Merewyn Pty Limited v Simeon Wines Limited

[2002] NSWSC 207

CITATION:	Merewyn Pty Limited & Ors v Simeon Wines Limited [2002] NSWSC 207
CURRENT JURISDICTION:	Equity Division Commercial List
FILE NUMBER(S):	SC 50005/02
HEARING DATE(S):	27 - 28 February 2002 6 - 7 March 2002
JUDGMENT DATE:	22 March 2002
PARTIES :	Merewyn Pty Limited & Ors (Pltfs) Simeon Wines Limited (Def)
JUDGMENT OF:	McClellan J

COUNSEL :	B W Rayment QC/W S Johnson/J R J Lockhart (Pltfs) F M Douglas QC/D T Kell (Def)
SOLICITORS:	Coudert Brothers (Pltfs) Mallesons Stephen Jaques (Def)
CATCHWORDS:	CONTRACT - interpretation - contractual term obliged one party to accept the reasonable opinion of another - ambiguous contractual term - "first quality wine" - pre-contractual conduct of parties considered - whether evidence of post-contractual conduct may be considered - the word "otherwise" after specific description words should be considered in the context of the clause
CASES CITED:	Bickel v Duke of Westminster (1977) 1 QB 517 Commonwealth v Sterling Nicholas Duty Free Pty Ltd (1972) 126 CLR 297 Jones & Anor v Clarke (1858) 2 H & N 725 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 Brambles Holdings Ltd v Bathurst City Council (unreported, 23 March 2001, NSWCA 61 Spunwill Pty Ltd v BAB Pty Ltd (1994) 36 NSWLR 290
DECISION:	See paras 80-84

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

McCLELLAN J

FRIDAY 22 MARCH 2002

50005/02 - MEREWYN PTY LIMITED & ORS v SIMEON WINES LIMITED

JUDGMENT

Introduction

1 The plaintiffs are grape growers at Balranald in the Sunraysia Murray Darling Wine District (“Sunraysia District”) of south western New South Wales. Each of them owns a vineyard of at least 40 hectares, which were developed and are managed together as one holding by Whitnall Rohde Farm Management Services Pty Ltd (“Whitnall Rohde”). The development is known as the Balranald Vineyards.

2 The defendant, a public company, is one of Australia’s largest wine makers. It has a major winery at Buronga Hill in the Sunraysia District and has contracted to take all of the plaintiffs’ grapes grown on the Balranald Vineyards for processing into wine at that winery. The contract contains a number of conditions of which one is in dispute in these proceedings.

3 These proceedings involve controversies beyond the disputed condition. However, when first commenced, there was an immediate problem in relation to a substantial volume of grapes suitable for making red wine, (“red wine grapes”) which were almost ready for picking, and the matter was brought on for hearing with some urgency. The plaintiffs were fearful that the defendant may not take all of their red wine grapes and both parties were concerned to know of their rights and obligations under the contract. During the hearing, the parties were able to agree a regime which has allowed the grapes to be picked, processed and held as must or wine pending the outcome of the proceedings. The decision in the proceedings may be relevant to any decision by the defendant to retain the product of the processed grapes or return it to the plaintiffs.

4 The plaintiffs commenced these proceedings after they received a letter from the defendant dated 15 January 2002. That letter imposed a minimum colour standard in respect of the plaintiffs’ red wine grapes expressed in milligrams of anthocyanin per gram of berry weight. It stated that unless the identified levels were evident in each of the nominated variety of grapes sampled before harvest, the grapes would, at the election of the defendant, either be rejected or accepted at a reduced price.

5 Although the defendant has contracted separately with each plaintiff, the grape supply contracts are relevantly identical. I shall only refer to one contract in these reasons (“the contract”). The contract contains no reference to a colour standard expressed in milligrams of anthocyanin or otherwise, and the evidence indicates that no practical method of measuring colour was available in 1995 when the contract was first executed. However, in more recent years a method of testing for colour has been developed and for grapes grown in warmer regions such as the Sunraysia District, the defendant and at least another major wine company – BRL Hardy Limited - believe that they can relate colour measured in red grapes with the quality of the wine made from those grapes. In general terms, the more dense the colour of the grapes, the better the quality of the wine.

6 The letter of 15 January 2002 was preceded by grower information meetings chaired by representatives of the defendant, where matters relevant to the colour and quality of grapes and wine were discussed. From material which the defendant had made available to growers at these meetings, which included the colour measurements taken of red wine grapes in recent vintages, the plaintiffs formed the view that, in particular, their cabernet sauvignon grapes would almost certainly not meet the colour criteria set by the defendant in the letter of 15 January 2002. Whether they were correct in their conclusions is questioned by the defendant.

7 However, as a consequence of these concerns, when these proceedings were commenced, the plaintiffs sought to restrain the defendant from refusing to accept grapes which did not meet the colour standards provided in the letter of 15 January 2002 or indeed any colour standard.

8 Before the proceedings came on for hearing, the defendant wrote a further letter dated 19 February 2002, which was intended to modify the position stated in the letter of 15 January 2002. However, the second letter was not entirely clear and it was necessary for the defendant’s senior counsel to make plain in court, that the January letter was not to be relied upon. Any claim by the defendant that it can reject grapes merely because they do not meet an identified colour standard has been withdrawn.

9 Unfortunately, this did not eliminate all of the problems between the parties. Having withdrawn any claim that it could impose a colour standard, the defendant nevertheless said that it was entitled to reject grapes which did not meet the quality standard provided in the contract, in which colour may play a part. This standard is embodied in clause 4.1 of the Schedule to the contract, which provides that the defendant is not bound to “purchase from the Grower any Grapes which in the reasonable opinion of the Processor’s grader (the defendant is the processor) are not of sufficient quality for “making first quality wine whether by reason of unsoundness, damage, contamination, disease or otherwise.”

10 The parties cannot agree as to the meaning of the phrase “first quality wine” in the clause. In short, the defendant says that it means wine of a quality suitable to be sold under the Jacobs Creek label of Orlando Wyndham Group Pty Ltd (“Orlando Wyndham”). As it happens, the defendant’s largest customer is Orlando Wyndham to which it sells significant quantities of wine suitable for Jacobs Creek. It also sells significant quantities of lesser grade wine to Orlando Wyndham, which is used in inferior products.

11 The plaintiffs’ position is that “first quality wine” means sound wine, being wine without physical defects, irrespective of its quality.

12 The parties have proffered possible declarations, which it is submitted may be appropriate in the circumstances.

13 I have been troubled by whether the court should intervene at this stage of the dispute or whether as the defendant has submitted, the plaintiffs should be left to a remedy in damages, should it be available. But for the arrangements which the parties have put in place, in relation to the grapes from the current vintage, there was a risk that a significant quantity of grapes may have been entirely lost, which, even if rejected by the defendant, may have had real value in the market place. Although that risk has been eliminated there remains a real dispute between the parties as to the meaning of clause 4.1 and the rights which each party has under the contract. Rather than leave the parties with the real possibility of significant further litigation, which may require an examination of complex factual issues, such as the criteria by which any grapes were rejected and even more complex inquiries with respect to damages, I am satisfied that, if a declaration can be made, then it should. (See the discussion in Meagher, Gummow and Lehane Equity: Doctrines and Remedies, 3rd ed p 358).

14 I am mindful of the remarks in Bickel v Duke of Westminster (1977) 1 QB 517 at 524 where Lord Denning emphasised the care with which a court must approach a claim for relief, in respect of contractual terms, which oblige one party to accept the reasonable decision of another. However, in a case such as the present where the parties accept that a discretion is available to the defendant’s grader, but are at issue as to the matters which are relevant to inform that discretion, I am satisfied it may be appropriate for the court to grant declaratory relief. There can be little doubt that the grant of such relief may enable the parties to proceed to order their affairs more efficiently and with greater certainty than might otherwise be the case, (see Commonwealth v Sterling Nicholas Duty Free Pty Ltd (1972) 126 CLR 297 at 305).

15 The contract made by the parties does not define the phrase “first quality wine” and it is not a term of art known in the wine industry as perhaps “fair average quality” is used in relation to primary produce. (see Jones & Anor v Clarke (1858) 2 H & N 725). It is agreed between the parties that because it is impossible to make wine described in the industry as Icon wine (an example being Penfolds Grange) from grapes grown in the Sunraysia District – it is just too hot and dry – “first quality wine” cannot mean the best wine which can be made. However, it is plain that the meaning of the phrase is ambiguous and accordingly, assistance, if available, may be sought in the precontractual conduct of the parties. By this means, the court may be informed of “the objective framework of facts within which the contract came into existence, and to the parties’ presumed intention in this setting.” See Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 347-352.

16 Evidence of post contractual conduct is “not admissible on the question of what a contract means as distinct from the question of whether it was formed”. (Brambles Holdings Ltd v Bathurst City Council (unreported, 23 March 2001, NSWCA61 Mason P, Heydon JA and Ipp AJA). However, see the suggestion by Santow J to the contrary in Spunwill Pty Ltd v BAB Pty Ltd (1994) 36 NSWLR 290.

17 In the present case, because the dispute has its origin in the attempt by the defendant to impose an objective colour standard for red wine grapes, considerable evidence of the conduct of the parties in recent years has been admitted. I have related that evidence briefly in these reasons but it now provides no more than background to the dispute. It cannot be relevant to an understanding of the true bargain between the parties.

The background

18 Grapes suitable for the making of table wine are grown in many parts of Australia with varying climate and soils. The Sunraysia District is a warm inland grape growing region with most vineyards relying on irrigation. Cooler grape growing regions, such as the Coonawarra and Barossa Valley, but there are many others, rely far less on irrigation. The cooler areas are generally believed to provide grapes which make higher quality wine than can be made with grapes from the warm inland areas.

19 Most of the major wine companies have interests in the Sunraysia District. By 1995, when the contract between the parties was executed, the major winery owners in the District were the defendant, Southcorp Ltd, BRL Hardy Ltd, Mildara Blass and Cranswick Wines. The District produced in the order of twenty percent of Australia’s wine grapes, the vineyards producing larger quantities of grapes per hectare than vineyards in the cooler regions. Vineyards in the Sunraysia District produce on average, twenty-four tonnes of grapes per hectare whereas in the Coonawarra region, the average production may be only ten tonnes of grapes per hectare.

20 In 1995, the average price per tonne for wine grapes grown in the Sunraysia District was between one third to one half of the average price per tonne for grapes grown in the cooler wine grape growing regions.

21 The global market for wine and its various segments can be described in a number of ways. However, in these proceedings, the labels generally applied to the various market segments in the United States of America, were adopted. Using those labels at the top of the quality range are Icon wines, comprising one percent of the market, Ultra Premium wines comprising five percent of the market, Super Premium wines comprising ten percent of the market, Premium wines comprising thirty-four percent of the market and Basic wines which make up fifty percent of the market.

22 Brands which are accepted as indicative of the Premium segment of the market include Banrock Station, Jacobs Creek, Lindemans Bin Range, Oxford Landing and BRL Hardy’s Nottage Hill. Generally wines suitable for the Premium segment are packaged into bottles although some wines of this quality are sold in both bottles and casks – generally two litre casks. Basic wines are sold in casks generally of four litres in size. These are generally referred to as generic casks as a significant proportion of the wine may be made from multi-purpose or non-varietal wine grapes, although this is not always the case.

23 The defendant was formed in 1994 and was listed on the stock exchange in June of that year. From the outset it had a close relationship with Orlando Wyndham which is Australia’s third largest wine company. One of the goals of the defendant, upon flotation, was to be able to provide processed varietal grapes for use in making Orlando Wyndham’s flagship wine marketed under the Jacobs Creek label. Apparently, the name Simeon was chosen for the defendant because in biblical terms, Simeon was the son of Jacob. Orlando Wyndham remains the defendant’s largest single shareholder. One of the defendant’s original assets was the Buronga Hill winery which is situated so that it can accept and process grapes from the Sunraysia District.

24 Mr Mackenzie has been the Managing Director of the defendant since its formation. He was formerly employed by Orlando Wyndham. He gave evidence that in Australia in 1995, there was only a limited amount of wine packaged in two litre varietal casks and this was mainly white wine. Although selling at a higher price than generic cask wine, the wine was inferior in quality to bottled wine such as Jacobs Creek or Nottage Hill, which was the wine of BRL Hardy equivalent to Jacobs Creek. In 1995, some varietal grapes such as cabernet sauvignon, shiraz and merlot found their way into generic casks but only when considered unsuitable for either varietal cask or bottled wine.

25 Mr Mackenzie gave evidence about the state of the Australian wine industry in 1995. In his affidavit he said the following:

“In 1995 wine was produced in Australia and sold both in Australia (bottle and casks) and for export, mainly in bottles. Generic cask wine was (and remains) the minimum standard of drinkable wines. This minimum standard was in 1995, and remains today, reflected in the retail price of such generic cask wines (in 2001, $10 for 4 litres). Bottle wine in Australia in 1995 was almost invariably made from varietal grapes such as, in the case of red wine, Cabernet Sauvignon, Shiraz and Merlot. Bottled wine ranged from commercial bottled wine (such as Jacobs Creek and Nottage Hill, in 1995 $6, now currently $8 bottle) up to premium bottled wines such as Hill of Grace (currently $200 bottle). In between these two categories fell what may be regarded as mid-range quality bottled wines (that presently retails for about $15.00 per bottle, such as Peter Lehman).
There was, in Australia in 1995, only a very limited amount of dedicated 2 litre varietal casks (such as Yalumba) and then mainly for white wine. Those dedicated varietal casks sold at a significantly higher price than generic cask wine, but were regarded as being at a qualitative level below Jacobs Creek and Nottage Hill.
In 1995 varietal grapes such as Cabernet Sauvignon, Shiraz and Merlot typically found their way, in very limited form, into generic casks only when adjudged to be substandard, that is to be of insufficient quality for inclusion in dedicated varietal product, whether bottled or, in more limited quantities, varietal cask. This remains the case today. In 1995 generic cask wine was commonly referred to in the industry, including by me, as base wine or cask wine.”

26 Mr Mackenzie also gave evidence that in late 1994 and early 1995 there was a general expectation in the wine industry that export sales would provide a significant avenue for growth. However, that expectation was confined to the export of bottled wine, in particular Premium wine (called by Mr Mackenzie “commercial wine”) rather than of cask wines. The natural response to this expected increase in demand for Australian wine was the planting of new vineyards to provide the necessary grapes. In particular, cabernet sauvignon, shiraz and merlot wines were planted in the Sunraysia District.

27 In April 1994, the defendant issued a prospectus which contained amongst other information, the following statements:

“Orlando Wyndham has contracted for ten years to take a large quantity of the Buronga Hill winery’s output, and has contracted for fifteen years to take all of the grapes from the vineyards. Orlando Wyndham’s demand for additional supply is largely based on its substantial forecast increase in export sales, particularly of the Jacobs Creek brand.

…

The Australian wine industry has targeted export sales of $1 billion by the year 2000.

…

In recent years, both domestic and export wine consumption has increased for wines made with premium grape varieties. This trend is projected to continue, especially for the export markets. The demand for varieties in the premium red wine grape category (notably cabernet sauvignon and shiraz) is projected by the wineries to increase by 64% (64,951 tonnes) based on the actual intake in 1992-93 and the forecast intake for 1995-96.

…

A significant proportion of the Company’s output is expected to be used for Jacobs Creek.

…

In respect of the Buronga Hill Winery, Simeon’s objectives included to: ‘Increase the percentage of varietal grapes processed in line with increased demand from customers.’”

28 In the same year, the defendant forecast an increase in its varietal grape intake from 11,000 tonnes in that year to 24,000 tonnes in 2000. It was anticipated that most of this growth would be at the Buronga Hill winery. As a consequence, the defendant was anxious to maximise its own grape production as well as identify growers or prospective growers with whom it could negotiate long term grape supply agreements.

29 In 1995, the defendant’s facilities at Buronga Hill did not enable it to identify where the produce from a particular vineyard actually ended up. It was not possible to identify whether any particular vineyard produced wine suitable for bottles or merely for casks. This has changed in recent years and the defendant has installed a system which enables it to monitor grapes from particular vineyards through to end wine. The consequence was that at the time the contracts with the plaintiffs were executed, the defendant could not be aware whether the red wine grapes which it received ended up in Jacobs Creek or any other bottle or would be merely suitable for cask wine.

The discussions between the plaintiffs and the defendant

30 In 1994, Mr Mackenzie was approached by Mr Whitnall, a principal of Whitnall Rohde Pty Ltd, which was keen to promote a major new vineyard development at Balranald. It was to become the development in which each of the plaintiffs ultimately acquired an interest. At the time, the land to be utilised was undeveloped “mallee scrub”, although it was considered suitable for the growing of grapes. Mr Whitnall was seeking to put together a development, which would attract investors for the individual vineyard blocks. He needed the assurance of a buyer for the prospective grapes.

31 Mr Mackenzie gives an account of a meeting with Mr Whitnall in which he says:

“At his invitation, I met with Peter Whitnall in September 1994 to discuss his Balranald vineyard proposal. I do not now remember the precise words that Mr Whitnall used at the meeting. I do recall that he indicated to me that he was aware of Simeon’s recent float and the company’s expansion plans.
During my meeting with Mr Whitnall, I discussed the profile of Simeon. Although I do not now remember the precise words that I used, I did outline to Mr Whitnall a number of matters that were the subject of the prospectus (released only a few months before the meeting), including that Simeon had a wine sale agreement with, and provided most of its output to, Orlando. I also told Mr Whitnall that Simeon’s plan (in conformity with the information detailed in the prospectus) was to invest in vineyards and enter into grower contracts in order to increase the total volume of wine made at Buronga (from 50,000 to 69,000 tonnes) and that the vast majority of that increased production was to be of varietal wine capable of being sold to Orlando for inclusion in its flagship export brand Jacobs Creek. I remember visiting the Balranald site and being impressed by Mr Whitnall’s enthusiasm in presenting the project and in particular his stated commitment to developing a high quality vineyard, capable of being able to produce grapes of an appropriate quality to meet our wine standards, which I had told him was Jacob’s Creek. At this stage he was selling the merits of the project to Simeon as prospective purchaser of the grapes, and if I had not been convinced by his commitment to quality I would not have proceeded to sign the grape purchase contract.”

32 Mr Rohde, the other principal of Whitnall Rohde Pty Ltd, was also present at this meeting. Although he has been involved in grape growing for about fifty years, his knowledge of wine is limited. He is not a drinker of wine. He gave evidence that in 1995 he had no idea whether wine made from grapes from the Sunraysia District was destined to end up in bottles or casks. He had little recollection of a meeting with Mr Mackenzie although he had a recollection of discussions with Mr McLeod, another senior executive of the defendant. Although Mr Rohde recalls being told that the defendant wanted increased grape production, he says he was not told that the increased production was desired so that varietal wine capable of being sold to Orlando Wyndham for the Jacobs Creek range could be made. He believed at the time, that the ultimate destination for grapes grown at Balranald would be in the lower range of casks and bottles, which was the typical destination of grapes from Sunraysia District at the time. He believed that Balranald would be capable of producing grapes similar in quality to those already being grown in the Sunraysia District.

33 I prefer the evidence of Mr Mackenzie to that of Mr Rohde. I have little doubt that both Mr Whitnall and Mr Rohde would have been eager to impress on Mr Mackenzie their desire to produce high quality grapes – it would be commercially naïve to do otherwise. I am also satisfied that Mr Mackenzie did refer to both Orlando Wyndham and Jacobs Creek wine and expressed his expectation that grapes to be grown on the Balranald Vineyards would be suitable to make wine of that quality. Having regard to the relationship between the defendant and Orlando Wyndham and the role which Jacobs Creek played in the latter’s product line, it would be extraordinary if Jacobs Creek had not been mentioned. After all, this was a meeting to determine whether the aspirations of each party were such that a long term grape supply contract could be successfully negotiated.

34 Unfortunately, by the time the dispute as to this conversation emerged in the proceedings, Mr Whitnall was in hospital and not available to give evidence.

35 Mr Whitnall and Mr Mackenzie wrote to each other following the meeting – Mr Mackenzie on 29 September 1994 and Mr Whitnall on 30 September 1994. In his letter, Mr Mackenzie refers to discussing “the profile of Simeon during our visit.” No doubt, this included a discussion about the defendant’s facilities, commercial and market position and expectations. However, the plaintiffs emphasise the fact that the letter does not refer to Jacobs Creek and furthermore, makes no attempt to confirm any minimum or expected quality level for the grapes to be grown at Balranald.

36 The plaintiffs also emphasise the fact that Mr Whitnall’s letter of 30 September 1994, contains no reference to a defined quality standard for grapes or any reference to Jacobs Creek or Orlando Wyndham. Relevant matters in relation to the purchase of grapes are recorded in the letter and include the following:

“1. Whitnall Rohde Farm Management Services on behalf of separate investors agree to enter into 15 year supply contracts with Simeon Wines Limited for the entire production at Balranald.
2. Grape prices payable over the entire 15 years will be Sunraysia district market prices calculated as an average of three major wineries, Southcorp, BRL Hardy and Mildara Blass with prices relating to the Sunraysia area. Should the Simeon price be higher than the above average then the Simeon price will be paid.
3. A guarantee floor price plus CPI increases will be paid for the first 10 year period of the contract commencing from the date of planting. As planting will be carried out progressively over 4 years the 10 year guaranteed floor price will apply for each of those planting years, namely 1995, 1996, 1997 and 1998. CPI increases will apply for all plantings commencing from the date of signing the separate growers agreements.
Guaranteed floor prices are as follows:
$

Chardonnay	650 tonne
Shiraz	550 “
Cabernet Sauvignon	550 “
Merlot	550 “
Sauvignon Blanc	400 “
Gordo	300 “

37 At about the same time, Mr Whitnall also wrote to Mr Rod McLeod, who had responsibility on behalf of the defendant, for negotiating the grape supply contract. His letter of 5 October 1994 related to the draft contract between the plaintiffs and the defendant.

38 Clause 6.2 of the draft provided that the grower must “cultivate and maintain the vines upon the Vineyard in accordance with best viticultural practices and harvest and deliver the Grapes to the Winery in accordance with best industry practices”. In the letter of 5 October 1994, Mr Whitnall wrote saying he believed that this clause should not be included as the definition of “best” is not clear and most difficult to define. He supported his suggestion by referring to clause 4 in the following terms:

“Clause 4 of the second schedule (Standard of Grapes) states that grapes must be suitable for making first quality wine. Our management contract states that Whitnall Rohde Farm Management services would do all in keeping with good and proper management of the property.”

39 In response to his request clause 6.2 was deleted from the contract executed by the parties.

The contract

40 The enthusiasm of the defendant for the project can be gauged from the letter written by Mr Mackenzie on 23 January 1995. The letter confirms the desire of the defendant to purchase two of the blocks and indicates that it was prepared to fund the erection of a manager’s residence along with appropriate sheds for plant, machinery and chemical storage, all located on one of the company’s blocks. Mr Mackenzie states in the letter:

“We are keen to assist in whichever manner so that this project can be progressed.”

41 It is plain from the correspondence that the development of the vineyards was undertaken in close consultation with the defendant. The grape supply contract, which was ultimately executed by each plaintiff with the defendant, provided that the defendant would purchase all the grapes harvested from the vines planted on the various vineyard blocks, acknowledging that planting would commence in 1995 with further plantings in 1996, 1997 and 1998. The contract provided that the vineyards would be planted with nominated grape varieties in agreed areas.

42 The grape varieties extended over the range of grapes commonly referred to as varietal grapes. They included chardonnay, shiraz, cabernet sauvignon, merlot, ruby cabernet and colombard. Each of these varieties is used either exclusively or in a blend to produce bottled wine. They may, of course, also be used in cask wine. They are referred to as varietal because when of sufficient quality, they can be used to make wine which reflects the taste of the particular grape variety rather than being merely nondescript red or white wine.

43 The agreement provided a pricing structure with a guaranteed floor price which, as it happens, reflected the average price paid by the major wine companies for grapes of the particular variety from the Sunraysia District in 1994. The floor price was stated to increase each year in line with the consumer price index. Otherwise the agreement reflected the earlier negotiations and provided in relation to the purchase price:

“Purchase Price
2.1 Unless otherwise agreed the Processor will purchase the Grapes from the Grower at a price for each variety being the highest of:
2.1.1 The floor price per Item 4 in the First Schedule, or;
2.1.2 The Sunraysia district market price being calculated as the average paid by Southcorp, BRL Hardy and Mildara Blass relating to the Sunraysia area, or;
2.1.3 The average price paid by Simeon Wines by variety in the Sunraysia area.”

44 The agreement also provided that the floor price ceased to apply ten years after the date of planting of any particular vine with the price thereafter being the higher of the price provided by clause 2.1.2 or 2.1.3.

45 Clause 2.1 was later replaced when it became apparent that the major wine companies would not readily disclose the price they were paying for grapes. It was replaced with the following clause:

“Sunraysia district market price being based on the district average prices published in the Wine Grape Utilisation Survey for Sunraysia Wineries, compiled and released annually under the auspices of the Murray Valley Wine-grape Industry Advisory Committee.”

46 The agreement provided for payment terms and under the heading ”Standard of Grapes” provided as follows:

“ Standard of Grapes
4.1 The parties acknowledge that the Processor enters into this Agreement for the purpose of acquiring Grapes suitable for making first quality wine and, notwithstanding anything to the contrary contained in this Agreement, the Processor will not be bound to purchase from the Grower any Grapes which in the reasonable opinion of the Processor’s grader are not of sufficient quality for making first quality wine whether by reason of unsoundness, damage, contamination, disease or otherwise.”

47 I have related the fact that although the dispute between the parties arose from an attempt by the defendant to impose a measurable colour standard on grapes, the difficulties now relate to the meaning of the words “first quality wine” in clause 4.1. The submission of the plaintiffs is that grapes will be of sufficient quality for making “first quality wine” if they are sound grapes, in that they are free of deleterious material, disease or some contamination and are not damaged. The defendant submits that the expression “first quality wine” means sound, saleable wine with a fruity type varietal flavour and characteristics appropriate for wines made from varietal grapes grown in the Murray Valley including Sunraysia Riverland and Balranald, of which wine sold under the Orlando Wyndham Jacobs Creek label in 1995 is an appropriate bench mark.

48 The contract provides for the plaintiffs to comply with the directions of the defendant with respect to harvesting and delivery of grapes to the winery. The plaintiffs bound themselves not to plant any grape variety other than the variety which had been agreed upon and not to use vine stock other than that generally accepted as standard by the wine industry in the Sunraysia District. The plaintiffs were also required to take into account all advice given by the defendant in relation to the growing and harvesting of the grapes.

49 With respect to the harvesting of grapes the contract provides that the defendant may determine when the grapes are mature following which, the grapes will be harvested. No attempt to define maturity is made in the contract and accordingly, whether it was intended to reflect a sugar level, flavour criteria or colour development or a combination of two or all of these factors is not stated.

The recent events

50 On 9 July 2001, the defendant wrote to a number of its contracted growers drawing attention to changes that had taken place in the wine industry over the past four years. The letter was in the following terms:

“Dear Grower,
You will all be aware of the significant changes that have taken place in the wine industry over the past four years. With a record crop of red grapes this year and significant stock levels held by our customers, quality will become a paramount issue in the near future.
Most of our contracts with growers were written several years ago when the trading environment was different. In order to keep pace with our customers’ needs we are preparing a new grower contract and annual grower manual that will more fairly and accurately describe our grape quality parameters and match payments to those parameters.
We shall be writing to all grower in the near future with a proposal that they move to the new contract, as existing contracts in their current form will not be renewed.”

51 In its Annual Report for year 2001, the defendant said of the current trading circumstances:

“The Australian wine crop in 2001 was over 1.4 million tonnes, or about 1 billion litres. This exceeded expectations by nearly 100,000 tonnes, and as a result there are some early signs of oversupply, especially in lower grade red wines. It is interesting to note that there was a short-term oversupply of chardonnay three years ago, and yet we are forecasting there may be a shortage in the near future. Indeed we are signing new contracts with growers to boost our chardonnay intake by 10,000 tonnes in four years time.
Quite clearly the 2002 vintage is going to be critical. With additional red grape supplies coming into the market, extreme diligence will be needed by the wine companies to ensure that quality parameters are met, and that low grade material is rejected. Flooding export markets with poor quality wine will undermine all of the excellent work done by Australian wine companies in the past decade.”

52 In order to effectively communicate its requirements to its growers, the defendant held a series of meetings with them. At those meetings, quality parameters, particularly colour, were discussed.

53 In November 2001, the defendant also wrote to the plaintiffs in the following terms:

“As you are no doubt aware Simeon Wines will be introducing Colour as a component of our quality assessment process for certain red grape varieties during the forthcoming 2002 vintage. These varieties are Cabernet Sauvignon, Shiraz, Merlot, and Ruby Cabernet. This Colour measurement will be used as a basis for payment, with good colour scores receiving above average payment. We will advise growers of our minimum colour level requirements by the 31st January or in any event prior to harvest in our published vintage booklet.
Given the surplus of low grade red wine held in stock within the wine industry, our customers are insisting on higher quality wines to remain competitive in both the international and domestic markets. In order to achieve a favourable outcome for all concerned we are encouraging all growers to review their cropping levels and manage their vineyards in a manner suitable to achieve the higher quality standards required by our customers.
If in your opinion your anticipated cropping level is excessive, you may fail to meet minimum required quality standards. It is recommended that all growers take these factors into consideration and take remedial action if required.
Grapes that do not reach our minimum quality standards including colour may be rejected.”

54 At about the same time the defendant offered its growers a new contract to replace existing contracts. Amongst other changes, the new contract does not contain a floor price. Instead, a price which reflects the defendant’s assessment of the quality of the grapes is to be paid. The contract is intended to be accompanied by a grower’s manual with which a contracted grower is bound to comply. The grower’s manual includes specified levels for various quality parameters of the grapes, including parameters for colour. Those growers who entered into new contracts received a letter in January setting out the colour levels required from their grapes. Those levels were lower than the levels required of the plaintiffs in the letter which they received in January 2002.

55 The levels provided are as follows:

Variety	Minimum Colour Requirement
Cabernet sauvignon	.85
Merlot	.85
Ruby cabernet	1.70
Shiraz	.95

56 The levels required of the plaintiffs’ grapes were:

Standard Colour mg/g
Cabernet sauvignon	1.0
Shiraz	1.2
Merlot	1.0
Ruby cabernet	2.0

57 The reason for this difference was explained by Mr Mackenzie. He says that the defendant is developing a market for its own bulk wine by sales to United Kingdom supermarkets, where it is bottled with “own brand” labels. He says that this market will accept a quality parameter below that at the highest level achieved by grapes in the Sunraysia District. However, he says that grapes which meet only the lower quality parameter will be paid at a price which is below the floor price provided in contracts, such as that with the plaintiffs.

58 Mr Mackenzie also believes that the plaintiffs’ fears that their grapes may not meet the colour standards in the letter of 15 January 2002 may be misplaced. He says that the measurements in earlier years were crude and are not a guide to the measurements which will be derived from the use of more recent equipment and methodology. Whether this is correct will be revealed by the results achieved in the current and future vintages.

Evidence in relation to quality

59 Mr Angus Kennedy is the Operations and Technical Director of BRL Hardy Limited. He has considerable experience in the wine industry including a period of time as the Group Operations Manager of Berri Renmano Limited. Mr Kennedy believes that in a warm climate region such as the Sunraysia District there is a strong relationship in a chemical and statistical sense between grape colour, as measured in total anthocyanins of red grape berries, and the quality of wine made from those grapes.

60 Apparently, BRL Hardy Limited produce bottled red wine labelled Nottage Hill Cabernet Shiraz which retails in the same price range as Jacobs Creek Shiraz Cabernet produced by Orlando Wyndham. In his opinion, Nottage Hill and Jacobs Creek are of similar quality and compete with each other. This was true in 1995. He said that both wines are made from preferred varietal grapes such as cabernet sauvignon and shiraz and are of a better quality than generic cask wines which are generally made from less preferred varietal grapes such as Grenache and Mataro or multi purpose grapes.

61 He gave evidence that the estimated average colour standard which his company applies to Nottage Hill are:

Variety	Average Colour Standard
Cabernet Sauvignon	1.10
Shiraz	1.25
Merlot	1.00
Ruby Cabernet	No data available

62 He reviewed the minimum colour requirement, which the defendant has provided for growers with the new contract for the year 2002. Those requirements are set out in para 55 of these reasons.

63 In Mr Kennedy’s opinion, grapes of the various varieties at these colour levels would not be suitable for Nottage Hill. It follows that he believes that such grapes would not be suitable for Jacobs Creek wine.

64 He was asked about the wine which BRL Hardy Limited produced from grapes from the Sunraysia District. He said there are five grades of wine. Grade A is the top grade. Grade B is Nottage Hill. Grade C is a “stamp” cabernet-shiraz blend which is sold in the United Kingdom and Banrock Station shiraz-cabernet which is sold in Australia. Grade D is primarily two litre shiraz and shiraz-cabernet casks sold under the Renmano brand and finally there is a generic cask which comes in four or five litre containers. He agreed that the cabernet sauvignon wine which his company buys from the Sunraysia District is used, in part, in cask wine and, in part, in bottle wine. He also indicated that his company purchased wine from the defendant for the purpose of both bottled wine and cask wine.

65 Mr Philip Laffer is the Chief Wine Maker and Director of Winemaking for Orlando Wyndham.

66 He gave evidence that from a time prior to 1995, Orlando Wyndham has produced bottled red wine for sale under the label Jacobs Creek. He said that in 1995, bottled wine was typically made from varietal grapes and was regarded as superior to cask wine. Jacobs Creek was identified by the Australian wine industry as commercial bottled wine which was regarded as inferior to Premium, Super Premium or Icon wines.

67 Since 1994, the defendant has offered wine made from grapes grown in the Sunraysia District to Orlando Wyndham as suitable for making Jacobs Creek wine. Some of the wine offered has been purchased by Orlando Wyndham as suitable for Jacobs Creek wine and other wine offered has been rejected as unsuitable.

68 Mr Laffer indicated that by 1995, it was very unusual for shiraz, cabernet sauvignon and merlot grapes to be used in the production of generic (ie four litre) red wine cask unless the fruit was substandard, meaning that it was sunburned, split through rain, mildew affected or grossly overcropped. At that time, varietal red wine casks (predominantly two litre) were sold in small volume (less than five percent of the market) and were sold at a premium to the generic (ie four litre) cask.

69 Mr Laffer gave evidence about the characteristics of wine suitable to be used in the Jacobs Creek label. In his affidavit he said:

“6. In my view, there are three factors used in determining whether grapes from this region are suitable for making quality wine, and in using that expression I mean wine that is suitable to sell under the Jacobs Creek label (or other wines competitive with Jacobs Creek). These factors in order of importance are:
6.1 flavour;
6.2 colour;
6.3 baume.
In determining whether grapes from the region are suitable for making quality wine, if those grapes have a flavour and/or are of a colour unsuitable for making quality wine then, in my view, those grapes are unsuitable for that purpose. Baume is only taken into account as a factor when those grapes have been considered to be of sufficient flavour and colour.
7. In paragraph 6 of this Affidavit I set out the three factors to be taken into account and in order of importance in determining whether grapes from the region are suitable for making first quality wine. Those three factors and in that order of importance applied equally in 1995.”

70 When cross examined he was asked about the use of the expression “quality wine” in para 6 and “first quality wine” in para 7 of his affidavit. He indicated that the expression “quality wine” does not have any industry acknowledgement. With respect to the expression “first quality wine” he said that it was not an expression he would normally use. He was asked:

“Q. Did you intend to fall into that expression?
A. No I did not. “First quality wine” is not an expression I would normally use.
Q. It might have just slipped into the affidavit?
A. My apologies for that.”

71 He was also asked about the quality of wine purchased to be bottled under the Jacobs Creek label. He was asked this question:

“Q. Has the quality of Jacobs Creek been rising since 1995?
….
A. In line with all other Australian wines, the quality has been rising.
Q. So that the grapes for the wine that you would be prepared to buy for Jacobs Creek in 2002 would be better than 1995?
A. Yes, but it would come from the same (vines) grapes. The improvement has been in viticulture, so it is not that Jacobs Creek now comes from a premium district; it is the quality of the fruit that is now greater.

72 He was later asked:

“Q. But the quality demanded by the bottle in 1995 was less than demanded in 2002?
A. Yes, but I say in the case of Jacobs Creek. It may not be the case in all other wine selling in that category. I can vouch for Jacobs Creek. I cannot vouch for competitors’ products.”

73 Mr Peter Stephens is the Agribusiness Manager of the defendant. He gave evidence that in 1995, some of the lower grade red wine made from varietal grapes would have gone into casks. Over the years, this has increased as the lesser varieties, for which lower prices have been paid, have diminished, and more of the lower grade wine made from varietal grapes has found its way into casks.

What is meant by “first quality wine”.

74 Although I have found the resolution of the present dispute difficult, I am satisfied that the construction contended for by the defendant, should be accepted.

75 It is necessary to identify the ordinary meaning of the words “first quality”. Those words would normally be understood as referring to “the best” or at least, equal to, “the best”. Because the contract relates to grapes from the warm inland Sunraysia District, the words must be referring to a quality standard relevant to grapes from that District and not the industry as a whole. Accordingly, “first quality wine” must mean wine as good as any made from grapes from the Sunraysia District. The evidence is that this would be wine suitable to be bottled under the Jacobs Creek, Nottage Hill, or other labels of similar quality wine. It will not be wine of lesser quality, suitable only for inferior bottles or cask wine.

76 Although grapes may be sound in the sense of being free from disease or contamination, they, and the resulting wine, will vary in quality depending upon the level of anthocyanin, sugar and flavour. In my view, it is unlikely that the parties would have used the expression “first quality” if they intended that the defendant must take grapes capable of making wine of second or lesser quality, provided only that the grapes were free from disease or contamination.

77 The defendant invited me to draw upon the precontractual discussions to construe the contract. However, although I have accepted the evidence of Mr Mackenzie, it cannot assist in the resolution of the present problem. No doubt he intended to contract for grapes suitable for Jacobs Creek but whether he did so depends upon the proper construction of the contract.

78 The most significant argument in favour of the plaintiffs’ preferred construction comes from consideration of the pricing structure which was agreed. The bargain which was struck obliged the defendant to pay only an average price for the grapes which would of course reflect the price paid for the poorest and for the best grapes from the District. The plaintiffs say that they would not have agreed to provide only top quality grapes if they were to be paid only an average price.

79 The defendant responds that because the expectation is that varietal grapes from the District will be of higher quality suitable for premium rather than bulk wine, the average price is likely to be a high price. More importantly, as the bargain required the defendant to take all of the plaintiffs’ grapes over the fifteen years of the contract and, for ten of those years a guaranteed floor price was payable, if the average price in the District was to fall, the plaintiffs may receive a price greater than that which other wineries were paying for “first quality” grapes.

80 In my opinion, the defendant’s argument should be accepted. A guaranteed floor price was a significant benefit to the plaintiffs and although the evidence discloses that the average price has been greater than the floor price in the years during which red wine grapes have been supplied, this may not continue. If the fears of an oversupply of red wine grapes are realised and the average price falls below the floor price, an obligation to provide grapes for making first quality wine in return for the floor price will appear commercially attractive.

81 The plaintiffs also submit that the phrase “first quality wine” should be understood by consideration of the qualifying words “whether by reason of unsoundness, damage, contamination, disease or otherwise.” It is submitted that as these words all relate to aspects of the physical condition of the grapes, “first quality wine” should be understood as a description of wine made from grapes free of any physical defect, but otherwise without regard to its quality. In my opinion, this submission should not be accepted. The qualifying words must be understood having regard to the fundamental requirement that the grapes be suitable for “first quality wine”. The context dictates that the word “otherwise” allows the defendant to reject grapes capable of making only inferior wine, even if they are physically sound.

82 I am satisfied that the use of the word “otherwise” was deliberate and intended to ensure that all the attributes of the grapes, not just physical soundness, were considered when assessing whether the ultimate wine would be “first quality wine”.

83 For these reasons, the construction of clause 4.1 contended for by the plaintiffs cannot be accepted.

84 The defendant should bring in short minutes of order which include a declaration which reflects these reasons for decision. The parties may also address me in relation to costs.

Last Modified: 03/28/2002