Otway Livestock Exports Pty Ltd v Bakar Tnuva Limited Partnership
[2016] VCC 1264
•20 July 2016
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
EXPEDITED LIST
Case No. CI-15-03188
| OTWAY LIVESTOCK EXPORTS PTY LTD | Plaintiff |
| v | |
| BAKAR TNUVA LIMITED PARTNERSHIP | Defendant |
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JUDGE: | HIS HONOUR JUDGE MACNAMARA | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 27, 28, 29, 30 June, 1 July 2016 | |
DATE OF JUDGMENT: | 20 July 2016 | |
CASE MAY BE CITED AS: | Otway Livestock Exports Pty Ltd v Bakar Tnuva Limited Partnership | |
MEDIUM NEUTRAL CITATION: | [2016] VCC 1264 | |
REASONS FOR JUDGMENT
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Subject:CONTRACT
Catchwords: Sale of live cattle for export on CIF `cost-plus’ terms; whether buyer’s liability limited to face value of letter of credit or by reference to US$3.92 per kilogram of stock; whether buyer entitled to refund; effect of substitution of cattle different from those already constructively delivered; substitute cattle accepted, slaughtered and sold; no loss to buy proven; judgment for plaintiff seller.
Legislation Cited: Supreme Court Act 1986;
Cases Cited:Eureka Operations Pty Ltd v Viva Energy Australia Ltd [2016] VSCA 95; HIH Casualty and General Insurance Ltd v New Hampshire Insurance Co [2001] 2 Lloyd’s Rep 161; Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45; Triple “C” Holdings Pty Ltd v Hogan [1983] 1 NSWLR 252;
Judgment: (1) Within 14 days of this date the parties must bring in short minutes to give effect to these reasons; (2) Costs reserved.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr C R Northrop | Harwood Andrews Lawyers |
| For the Defendant | Mr J A Slonim | KWS Legal |
HIS HONOUR:
Background
1 The plaintiff, Otway Livestock Exports Pty Ltd, is controlled by Mr Alan Schmidt, its managing director. As its name suggests, it is active in the business of exporting livestock from Australia. The defendant is a limited partnership carrying on a business entailing livestock imports to Israel.
2 This proceeding relates to an arrangement for the export of live bulls from Australia to Israel, known by the parties as ‘Israel 07’. From March 2013 onwards the parties had entered into previous livestock export arrangements for the export of live cattle to Israel. The first, dated 6 March 2013 and designated ‘Israel 01’, was between Bakar Tnuva and the plaintiff, then known as A.T.T. & R. Schmidt Pty Ltd (Court Book “CB” 29–38). A further contract of the same date designated ‘Israel 02’ was also entered into by the parties (CB 39–48). The contract for the voyage known as ‘Israel 03’ is dated 14 September 2013 (CB 49–58). There is no evidence of voyages designated ‘Israel 04’ or ‘Israel 05’, but on 15 September 2014 Bakar Tnuva and Otway, as it now is, entered into a contract relative to the voyage known as ‘Israel 06’ (CB 59–70).
3 The sales contract to which this proceeding relates for voyage ‘Israel 07’ was made 20 November 2014 (CB 71–82). This contract provided for the transaction to be:
“... conducted on cost plus margin (to the Seller) basis, with all actual cost to be declared by the Seller. The Seller will make available to the Buyer all documents relating to the costs.
The Buyer’s request for documentary information regarding costs will at all times be reasonable.
A summary of the estimated costs per head/per day are listed in Appendix I.
The Seller’s margin for this voyage shall be fixed at AU$125,000.00 unless otherwise agreed between the parties.
The CIF price is defined as:–
· The total accumulated costs as defined in Appendix I plus the Seller’s Margin of AU$125,000
· Divided by
· The total Sale Weight (as defined under Table I below).
Unless otherwise agreed between the parties, the US$/AU$ exchange rate will be determined and set at the date of signing by the last signatory to this Contract.” (CB 71)
4 Table I and the associated terms of the contract were as follows:
“Table I – Cattle Specifications
Item Price, area, weight Vessel space contracted 4,500 sqm. Estimated head numbers 4,300-4,600 Estimated average sale weight 307Kg. Estimated age range 12 – 24 months. Estimated CIF Price US$3.92C/Kg. Total Value of Letter of Credit US$5,415,480.00 a. Basis of determining the value of the L/C will be US$ per ton of cattle shipped as per Table I, above. Cattle will be bulk weighed at a registered weighbridge near the Port of Loading just prior to embarkation (the “Sale Weight”). The Buyer will be invoiced at the weighbridge weight.
b. If during the Cattle buying process the Seller is not able to secure livestock so as to deliver the consignment at or within the CIF price of US$3.92/Kg, then the Buyer and the Seller shall consult.
c. Estimated final CIF Price will be advised to the Buyer within 5 working days of sailing. Accounts will be closed within 30 days of sailing unless otherwise agreed between the parties.
a. INCOTERM: CIF Eilat Port Israel
b. Estimated Delivery Date: 28th December 2014
c. Estimated Shipping Date: Approximately 29th December 2014
d. Port of Loading: Any Australian port.
e. Estimated Arrival Date: Approximately 15th January 2015
f. Origin of Commodity: Australia
g. Negotiating Bank: HSBC Melbourne (as per details in Clause 7 below)
h. Shipping of this consignment will be subject to ESCAS compliance in the country of destination at the time of embarkation.
i. Seller shall make all possible efforts to assist Buyer in its compliance with ESCAS requirements.” (CB 72)
5 The contract provided for the livestock to be “entire male cattle (bulls)”:
“Breeds shall be a mix of:
Pastoral
Local – being British, European and crosses
Brahman
The Buyers in order of preference would like to receive:
Local – being British, European and crossesPastoral
Brahman.” (CB 72–73)
6 The contract provided for an estimated delivery date of 28 December 2014, an estimated shipping date of approximately 29 December 2014, and an estimated arrival date at Eilat of 15 February 2014. It also included:
“Port of loading: any Australian port.”
7 As to matters of payment, the contract required the buyer to open an irrevocable letter of credit “within one week of signing by the last signatory to this contract” with a “first-class bank as reasonably deemed acceptable by the seller”. The contract provided that Otway, as seller:
“... must store the Cattle separately so that they are readily distinguishable from other cattle held at the pre embarkation quarantine.” (CB 75)
8 And further, Otway was required to ensure:
“ that any third party which may have control over the Cattle whilst at the pre embarkation quarantine is aware of and recognises the Buyer’s right and title in the Cattle.” (CB 75)
9 Clause 9 dealt with payments under the letter of credit, and I will set it out in full:
“Payment under the L/C shall be made according (to) the following payment schedule:
I. First Payment
a. The first payment shall cover an aggregate amount up to US$2,700,000.00 in consideration for the purchase of all the Cattle covered by this Contract in accordance with the Cattle Specifications in Table I from the Seller to the Buyer (the “First Payment”). The First Payment shall not exceed 49.86% of the total value of the amount payable by the Buyer to the Seller under the Contract.
b. The First Payment shall become due and payable by the Buyer upon provision by the Seller of the following documents to the Negotiating Bank (the “First Payment Condition Precedent Documents”). All documents should be in English version, for Buyer’s verification:
i.Seller’s original invoice for the sale of the Cattle, hand signed by the Seller in 4 copies, indicating the contract number, quantity and value (the “Seller’s Invoice”). The Seller’s invoice shall be signed by the Buyer or the Buyer’s nominated representative.
ii.Individual Animal Electronic Identification tag list for the Cattle (the “NLIS Tag List”). The NLIS Tag List shall be signed by the Buyer’s nominated representative.
iii.A certificate from the pre-embarkation quarantine certifying that the cattle on the Seller’s Invoice has been delivered to the quarantine for the Buyer and taken care for the Buyer (the “Pre Embarkation Quarantine Certificate”). The Pre Embarkation Quarantine Certificate shall be signed by the Buyer or the Buyer’s representative.
iv.Certificate of Insurance. The Certificate of Insurance shall be signed by the Buyer or the Buyer’s representative.
v.Signed Charter Party agreement between the Seller and the Vessel owner (the “Charter Agreement”). The Charter Agreement shall specify the destination of the vessel and the Shipping Date. The Charter Agreement shall be signed by the Buyer or the Buyer’s representative.
c. The First Payment can be made in up to three separate installments, the total of which shall not exceed the above First Payment amount. Each installment shall reflect the actual quantity of cattle head purchased by the Buyer and covered by such installment.
d. Before each installment is made the Seller shall provide the Payment Condition Precedent Documents to the Negotiating Bank, all in accordance with the provisions of sub-section b. above. Notwithstanding the above, the Certificate of Insurance and the Charter Agreement shall be presented to the Negotiating Bank only as precedent to the first installment.
e. The title to the Cattle shall pass to the Buyer upon the drawdown of each installment in respect of the cattle covered under such installment, of which the Seller shall immediately notify the Buyer.
II. Second Payment
a. The second payment shall cover the remainder of the Value of the Letter of Credit in accordance with table I (the “Second Payment”).
b. The Second Payment shall become due and payable by the Buyer upon provision by the Seller of the following documents to the Negotiating Bank. All documents should be in English version, for Buyer’s verification:
i.Clean Bill of Lading.
ii.Hand signed commercial invoice in 4 copies, indicating the contract number, quantity and the remainder of the contract value.
iii.Packing list, indicating contract number, quantity individual tag numbers and average weight, in 3 copies. Packing list will be signed by the Buyer or the Buyer’s nominated representative.
iv.Copy of Health or Zoo Sanitary Certificate issued by the country of origins government authority in 2 copies (the original must accompany the consignment).
v.Email shipping advice within 3 days after loading advising the Buyer of the ship’s name, loading date, loaded quantity, total invoice value, estimated date of arrival at Israel port and Bill of Lading number.
vi.The Seller shall e-mail the Buyer within 3 working days after loading the documents of Packing List, Commercial Invoice, Bill of Lading, and Health Certificate in PDF format.” (CB 76–77)
10 Clause 10 provided for Otway:
“... to cover 110% of the contract value for any animal that, during the period of insurance, dies or is rendered unfit due to an insured peril.” (CB 78)
11 The contract also included an “entire contract” provision as follows:
“This Contract constitutes the entire Contract between the parties concerning the subject matter hereof and supersedes all prior negotiations, Contracts and understandings between the parties, whether oral or in writing, concerning the subject matter hereof. This Contract may be modified only in writing, signed by the party against whom such modification is asserted, provided that the terms of any purchase order, invoice or similar document used to implement this Contract shall not modify and shall be subject to this Contract.” (CB 79)
12 There was also a provision as to dispute resolution which it is unnecessary to set out in full. Broadly, it required mediation as a condition precedent to the commencement of any legal proceedings arising out of a dispute under the contract, with mediation to be conducted under the auspices of the Australian Centre for International Commercial Arbitration and the mediation being held in Melbourne, Victoria. Victorian law was chosen as the proper law of the contract, and:
“The sole and exclusive place of jurisdiction in any matter arising out of or in connection with this Agreement shall be the applicable courts in Victoria and Australia.” (CB 81)
13 Otway signed the sale agreement on 20 November 2014, and the buyer partnership signed on 25 November 2014. The contract provided:
“Unless otherwise agreed between the parties, the US$/AU$ exchange rate will be determined and set at the date of signing by the last signatory to this Contract.” (CB 71)
14 The contract stated that a summary of the estimated costs per head/per day was listed in Appendix I. This appendix was headed ‘Summary of Estimated Costs’ and expressed in Australian dollars. It showed a total cost of sales, including livestock and shipping, at $6,098,625, with a total cost per head inclusive of livestock and shipping expenses of $1,355.25 per head. The cost of purchase of livestock, exclusive of shipping and associated costs, was AU$2,827,868, or $628.42 per head.
15 On 27 November 2014 the partnership established Letter of Credit 600-01-105504-1, showing Otway as the beneficiary with a face value of US$5,415,480 (CB 578–581). On the same day, Otway established a contract of insurance with cover of $5,957,028 expressed to be 110 per cent for the livestock on a voyage from Fremantle to Eilat, Israel, on the ship MV Gelbray Express.
16 The plaintiff engaged the MV Gelbray Express to undertake the voyage. The booking note for this engagement, dated, it appears, 20 November 2014 (though the handwritten date is somewhat difficult to read), is at CB 467. It evidences an engagement of the MV Gelbray Express for a voyage from Fremantle to Eilat, Israel, with a cargo:
“Up to a full cargo of Livestock to be loaded in accordance with Australian Maritime Safety Authorities and AQIS Rules and Regulations.” (CB 467)
17 The freight charge was US$1.810m for:
“4500 meters AMSA approved cattle pen space.” (CB 467)
18 Otway then created Invoice No 00003389 relative to some 810 bulls. The invoice is to be found in a number of versions from CB 529–532. The process adopted by the parties for invoices and other documents required for letter of credit drawdowns was to prepare them in draft, and dispatch them to the partnership in Israel to be checked and amended if necessary, where the relevant documents were signed on behalf of the partnership by KWS Legal (Transcript (“T”) 200, Lines (“L”) 9–15). The version at CB 532 appears to include this final endorsement by a Ms Miciulis on behalf of the partnership. What is presumably an earlier version of the invoice appearing at CB 531 describes the beasts as “810 bulls ex Twyata Pool Feedlot”, which is the quarantine station in the vicinity of the Port of Fremantle. The apparently final version at CB 532 refers to:
“26 bulls ex Bambi Station
372 bulls ex Bidgemia Station
412 bulls ex RobinsonTOTAL NUMBERS 810.”
19 All versions of the invoice show:
“Estimated head numbers 4300–4,600
Estimated av sale weight 307kgs.”
20 On 17 December Otway drew part of the “first payment” referred to in Clause 9 of the sale contract. The amount drawn was some $475,167 (CB 549). It will be recalled that, in accordance with the sale contract, the booking note known as the “signed charter party agreement” was required to be produced to the bank for payment, together with the certificate of insurance and individual animal electronic identification tag lists for each of the cattle (CB 76). It is also notable that title to the cattle the subject of the relevant invoice passed upon the drawdown of that instalment in accordance with Clause I (e) of Part 9 of the contract (CB 76).
21 Some five days later Otway entered into a revised booking note for the MV Gelbray Express. In a document dated 27 November 2014 this vessel was engaged for a voyage, this time from Portland, Victoria, to Fremantle, Western Australia, and then to Eilat. The freight charge was increased to US$2.190m. The other terms were as before, save for the adjustments relative to the increased freight charge and the “Laydays in Carrier’s option” were put back from 27 December 2014 to 10 January 2015 in the first booking note to 2 January 2015 to 15 January 2015 in the revised one (CB 469–475).
22 On 16 December 2014 Otway issued the second invoice, this time referring to 1,409 bulls (CB 533–534). In what seems to be the final version at CB 534, signed once again by Ms Miciulis, the 1,409 bulls are said to be made up of 579 bulls ex Union, 329 bulls ex Cooramook, 39 bulls ex Broken Hill, 323 bulls ex Lowlands, 13 bulls ex Clarke, 72 bulls ex Rossander, and 54 bulls ex Ballantrae. The total amount invoiced was US$1,032,353.82.
23 On 5 January 2015 Otway issued Invoice No 00003400 (CB 535–536) for some 1,118 bulls with a total price of US$689,253.20. What appears to be the final version of the invoice (at CB 536), shows those bulls consisting of 243 bulls ex Brockman, 54 bulls ex Austrex, 19 bulls ex Enokurra, 16 bulls ex Grima, 35 bulls ex Milly Milly, 65 bulls ex Minalya, 37 bulls ex Outdoor, 508 bulls ex Red Hill, 7 bulls ex Robe River, 35 bulls ex Shine, and 99 bulls ex Yarlaweelor.
24 MV Gelbray Express sailed from Portland with 2107 cattle aboard. A bill of lading to that effect was issued on 5 January 2015 (CB 478). A further bill of lading was issued on 10 January 2015 for a further 2,078 bulls embarked at that port, making 4,185 bulls embarked for Eilat (CB 480–481).
25 On dates which do not appear from the evidence, Otway drew the second and third instalments of what was described in the letter of credit as the first payment. On 22 January it drew what is described as the second payment; that is, the balance of the letter of credit. The cattle were delivered at Eilat on 27 January.
Plaintiff’s claim
26 On 2 July 2015 solicitors acting for Otway filed the writ that commenced this proceeding.
27 Otway’s amended statement of claim filed earlier this year referred first to the earlier transaction entered into between Otway and the partnership, then alleged the terms of the contract for voyage Israel 07, stating that as at 25 November 2014 the exchange rate between Australian and United States dollars was 1.15549. It alleged the delivery of 4,185 cattle in accordance with the contract, asserting that, giving credit for the amounts drawn down under the letter of credit, there remained an unpaid shortfall of the price of US$579,577.38, which converted to Australian dollars at the relevant exchange rate AU$669,695.87. This shortfall was calculated by reference to AU$6,802,255.88 being payable under the sales contract, plus seller’s commission AU$125,000, making a total of AU$6,927,255.88, deducting therefrom AU$6,257,560, being the proceeds of the letter of credit, leaving a balance of AU$669,695.88 converted to US$579,577.38. The claim sought payment of this amount, interest and costs.
Defence and counter-claim
28 In its defence and counter-claim the partnership admitted the making of the sale contract but asserted that its liability under that contract was capped at either the total weight of the cattle measured in kilograms multiplied by US$3.92, or US$5,415,480 (being the face value of the letter of credit).
29 The defence continued by asserting the term for the calculation of the price under the sale contract, including the “open book” provision as to costings and the estimated CIF price for the cattle in accordance with Table I of the contract, being US$3.92. The defence noted the stipulation as to a range of numbers from 4,300 to 4,600, the provisions as to the establishment of a letter of credit and the documents which were required to be produced for drawdowns of the letter of credit, the provisions as to insurance in the contract and Otway’s taking out of the insurance policy. It said that the exchange rate provided for in the contract “was limited in its application to the amount specified in the contract”, and:
“the value of all payments made, and liabilities incurred, by [Otway] in relation to the purchase and supply of the cattle was governed by the exchange rate that prevailed on the dates on which payments were drawn down from the Letter of Credit.” (CB 19)
30 It admitted receipt of 4,185 cattle, but denied that any further amounts were payable for those cattle by the partnership beyond what had been drawn down under the letter of credit.
31 According to the defence, the three drawdowns forming part of the “first payment” under the letter of credit were made on the basis of invoices presented which were “a condition precedent for the payment of each invoice”, and payment of the amounts was made in accordance with the contract. It was said the final payment was made under a “fourth and final invoice” pursuant to the letter of credit, and the face value of the letter of credit “was the maximum amount to which [Otway] was entitled under the contract ...”. By way of counter-claim it was said that Otway was obliged to sell the cattle to the partnership at an average cost no greater than $628.42 per head, but Otway supplied the cattle at a price greater than that, and at a price greater than US$3.92 per kilogram. It was said that, contrary to the “open book” clause in the contract, Otway failed to declare all of the actual costs incurred in purchasing the cattle and make available to the defendant all documents relating to that cost, as a result of which the partnership said it had overpaid and was entitled to a refund. The counter-claim sought “damages”.
32 By way of reply and defence to counter-claim, Otway joined issue and denied liability.
Agreed statement of issues
33 In accordance with a pre-trial direction, the parties identified the following questions to be determined at trial:
IWhether the price payable under the contract was limited to the amount of the Letter of Credit.
A The plaintiff contends that under the terms of the contract it was entitled to recover from the defendant costs incurred by it in procuring cattle and supplying them to the defendant, together with a margin of AU$125,000.
B The defendant contends that:
[i] the maximum price that was payable under the contract upon its proper construction was the sum of US$5,415,480, this being the amount of the Letter of Credit established by it and drawn down by the plaintiff;
[ii] as it only received 4,185 cattle, the plaintiff should not have been paid more than US$5,036,396 and the defendant is entitled to a refund from the plaintiff of US$379,083.60.
II The amount of the costs incurred by the plaintiff in supplying the 4,185 cattle to the defendant under the contract.
Limit of liability
34 The question as to whether the liability of the partnership was limited, either by reference to the face value of the letter of credit or to a rate of US$3.92 per kilogram, is a pure matter of construction of the written contract. Neither party alleged that the contract was other than wholly in writing.
35 Mr Slonim, on behalf of the defendant, submitted that with the contract being in writing, and in light of the entire contract clause quoted above, there was no occasion to refer to any extraneous material or consideration.
36 Mr Northrop, however, on behalf of Otway, submitted first that the contract should be construed in a manner which avoided commercial nonsense or commercial inconvenience. He referred to the decision of the Court of Appeal in Eureka Operations Pty Ltd v Viva Energy Australia Ltd [2016] VSCA 95 at [43] and following. He said it was proper to consider the contract as part of the surrounding circumstances or factual matrix without first having to identify any ambiguity on the face of the written document. He referred to Lewison and Hughes, The Interpretation of Contracts in Australia (2012) at [3.05], HIH Casualty and General Insurance Ltd v New Hampshire Insurance Co [2001] 2 Lloyd’s Rep 161, 179, and Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45, [30].
37 As to the extraneous material that Mr Northrop submitted I should consider, I understand it to be the terms and the performance of the earlier contracts for the sale of cattle between the same parties.
38 In the event, I consider that the true meaning of the contract for Israel 07 is clear and evident on the face of the document, without resort to extraneous considerations save, perhaps, the general proposition that an interpretation should be preferred which avoids inconvenience or business absurdity.
39 Mr Slonim’s primary contention, in support of the liability limits which he said were to be found in the contract, derived from its financial structure.
40 He said that a consideration of the structure of the “first payment” provided for under the letter of credit showed that it was to be a maximum of US$2.7m and should not exceed 49.86 per cent of the “total value of the amount payable under the contract”. He noted that the letter of credit had a face value of US$5,415,480, and 49.86 per cent of that sum was US$2,700,158.
41 Next, he noted the provision in the contract for insurance cover of 110 per cent of the contract value. 110 per cent of US$5,415,480 (the face value of the letter of credit) was US$5,957,028, which was the amount of insurance taken out for the livestock on the voyage. He referred to CB 668.
42 Finally, on this subject he noted, “the exchange rate used in the contract at or around the time of signing equals AU$6,098,625 (total Appendix I) against US$5,415,480, the face value of the letter of credit, equals AU$1.126.”
43 I should say something immediately as to the final point in this part of the submissions made by Mr Slonim as to the exchange rate. Mr Northrop correctly observed that the calculation was based upon a fallacy. The defendant’s case was that the face value of the letter of credit was intended to cover the entirety of the partnership’s liability for both the cattle and the $125,000 profit margin payable to Otway under the terms of the contract. The conversion made by Mr Slonim in this part of his submissions omitted the $125,000 by way of profit margin. I therefore put the alleged exchange rate as between Australian and US Dollars at 1.126 to one side.
44 As to the meaning of `cost-plus accounting or pricing’, Mr Slonim took me to an extract from Wikipedia under the heading ‘Cost-plus pricing’. The sections upon which he relied were as follows:
“Cost-plus pricing is a pricing strategy in which the selling price is determined by adding a specific dollar amount markup to a product’s unit cost. Mark ups are when you add a % to the cost to set the price. An alternative pricing method is value-based pricing.
...
Cost-plus pricing is especially common for utilities and single-buyer products that are manufactured to the buyer’s specification such as military procurement.
The two steps in computing the price are to compute the unit cost and to add a markup. The unit cost is the total cost divided by the number of units. The total cost is the sum of fixed and variable costs. Fixed costs do not generally depend on the number of units, while variable costs do. The markup is a percentage that is expected to provide an acceptable rate of return to the manufacturer.”
45 According to Mr Slonim, as Wikipedia mentioned, the cost-plus formula was “very commonly used in manufacturing” (T334, L23‑24). Translating that to the present contract, according to Mr Slonim:
“... what is the variable here within reason is the cattle because we know the cost of cattle can vary, the unit for which this is calculated is the kilogram, cost plus in a manufacturing or supply sense is always referable to a unit of production or supply against which the costs can be assessed, and that is why the formula works, for example, in manufacturing because once you have established that cost per unit you can keep on rolling production. Here one can keep on acquiring cattle knowing what the unit cost must be ...” (T335, L4–13)
46 Referring to the figure of $3.92 per kilogram, he said:
“... this is not a figure picked out blindly, Otway already knows what its likely cost of cattle will be.” (T337, L2–3)
47 He referred to the evidence given by Otway’s cattle buyer that for purchases of cattle in Western Australia for delivery at the end of a calendar year, action begins and contracts are made as early as March (T337).
48 Mr Slonim also referred to a book by Langfield-Smith, Thorne and Hilton, Management Accounting, which he said was a university text. Under the heading ‘Cost-plus pricing’ the learned authors state, in Part 4, Chapter 12:
“Finally, and most importantly, the cost of a product or service provides a floor, and the price cannot be set below this floor in the long run. Although a product may be ‘given away’ at a price below cost when it is first launched, ultimately a product’s price should usually cover its costs in the long term ... Many businesses, particularly some professional service firms, service shops and smaller manufacturers, use cost-plus pricing. Cost-plus pricing formulas have the following general form:
Price = cost + (markup percentage x cost)
This approach is called cost-plus pricing, because the price is equal to cost plus a markup. As we have learnt in previous chapters, there are a variety of different definitions of ‘product cost’. These include variable cost and absorption cost, and broader definitions of product cost that may include product-related costs that occur outside of manufacturing.
...
Cost-plus pricing requires us to consider two issues:
1. What is the best definition of cost?
2. How will the markup be determined?
There is no one best definition of product cost for pricing purposes. The decision depends on whether we want to determine a short-term price, or a long-term price.”
49 Mr Northrop rejected the two limits which Mr Slonim alleged were built into the contract price. He stressed that the statement of the basis on which the transaction would be conducted, namely cost-plus margin stated that:
“All actual costs [were] to be declared by the seller.”
50 The words “actual costs” stood in contradistinction to the estimated costs that were to be found in Table I. According to Mr Northrop, Table I of the contract did not fix a price. Rather, it set out the basis for determining the value of the letter of credit. There was nothing in Table I which stated it to be a maximum. On the contrary, the calculations were stated to be estimated, only. The same, he submitted, could be said for the figures in Appendix I. He said the requirement for insurance at 110 per cent was a boilerplate provision included in all contracts. He referred to CB pages 45, 55 and 66, being the insurance provisions in the earlier contract. According to Mr Northrop, where a seller is entitled to recover costs plus a margin without specifying how the costs were to be calculated, the party was entitled to recover the costs it incurred, but:
“The law would probably imply a term preventing the seller from recovering costs that were excessive or unreasonable.”
51 He referred to Triple “C” Holdings Pty Ltd v Hogan [1983] 1 NSWLR 252 and Keating on Construction Contracts, 9th edition (2012), at [4–018].
52 According to Mr Northrop, it would be commercially absurd to treat the face value of the letter of credit as a maximum recoverable by the seller. Table I was based on 4,500 head of cattle, and it represented the basis for the calculation of the face value of the letter of credit. The number of cattle could, in particular circumstances, have been as many as 4,600 at an average weight of 307kgs:
“If the seller supplied 4,600 cattle at the stipulated average weight, the buyer would receive the last 100 head at no cost.”
53 Further, he said:
“(a) If the cost is AU$5,000,000 for 4,300 cattle, the buyer gets the cattle for a price of $5,125,000.
(b) If the cost is AU$6,500,00 for 4,600, the buyer pays $6,257,560 and keeps all 4,600 cattle. The seller gets nothing and is in effect gifting the difference to the seller.”
54 He continued:
“The provisions for the drawing on the letter of credit [contemplated that it would be drawn] for the full amount.”
55 The face value of the letter of credit, he said, should be regarded:
“as a floor, not a ceiling.”
56 According to Mr Northrop:
“It is submitted that on the proper construction of the contract between the parties:
(a) The amount of the letter of credit is derived from the estimate of the costs to be incurred.
(b) The full amount of the letter of credit is to be drawn at the time of shipment.
(c) The actual costs are to be declared by the seller. The seller must make available all documents relating to costs. The buyer may make reasonable requests for documentary information.
(d) Once the actual costs are determined there may need to be a payment from one party to the other. If the actual costs plus margin are less than the letter of credit, payment is made by the seller to the buyer. If actual costs plus margin are greater than the letter of credit, the buyer must pay the difference to the seller.”
57 Despite Mr Slonim’s submissions to the contrary, I cannot accept that the construction he advocates can be derived from the plain words of the contract.
58 One seeks in vain for any express statement in the contract that either the US$3.92 per kilogram or the face value of the letter of credit is to be considered as a maximum or ceiling upon the buyer’s liability. Reference to cost-plus contracts in the context of manufacturing is apt to mislead. The analysis there proceeds upon the footing that there are fixed costs of manufacture per unit, assessed by reference as the case may be, to direct or absorption cost theories, and that the “plus” margin is simply added thereto.
59 The present contract is quite different from such a manufacturing arrangement and, in any event, the passages relied on by Mr Slonim seem to me to deal with the process of internal cost-fixing by a manufacturer rather than a contract between a buyer and seller which fixes the price of the items sold on a cost-plus basis rather than for a sum of money absolute, which is the present case.
60 The cost of individual cattle to be acquired is, by its nature, a variable, and the analysis relied upon by Mr Slonim is therefore inapt. In any event, he omitted from his quotation from Wikipedia a significant paragraph which we find between two of the quoted paragraphs, in the following terms:
“Cost-plus pricing is often used on government contracts (cost-plus contracts), and was criticized for reducing pressure on suppliers to control direct costs, indirect costs and fixed costs whether related to the production and sale of the product or service or not.”
61 What Mr Slonim is advocating as the character of this contract is not a pure cost-plus arrangement at all, but rather cost-plus subject to a maximum. There is no foothold in the contract itself to support such a view and none of the texts to which he referred me dealt with such a contract, though, as a matter of logic, subject to the choice of the appropriate language, it must be possible to construct a contract having this effect.
62 Building contracts constitute a much better analogy to the present. In Hudson’s Building & Engineering Contracts (11th edition, 1995), the learned editor states at paragraph [3-045]:
“Cost-based contracts involve reimbursement of the contractor’s total cost plus a stipulated fee or profit, often expressed as a percentage. These contracts will normally be used only where the extent and nature of the work is not known with sufficient precision at the time of contracting to enable prices to be obtained, since they have a number of unavoidable disadvantages which well-advised owners would not usually accept. The principal objection to such contracts is the greatly reduced incentive to economy or speed of construction, since no really effective sanction to enforce these can be provided, although no doubt terms will be implied in almost all such contracts preventing payment for waste or uneconomic use of labour, materials or plant, and for due diligence in carrying out the work.” (p. 438)
63 I accept the submission of Mr Northrop that, subject to issues dealt with below in the next section, Otway is entitled to recover, as the contract says, “all actual costs”. Insofar as various matters such as the face value of the letter of credit, the insurance taken out, and the limits on progressive drawings are related to a particular basic figure, that does not indicate that that figure, which is the face value of the letter of credit, is to be regarded as a maximum.
64 The cost-plus arrangement necessarily entails a situation where ultimate cost is not fixed and these various matters, such as insurance and the letter of credit, must be related to something.
65 Paragraph (c) of Clause 1 of the contract calls for an accounting between the parties which is to be “closed within 30 days of sailing unless otherwise agreed…”. Again, one seeks in vain for what is necessarily implicit in Mr Slonim’s submission, namely, that this “accounting” can adjust the price downwards but never upwards.
66 The argument put by Mr Northrop, that the calculations in Appendix I to the contract are made according to the terms of the relevant table by reference to some 4,500 cattle, whilst as many as 4,600 might have been shipped, is compelling. It would be commercial nonsense to suppose that the seller would have agreed to provide 100 head of cattle for free.
67 Once one allows for the “accounting” to adjust both upwards and downwards, it all makes commercial sense. There is an obligation to “consult” if the per kilogram price for the cattle exceeds US$3.92. The defendant’s counterclaim in its first incarnation included an allegation of failure to consult. The counterclaim was amended and that allegation is deleted. In the absence of any allegation of failure to consult, the fact that the price CIF on a cost-plus basis per kilogram has exceeded US$3.92 is not in itself an objection to Otway’s recovery.
68 Mr Northrop’s submission as to the second payment of the letter of credit is correct. The contract states that such second payment “shall cover the remainder of the value of the letter of credit”, that is, the letter of credit is to be drawn down in its totality. Again, this is consistent with the letter of credit providing the prima facie mode of payment subject to a subsequent accounting to be carried out in accordance with the contract and without any bar to the price moving up, beyond the face value of the letter of credit or the estimated per kilogram cost, or down.
69 Neither of the positive limits upon the partnership’s liability to Otway under the contract is imposed by the contract upon its true construction.
The second question
70 Following the opening statement on behalf of the plaintiff by Mr Northrop, I invited Mr Slonim to make an opening statement on behalf of his client. He explained in some detail the defendant’s case on the true construction of the contract and the limitations by reference to the face value of the letter of credit and the figure of US$3.92 per kilogram, which he said put a ceiling on his client’s liability.
71 I then invited him to explain what issues as to quantum the defendant raised relative to the second question.
72 As to this latter point, Mr Slonim articulated no particular objection to the amounts sought to be recovered by the plaintiff, apart from some general dissatisfaction. He said, “All that’s been sought is particulars, tell us how you calculate, give us a breakdown apart from the summary profit and loss statement…”. (T76, L20‒23)
73 He noted a pre-trial direction by a judicial registrar requiring the filing of an outline of evidence in relation to the question of costs and continued expressing dissatisfaction with the outline that had been provided. He said:
“It may well be unfortunate though it is, it may be that the defendant will not quibble with a lot of the quantum once it hears the evidence but there has been no clear statement and this is why issues have not been identified to date.” (T78, L3‒8)
74 With that lack of guidance, the evidence began.
75 The first witness, Ms Gangi, who was the Chief Financial Officer of Otway, produced a profit and loss statement for ‘Israel 07’ (CB 83) which showed a total outlay on livestock of $3,617,752. The value of cattle shipped was $2,910,099.11. More cattle were purchased than were actually loaded on the ship. (T92, L21‒25) The excess stock was sold, presumably, on the domestic market, though the evidence was not entirely clear, raising some $771,399.24 according to the profit and loss statement at CB 83. The profit and loss statement showed a loss for the voyage of $605,297.14, expressed in Australian dollars. After the event, Ms Gangi prepared a revised profit and loss statement. (CB 83.01) This revised document showed a voyage loss of US$456,248.85, with a total shortfall, allowing for seller’s margin, of $564,428.06. The variations are the result of a number of relatively minor adjustments which were explained by Ms Gangi in her evidence at T96‑99.
76 An outline of Ms Gangi’s evidence, prepared by the plaintiff’s solicitors, appears at CB 84‒86. Thereafter, there are extracts which were described as the “general ledger”, which recorded the outlays made for voyage ‘Israel 07’, and there then followed numerous documents which, as Ms Gangi said, provided ordered verification for each recorded outlay on the voyage. (T148, L16‒25) These and associated matters were the subject of extensive cross-examination by Mr Slonim of the witness, Ms Gangi, and also Otway’s former operations manager, Ms Clea Schmidt.
77 Mr Slonim said:
“A great deal of material — I will address this for liability in a moment — was delivered at a later time after completion of payment and delivery and that is after embarkation, certainly, and after payment had been made.” (T378, L30‒379, L4)
He said:
“… it would make a nonsense of the contract to contemplate that all of this material can be provided after cattle are on the ship and all drawdowns have been effected, at which point there is no room for the defendant.” (T379, L21‒25)
As I noted in my exchange with Mr Slonim at T378‒79, the “open book” provision in the contract does not make any stipulation as to timing. Moreover, the letter of credit was expressed to be irrevocable and the second payment provided for in the contract contemplated that the entire balance of the letter of credit would be drawn down. As explained above, what was contemplated was that there would thereafter be an accounting between the parties.
78 Even if I were wrong and the “open book” provision in the contract was to be regarded as operative at a particular time — for instance, before the final accounting — since there has been no final accounting and certainly the defendant has paid no money beyond the face value of the letter of credit, it cannot be that it has suffered any loss, and damages, or perhaps a refund of monies paid, can be the only remedies available to the partnership in these circumstances when it would appear the cattle, the subject matter of the sale, have long since been slaughtered and consumed.
79 In his reply, Mr Slonim raised a further objection to the amounts claimed by Otway. The evidence relative to the booking made for the MV Gelbray Express show that the addition of Portland as a port of embarkation for cattle was an afterthought. I asked Mr Brown, Otway’s cattle buyer, if he could shed any light on that. He said:
A.“The cattle in Portland were originally for Turkey, I thought.
Q.What happened to change that?
A.We didn’t end up shipping to Turkey out of Portland.
Q.Because of a shipping shortage that had to be aborted, as far as Turkey is concerned?---
A.Yes.
Q.So there they are, all dressed up with nowhere to go?---
A.Yes.”
(T278, L26‒279, L2)
80 Mr Slonim cross-examined Ms Clea Schmidt relative to a large number of cattle which were embarked at Portland and described in the final list of cattle embarked in a document known as the Invoice Breakdown (CB 1038) as `Sharps ex Viona’. There were no purchase documents relative to that large number of beasts, some 1,409, on the basis that they were “stock on hand”, according to Ms Schmidt. (T310) That is, they had been acquired at some previous time by Otway and were redeployed to ‘Israel 07’ as a result of the “second thoughts” which led to bulls being embarked at Portland. In reply submissions at the end of the case, Mr Slonim referred to this evidence and said:
“So there’s no weigh docket, there’s no original invoice showing what Otway purchased them for. That’s missing. They list the vendor and the agent as the name of the station and they have listed a price, a value. We don’t know. The question — and that’s why I said this morning, we don’t know what the cost of those Portland cattle were.” (T446, L13‒18)
81 There are a number of responses to this. First, it assumes that the contract arrangement did not countenance Otway selling stock on hand to the partnership. I find nothing in the contract that would include such a restriction. Further, it should be noted that Otway sold as principal. It did not undertake the role of fiduciary agent for the partnership. It was not obliged to prefer the partnership’s interest to its own. It may be that under the “open book” entitlement, the partnership could have pressed for further material. Again, according to CB 182, the per kilogram price of these cattle was $2.40. The matters relied on by Mr Slonim in this regard do not, in my view, provide an answer to a claim to recover the price of these bulls.
82 Mr Slonim, on the issue of quantum, relied on some text material cited by Mr Northrop. Keating on Construction Contracts 9th edition states at paragraph 4‑018:
“Cost plus percentage contracts. Such contracts sometimes contain an elaborate description of the method of calculating the cost. Where they do not and there is a simple agreement to pay a percentage upon the cost of labour and materials, ‘cost’ means, it is submitted, the actual cost honestly and properly expended in carrying out the works. The contractor is not, it is submitted, disentitled from such cost merely because it exceeds what was anticipated. But it is thought that there would normally be an implied term that the contractor would carry out the works with reasonable economy so that expenditure in excess of what was reasonable would be irrecoverable. It would be a question of fact and degree in each case. A formally drafted cost plus contract will usually have a clause intended to protect an employer against waste or extravagance on the part of the contractor.”
83 Mr Northrop referred me to a decision of Sheppard J of the Common Law Division of the Supreme Court of New South Wales in Triple “C” Holdings Pty Ltd v Hogan [1983] 1 NSWLR 252 where his Honour approved the passage just quoted from Keating ([1983] 1 NSWLR 252, 255).
84 Mr Slonim referred to and relied upon the passage from Keating at T454‒55. As I understood his submission there, the evidence established that Otway was in breach of the implied term against wasteful expenditure referred to by the learned editor and this would constitute a defence against Otway’s claim. With regard to Mr Slonim’s reliance on this provision, he was contending that money was wasted by the addition of Fremantle as an embarkation port (the shipping cost increased by some US$280,000). He was also critical of the fact that, presumably, a substantial number of the cattle, which were identified in early drawdowns of the letter of credit with the result that title to them passed to the partnership, were deleted from the voyage in favour of other cattle which were loaded at Portland.
85 The allegation of wasteful expenditure was unpleaded. It was not, as far as I can recollect, mentioned in any opening statement. In Triple “C” Holdings Pty Ltd, a counterclaiming builder alleged a cost-plus contract and, according to Sheppard J, in the face of allegations of unsatisfactory work:
“The onus of establishing entitlement to succeed is, of course, upon the defendant [builder].” ([1983] 1 NSWLR 252, 255)
This would seem to be supportive of the approach adopted by Mr Slonim, namely, that merely to deny or not admit liability for the amount claimed in itself provided a proper basis for an allegation of wasteful expenditure. I am not clear that this is so. The formulation in Keating states that a cost-plus contract carries with it an implied term against wasteful expenditure. Normally, where a claim or a counterclaim or a defence entails a contention that an implied term has been breached, it is incumbent on the person relying upon the implied term, first, to allege the term and, secondly, to allege its breach.
86 At any rate, I am not satisfied upon the present state of evidence, that a breach of the term, which I accept would be implied in this contract against wasteful expenditure, has been made.
87 The contract provides for dispatch from any port in Australia. It would therefore have been competent for Otway to have mounted the assembly of the cattle at Portland from the outset or at some other port — for instance, in Queensland — even more distant from Israel than Portland. The additional cost of the voyage from Portland does not seem to constitute a breach of contract. Of course, the shipping and other charges are likely to have been increased by having two points of embarkation rather than merely one. This matter was not examined in detail, but I am prepared to find that there has been an increase in the cost of performing the contract as a result. Again, it is a standard rule of construction for statutes and regulations throughout Australia and in England under standard interpretation statutes that the singular includes the plural. This is also a boilerplate provision in the interpretation of clauses in formal legal deeds. There is no such provision in the present contract, but it is so common, both in private and public law, that in my view, this rule of construction should apply to the present contract. Accordingly, it would appear to entail no breach of contract to have two ports of embarkation rather than one.
88 These were the only matters identified as constituting excessive or wasteful expenditure. Issues such as quarantine costs and so forth were touched upon, but no explanation was given as to why the amounts in question might have been regarded as excessive.
89 In my view, the plaintiff, Otway, should be regarded as successful in relation to the second question as well as the first.
Other matters
90 On the evidence before me, there has been a plain breach of contract in the substitution of different cattle for the ones title to which passed to the partnership under an earlier letter of credit drawdown. As already explained, with the cattle delivered, and, presumably, slaughtered and consumed, there is no basis to undo the contract. The only other remedy that would be available to the seller would be a remedy for damages for breach of contract. There was no evidence to suggest that the substituted cattle were in any way inferior in accordance with the provisions of the contract other than as to their identity in comparison to the original ones whose title passed to the partnership. More significantly, there was no claim along these lines pleaded. Mr Slonim said that it was only following my question to Mr Brown at the close of the third day of hearing that “the penny dropped” on this point. Nevertheless, he made no application to amend the partnership’s pleadings.
The counterclaim
91 The allegation in the counterclaim as pleaded is that there was a failure to declare all of the actual costs incurred in purchasing the cattle and make available to the partnership all documents relating to the costs. As previously noted, it is difficult to see that these matters of alleged non-disclosure, if made out, in themselves inflicted any loss or damage on the defendant. Mr Slonim did not deny the material was ultimately provided. It was a matter of timing (T378, L30 – T379, L4)
92 As noted above, the defendant’s counterclaim sought “damages”. As explained by Mr Slonim in his closing submissions, the counterclaim could be summarised in this way:
“The true cost of the cattle delivered under the contract was US$5,036,396.40 which equals 4,195 cattle multiplied by 307 kg multiplied by US$3.92 [per] kilogram. The plaintiff was paid US$5,415,480. Therefore payment equals US$379,083.60.”
This claim is pleaded as one in contract, not by way of restitution as, for instance, for monies paid under mistake or upon a consideration which has totally failed. Mr Slonim submitted, plausibly, that the pleading of these money counts is intended generally to exclude payments which are regarded as “voluntary”, and the payments here were non-voluntary as far as the partnership was concerned, since they were drawn down by Otway under an irrevocable letter of credit and, short of obtaining some sort of injunction, the payments could not have been prevented by the partnership. (T368‒9) A claim along these lines would, I should have thought, have better been framed as a claim for a debt or liquidated sum, rather than for damages. Leaving this pleading point aside, however, the counterclaim must fail because the premise that there was a limit of US$3.92 per kilogram for stock sold and delivered is invalid for the reasons given above.
93 The counterclaim therefore fails.
Relief
94 Otway should have judgment for the sum which it claims, together with interest under s58 of the Supreme Court Act 1986. The counterclaim should be dismissed.
95 I have heard no submissions on costs and this issue should be reserved. I will direct the parties to bring in short minutes to give effect to these reasons.
96 The orders are:
(1)Within 14 days of this date the parties must bring in short minutes to give effect to these reasons.
(2)Costs reserved.
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