal obligations that the guarantees were discharged.
[68](1877) 3 QBD 495, 498.
[69](1987) 162 CLR 549, 558.

In my view, that takes the matter no further, for two reasons. First, the principle in Holme v Brunskill is not really to the point. The concern here is not with an alteration to an existing risk of suretyship as, for example, where a creditor allows a principal debtor time or other indulgence or releases a security for the principal indebtedness. Here we are concerned with the substitution of one principal debtor for another by way of novation which has the effect of discharging the original debtor and thus the guaranteed indebtedness. More particularly, since the original guarantee was of the obligations of McMahon’s Milk, and since the terms of a guarantee are construed strictissimi juris,[70] then, upon M P McMahon being substituted for McMahon’s Milk and the latter discharged, the guarantor would necessarily have been discharged.
[70]Ibid 561; Chan v Cresdon Pty Ltd (1989) 168 CLR 242, 256.

Secondly, just as a surety may agree with a creditor that the surety will not be discharged by reason of an alteration to the risk,[71] so too may a surety agree with the creditor that, upon novation of the principal debt, the surety will go guarantor for the new debtor’s obligations as the surety had done for the old. Strictly speaking, what is involved in such a case is not a variation of the guarantee but rather the creation of a new guarantee, albeit that mutatis mutandis it may be upon the same terms as the old.[72] However, just as an agreement that a surety not be discharged by a material change in risk may be inferred,[73] so too may an agreement by a surety that upon novation of the principal debt he will stand as guarantor for the substituted debtor.
[71]Williams v Frayne (1937) 58 CLR 710, 729.
[72]Pybus v Gibb (1856) 6 E & B 902, 911; Leathley v Spyer (1870) LR 5 CP 595, 603; Goodaston Ltd v F H Burgess plc [1998] L & TR 46, 48.
[73]Williams v Frayne (1937) 58 CLR 710, 729; Swanson Bros v Stardown Investments Pty Ltd, (Unreported, Supreme Court of Victoria, 8 May 1967, Newton J); Wren v Emett Contractors Pty Ltd (1969) 43 ALJR 213, 220 (Menzies J, in diss but not in point of principle); Mytian v Williams [2001] NSWSC 47 [13]; O’Donovan & Phillips, Modern Contract of Guarantee 4^th Ed, [7.650].

There is a more significant problem with the Heads of Agreement guarantee. National Foods did not allege in its statement of claim that Mr McMahon was liable as guarantor under clause 10 of the Heads of Agreement for the obligations of McMahon’s Dairy under that agreement. Its case at trial was that there was no second novation. But the judge, having decided that there was a second novation, then went on to hold that Mr McMahon was liable as guarantor in respect of the second novated arrangements. The difficulty which that created was that McMahon did not get a chance to plead to any such proposition, and before us it was accepted that, if McMahon had been given that opportunity, it would have alleged an absence of note or memorandum under s 126 of the Instruments Act 1958 (just as it had alleged from the outset that there was no such note or memorandum in respect of the novated Licensed Dealer Agreement guarantees). The point is significant because, although a variation of guarantee need not be evidenced in writing,[74] at least if the variation is within the ‘general purview’ of the guarantee,[75] if a new contract is to be secured, as is the case where the principal obligation has been novated, there must be a new guarantee and it must be evidenced in writing.[76]
[74]Davidson v McGregor (1841) 8 M&W 755, 151 ER 1244; Re Blakely (1854) 4 De G M&G 881, 43 ER 752, 759; Farrow Mortgage Services Pty Ltd (in liq) v Slade (1996) 38 NSWLR 636, 639-40 (Gleeson, CJ); Wren v Emmett Contractors Pty Ltd (1969) 43 ALJR 213, 220; Mark Sensing (Aust) Pty Ltd v Tan [2000] VSC 525 [57] (Byrne J); Fortron Automotive Treatments v Eurotime Holdings Pty Ltd [2001] WASCA 275 [11].
[75]Trade Indemnity Co Ltd v Workington [1937] AC 1, 21; Moss QC and Marks, Rowlatt on Principal and Surety, 5^th Ed [4.72].
[76]Kitson v Julian (1855) 4 El & Bl 854, 119 ER 317; Leathley v Spyer (1870) LR 5 CP 595, 603; Goodaston Ltd v G H Burgess plc [1998] L & TR 46,48.

Faced with the problems which that created, counsel for National Foods disclaimed the task of demonstrating that there had been sufficient compliance with s 126 of the Instruments Act in respect of the Heads of Agreement guarantee and announced that he would not seek to uphold Mr McMahon’s liability as guarantor otherwise than under the Licensed Distributor Agreement guarantees.

I turn, therefore, to those guarantees. For whatever reason, the judge did not deal in his reasons for judgment with the application of s 126 of the Instruments Act1958 to the Licensed Distributor Agreement guarantees. His Honour’s failure to do so, however, was not the subject of a ground of appeal or referred to in the appellants’ proposed amended notice of appeal or mentioned in the appellants’ written outline of argument. Nor was anything said about it in oral argument until the court asked counsel for the respondent a question about amending the pleadings to accommodate the judge’s conclusion that Mr McMahon was liable as guarantor under the Heads of Agreement guarantee. At that point, counsel for the appellants said that, if the pleadings were to be so amended, he would wish to plead that the novation of the Heads of Agreement guarantee was unenforceable for want of compliance with s 126. As has been noticed, that led to counsel for the respondent disclaiming reliance on the Heads of Agreement guarantee.

Thereafter, counsel for the appellants did not say anything further about s 126 until, at the end of the day, when in reply to the submissions made by counsel for the respondent, he submitted that it could be seen from the transcript of the argument below that counsel who appeared at trial for McMahon argued in final submissions to the judge that National Foods had failed to demonstrate that the first novation of the Licensed Distributor Agreement guarantees was sufficiently evidenced in writing to comply with s 126 of the Instruments Act; as a consequence, that the Licensed Distributor Agreement guarantees had at that point ‘fallen away’; and that, although there may have been a sufficient note or memorandum evidencing the second novation to satisfy the requirements of s 126, the Licensed Distributor Agreement guarantees had by then gone and so there was nothing left to novate.

I reject that argument for three reasons. First, it is beyond the grounds of appeal, and there was no application to amend the grounds to accommodate the point. Secondly, it was so obviously an afterthought that it was but barely argued on behalf of the appellants and not at all on behalf of the respondent, and in my view it would not be fair to the respondent, nor should it be thought of as acceptable to the court, to extend these proceedings any longer in order to allow for further preparation and argument of the point. Thirdly, the point appears to me to be misconceived.

A failure to comply with s 126 in respect of the first novation may have rendered the first Licensed Distributor Agreement guarantee unenforceable. But it would not have rendered it void.[77] So far from it ‘falling away’ at that point, it would have remained in existence, albeit unenforced and unenforceable, until the time of the second novation. At the point of the second novation, as the judge found, the parties so conducted themselves towards each other that it is to be inferred that they agreed to novate the Licensed Distributor Agreement to McMahon’s Dairy and, as part of that arrangement, that Mr McMahon would go guarantor for McMahon’s Dairy mutatis mutandis upon the terms of the existing guarantee of M P McMahon. It was not suggested that the second novation agreement was insufficiently evidenced by a note or memorandum to comply with s 126. It follows that there is no reason of which I know why that new guarantee may not now be enforced in invitum.
[77]Leroux v Brown (1852) 12 CB 801, (1852) 138 ER 1119; Maddison v Alderson (1883) LR 8 App Cas 467, 488.

It is true that the note or memorandum of the second novation may not have sufficiently referred to the first guarantee to render that guarantee enforceable. But that is not to the point for present purposes. The first guarantee did not have to be enforceable for the parties to be taken implicitly to agree that Mr McMahon would go guarantor of McMahon’s Dairy on terms mutatis mutandis the same as those of the first guarantee. It is the new guarantee which needed to be sufficiently evidenced by note or memorandum signed by or on behalf of Mr McMahon and, as I say, it is not suggested that it was not. In effect, the position is really no different to what it would have been if Mr McMahon had entered into an express oral agreement with National Foods to go guarantor for McMahon’s Dairy mutatis mutandis on the terms of the unenforceable Licensed Distributor Agreement guarantee and if a note or memorandum of that express oral agreement had been created.

Turning then to the substance of the argument concerning the Licensed Distributor Agreement guarantees, counsel for the appellants concentrated his submissions on paragraphs 266 and 267 of the judge’s reasons, wherein his Honour said that:

In my view, once it is inferred that the parties agreed to a novation of the arrangements between them, it should also, as a matter of business commonsense and avoiding any narrow or pedantic approach, be inferred that Tony McMahon agreed to the continuation of his guarantees of the whole of the commercial arrangements between National Foods and his companies which were the subject of the novation.
This is particularly so in circumstances where Tony McMahon requested the second novation and indicated a clear intention that his guarantee should continue to apply to the trading arrangements under the licensed distributor agreement by executing a fresh guarantee when he submitted the credit account application form. There is no reason to suppose that he intended any different result in connection with his guarantee of the licence fees due under the heads of agreement.

Counsel for the appellants argued that his Honour’s conclusion was not based on any relevant finding of fact or accepted legal principle.

So far as the facts are concerned, I think that submission to be untenable. The McMahons’ position at trial was that there was a second novation the result of Mr McMahon agreeing orally and by conduct with National Foods to change the company through which he operated from M P McMahon to McMahon’s Dairy.[78]

The judge dealt in extenso with the evidence of that event[79] and concluded that he accepted Mr McMahon’s version of events.[80]
[78]Reasons, [103] and [104].
[79]Reasons, [105]-[131].
[80]Reasons, [132].

So far as the law is concerned, I have dealt already with the principles which determine whether it is open to infer the existence of a novation agreement (including the novation of a guarantee), and I have noticed that no narrow or pedantic approach to the drawing inferences of that kind is warranted when one is dealing with commercial novation arrangements. As has also been observed, where a surety instigates or is otherwise involved in the novation of an underlying obligation, it may more readily be inferred that the surety thereby agrees that his or her guarantee of the old arrangement will stand as a guarantee of the new.[81] Consequently, as Mahon J observed in Winstone Ltd v Bourne,[82] in circumstances where a guarantor argued that he had not assented to a variation in underlying obligation in his capacity as guarantor, but only in his capacity as director of the debtor company:

On the facts, bearing in mind the clear knowledge of the defendants of their liabilities as guarantors, I cannot hold that their informed and endorsed assent as directors of that company to the alteration in the debenture was not also an informed though unrecorded assent as guarantors of the plaintiff’s debt.[83]

[81]Williams v Frayne (1937) 58 CLR 710, 729; Swanson Bros v Stardown Investments Pty Ltd, (Unrep, Supreme Court of Victoria, 8 May 1967, Newton J); Wren v Emett Contractors Pty Ltd (1969) 43 ALJR 213, 220 (Menzies J, in diss but not in point of principle); Mytian v Williams [2001] NSWSC 47 [13]; O’Donovan & Phillips, Modern Contract of Guarantee 4^th Ed, [7.650].

[82][1978] 1 NZLR 94.

[83]Ibid 96.

Tested against those principles, I am unable to perceive any error in the judge’s legal analysis. I agree with his Honour that it was open to infer from the conduct of the parties that, in consideration of National Foods agreeing to the substitution of McMahon’s Dairy for M P McMahon as the Licensed Distributor, Mr McMahon agreed that he would go guarantor of McMahon’s Dairy on the terms mutatis mutandis of the Licensed Distributor Agreement guarantee. In particular, given that Mr McMahon was the sole director and executive officer of each of M P McMahon and McMahon’s Dairy, and instigated and arranged for the second novation, I agree with the judge that it was properly to be inferred that Mr McMahon implicitly agreed with National Foods that his Licensed Distributor Agreement guarantee would apply as a new guarantee to the obligations of McMahon’s Dairy as Licensed Distributor.

Counsel for the appellants submitted that the fact that Mr McMahon had been asked to sign and had signed a specific guarantee of McMahon’s Dairy’s milk account obligations implied that the parties were agreed that it should be the only guarantee in respect of McMahon’s Dairy’s obligations as Licensed Distributor, or at least that in face of that specific guarantee, it was not open to infer that Mr McMahon agreed to go guarantor on terms the same as the Licensed Distributor guarantee.

I do not accept that submission. If the only payment obligation for which the Licensed Distributor Agreement provided was payment of milk accounts, then perhaps there may have been some force in the point. But the Licensed Distributor Agreement also provided for the Licensed Distributor to indemnify National Foods against damage resulting from any breach of the Licensed Distributor Agreement (the possible instances of which were far broader than failure to pay milk accounts, and included damage resulting from any breach of the Heads of Agreement). In those circumstances, it is not lightly to be supposed that National Foods intended to forgo the full guarantee it enjoyed in relation to M P McMahon in return for the much more limited milk guarantee which Mr McMahon was then asked to sign. In my view, honest and reasonable business observers would more likely take the parties’ intention to be that the milk guarantee should stand as a collateral security for the specific milk account part of McMahon’s Dairy’s total obligations.

Clause 1.4 of the Heads of Agreement provided that:

Licensed Distributor Agreement
(a)This agreement is subject to the terms of the Licensed Distributor Agreement and a breach of this agreement will amount to a breach of the Licensed Distributor Agreement.

(b)In the event of conflict between the terms of this agreement and the terms of the Licensed Distributor Agreement, the terms of this agreement will prevail.

It follows from what I have said that, in my view, Mr McMahon is liable under the second novated Licensed Dealer Agreement guarantee for McMahon’s Dairy’s failure to pay its Heads of Agreement licence fees obligation.

Conclusion and orders

For the reasons I have given, I would dismiss the appeal.

NEAVE JA:

I have had the considerable advantage of reading in draft form the reasons of Nettle JA. I would also dismiss the appeal, for the reasons given by his Honour.

DODDS-STREETON JA:

I have had the advantage of reading in draft the reasons for judgment of Nettle JA. I agree with the disposition proposed by his Honour, for the reasons he gives.

[2009] VSCA 153

25 June 2009