National Foods Milk Limited v McMahon Milk Pty Ltd

G64IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL LIST

F5887
No. 2098 of 2005

NATIONAL FOODS MILK LIMITED (ACN 051 192 272)	Plaintiff
v
McMAHON MILK PTY LTD (ACN 094 395 874) & ORS (According to the schedule annexed)	Defendants

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JUDGE:	HARGRAVE J
WHERE HELD:	Melbourne
DATES OF HEARING:	19-22, 26-30 November 2007 Final written submissions received 6 February 2008
DATE OF JUDGMENT:	18 June 2008
CASE MAY BE CITED AS:	National Foods Milk Ltd v McMahon Milk Pty Ltd
MEDIUM NEUTRAL CITATION:	[2008] VSC 208

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CONTRACT – Interpretation - Licensed Distributor Agreements – Whether granted exclusive rights within defined territories – No exclusivity granted – Whether breach of provisions prohibiting competition with licensor during and for six months after termination of agreements – Breaches established.

CONTRACT – Collateral contract – Alleged collateral contract not established.

CONTRACT – Novation – Whether novation to be implied from conduct – Novation established.

CONTRACT – Guarantee – Whether guarantee of principal debtor can survive a novation where another principal debtor is substituted – Continuance of guarantee established notwithstanding novation.

TORT – Interference with contractual relations – Whether actions of principal of contracting company, acting on behalf of another company in which the principal has no financial interest, constituted procuring of a breach by the contracting company – Tort established on the facts of the case.

TRADE PRACTICES – Unconscionable conduct – Whether actions not in breach of contract amounted to unconscionable conduct – No unconscionable conduct in the circumstances of the case – Trade Practices Act 1974 (Cth), s 51AC.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr N J O’Bryan, SC with Mr C E Shaw	Deacons
For the Defendants	Mr A W Sandbach with Mr R A Harris	Settle Legal

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TABLE OF CONTENTS

I. PARTIES AND INTRODUCTION

II. FACTS

(1) Background, surrounding circumstances and negotiations

(a) Discussions about exclusivity
Initial discussions and slide presentation: David Mead
Subsequent discussions: Geoff Byrne
Subsequent discussions: Paul Pino
Subsequent discussions: Bevan Williams

(b) Commercial terms

(2)     Entry into the agreements
(3)     First alleged novation
(4)     Second alleged novation
(5)     Continued competition from Moonya Farm and subsequent conduct
(6)     Breakdown of relationship between the parties
(7)     Conduct of McMahons following termination

III. DEBT CLAIMS BY NATIONAL FOODS

IV. WAS THERE A SECOND NOVATION?

V. DO THE AGREEMENTS GRANT EXCLUSIVE RIGHTS?

(1)     Surrounding circumstances
(2)     Express terms
(3)     Implied terms

VI. WAS THERE A COLLATERAL AGREEMENT?

(1) The application to amend
(2) Has the collateral agreement been established?

VII. DID MCMAHONS DAIRY BREACH THE AGREEMENTS?

(1)     Non-payment of amounts due
(2)     Breach of non-competition provisions during the term of the agreements
(3)     Breach of non-competition provisions after termination of the agreements

VIII. DID NATIONAL FOODS BREACH THE AGREEMENTS?

IX. LIABILITY OF TONY MCMAHON AS GUARANTOR OF McMAHONS DAIRY

X. IS McMAHON’S DAIRY PRODUCTS LIABLE FOR PROCURING BREACHES OF THE NON‑COMPETITION PROVISIONS?

XI. UNCONSCIONABLE CONDUCT DEFENCES

XII. CONCLUSIONS AND ORDERS

HIS HONOUR:

I. PARTIES AND INTRODUCTION

The plaintiff, National Foods Milk Ltd, produces and manufactures “Pura” milk products. The defendants are Anthony (Tony) McMahon and companies associated with him, his sons and his wider family (collectively “the McMahons”).

MP McMahon Pty Ltd is the original family company. It was established by Tony McMahon’s father, John McMahon, in 1951 and successfully traded as a milk distributor from that time until in or about December 2002. From about 1985, Tony McMahon had day-to-day control of its operations.

MP McMahon Pty Ltd holds the bulk of the assets of the McMahon family.

McMahons Dairy Pty Ltd was incorporated on 15 November 2002 to take over the milk distribution business of MP McMahon. It did so from 31 December 2002. It is owned and controlled by Tony McMahon.

McMahon’s Dairy Products Pty Ltd was incorporated on 9 August 2005 to take over the milk distribution business of McMahons Dairy. It did so from 15 August 2005. It is owned by Tony McMahon’s sons, Patrick and Nicholas. Nicholas was a director of McMahons Dairy Products for a few weeks only. He resigned on 31 August 2005, and the McMahons Dairy Products business has since been managed by Patrick.

Another McMahon company, McMahon Milk Pty Ltd, was incorporated on 6 September 2000. Its brief role is described below.

Until 2000, National Foods distributed its milk in Melbourne, Geelong and the Mornington Peninsula either directly or through many distributors who competed with each other. After an internal review, National Foods concluded that this was an inefficient milk distribution system. Accordingly, National Foods sought to increase the efficiency of its milk distribution. In broad summary, increased efficiency was to be achieved by dividing Melbourne, Geelong and the Mornington Peninsula into a number of geographical zones or territories, and licensing one distributor to be the exclusive licensed distributor in that territory. A licence fee was to be payable by licensed distributors.

For many years, MP McMahon had been a successful distributor of National Foods milk products in the north western suburbs of Melbourne. National Foods wanted to appoint MP McMahon as a licensed distributor in two territories in that area. Following negotiations, Tony McMahon agreed to become a licensed distributor for National Foods in two geographical territories (“the McMahon territories”). Specific commercial terms applicable to MP McMahon were agreed between Tony McMahon and officers of National Foods. These are recorded in correspondence annexed to brief initial heads of agreement. Under those heads of agreement, MP McMahon agreed to execute formal documents to record the new trading relationship with National Foods.

In September 2000, National Foods presented the formal documents to Tony McMahon for execution. The formal documents comprised a document titled “Heads of Agreement”, which imposed an obligation to pay licence fees, and two documents titled “Licensed Distributor Agreement”, one for each of the McMahon territories.

The principal claims made by National Foods in this proceeding are for unpaid licence fees of $242,338.80 and for $664,597.96 in respect of milk products sold and delivered by it to the relevant McMahons company. The total claim is for $906,936.66 plus interest.

There is a dispute as to which McMahon company entered into the relevant agreements with National Foods. On the original documents, the name and company number “MP McMahon Pty Ltd ACN 004 293 430” has been crossed out and the name and company number “McMahon Milk Pty Ltd ACN 094 395 874” has been inserted in handwriting. National Foods contends that these changes were made by or on behalf of Tony McMahon after the agreements had been executed by National Foods, and that MP McMahon was at all times the party with whom it contracted. The McMahons deny this, and contend that the changes were made prior to National Foods executing the agreements. However, they accept the alternative case pleaded by National Foods that there was an immediate novation of the agreements from their inception, with the effect that MP McMahon replaced McMahon Milk as the contracting party.

The issue as to who is the contracting party has commercial significance because the McMahon interests contend that there was a further novation effective from 1 January 2003, whereby McMahons Dairy was substituted for MP McMahon as the contracting party. In this regard, there appears to be no doubt that MP McMahon has sufficient assets to satisfy a judgment against it for the amounts claimed by National Foods in this proceeding. On the other hand, McMahons Dairy may not have sufficient assets for this purpose.

Further, the issue has significance because Tony McMahon claims that his initial guarantees of the obligations of McMahon Milk under the agreements were discharged by the first novation. However, Tony McMahon concedes that he executed a further guarantee of the obligations of McMahons Dairy under the licensed distributor agreements, but not the heads of agreement, at the time of the second alleged novation from MP McMahon to McMahons Dairy. There was no evidence of Tony McMahon’s assets.

During the trial, National Foods sought leave to amend its statement of claim to make claims under s 172 of the Property Law Act 1958 (Vic) alleging that the steps taken by the McMahons to change the identity of the contracting parties, and to move assets between various McMahon entities, were actions taken with intent to defraud National Foods as a potential creditor. For the reasons given at that time, I refused leave to make that amendment. However, it was submitted on behalf of National Foods that these matters continue to be relevant because they impact upon the credibility of witnesses in relation to other issues in the proceeding.

National Foods also makes claims against MP McMahon, or alternatively McMahons Dairy, and against Tony McMahon as guarantor, for damages in respect of alleged breaches of non-competition terms contained in the licensed distributor agreements. To cover the possibility that any liability for these claims is that of McMahons Dairy, which may not have sufficient assets to satisfy a judgment, National Foods has made a claim against McMahon’s Dairy Products in tort for wrongfully inducing McMahons Dairy to breach these non-competition obligations.

There is no dispute that debts for licence fees and milk deliveries are owed to National Foods, although the McMahon interests seek an opportunity to challenge the accuracy of the National Foods’ calculations. The McMahons deny any breach of the non-competition provisions or that McMahon’s Dairy Products procured any breach of the non-competition provisions which may be established.

The principal issue in the case concerns an allegation by the McMahons that National Foods granted the McMahon party with whom it contracted, including any substituted party under a novation, the exclusive right to distribute National Foods milk products in the McMahon territories for the duration of the licensed distributor agreements. Alternatively, the McMahons allege that their contractual arrangements with National Foods included a collateral agreement under which National Foods promised that it would, within a reasonable time from the commencement of the licensed distributor agreements and thereafter until the expiration of those agreements, ensure that a major competitor of the McMahons, Moonya Farm, would be prevented from distributing National Foods milk products in the McMahon territories. For convenience, I will refer to the National Foods milk products to which the agreements apply as “Pura milk products”, as the majority of the products are sold under the “Pura” brand name.

There is no dispute that, if either the principal or alternative allegation is established by the McMahons, National Foods is in breach of contract and the McMahons are entitled to set-off any damages for such breach against the claims by National Foods in this proceeding.

The trial was not concerned with quantification of damages, those issues being left for further determination once liability issues have been determined. This is the usual procedure in the Commercial List and was consented to by all parties.

An issue arises as to whether the quantification of the debt claims made by National Foods formed part of the issues which have been tried.

II. FACTS
(1) Background, surrounding circumstances and negotiations

The McMahon family has operated a milk distribution business for over 85 years. MP McMahon was incorporated in October 1951. From the early 1960s, MP McMahon distributed Pura milk products.

Tony McMahon was born in 1954. Upon completing school in 1972, he commenced working in the family milk distribution business as an employee of MP McMahon. In or about 1985, Tony McMahon became principally responsible for the day to day operations of the MP McMahon milk distribution business.

Tony McMahon’s brother, Daniel McMahon, took a different career path. He is an accountant in private practice. In that capacity, he acts as the accountant for the wider McMahon family and all entities related to the family.

In 1995, the McMahons entered into a “Wholesale Distributor Agreement” with a subsidiary of National Foods (National Dairies Victoria Ltd) for an initial term of five years, with an option for a further five year term. Under this agreement, National Dairies agreed to supply milk to MP McMahon and MP McMahon agreed to distribute it. There was no restriction on the areas in which MP McMahon could distribute milk purchased from National Foods. However, MP McMahon was prohibited under the agreement from distributing the products of National Foods’ competitors.

The paperwork for this agreement was sloppy. The “Distributor” named in the schedule to the agreement is both Tony McMahon and his father John McMahon, presumably as partners. However, the agreement has been executed “on behalf of the Distributor” by the affixation of the common seal of MP McMahon. It appears that this disconformity was not noticed by National Dairies, notwithstanding a clear statement on the execution page that “WHERE THE DISTRIBUTOR IS A PARTNERSIP ALL PARTNERS MUST SIGN”. In any event the parties treated the trading relationship as existing between National Foods and MP McMahon.

In late 1997, National Foods commenced an internal review of its milk distribution system. At the commencement of this review, National Foods distributed milk products in the following manner:

(1)National Foods owned and operated its own milk distribution business, in Melbourne and Geelong.
(2)National Foods also distributed milk products through approximately 150 independent distributors. Of these, approximately 80 operated within the Melbourne metropolitan area. Most of these distributors operated under wholesale distributor agreements similar to that entered into by the McMahons in 1995. There were also uncontracted distributors, including Moonya, who distributed the products of other dairies as well as those of National Foods. These distributors purchased milk from National Foods for sale to their own customers. The price they were charged depended upon whether they had their own refrigerated storage depot, or whether they utilised refrigerated storage space maintained by National Foods.
(3)National Foods also utilised the services of the independent distributors to deliver milk to its own customers, where it was uneconomic for it to do so. Where this distribution method was utilised, the distributor was paid a delivery fee. These deliveries were called “contra” deliveries, and the delivery fees were called “contra” fees.
(4)National Foods also had arrangements with some of its competitors for milk distribution, and itself distributed milk on behalf of its competitors in certain circumstances.

The internal review identified inefficiencies in this milk distribution system. These inefficiencies adversely affected the profitability of both National Foods and its independent distributors. Further, National Foods did not have control over the market for its milk products.

The review indicated that the costs to National Foods of distributing milk were higher than those of its independent distributors. This was largely because its distribution workforce was heavily unionised and its drivers and support staff received better pay and conditions, and were less flexible, than employees of the independent distributors. Further, the existing distribution system was inefficient for both National Foods and its independent distributors because there was no geographical limitation on where deliveries could take place. It was common for deliveries of Pura milk to be made by National Foods itself, and by a number of its independent distributors, within the same strip of shops or at the same shopping centre.

As a result of identifying these inefficiencies, National Foods determined to establish a new milk distribution system. The project became known as “Project 3 Cows”. The key elements of the proposal were as follows:

(1)National Foods would divest its own distribution business. All deliveries to customers of National Foods would be made by independent distributors as “contra” deliveries in return for a delivery fee.
(2)Melbourne, Geelong and the Mornington Peninsula would be divided into geographical territories. A “licensed distributor” would be appointed for each territory. Those licensed distributors would receive increased commercial support such as additional discounts for milk, sales and marketing support, referral of customers, access to improved technology and accounting, office and management advice. A licence fee would be charged for these services, and for the benefit of being appointed the licensed distributor for the geographical territory.
(3)National Foods would support the licensed distributors by endeavouring to exclude distributors other than the licensed distributor from each licensed territory. The aim was to reduce the number of independent distributors and thus increase efficiency and profitability for National Foods and its licensed distributors. Internally, National Foods proposed that it would achieve this goal by taking “every opportunity in the market place” to acquire the businesses of non-licensed distributors as their wholesale distribution agreements expired.

As I have said, National Foods identified MP McMahon as a distributor for two geographical territories in the north western suburbs of Melbourne. Prior to commencing negotiations for MP McMahon to become a licensed distributor, National Foods required MP McMahon to sign a confidentiality agreement. Such an agreement was signed on 10 December 1999. From that time, there were discussions and negotiations between representatives of National Foods and Tony McMahon until the relevant agreements were executed in September 2000. The evidence of these discussions and negotiations is relevant to a number of issues. First, it is relevant to establish the objective commercial aim or object of the agreements which were signed. Second, it is relevant to establish the surrounding circumstances in which the agreements were signed. This evidence may assist the interpretation of the agreements, including as to whether any terms should be implied. Third, the evidence is relevant to the alternative allegation by the McMahons that a collateral agreement was reached during the course of the negotiations, under which it is alleged that National Foods agreed to procure the removal of Moonya Farm as a competitor in the McMahon territories.

(a) Discussions about exclusivity
Initial discussions and slide presentation: David Mead

The first relevant meeting took place in late 1999 or early in 2000. The meeting was attended by David Mead, the Victorian Regional Sales and Marketing Manager of National Foods and Tony McMahon. The account manager for the MP McMahon accounts may have been present, but there is no evidence of anything being said by him. The purpose of the meeting was for Mr Mead to make a presentation to Tony McMahon concerning the proposal that the McMahons become a licensed distributor. Mr Mead gave a “PowerPoint” presentation with the aid of computer slides developed by him and another employee of National Foods (“the slides”). The slides contained the following relevant statements:

Objective
·     Optimum physical distribution system.
·     Security for NFL distributors.
·     …
·     Exclusive range of NFL products within a defined geographic area.
·     Licensed Distribution Agreement.
·     Business Support Process.

Benefits
· …
Brand exclusivity

Licensed Distribution Agreement – key elements
· Standard format
· Exclusive agent
- Product range
- Zone[1]

[1]Emphasis added.

There are then a number of slides dealing with policies and procedures, manuals, business information systems and plans, business support available to licensed distributors and other matters relating to the implementation of the licensed distributor system. The slides then continue:

Next steps – Phase I (4-6 weeks)
·Subsequent meeting.
- Detailed review of zoning, volume implications.
- Signing an Exchange of Information Agreement.
Phase II
·Signing Volume Lease Agreement.
·Signing Licensed Distribution Agreement.
·Identifying volume outside nominated zones.
Phase III (Year 1)
·Managing NFL volume …
·Managing volume outside nominated zones.

Phase IV (Est 1 to ? Years)
·Volume trading between LDA Distributors.
·LDA to purchase non-LDA Distributors as businesses become available.

Phase V (Est 2 to ? Years)
·LDA continue to purchase non-LDA Distributors as businesses become available.
·NFL Contra volume interchange from non-LDA Distributors to LDA Distributors.[2]

[2]Emphasis added.

Tony McMahon gave evidence concerning this presentation by Mr Mead. He recalled Mr Mead telling him about the general purpose of the licensed distributorship concept, in the following terms:

They basically rolled out the idea of what they had in mind, that they were going to try to streamline the distribution of their products and they wanted to get away from the old-fashioned style of three blokes going down the one street to the one destination or same destinations and to make it more profitable for the blokes or the distributors who went with them with their idea. So the option basically was that if you went along with their idea and became an LDA, you became one of their preferred distributors and you would have exclusive access to the product and to the zone.[3]

[3]Emphasis added.

Tony McMahon recalled the presentation of the slides and how they indicated that National Foods “would progressively roll the idea out and what the advantages would be with it” (emphasis added).

Tony McMahon said that, in pointing out the main benefits of the licensed distributor system, Mr Mead “pointed out that because of the way it would be set up, that the distributor would have exclusive areas to distribute Pura milk within”.

Tony McMahon said that Mr Mead told him that National Foods intended to remove other distributors from a licensed distributor's area by either buying “their litreage or [moving] them out through market means”.

Mr Mead gave contrary evidence to Tony McMahon in certain material respects. He gave evidence of a general recollection that, in each presentation to a potential licensed distributor, it was explained that:

They wouldn’t have exclusive distribution for the whole area because we had other distributors in that area who were WDAs or some were non‑contracted who purchased off us. … [W]e explained that thoroughly every time we did a presentation, that we could not arrange for distributors not to supply in that area, in that geographical area.

Specifically with respect to his conversations with Mr McMahon, Mr Mead said that he recalled Mr McMahon asking, “Will there be other distributors in my geographical area if I sign?” According to Mr Mead, he replied:

Yes there would be. There would be others in that area. We cannot just stop supplying other distributors … in your area. That’s not the way the business works.[4]

[4]Emphasis added.

By this evidence, Mr Mead was clearly endeavouring to convey to the Court that he made no statements to Tony McMahon concerning the intention of National Foods to procure the removal of non-licensed distributors from the geographical territory of a licensed distributor. However, that was clearly not the general tenor of the conversations. Mr Mead was not so blunt. He was trying to persuade Tony McMahon to become a licensed distributor. From the whole of the evidence-in-chief of Mr Mead concerning his initial presentation to Tony McMahon, it is clear that Tony McMahon was concerned about continued competition within the proposed McMahon territories, in particular from Moonya Farm and another distributor, Merrigold. In that regard, Mr Mead recalls informing Tony McMahon of the long-term plan of National Foods to ensure a measure of exclusivity in the proposed McMahon territories. Mr Mead described this measure of exclusivity as being an endeavour to ensure that, “in the long‑term”, there would be “as minimal amount of distributors in that area” as could be achieved.

Mr Mead recalls Tony McMahon asking how long that would take to achieve and gave the following evidence about his response to Tony McMahon’s questions:

my answer would have been, ‘How long is a piece of string? We are changing the industry. We have got no control on when distributors will change the way they do business.’[5]

I do not accept that Mr Mead said these words to Tony McMahon. However, I accept that he said words to the effect that it would take an indeterminate time to remove other distributors from the McMahon territories, as reflected in the slides.

[5]Emphasis added.

In cross-examination, Tony McMahon was taken to the slides which were presented by Mr Mead during the initial meeting. He acknowledged that reference was made by Mr Mead during the meeting to the various post-contract phases mentioned in the slides. In particular, Tony McMahon acknowledged that he read and understood the slide headed “Phase IV (Est 1 to ? Years)” which states that, during an indeterminate period following entry into a licensed distributor agreement, the businesses of non-licensed distributors would be purchased “as businesses become available”. Tony McMahon acknowledged the fact that no time period was specified for this to occur, but responded that National Foods had given him “undertakings before I signed the LDA that … this issue would be address[ed]”. Reading the evidence of Tony McMahon as a whole, it is clear that the undertakings to which he referred were not undertakings which he alleges were given by Mr Mead. Rather, they are undertakings which he alleges were given by Mr Byrne in later discussions. I will next consider those discussions.

Subsequent discussions: Geoff Byrne

Following the initial meeting, Tony McMahon met with Mr Byrne on a number of occasions. At this time, Mr Byrne was the regional general manager of the Victorian and Tasmanian milk divisions of National Foods. He was senior to Mr Mead. Tony McMahon said that Mr Byrne encouraged him to sign a licensed distributor agreement, in the following terms:

If you don’t go ahead with this LDA and become an LDA, there will be no future for you in the industry. The industry is changing. This is the way it is going. This will give you an opportunity to consolidate and set yourself up for the future.

Tony McMahon gave evidence of discussions with Mr Byrne about the plan of National Foods to remove non-licensed distributors from the territories of the licensed distributors and, in that regard, discussing Moonya Farm and its position as “a main competitor in our area”. In this regard, Tony McMahon’s evidence is contained in the following exchange:

What was said by each of you in relation to Moonya Dairy? --- I questioned the fact that they were uncontracted, to which Mr Byrne agreed and said that they were negotiating with them at the time to buy them out and they were interested in selling.
Did the discussions extend to what might happen if the sale didn’t proceed? --- There really wasn’t much talk about that because they seemed to be quite convinced that they had it in hand.[6]

[6]Emphasis added.

In cross-examination, Tony McMahon was asked about the period within which he expected that the McMahons would obtain exclusivity within the McMahon territories. He initially responded that he expected that exclusivity would be implemented in the first 12 months of the licensed distributor agreement operating. He based this expectation upon undertakings which he said were given by Mr Byrne “to get it done immediately”. Tony McMahon initially said that he understood “immediately” to mean within 12 months:

Why does that translate to 12 months in your mind? --- Well, 12 months is a reasonable period to expect that it should be implemented if there are any difficulties.

Later in his cross-examination, Tony McMahon was asked about two documents titled “Transition Summary” prepared by National Foods in respect of each of the two McMahon territories. The transition summaries were prepared on 5 September 2000, which was shortly before the agreements were signed. There were earlier versions. These summaries identified the current volumes of milk distributed by the McMahons and the proposed volumes of milk to be distributed by the McMahons if they became a licensed distributor. Relevantly, the transition summaries show that it was “proposed” to assign to the McMahons all of the milk volume currently distributed by other distributors operating in the McMahon territories. In particular, the whole of the volume distributed by Moonya Farm is shown as being proposed volume to be distributed by the McMahons as a licensed distributor.

In this part of his cross-examination, Tony McMahon again said that he understood that the transfer of milk volume from other distributors in the McMahon territories to the McMahons “was going to happen immediately”. However, on this occasion, Tony McMahon said that he understood “immediately” to mean “as soon as practicable”, and said he could not “put a time period” on when he understood all of the other distributors of Pura milk products would be removed from the McMahon territories and their volume assigned to the McMahons.

Apart from the issue of when Moonya would be removed as a competitor for Pura milk products in the McMahon territories, Mr Byrne’s evidence did not directly contradict that given by Tony McMahon. In his evidence-in-chief, Mr Byrne said that he recalled Tony McMahon indicating a concern “that the territory provide as much volume for his business as could be arranged”. In this regard, Mr Byrne recalls discussing “the process that National Foods would follow in seeking to establish an increase in [McMahon’s] volume”.

Mr Byrne recalled Tony McMahon expressing a concern that the Moonya Farm business should cease in the proposed McMahon territories. In this regard, Mr Byrne’s evidence is contained in the following exchange:

Mr McMahon on a number of occasions indicated a strong preference for National Foods to negotiate the removal of Moonya from that territory.
Do you recall any other distributor’s name; Frosster, for example? --- I think that all of those distributors who operated in the territory were the subject of such a discussion. But I think it is also fair to say there … seemed to be more particular concern with Moonya.
Can you tell his Honour what you responded to Mr McMahon’s request in relation to Moonya’s future operations in the territory? --- Our indication to Mr McMahon on a number of occasions was that we would be seeking to negotiate the departure of Moonya. We had indicated on a number of occasions our desire to acquire the Moonya business and our discussions that had occurred and were continuing to occur during that period seeking to acquire that business, with the intention if we were successful in that regard that we would assign the litrage acquired to McMahon.

Mr Byrne said that he recalls discussions of this kind with Tony McMahon both before and after the licensed distributor agreement was signed.

Mr Byrne agreed that he said to Tony McMahon words to the general effect that, if he entered into a licensed distributor agreement:

any wholesale distributors, WDAs, which currently service the territory would either, one, as a matter of priority … be bought out by National [Foods] and their volume would be reallocated to [McMahons] or, two, those that would not sell would be persuaded by commercial means to purchase their requirements of products for distribution in the territory from [McMahons].[7]

[7]Emphasis added.

Although Mr Byrne agreed that this was the general thrust of the conversations which he had with Tony McMahon, he disputed that he gave any undertaking that these intended outcomes would be achieved within any particular period. In particular, he denied that he said to Tony McMahon, or gave him any undertaking, that these outcomes would be achieved within a 12 month period:

The general thrust of the paragraph is correct, but is not correct in the terms of the 12-month undertaking. I think anyone who had been in the milk industry for any period of time at the period of these discussions would have understood that the scale of the task to rationalise I think either nine or 10 distributors in that territory to one through acquisition or other negotiation within 12 months would have been impossible. We certainly realised that and we certainly didn’t give an undertaking of doing it within 12 months.

Mr Byrne agreed with the proposition that he told Tony McMahon that National Foods intended that distributors who did not enter into a licensed distributor agreement “would be squeezed out commercially”:

because, to be perfectly open, that was in fact the effect of what we were doing. We were seeking in each territory to nominate a preferred distributor and then seek to negotiate or acquire the other distributors in a way that the litrage moved to the preferred distributor. By definition, if McMahon was the preferred distributor, the litrage would come to him. If he wasn’t the preferred distributor, our intention would be to see the litrage migrate from him.

On the specific subject of Moonya Farm, Mr Byrne said:

I confirm that we advised Mr McMahon that we were negotiating with Moonya to hopefully acquire their business, and if we were successful in that regard we would ensure that that litrage was assigned to McMahon. We may also have indicated to him that if we were unsuccessful in negotiating to buy the business we would try other means commercially to arrange for them to leave the area. To the best of my recollection, we gave no indication of a time frame, certainly not a period of 12 months …[8]

[8]Emphasis added.

Mr Byrne concluded his evidence-in-chief by summarising the substance of the discussions with Tony McMahon to which he was a party:

We indicated our desire to have Mr McMahon become our licensed distributor in the area. We indicated our strong desire to over a period of time negotiate the litrage distributed by other contractors in that area across to Mr McMahon. That was certainly my best recollection of those discussions.[9]

[9]Emphasis added.

In cross-examination, Mr Byrne did not say anything which was materially different from the substance of his evidence-in-chief.

It is clear from Mr Byrne’s evidence concerning Moonya that National Foods was seeking to negotiate the purchase of the whole of the Moonya business. Moonya’s business involved distributing the milk products of both National Foods and its competitors, in the McMahon territories and elsewhere. Such a purchase would have had obvious commercial benefits for National Foods, because its competitors would have lost a substantial and entrenched distributor and would have needed to make arrangements to transfer that volume to other distributors. Some of that volume may well have been acquired by National Foods. For the McMahons, elimination of Moonya as a competitor would have led to the acquisition of all of the Moonya volume of Pura milk products in the McMahon territories, as depicted on the transition summaries, and would have given the McMahons the opportunity to persuade Moonya’s customers for competitors’ products to transfer their requirements to Pura milk products. This would further increase the McMahons’ volume.

As to the intention of National Foods if it could not negotiate a purchase of the Moonya business, the only evidence is the ambiguous reference by Mr Byrne to the possibility of National Foods trying “other means commercially to arrange” for Moonya to cease distributing Pura milk products in the McMahon territories. In particular, there was no evidence of any discussions concerning the possibility of National Foods terminating the right of Moonya to distribute Pura milk products by giving Moonya, as an uncontracted distributor, reasonable notice that it would cease to allow it to distribute Pura milk products.

The evidence concerning the possibility of terminating Moonya’s entitlement to distribute Pura milk products within the McMahon territories was given by Mr Byrne in cross-examination. It was put to Mr Byrne that, because Moonya was an uncontracted distributor of Pura milk products, its entitlement to continue distributing those products could be terminated upon the giving of reasonable notice to Moonya. Mr Byrne agreed with this, and with the proposition that National Foods could have given such a notice at any time after September 2000, when MP McMahon became a licensed distributor. However, whilst agreeing with the general proposition that Moonya could have been terminated as a distributor of Pura milk products, Mr Byrne explained the commercial realities in the following terms:

Our intention in negotiating with Moonya for acquisition of the business and in turn assignment of that litrage to Mr McMahon was twofold. One was to protect all parties given the longstanding relationship between the two companies and, secondly, to seek to negotiate transfer of the entire litrage of the Moonya business. I think it is important to point that out, that only half of it was National Foods business. If National Foods had terminated their relationship with Moonya overnight, which in your opinion it may have been allowable to do, it would have resulted in two things. Moonya would have stayed in business but would have acquired all their requirements from the other parties. They would have stayed geographically in that territory and they would have continued to compete with McMahon, I suggest with as much vigour as prior, or more. Our intention was to get a complete resolution of the subject and, in fairness to Mr McMahon, achieve the assignment of roughly twice the litrage that he would get if we simply terminated the Moonya business with National Foods.

As to whether purchase of the Moonya business by National Foods would result in the McMahons acquiring the volume of milk products previously distributed by Moonya on behalf of competitors of National Foods, Mr Byrne said:

I think the important point here is that, if we had managed an amicable acquisition of the Moonya business, the net results would have been that the primary owner at the time, a gentleman by the name of Noel Butler, would have retired; he was 75 or 78 at the time. His two sons who were working the business would have taken some of the proceeds and I think probably departed the industry happily, and I think, although there was some animosity between the McMahon family and the Butler family, I think we could have managed a successful transition of the great majority of the non-National Foods litrage that Moonya was doing.

In cross-examination also, Mr Byrne agreed with the proposition that National Foods told Tony McMahon that it would, if Tony McMahon agreed to become a licensed distributor, endeavour to remove other distributors of Pura milk products from the McMahon territories:

In any event, the bottom line was Mr McMahon was given clear assurances before entering the LDA that one way or another Moonya would be got out of zone, wasn’t he?---He was assured that we would work against the issue of all of the other distributors in the zone being transitioned out, yes.
And Moonya being one of them?---Yes.
And Moonya being one that National Foods knew was of particular concern to Mr McMahon?---Yes.[10]

Subsequent discussions: Paul Pino

[10]Emphasis added.

Between 1994 and 2004, Mr Pino was a “distributor account manager” employed by National Foods. Prior to 2000, Mr Pino had been, for a time, the account manager for the McMahons account. However, at the inception of Project 3 Cows, Mr Pino had ceased to manage the McMahons account. Following unsuccessful attempts to have Tony McMahon sign up as a licensed distributor, Mr Pino was reappointed as the account manager for the McMahons account, with instructions to use his prior working relationship with Tony McMahon to endeavour to obtain his agreement to become a licensed distributor.

Subsequent to Tony McMahon signing the licensed distributor agreement, Mr Pino left his employment with National Foods and commenced working with one of its competitors, Warrnambool Cheese & Butter Factory Company. As will appear, when the agreements between the McMahons and National Foods were terminated, the McMahons commenced distributing Warrnambool Cheese & Butter milk products in competition with Pura milk products. Accordingly, Mr Pino’s evidence must be considered in the light of his current commercial relationship with the McMahons for his new employer. As appears below, there are aspects of his evidence which I do not accept.

Tony McMahon gave evidence that he discussed exclusivity with Mr Pino and that he recalled Mr Pino was “probably in the same picture as what I was as to what the plans were”, that he understood Mr Pino “was more of a messenger than an administrator,” and that “we spoke about [exclusivity] in the same terms”.

Mr Pino was not part of the review team which gave rise to Project 3 Cows or part of its implementation team. He gave evidence that Mr Mead took him “though the fundamentals” of the proposal to establish a scheme of licensed distributors operating under licensed distributor agreements. Mr Pino gave the following evidence:

The fundamentals of the LDA was explained to me by David Mead saying that the identified distributor that National Foods would identify and Tony McMahon was one of these, he would be given a geographical zone and within that zone National Foods were looking at getting out of their direct distribution to their customers and in turn those customers being licensed to the LDA zone holder and also part to that there was WDAs. It was explained that [there would be] wholesale distributor agreement distributors operating within that zone and the intention with what was explained to me was that obviously some of those guys would still be contracted to National Foods but they could operate in any zone but the intention was for National Foods to endeavour before the expiry of that agreement to either buy that distributor out and then licence the volume back to the LDA zone holder. In this case it would have been Tony McMahon and if they couldn’t get to the point of purchasing that business or the distributor wouldn’t sell to National Foods, they would either look at the distributor purchasing volume from the LDA zone holder, uncontracted or possibly face National Foods stopping their supply.
Was there anything said about uncontracted distributors? --- Yes. Of note it was brought to my attention prior to the fundamentals of the LDA contract being explained to me, obviously there was ongoing issues as far as uncontracted milk distributors, Moonya Farm dairy being one of them and I was told that would get resolved and to tell Tony McMahon not to worry about Moonya Farm dairy, that would be sorted out down the track.[11]

[11]Emphasis added.

In his evidence‑in‑chief, Mr Pino said that he specifically discussed Tony McMahon’s concerns about continuing competition from Moonya, in conversations prior to the initial heads of agreement being signed in July 2000:

Did you have any discussions with Mr McMahon about those issues?‑‑‑Yes, look, when I was officially put back onto the account it was a culmination of a few meetings where Tony had explained his express concern relating to Moonya Farm and that is why he had been hesitating in signing the LDA prior, when the other executive management team had gone to approach him to sign the LDA because Moonya Farm was operating and serving customers within that geographical zone meant for McMahon Dairy. As a result of his express concern I had gone back to National Foods and spoken to David Mead and had explained, well Tony won't sign the LDA because of the Moonya Farm supplying those customers in his geographical zone. David Mead told me to tell Tony specifically that National Foods would deal with Moonya Farm either by purchasing his business or ultimately if they wouldn't sell to National Foods they would look at stopping his supply. I then went back to Tony McMahon, had explained to Tony what National Foods or David Mead had said and he understood and he was happy with that.[12]

[12]Emphasis added.

Later, when the agreements were signed at Daniel McMahon’s offices in September 2000, Mr Pino said the removal of Moonya as a competitor was specifically discussed whilst Tony and Daniel McMahon were reading the documents:

I also recall Tony saying ‘Well I hope National Foods follow through with what they said they would do,’ and that was either purchase his business or stop Moonya Farm’s supply.
Purchase whose business?---Moonya Farm’s business because obviously it was a big major step that he was undertaking, and I told him not to worry because I expected National Foods to follow through with what they said they were going to do.

Subsequent discussions: Bevan Williams

Tony McMahon met with Bevan Williams on a number of occasions. Mr Williams was at the time a “route channel manager” employed by National Foods. Mr Williams was responsible for maximising sales of milk products to retailers other than chain supermarkets. He reported to Mr Mead.

Most of the meetings between Tony McMahon and Mr Williams involved Mr Williams seeking to persuade Mr McMahon to sign a licensed distributor agreement. A number of issues other than exclusivity were discussed. On the topic of exclusivity, Tony McMahon recalls Mr Williams indicating “that the process was in place, was in motion, that it should be achieved in a short period”.

Mr Williams could not recall any discussion with Tony McMahon concerning exclusivity within the McMahon territories. Nor could he recall Mr McMahon raising with him any concerns about Moonya continuing to operate within the McMahon territories.

(b) Commercial terms

The pre-contractual discussions between the parties were not limited to the topic of exclusivity. There was discussion concerning commercial terms. In broad summary, Tony McMahon sought to negotiate the provision of incentives by National Foods to McMahons as a pre-condition to the entry into a licensed distributor agreement.

It is unnecessary to recount the evidence of the discussions in this regard, and there is little evidence of them. It is sufficient to note that, following Mr Pino being re‑appointed as the MP McMahon account manager, an agreement on commercial terms was reached. By letter dated 24 July 2000 from Mr Pino to Tony McMahon, Mr Pino stated:

Dear Tony
This is to confirm the terms and conditions of our proposal to you and will be attached to a heads of agreement to which I will need you [t]o sign formally accepting these terms set out below.
1.one weeks free milk for each year of the term of the agreement (5 years)
plus one extra weeks free milk for the first two years of the agreement paid as follows:
1^st year and 2^nd year only: one weeks free milk at the end of the first six months into the agreement an additional one weeks free milk six months later. This free milk will be paid at your current average weekly purchases.
3^rd, 4^th, and 5^th year: one weeks free milk, paid at the completion of each year.
2.NFL TO PAY ALL DISCOUNTS ON A 50-50 SHARED/ARRANGEMENT WITH MCMAHONS APPLICABLE TO MCMAHONS CUSTOMER BASE.
NOTE:MUST CLAIM ON A MONTHLY BASIS WITH APPROPRIATE DOCUMENTATION.

3.NFL AGREE TO RAISE THE CURRENT CONTRA DELIVERY TO LANCEFIELD DAIRY FROM $180.00 PER WEEK TO $240.00 PER WEEK TO MCMAHON DAIRY.

This letter was annexed to the initial heads of agreement signed by Mr Pino on behalf of National Foods and Mr McMahon on behalf of MP McMahon. In respect of this document, National Foods takes no issue as to the authority of Mr Pino. The initial heads of agreement state:

M.P. McMahon Pty Ltd wishes to purchase products from National Foods and to distribute them on the terms and conditions set out in the Licensed Distributor Agreement and agrees to the formal signing and sealing of the Document on completion of preparation by National Foods. The terms and conditions of the offer made by National Foods Milk Ltd to M.P. McMahon are attached.

Neither the letter from Mr Pino, nor the initial heads of agreement, makes any reference to the discussions between Tony McMahon and representatives of National Foods concerning exclusivity, either generally or in relation to Moonya continuing to operate in the proposed McMahon territories. At the time Tony McMahon signed the initial heads of agreement, he had not seen a copy of the licensed distributor agreements which he agreed to sign.

In cross‑examination, Mr Pino appeared to suggest that, at the time the initial heads of agreement were signed, Tony McMahon had stipulated that he required Moonya to be removed from the McMahon territories as a competitor and that this had been agreed. When asked why he did not include such an important matter in his 24 July 2000 letter, Mr Pino said that this matter was discussed between him and Tony McMahon, and that Tony McMahon did not require the agreement to remove Moonya to be documented:

… because of our relationship, he trusted what I had said to him, based on what David Mead had said to me and he thought our word was good enough.

I do not accept this evidence. Tony McMahon had no recollection of any such statement being made by Mr Pino. Further, as appears below, it is clear that Tony McMahon regarded Mr Pino as a “messenger” and relies upon statements made to him by Mr Byrne as the foundation of the alleged collateral agreement concerning removal of Moonya as a competitor of the McMahons.

(2) Entry into the agreements

As I have said, there is a substantial factual dispute as to the circumstances in which the agreements were entered into.

Following the signing of the initial heads of agreement, the solicitors then acting for National Foods prepared the formal documents. These comprised the formal “Heads of Agreement” and a “Licensed Distributor Agreement” for each of the two McMahon territories (collectively “the agreements”). The agreements were all prepared in the name of MP McMahon as the distributor. They were otherwise in a standard form.

Mr Pino attended at the accounting firm of Tony McMahon’s brother, Daniel McMahon, in early September 2000 for the purpose of having the documents signed. At this time, the documents had not been signed on behalf of National Foods. Further, prior to this time, copies of the documents had not been provided to Tony McMahon for perusal.

On the original agreements the name and company number “MP McMahon Pty Ltd ACN 004 293 430” has been crossed out and the name and company number “McMahon Milk Pty Ltd ACN 094 395 874” has been inserted in handwriting. National Foods contends that these changes were made by or on behalf of Tony McMahon after the agreements had been executed by National Foods, and that MP McMahon was at all times the party with whom it contracted. McMahons deny this and contend that the changes were made prior to National Foods executing the agreements.

The issue is largely one of credit with the capacity to affect the Court’s findings about the credibility of other evidence which is in issue, in particular concerning the making of the alleged oral collateral agreement.

There is direct evidence as to the circumstances in which the changes were made to the original agreements. That evidence was given by Tony McMahon, his brother Daniel and Mr Pino. Their evidence was consistent and was to the following effect.

The documents were signed at Daniel McMahon’s accountancy offices. There was small talk and then some discussions. In these discussions, Tony McMahon explained that he was taking over the milk distribution business from his father and, as a result, had created a new company which was to enter into the licensed distributor agreements with National Foods. As neither Tony McMahon nor his brother Daniel had previously read the form of the licensed distributor agreement or heads of agreement, they took some time to do so. In the course of this process, those present identified what they believed to be an error in the statement of the formula by which the licence fee was to be calculated. That formula is contained in the heads of agreement.

At some stage, Daniel McMahon made the handwritten changes to the documents, by inserting the name and company number of McMahon Milk in place of MP McMahon. Further, Daniel McMahon made the changes to the licence fee formula contained in the heads of agreement. Those present then initialled all of the changes which had been made.

At some time, Mr Pino wrote the date 4 September 2000 on some of the documents. In fact, on 4 September 2000, McMahon Milk had not been incorporated and there is no possibility that its ACN number could have been known. McMahon Milk was not incorporated until 6 September 2000. Accordingly, if the evidence given by Tony McMahon, Daniel McMahon and Mr Pino is correct, the documents have been incorrectly dated.

Mr Pino said that he was not concerned by the change of the identity of the distributor from MP McMahon to McMahon Milk. This was because National Foods had not yet signed the documents and he assumed that, if National Foods had a problem with the change of distributor, this issue would be raised before National Foods executed the documents. Further, Mr Pino said that he understood his instructions to be to get Tony McMahon to sign the documents “whatever it took”, and for this reason did not object to the change of identity of the distributor.

I accept that the general tenor of Mr Pino’s instructions was to do whatever was necessary to get Tony McMahon to sign the documents. Taking the evidence as a whole, it is clear that National Foods regarded Tony McMahon as an important distributor of Pura milk products, and were very keen for him to become a licensed distributor. It is also clear that Tony McMahon was somewhat reluctant to sign up as a licensed distributor, and was seeking to negotiate the best deal that he could. Mr Pino’s evidence that he was instructed to do “whatever it took” to get Tony McMahon to sign as a licensed distributor is consistent with the evidence as a whole, and I accept it. Of course, he was not authorised by such a general statement to exceed his authority in any way, or to mislead Tony McMahon. However, the obtaining of Tony McMahon’s signature as a licensed distributor was an important matter from the viewpoint of National Foods, as is evidenced by the letter of congratulations from National Foods to Mr Pino, to which I will refer.

Mr Pino said that he returned to the National Foods’ offices with the documents signed by Tony McMahon on behalf of McMahon Milk, and Tony McMahon personally as a guarantor. He said that he informed two of his superiors, Bevan Williams and Bob Daniels, that he had obtained Tony McMahon’s signature to the documents and brought to their attention the alterations which had been made. Mr Williams and Mr Daniels dispute this.

The documents were then sent off to National Foods’ head office to be executed by National Foods. There is no dispute that the documents were executed under the common seal of National Foods. The seal was affixed in the presence of Michael Read, a director of National Foods, and Janice van Reyk, a director or secretary of National Foods. Mr Read gave evidence. Ms van Reyk did not. Mr Read could not recall signing the documents. However, he said that his signature appeared on them and that he could say, from his experience as a director, that if there were any handwritten amendments to the documents, he would have placed his initials beside those amendments if he agreed with them. As his initials do not appear beside any of the amendments, he does not believe that the amendments had been made prior to him witnessing the affixing of the National Foods’ seal to the documents.

On Monday 11 September 2000 Mr Williams wrote a letter of congratulations to Mr Pino for obtaining the signature of Tony McMahon to the heads of agreement and licensed distributor agreements. This was obviously seen by National Foods as a significant achievement, as the letter discloses:

Dear Paul
As per our recent discussions this letter serves as formal confirmation of both myself & National Foods commitment to reward your outstanding endeavours in gaining the signature and inturn [sic] agreement of Sunbury Dairy to come on board as a Licensed Distributor as of the 4^th September 2000.
As agreed National Foods will fund the cost of you taking a ‘Weekend Escape’ for both you and your partner to a destination of your choice covering all associated accommodation and meal costs …
Finally in conclusion sincere thanks for your efforts as detailed above and we trust that you will enjoy this reward with the businesses [sic] best wishes.[13]

[13]Emphasis added.

It was submitted on behalf of National Foods that I should reject all of the evidence given by Tony McMahon, Daniel McMahon and Mr Pino in this regard. It was submitted that, when the evidence is taken as a whole, I should find that the changes to the documents were made at some time after the documents were executed by National Foods and without the knowledge of anyone at National Foods except Mr Pino. Accordingly, it was submitted that the handwritten amendments are ineffective and that the contracting party was at all relevant times MP McMahon.

It was submitted on behalf of National Foods that I should reach this conclusion because Mr Williams could not recall Mr Pino ever bringing the amendments to his attention, or indeed of ever having seen the signed documents. Mr Daniels denied that Mr Pino brought the alterations to the documents to his attention and said that, if the alterations had been brought to his attention, he would have commissioned asset searches in relation to McMahon Milk to ensure that it had sufficient assets to justify the extension of credit to it. Further, it was submitted that the lack of any initials by Mr Read or Ms van Reyk is significant because Mr Read should be believed when he says that he would not execute a document containing amendments without initialling any of those amendments.

For the following reasons, I do not accept these submissions.

First, the changes to the formula for the calculation of the licence fee are consistent with the evidence given by Mr Byrne, to the effect that the licence fee was spread over the five year period of the licensed distributor agreements, and are consistent with the schedule to the heads of agreement which refers to 60 monthly payments. Prior to its handwritten amendment, the licence fee formula contained in the heads of agreement referred to 65 payments at four weekly intervals. I was not directed to any evidence that National Foods took any issue with licence fee payments being made on a monthly basis.

Second, I take into account the letter of congratulations. That letter demonstrates that National Foods regarded the securing of Tony McMahon as a licensed distributor as a matter of high importance. Accordingly, it is unlikely that National Foods would have been concerned at the use by him of a different corporate vehicle, especially when he was personally guaranteeing its obligations to National Foods. I find that Mr Pino brought the alterations to the attention of Mr Williams and Mr Daniels and that they were not concerned by them. I find that Mr Williams and Mr Daniels simply do not recall this.

Third, I take into account the fact that Ms van Reyk gave no evidence. I infer that her evidence would not have assisted the case of National Foods on this issue. Her absence as a witness was not explained. In any event, the evidence of Mr Read is of general practice, not of recollection of the agreements at issue. I find that Mr Read was either unconcerned at the amendments or that they were not brought to his attention at the time he executed the documents.

Fourth, I do not place significance upon the fact that the agreements have been dated 4 September 2000 by Mr Pino, which was two days prior to the incorporation of McMahon Milk on 6 September 2000. There is no evidence as to when this date was placed on the documents. I infer that it was placed on the documents by Mr Pino in error at some stage on or prior to 11 September 2000, as the 4 September date is referred to in the letter of congratulations dated 11 September. Further, that letter uses the language “as of 4^th September”. This is consistent with the parties reaching agreement that the agreements were to operate from that day (a Monday and thus the beginning of a trading week) even though executed subsequently. This possibility was not explored in the evidence, but it does indicate another innocent explanation for Mr Pino to date the agreements 4 September, even though they could not have been signed on that date.

Fifth, although the issue was raised, counsel for National Foods did not seek to put the originals of the agreements in evidence. Accordingly, no submission was, or could have been, made that there was anything about the originals which indicated that they had been added to at a later date.

Sixth, the evidence given by Tony McMahon, Daniel McMahon and Mr Pino on this issue was consistent and given confidently. There was nothing about the demeanour of any of them which caused me to doubt their evidence on this issue.

Finally, in reaching my conclusion on this issue, I take into account the fact that it would be a most serious finding to make that Tony McMahon, Daniel McMahon and Mr Pino conspired to fraudulently alter the documents after they had been executed by National Foods. I am not satisfied to the requisite standard[14] that such was the case.
[14]Briginshaw v Briginshaw (1938) 60 CLR 336.

Accordingly, I find that the agreements were entered into between National Foods and McMahon Milk. Tony McMahon was a guarantor of the obligations of McMahon Milk under those agreements.

(3) First alleged novation

My finding that National Foods contracted with McMahon Milk makes it necessary to consider the alternative case pleaded by National Foods. In the alternative to its principal case, that it contracted with MP McMahon, National Foods alleges that the contractual arrangements were immediately novated by conduct, with the effect that the parties intended and agreed that MP McMahon would assume the rights and obligations of McMahon Milk under the agreements. National Foods contends that the novations are to be inferred from the course of trade and business dealings between it and MP McMahon on and from the date the licensed distributor agreements were signed. The trade and business dealings relied upon are the continued supply of milk products by National Foods to MP McMahon, the invoicing by National Foods to MP McMahon for those products and the payment by MP McMahon of the amounts invoiced. For convenience, I will refer to this as the “first novation”.

The McMahons admit the first novation. I find that the first novation included all of the contractual dealings between the parties. The heads of agreement and licensed distributor agreements are obviously interdependent, and relate to the same licensed distributor. If MP McMahon became that distributor, then it did so for the purposes of both the heads of agreement and the licensed distributor agreements. The case was conducted on this basis.

It is common ground that MP McMahon discharged all of the obligations arising under the agreements until shortly prior to 1 January 2003 and that, from on or shortly prior to 1 January 2003, National Foods commenced invoicing McMahons Dairy for all milk deliveries and licence fees and accepting payments from McMahons Dairy in respect of those obligations. McMahons contends that this was the result of a further novation of the agreements, whereby McMahons Dairy assumed the rights and obligations of MP McMahon to National Foods. For convenience, I will call this the “second novation”.

(4) Second alleged novation

The second novation is disputed by National Foods. It contends that the officers employed in its credit department who made the necessary administrative arrangements, which had the effect of altering the party to whom it addressed invoices from MP McMahon to McMahons Dairy, lacked the necessary authority to commit National Foods to any change in its contractual relations with MP McMahon, which resulted from the first novation. The relevant facts are as follows.

In his witness statement Mr Pino said that he recalled Tony McMahon telling him in December 2002 “that he was finally purchasing the distribution business from his father”. Mr Pino said that Tony McMahon asked him what, if anything, “needed to be done from National’s end”. Mr Pino said that he made enquiries within the National Foods office with, he believed, a credit officer named Britt Hallenrud, and was told that Tony McMahon would need to complete a new credit account application form. A copy of the blank form was provided to Mr Pino. Although he cannot specifically recall it, Mr Pino believes that he then provided the blank form to Tony McMahon and told him to complete the form and send it to Ms Hallenrud.

Mr Pino’s witness statement was drafted without the assistance of his handwritten notes. He produced some notebooks, containing his handwritten notes which are relevant to this issue, when he came to Court to give evidence. There was some cross-examination of Mr Pino directed to establishing that these notes were not genuine contemporaneous records. In final submissions, there was a formal attack upon the authenticity of the notes. I have read the original notebooks which contain the relevant entries, and am satisfied that they are genuine notes made by Mr Pino contemporaneously with the events which they record. The notes range well beyond any issues relevant to this proceeding and concern day to day matters attended to by Mr Pino in the course of his duties as an account manager for National Foods.

Mr Pino’s notes indicate that it was in fact in November 2002 that Tony McMahon told him that he was finally purchasing the milk distribution business from his father. On 15 November 2002, Mr Pino noted in his notebook:

- Tony McMahon change of ownership in writing exact date.
- Credit app, contract, names etc.

Also on 15 November 2002, McMahons Dairy was incorporated. It appears that this event caused Tony McMahon to speak with Mr Pino on that day concerning the proposed change of ownership. In this regard, Daniel McMahon said that he often received immediate notification when he arranged for the incorporation of a company. I accept this evidence. This is what occurred on 6 September 2000 when McMahon Milk was incorporated. I find that Tony McMahon knew of the incorporation of McMahons Dairy on 15 November 2002 and this caused him to speak with Mr Pino on that day.

Mr Pino’s note of 15 November 2002 appears to record the enquiries made by Mr Pino of the National Foods’ credit department, after having been told by Tony McMahon that he was taking over the milk distribution business from his father. In oral evidence, Mr Pino thought that this note may have related to a telephone call from Mr McMahon. However, Mr Pino was not confident about this and I do not think that it is likely to have been the case. The note contains details of the kind likely to have been given to Mr Pino by a credit officer as to what needed to be done to change the ownership of the licensed distributorship to a new entity.

The next relevant note made by Mr Pino was on 4 December 2002. It reads:

McMahon – buy out when, credit app & contract under what

This note appears to be a note made by Mr Pino of a conversation with Tony McMahon, in the course of which he passed on to Tony McMahon the information given to him by someone from the National Foods credit department: the need for an exact date for the changeover (“buy out when”), the need for a credit application form to be completed (“credit app”) and the need to know the name of the party, presumably a company, who would be the new licensed distributor in place of MP McMahon (“contract under what”).

The next document relevant to the second novation is a facsimile from Tony McMahon to Ms Hallenrud enclosing a completed credit application form and guarantee, both signed by Tony McMahon (the “27 December facsimile”). The 27 December facsimile is in the following terms:

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

The 27 December facsimile was obviously not sent on that date. The credit account application form which forms part of the facsimile has been completed by Tony McMahon in his handwriting, and dated 3 January 2003. This date has also been written by the witness to Tony McMahon’s signature to the attached guarantee. The copy of the 27 December facsimile in the Court Book does not indicate when, or if, the facsimile was in fact sent by Tony McMahon. The only facsimile header is in respect of the on‑forwarding of the 27 December facsimile by National Foods, to an unidentified recipient, on 7 February 2003. The fact that the facsimile was not sent on 27 December 2002, and the fact that it was on-forwarded by National Foods to an unidentified recipient, was not explored in the evidence or in final submissions. Indeed, Senior Counsel for National Foods cross-examined on the basis that the facsimile had been sent on 27 December 2002 and, in final submissions, referred to that as a significant fact. The copy facsimile in the court book, bearing the facsimile imprint of 7 February 2003, was discovered by the plaintiff. Accordingly, it appears that the facsimile was on‑forwarded within the National Foods organisation on 7 February 2003, for purposes which were not explored in the evidence.

The 27 December facsimile was received by Ms Hallenrud on or prior to Monday 6 January 2003. On that day, at 9.42 am, Ms Hallenrud sent an internal email within the National Foods accounts department, as follows:

To: Common Codes
Subject: Change of name
Hi there,
Could you please change the name for a/c 40002939 MP McMahon to:
McMahons Dairy P/L
ACN 102 840 773
Thanks!
Britt Hallenrud
National Credit Officer

Ms Hallenrud’s email was acted upon. From that time, the National Foods’ account department amended their records and sent all invoices and other statements relating to the licensed distributor account which was previously in the name of MP McMahon to “McMahon’s Dairy Pty Ltd”. These invoices and statements were sent to the address stated on the credit account application form enclosed with the 27 December facsimile.

Further, from this time, all correspondence from Tony McMahon to National Foods was on the letterhead of “McMahons Dairy Pty Ltd”. Formal correspondence from National Foods varied as to the identity of the addressee. Some correspondence was addressed to McMahon Milk Pty Ltd. Some of this correspondence appears to have been drafted with the input of external lawyers. For example, on 26 February 2004 the solicitors then acting for National Foods wrote to the McMahons’ solicitors on the basis that the contractual relationship was between National Foods and McMahon Milk. Other correspondence was addressed to “McMahon’s Dairy”. For example, on 17 September 2004 National Foods made a formal demand upon McMahons Dairy Pty Ltd for unpaid licence fees. This letter was drafted by National Foods internal legal counsel. There was no evidence of further correspondence by National Foods to MP McMahon.

The transfer from MP McMahon to McMahons Dairy is also dealt with in typewritten notes made by Mr Pino for the purposes of meetings with Tony McMahon on 3, 6 and 17 February 2003. There was much cross-examination about the authenticity of these notes. However, I am satisfied that they are genuine. In material respects, they are supported by the notebooks containing Mr Pino’s handwritten notes. At each meeting, the following “outstanding item” appears as a matter carried over from previous meetings. The item is in the following terms:

Tony McMahon – officially has taken over family milk business M.P. McMahon PTY LTD, effective 30^th December 2003. New Company Name is McMahon Dairy PTY LTD and parent company is McMahon milk PTY LTD – P.P. to ensure that NFL have all appropriate paper work. – Sam Dunlop satisfied with credit application from new owner. P.P. satisfied that current LDA is in order as it is under the new name McMahon Milk PTY LTD, signed Anthony John McMahon.

Mr Pino’s note of this outstanding item contains obvious errors. First, the effective date of the change in ownership was the end of 2002, not the end of 2003. The date should probably be 31 December and not 30 December, and this mistake also appears in Mr Pino’s handwritten note of 2 January 2003. Second, McMahon Milk Pty Ltd was never the parent company of McMahons Dairy Pty Ltd. Third, the new owner was to be McMahons Dairy Pty Ltd, not McMahon Milk Pty Ltd as stated at the end of the item. These errors have been carried forward to the minutes made by Mr Pino of the meetings on 6 and 17 February 2003. Mr Pino acknowledged that there were errors and that they were repeated because he simply moved the outstanding item forward from one meeting to the next.

The first meeting, on 3 February 2003, was attended by Mr Pino and Tony McMahon only. It was put to Tony McMahon and Mr Pino that this meeting did not occur. I do not accept that this is so. Mr Pino’s notebook contains a detailed note of conversations at a meeting with Tony McMahon on 3 February 2003. Those notes contain entries which are consistent with aspects of the typed minutes.

The second meeting on 6 February 2003 was attended by Mr Pino, Greg Wooller, the recently appointed state sales manager at National Foods, and Tony McMahon. This was the first occasion on which Mr Wooller met Tony McMahon. Mr Wooller recalled that Tony McMahon said at this meeting that he had taken over the McMahon family milk distribution business. However, Mr Wooller did not recall any reference during the course of the meeting to the name of any specific McMahon company. In cross‑examination, it was put to Mr Wooller that Tony McMahon mentioned that he had taken over the family milk distribution business and commenced operation through the entity McMahons Dairy Pty Ltd. Mr Wooller denied this and said “I specifically recall no specific entity being talked about”. In further cross‑examination, it became clear that Mr Wooller’s true position was that he could not recall any McMahon company names being mentioned. He agreed that there was no particular reason for him to remember if that had been the case, because his focus at the meeting was to meet Tony McMahon for the first time and establish a relationship with him.

The third meeting on 17 February 2003 was attended by Mr Pino, Phillip Ewers of National Foods, and Tony McMahon. Mr Ewers made notes of this meeting which make no reference to Tony McMahon taking over the milk distribution business. Mr Ewers did not recall the matter being discussed.

Tony McMahon could not recall what was said at the three meetings in February 2003.

Mr Pino’s evidence concerning what was said at the February 2003 meetings on this issue did not take the matter any further than the content of his notes.

In my view, the concession by Mr Wooller that Tony McMahon informed him at the 6 February 2003 meeting that he had taken over the McMahon family milk distribution is most significant. Whether or not Tony McMahon informed Mr Wooller that the new licensed distributor was McMahons Dairy Pty Ltd, or whether no particular corporate entity was identified, I infer that it was the statements made by Tony McMahon at this meeting which caused someone in National Foods, probably Ms Hallenrud or Mr Dunlop, to forward a copy of the 27 December facsimile to another person in the National Foods organisation, probably Mr Wooler, by internal facsimile on 7 February 2003.

It appears that the on-forwarding of the 27 December facsimile on 7 February 2003 was not noticed by the lawyers for either party. In any event, whether or not this is so, the issue was not explored in evidence. In particular, Mr Wooller was not asked about it and neither Ms Hallenrud nor Mr Dunlop were called to give evidence to explain the purpose of the 7 February 2003 facsimile within the National Foods organisation. Accordingly, National Foods has not disclosed to the Court the full facts concerning the manner in which it dealt with the credit account application form enclosed with the 27 December facsimile.

The evidence of Ms Hallenrud was always relevant. Her role in the alteration of the account name from MP McMahon to McMahons Dairy Pty Ltd was referred to in witness statements and documents in the court book.

As to Mr Dunlop, a more senior employee in the credit department than Ms Hallenrud, his role in the alteration of the account details from MP McMahon to McMahons Dairy Pty Ltd was mentioned in the note made by Mr Pino of this outstanding item for the meetings on 3, 6 and 17 February 2003. Although it was not until cross-examination that Tony McMahon said that Mr Dunlop gave him the name and facsimile details for Ms Hallenrud, it is National Foods which contends that its representatives involved in the alleged second novation did not have actual authority to effectuate any such novation. In these circumstances, it is for National Foods to establish that the change in account details from MP McMahon Pty Ltd to McMahons Dairy Pty Ltd was not approved by any person having actual authority to do so. In circumstances where Mr Pino’s note stated, “Sam Dunlop satisfied with credit application from new owner”, it should have been obvious to National Foods that his evidence may be relevant to this issue.

No reason was put forward as to why either Ms Hallenrud or Mr Dunlop could not be called as witnesses. I infer that their evidence would not have assisted the case of National Foods. I accept the evidence of Mr Read that neither of them had actual authority to agree to the second novation. However, they may have been functionaries in a process which resulted in an authorised person approving the second novation.

Tony McMahon McMahon said that he consulted Mr Byrne about his plans “to change the company through which [he] traded”. He said that Mr Byrne was “quite supportive” of this and told him to contact his account manager and the credit department of National Foods “and let them know and they would forward the necessary documents to me”.

(2) Breach of non-competition provisions during the term of the agreements

As appears above, National Foods terminated the licensed distributor agreements on 15 August 2005, following conduct by Tony McMahon in being involved in the promotion of Sungold milk products to customers in the McMahon territories. I find that this termination was justified. Tony McMahon’s conduct in this regard constituted a clear and deliberate breach of the licensed distributor agreements by McMahons Dairy[51] and, when viewed as a whole, his conduct at this time should be seen as a repudiation by McMahons Dairy of the licensed distributor agreements, or an abandonment by McMahons Dairy of the licensed distributorship. In these circumstances, National Foods was entitled to immediately terminate the licensed distributor agreement, either by accepting the repudiation or under clause 29.1(a)(iii). It is clear that, by this time, McMahons Dairy no longer had any intention of honouring its obligations under the licensed distributor agreement.
[51]Clause 23.16(a).

Further, and in any event, if National Foods was not entitled to terminate on 15 August 2005, the licensed distributor agreements nevertheless terminated on 20 August 2005, only five days later, by effluxion of time.[52]
[52]Item 4 of the schedule to the licensed distributor agreement.

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 clause 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[53]

[53]Emphasis added.

Reasonable persons in the position of the parties would understand this clause to prohibit Tony McMahon from being involved in any business distributing milk products which compete with Pura milk products. Even if it be accepted that Tony McMahon was doing no more than giving fatherly advice and assistance to his sons, to assist them to establish a business in competition with National Foods, that conduct involved a clear breach of clause 23.16(a). At the very least, Tony McMahon was involved as an “adviser” to his sons’ company McMahon’s Dairy Products. That was enough to constitute a breach of the term. However, Tony McMahon did more than given fatherly advice. He established the trading account with Warrnambool Cheese & Butter, using the McMahons Dairy name, and guaranteed that account.

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.

There will accordingly be judgment for National Foods against McMahons Dairy Pty Ltd for damages to be assessed in respect of its breach of clause 23.16(a).

(3) Breach of non-competition provisions after termination of the agreements

I have found above that Tony McMahon continued to be involved in his sons’ business, McMahon’s Dairy Products Pty Ltd, after the termination of the licensed distributor agreement. However, in this regard also, it was submitted on behalf of the McMahons that no breach of the licensed distributor agreement was involved by this conduct. For the reasons given below, I reject the submissions made on behalf of the McMahons in this regard.

The relevant clauses of the licensed distributor agreement are clauses 23.16(b) and (c). In order to understand those clauses, it is necessary to consider clause 23.16 as a whole. Clause 23.16 provides:

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 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 [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.
(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.[54]

[54]Emphasis added.

I have made findings above as to the involvement of Tony McMahon in the business of McMahon’s Dairy Products Pty Ltd after termination of the licensed distributor agreement.

It was submitted on behalf of McMahons Dairy that this conduct by Tony McMahon did not constitute a breach of clauses 23.16(b) or (c) because it was conduct by him in his private capacity, not on behalf of McMahons Dairy. It was submitted that Tony McMahon’s conduct was no more than “a father helping out his child”.

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.

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.

Accordingly, National Foods is entitled to judgment against McMahons Dairy Pty Ltd for damages to be assessed in respect of its breach of clauses 23.16(b) and (c) of the licensed distributor agreement.

VIII. DID NATIONAL FOODS BREACH THE AGREEMENTS?

It was submitted on behalf of the McMahons that the licensed distributor agreement was terminated by McMahons Dairy accepting a repudiation of the agreement by National Foods. The first repudiation relied upon was the conduct of National Foods in failing to provide the exclusivity which the McMahons contend was promised in the licensed distributor agreement. I have rejected the argument that the licensed distributor agreement granted the exclusivity alleged. Accordingly, it is unnecessary to consider this aspect of the alleged repudiation further.

Next, it was submitted on behalf of the McMahons that the circular letter by National Foods dated 11 August 2005, in which Mr Wooller informed McMahons Dairy’s customers of the possibility that the McMahons would cease to be the licensed distributor for Pura milk products, constituted a repudiation by National Foods of the licensed distributor agreement. There is no merit in this submission. Mr Wooller’s circular letter is carefully written, and emphasises the fact that customers are being notified of a “potential” that the licensed distributor agreement will not be renewed or extended and, if so, customers will need to make other arrangements with National Foods to receive deliveries of Pura milk products. I can see no way in which such a letter could constitute a repudiation by National Foods of the licensed distributor agreement.

It is accordingly unnecessary to consider the submission that such a repudiation was accepted.

IX.LIABILITY OF TONY MCMAHON AS GUARANTOR OF McMAHONS DAIRY

Counsel for Tony McMahon acknowledged that, if the Court found that the second novation occurred, with the effect that McMahons Dairy became the contracting party, Tony McMahon was liable as a guarantor of the amounts owing under the licensed distributor agreement for milk products sold and delivered to McMahons Dairy. This concession was made on the basis of the fresh guarantee signed by Tony McMahon when he completed the credit application form in the name of McMahons Dairy and transmitted those documents to National Foods by the 27 December facsimile. I have found that the second novation occurred. Accordingly, Tony McMahon is liable as a guarantor for all amounts owing under the licensed distributor agreement for milk products sold and delivered. Once those amounts, and interest, are fixed, there will be judgment for National Foods against Tony McMahon for this amount.

This leaves for determination the questions of whether Tony McMahon is liable as a guarantor of the unpaid licence fees due under the heads of agreement and of the damages payable by McMahons Dairy for breach of the non‑competition provisions of the licensed distributor agreements.

In determining whether Tony McMahon is liable as a guarantor of the unpaid licence fees, the first issue to consider is whether the first and second novations each included a novation of the heads of agreement, or were only novations of the licensed distributor agreements. The parties agree in their pleadings that the first novation included the heads of agreement. However, National Foods deny everything about the second novation.

Reference to the terms of the heads of agreement and the licensed distributor agreements demonstrate their inter‑dependence. The heads of agreement provide for the payment of licence fees by McMahon Milk. The heads of agreement contemplate the entry into licensed distributor agreements by McMahon Milk. For example, clause 1.4 provides:

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.

In these circumstances, my finding of the existence of the second novation of the licensed distributor agreements applies also to the heads of agreement. It makes no commercial sense to attribute to the parties an intention to novate the licensed distributor agreements but not the heads of agreement, by which the licence fees are to be paid.

In these circumstances, National Foods alleges that there was also a novation of the guarantee by Tony McMahon of the obligations of McMahon Milk under the heads of agreement. In response, it was submitted on behalf of Tony McMahon that, when the first novation took place, he was released from his guarantee. Although counsel for Tony McMahon gave no authority for this proposition, it is generally the case that novation of the principal agreement releases a guarantor of the principal debtor who falls out of the agreement and is replaced by another. This is because the debt of the principal debtor is extinguished by the novation.[55] However, the general position is subject to contrary agreement. If the guarantor agrees with the creditor that his guarantee will continue to apply to the liability of the new principal debtor under the novated agreement, the Court should enforce such an agreement.[56] This is especially so where the guarantor is the person requesting the novation, as here, or where the novation is for the benefit of the guarantor, also as here.
[55]Commercial Bank of Tasmania v Jones [1893] AC 313, 316.
[56]Perry v National Provincial Bank of England [1910] 1 Ch 464, 471; Davidson v M’Gregor (1841) 8 M & W 755; 151 ER 1244, 1249-50.

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.

I turn to consider whether Tony McMahon is liable for breaches by McMahons Dairy of the non‑competition provisions.

I have found above that McMahons Dairy breached the non‑competition provisions of the licensed distributor agreements, both before termination and during the six month period following termination. In these circumstances, Tony McMahon is also personally liable for these breaches. This follows from the express terms of Tony McMahon’s initial guarantees, which are Appendix 3 to the licensed distributor agreements.

For the same reasons that I have found Tony McMahon’s guarantee of the heads of agreement continued to operate notwithstanding the novations of the heads of agreement, I find that Tony McMahon’s initial guarantees of the licensed distributor agreements continued to operate notwithstanding the novations of those agreements. Tony McMahon’s initial guarantees of the licensed distributor agreements extend far beyond a guarantee of the payment of amounts due in respect of milk products sold and delivered by National Foods to the Licensed Distributor. In this respect, they are to be contrasted with the brief form of further guarantee signed by Tony McMahon at the time of the second novation. In addition, Tony McMahon guaranteed to National Foods:

2Due 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.
3That 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.

…
I covenant to indemnify you and keep you indemnified from and against … the breach non‑performance or non‑observance of any of the said covenants or 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.

In these circumstances, Tony McMahon undertook a personal obligation to ensure that the Licensed Distributor complied with all of its obligations under the licensed distributorship agreements. As I have said, I take the view that this guarantee survived the novations of the licensed distributor agreements, and continued to operate in respect of the assumption by McMahons Dairy of the obligations of the Licensed Distributor under the licensed distributor agreements. Accordingly, Tony McMahon is jointly and severally liable with McMahons Dairy for the breaches of the non‑competition provisions of the licensed distributorship agreements which I have found. National Foods is entitled to judgment against Tony McMahon for damages to be assessed in this regard.

X.IS McMAHON’S DAIRY PRODUCTS LIABLE FOR PROCURING BREACHES OF THE NON‑COMPETITION PROVISIONS?

National Foods raises a claim based upon the tort of interference with contractual relations. It was submitted on behalf of National Foods that McMahon’s Dairy Products Pty Ltd, which is a company owned by Tony McMahon’s sons and of which they were the only directors at relevant times,[57] induced or procured McMahons Dairy to breach the non‑competition provisions of the licensed distributor agreement. The alleged basis for this case is that Tony McMahon assisted his sons to establish McMahon’s Dairy Products, to establish a credit account with Warrnambool Cheese & Butter and to persuade customers of McMahons Dairy to purchase Sungold milk products from McMahon’s Dairy Products in preference to Pura milk products. I have found that this conduct by Tony McMahon constituted a breach by McMahons Dairy of the non‑competition provisions in the licensed distributor agreements, and a breach by him of his obligations as a guarantor of those agreements. As I have said, there will be judgment for National Foods against McMahons Dairy and Tony McMahon for damages to be assessed for these breaches. However, again due to possible enforcement issues, National Foods seeks to obtain judgment for these damages against McMahon’s Dairy Products.
[57]Patrick McMahon was the only director from 31 August 2005, when Nicholas McMahon resigned.

In Short v City Bank of Sydney,[58] Isaacs J summarised the elements of the tort of interference with contractual relations:

… the defendant must have induced or procured the doing of what he knew would be a breach of contract. A bona fide belief reasonably entertained that it was not a breach of contract would be fatal to the claim. If the defendant did not know of the existence of the contract, he could not induce its breach; if he reasonably believed it did not require a certain act to be performed, his inducing a party to the contract to do something inconsistent with it could not be regarded as an inducement or procurement knowingly to break the contract; if he believed on reasonable grounds that the contract had been rescinded, or performance waived, when in fact it had not, he could not be said to knowingly procure its breach.[59]

[58](1912) 15 CLR 148.

[59]Ibid, 160 (emphasis added).

In Sanders v Snell,[60] the High Court spoke in terms of the necessity to “establish an inducing or procuring of breach”.[61]
[60](1998) 196 CLR 329.
[61]Ibid, [22], per Gleeson CJ, Gaudron, Kirby and Hayne JJ.

In Fightvision Pty Ltd v Onisforou,[62] the Court of Appeal in New South Wales reviewed the authorities and summarised the tort of interference with contractual relations in the following manner:

The position may be stated, we think, as follows. The plaintiff must prove that the defendant intentionally procured the breach. The requirement that the defendant have sufficient knowledge of the contract is a requirement that he have sufficient knowledge to ground an intention to interfere with contractual rights. Ignorance of the existence of the contract or of its terms born of inadvertence or negligence is not enough. On the other hand, reckless indifference or wilful blindness to the truth may lead to a finding of the necessary intention.[63]

[62](1999) 47 NSWLR 473.

[63]Ibid, [171] (emphasis added).

These authorities demonstrate that, in order to establish the tort, it is necessary to establish that the contractual breach was intentionally induced or procured by the defendant. In my view, these words should be given their ordinary meaning. “Induce” includes action “to bring about, produce, or cause”.[64] “Procure” includes action “to effect; cause, bring about, especially by unscrupulous or indirect means”.[65]
[64]The Macquarie Dictionary.
[65]Ibid.

In British Motor Traders Association v Salvadori[66] Roxburgh J considered that “any active step taken by a defendant having knowledge of the covenant by which he facilitates a breach of that covenant is enough” to establish the tort.[67]
[66][1949] 1 Ch 556.
[67]Ibid, 563 (emphasis added).

It was submitted on behalf of National Foods that the involvement of Tony McMahon in the affairs of McMahon’s Dairy Products, by assisting it to compete with National Foods in the McMahon territories, is sufficient to establish that McMahon’s Dairy Products committed the tort of interference with contractual relations. It was submitted that this followed because Tony McMahon well knew of the non‑competition provisions of the licensed distributor agreement; Tony McMahon could not unilaterally participate in the affairs of McMahon’s Dairy Products without the consent of his sons; that Tony McMahon’s knowledge of the non‑competition provisions of the licensed distributor agreements should therefore be attributed to McMahon’s Dairy Products; and that it follows that McMahon’s Dairy Products procured the breaches of the non‑competition provisions by McMahons Dairy.

It was submitted on behalf of the McMahons that the “mere involvement” of Tony McMahon in the business affairs of McMahon’s Dairy Products was insufficient to demonstrate a breach of the non‑competition provisions and could not form the basis of a finding that McMahon’s Dairy Products had committed the tort of interference with contractual relations. It was submitted that the actions of Tony McMahon were taken on his own behalf and “did not necessary [sic] entail the knowledge or consent of McMahon’s Dairy Products”.[68]
[68]Written submissions, [63].

I do not accept the submissions made on behalf of the McMahons in this regard. I find that Tony McMahon’s actions in assisting his sons to establish a trading relationship with Warrnambool Cheese & Butter, and in approaching customers of McMahons Dairy and seeking to persuade them to purchase Sungold milk products from McMahon’s Dairy Products, were active steps taken by him with the consent of, and on behalf of, McMahon’s Dairy Products. That conduct was intentionally engaged in by Tony McMahon in order to further the business interests of McMahon’s Dairy Products and to damage the business interests of National Foods. These active steps were taken by Tony McMahon on behalf of McMahon’s Dairy Products with full knowledge of the non‑competition provisions of the licensed distributor agreements.[69] Tony McMahon’s actions in this regard on behalf of McMahon’s Dairy Products induced or procured the breaches of the non‑competition provisions by McMahons Dairy, because it was those actions which facilitated, caused or brought about those breaches. Indeed, that conduct comprised the breaches.
[69]National Foods reminded Tony McMahon of the non‑competition provisions in its letter to him on 15 August 2005.

Accordingly, there will be judgment for National Foods against McMahon’s Dairy Products Pty Ltd for damages to be assessed in respect of the interference by it with the contractual relations between National Foods and McMahons Dairy.

XI. UNCONSCIONABLE CONDUCT DEFENCES

The final defence relied upon by the McMahons, in order to establish a right to damages which could be set‑off against the debt claims made by National Foods, is based upon s 51AC of the Trade Practices Act 1974 (Cth). In the alternative, the McMahons relied upon alleged breaches of s 51AC in order to found a submission that the Court should vary the licensed distributor agreements by amending or deleting the non‑competition provisions contained in them.

Section 51AC of the Trade Practices Act relevantly provides:

(1)A corporation must not, in trade or commerce, in connection with:
(a)the supply or possible supply of goods or services to a person ...; or
(b)...

engage in conduct that is, in all the circumstances, unconscionable.

Section 51AC of the Trade Practices Act does not, like s 51AA, prohibit “conduct that is unconscionable within the meaning of the unwritten law”. The term “unconscionable” in s 51AC is not so limited. The question arises as to whether unconscionable conduct in these sections is a concept which differs from the equitable concept of unconscionable conduct. The authorities favour the conclusion that, in order for there to be unconscionable conduct under s. 51AC, there must be conduct which is unconscionable within the ordinary dictionary meaning of that word.

In Hurley v McDonald’s Australia[70] Heerey, Drummond and Emmett JJ considered an application for leave to appeal a trial judge’s decision not to allow an amendment to a statement of claim. The Full Court held:

[22]For conduct to be regarded as unconscionable, serious misconduct or something clearly unfair or unreasonable, must be demonstrated – Cameron v Qantas Airways Ltd (1994) 55 FCR 147 at 179. Whatever ‘unconscionable’ means in s 51AB and s 51AC, the term carries the meaning given by the Shorter Oxford English Dictionary, namely, actions showing no regard for conscience, or that are irreconcilable with what is right or reasonable – Qantas Airways Ltd v Cameron (1996) 66 FCR 246 at 262. The various synonyms used in relation to the term ‘unconscionable’ import a pejorative moral judgment – Qantas Airways Ltd v Cameron (1996) 66 FCR 246 at 283-284 and 298.
...
[31]Before s 51AA, s 51AB or s 51AC will be applicable, there must be some circumstance other than the mere terms of the contract itself that would render reliance on the terms of the contract ‘unfair’ or ‘unreasonable’ or ‘immoral’ or ‘wrong’.[71]

[70](2000) ATPR 41-741.

[71]Original emphasis.

In their pleadings and final submissions, the McMahons relied upon two grounds to establish their unconscionable conduct case. First, the McMahons contend that it was unconscionable for National Foods to deliver its circular letter dated 11 August 2005 to customers of the McMahons, because it was thereby “seeking to have such customers refrain from utilising the services of [McMahons Dairy].”[72] Second, the McMahons contend that National Foods acted unconscionably by “failing or refusing” to provide them with exclusivity in the McMahon territories, in contravention of the express or implied terms of the licensed distributor agreement for which they contend, or in contravention of the alleged collateral agreement.[73]
[72]Further amended defence, [13(a)], [47].
[73]Ibid, [13(b)], [43]-[46], [47].

In my view, whether taken alone or in combination, the matters relied upon by the McMahons to establish their unconscionable conduct case do not establish such a case.

I have set out above why the 11 August 2005 letter was an entirely appropriate letter for National Foods to send in the circumstances. It did no more than alert customers of the McMahons to a possible change in the status of McMahons Dairy as a licensed distributor of Pura milk products. It was written in temperate language and was an entirely justifiable letter to send in circumstances where National Foods apprehended that there was a real risk that Tony McMahon would not agree to continue as a licensed distributor of Pura milk products. There was nothing unfair, unreasonable or immoral about the 11 August 2005 letter. To the contrary, it was a fully justifiable response to the conduct of Tony McMahon at that time. As appears above, as at 11 August 2005, Tony McMahon was stringing National Foods along whilst he was assisting his sons to establish a competing business to distribute Sungold milk products in competition to National Foods. There is no need to give any further consideration to the 11 August 2005 letter in the context of considering the allegations of unconscionable conduct against National Foods.

Further, I can see nothing unfair, unreasonable or immoral about the conduct of National Foods by failing to provide exclusivity to the McMahons, in circumstances where National Foods did not promise to do so, either expressly, impliedly or by the alleged collateral agreement. In this regard, counsel for the McMahons relied upon the same surrounding circumstances upon which reliance was placed to establish the existence of an express term of exclusivity or, in the alternative, the alleged collateral agreement. However, the unconscionable conduct case sought to be raised by the McMahons in this regard suffers from the same defect as the collateral agreement case. It is nowhere alleged that National Foods acted unconscionably because it failed to use its reasonable or best, or reasonable, endeavours to remove Moonya as a competitor in the McMahon territories. Although there was some evidence given by Mr Byrne concerning attempts to reach agreement for the purchase by National Foods of the Moonya business, and Mr Byrne was cross‑examined about the possibility of National Foods unilaterally terminating Moonya’s uncontracted distributorship by giving reasonable notice, these issues were ventilated in the absence of any pleading that National Foods had undertaken an obligation to use its reasonable or best endeavours to ensure that Moonya would be prevented from selling Pura milk products in the McMahon territories; or that its failure to do so constituted unconscionable conduct. 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 the subject of final submissions. Accordingly, the case based on allegations of unconscionable conduct is rejected.

XII. CONCLUSIONS AND ORDERS

In summary, I have reached the following conclusions.

First, the heads of agreement and licensed distributor agreements were initially made between National Foods and McMahon Milk Pty Ltd. From their inception, they were the subject of an implied novation under which MP McMahon Pty Ltd was substituted for McMahon Milk Pty Ltd as the contracting party. Subsequently, on and from 1 January 2003, the heads of agreement and licensed distributor agreements were the subject of a second novation, whereby McMahons Dairy Pty Ltd replaced MP McMahon Pty Ltd as the contracting party with National Foods. Tony McMahon’s guarantees of the agreements continued to apply notwithstanding the novations.

Second, the licensed distributor agreements did not, upon their proper construction, grant the McMahons the exclusive right to sell and deliver Pura milk products in the McMahon territories during the term of the licensed distributor agreements.

Third, the collateral agreement contended for by the McMahons has not been established.

Fourth, National Foods did not engage in unconscionable conduct within the meaning of s 51AC of the Trade Practices Act 1974 (Cth).

Fifth, National Foods has established that McMahons Dairy Pty Ltd is indebted to it in respect of unpaid licence fees and unpaid amounts due in respect of milk products sold and delivered. The amount of that debt will be the subject of a further hearing.

Sixth, Tony McMahon is liable as a guarantor of McMahons Dairy Pty Ltd for the amounts found to be due by it to National Foods in respect of unpaid licence fees and unpaid amounts due in respect of milk products sold and delivered.

Seventh, McMahons Dairy Pty Ltd breached the non‑competition provisions of the licensed distributor agreements and is liable to National Foods for damages for those breaches. Further, Tony McMahon is also liable for those breaches under the terms of his initial guarantees of the obligations of McMahons Dairy Pty Ltd under the licensed distributor agreements; and by reason of his own personal covenants contained within those guarantees. National Foods is accordingly entitled to judgment against Tony McMahon for damages to be assessed for these breaches.

Eighth, McMahon’s Dairy Products Pty Ltd, by the actions of Tony McMahon on its behalf, intentionally procured McMahons Dairy Pty Ltd to breach the non‑competition provisions of the licensed distributor agreements. Accordingly, National Foods is entitled to judgment against McMahon’s Dairy Products Pty Ltd for damages to be assessed.

I will hear the parties as to the form of the judgment to be entered by the Court at this stage; as to directions for the further hearing to quantify the debts (including interest) due to National Foods by McMahons Dairy Pty Ltd and Tony McMahon; as to directions for the assessment of damages in respect of breaches of the non‑competition provisions of the licensed distributor agreements for which McMahons Dairy Pty Ltd, Tony McMahon and McMahon’s Dairy Products Pty Ltd are liable; and as to costs.

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SCHEDULE OF PARTIES

F5887 No. 2098 of 2005
BETWEEN:
NATIONAL FOODS MILK LIMITED (ACN 051 192 272)	Plaintiff
- and -
MCMAHON MILK PTY LTD	Firstnamed Defendant
ANTHONY JOHN MCMAHON	Secondnamed Defendant
MCMAHONS DAIRY PTY LTD (ACN 102 840 773)	Thirdnamed Defendant
MCMAHON'S DAIRY PRODUCTS PTY LTD (ACN 115 673 106)	Fourthnamed Defendant
MP MCMAHON PTY LTD (ACN 004 293 430)	Fifthnamed Defendant
AND BETWEEN:
MCMAHON MILK PTY LTD	Firstnamed Plaintiff by Counterclaim
MP MCMAHON PTY LTD (ACN 004 293 430)	Secondnamed Plaintiff by Counterclaim
- and -
NATIONAL FOODS MILK LIMITED (ACN 051 192 272)	Defendant by Counterclaim

[2008] VSC 208

18 June 2008