RSN Australia Pty Ltd v Casama Group Pty Limited

Case •

[2016] NSWSC 1788

•

14 December 2016

No judgment structure available for this case.

Supreme Court


New South Wales

Medium Neutral Citation: RSN Australia Pty Ltd v Casama Group Pty Limited [2016] NSWSC 1788
Hearing dates:30 November and 1 December 2016
Decision date: 14 December 2016
Jurisdiction:Equity - Commercial List
Before: Ball J
Decision:

See paragraphs 54 and 55

Catchwords: CONTRACTS – construction and interpretation of contracts – no issue of principle
Cases Cited: Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37
Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 90 ALJR 392
Category:Principal judgment
Parties: RSN Australia Pty Ltd (Plaintiff)
Casama Group Pty Limited (Defendant)
Representation:

Counsel:
ST White SC (Plaintiff)
K Andronos SC with TL Hollo (Defendant)

  Solicitors:
Hazan Hollander (Plaintiff)
Millens (Defendant)
File Number(s):2016/196195
Publication restriction:None

Judgment

Introduction

  1. The Riedel group of companies, which has its headquarters in Austria, manufactures and distributes glassware throughout the world. It has been owned by the same family since 1756 and is best known for its production of different types of wine glass sold under the Riedel brand. The plaintiff, RSN Australia Pty Limited (RSN), which is the Australian subsidiary of the group, was incorporated on 1 June 2007 to take over the distribution of Riedel products in Australia and New Zealand from companies in the group based in Austria.

  2. The defendant, Casama, was established in 1963 and is involved in the wholesale distribution of wine, glassware and water. It has distributed Riedel products in Australia since 1994 pursuant to various distribution agreements entered into with companies in the Riedel group. The scope of Casama’s distribution rights have changed over time. Originally, it was appointed the exclusive distributor of Riedel products in Australia and New Zealand, but following the incorporation of RSN, the scope of its rights has narrowed over time.

  3. Most recently, Casama and RSN entered into an agreement with effect from 1 July 2012 (the DA) in relation to the distribution of Riedel products in Australia by Casama. The DA was for an initial term of 3 years and was to renew automatically for two further one year terms unless either party gave written notice of termination at least three months before the expiration of the initial term or the expiration of the first renewal.

  4. On 26 April 2016, RSN gave written notice of the termination of the DA. It is common ground that, in accordance with an agreement that had been reached between RSN and Casama, that notice was effective to terminate the agreement on 30 June 2016. The issues in this case are concerned with the amounts payable by the parties following termination.

The 2012 Distribution Agreement

  1. By cl 2 of the DA, RSN appointed Casama as the exclusive distributor of “the Products” in the “Exclusive Territory” and a non‑exclusive distributor in the “Non-Exclusive Territory” to “Permitted Customers”. The precise scope of the appointment is not in issue in the proceeding. However, in broad terms, it permitted Casama to sell Riedel products throughout Australia to retailers who held a liquor licence or who operated premises where liquor is consumed and certain other customers. The agreement has been amended twice. To the extent relevant, the effect of the amendments is explained below.

  2. Clause 3 of the agreement sets out the terms on which the product would be supplied. Clause 3(vii) relevantly provides:

All returns are subject to Company’s [that is, RSN’s] pre-approval. Returned goods must be in the current Riedel collection and in mint resalable condition in original sealed master packs. Returns must be shipped within 30 days, delivered to Company, freight (risk and costs) at customer’s expense. For goods returned in accordance with these provisions, the cost valid at the date of the purchase will be credited less 15% restocking fee.

  1. Clause 4 sets out the obligations placed on Casama. Among other things, Casama was required “to maintain sufficient inventory of the active Products as listed in the current price book, including the Distributor Assortment, to carry out orders from Permitted Customers efficiently and promptly”.

  2. The term of the agreement is set out in cl 8. The rights of the parties following termination of the agreement are set out in subclauses (iii) and (iv) of cl 8, which provide:

(iii)   Upon expiry or termination of this Agreement for whatever reason, Distributor [that is, Casama] shall immediately refrain from selling the Products and return to the Company forthwith any stocks of the Products that are in sellable condition held at the date of termination in their original packages packed on pallets and will be reimbursed by the Company for the ex factory price paid by Distributor for the respective products unless the parties unanimously agree on the conditions for a final sale. Distributor will destroy all POS (Point of Sales) material and will upon respective request of the Company provide evidence for such destruction. If for any reason any stock of the Products is retained by Distributor and is not required to be returned to the Company, then Distributor shall sell those Products in such a manner as will not in any way harm the image of the Brand Names or Products or the Company.

(iv)   Except where the Company validly terminates this Agreement pursuant to Section 11, at the end of the term of this Agreement (whether due to expiry, termination or otherwise) the Company must pay to the Distributor a payment equal to twenty per cent (20%) of the average of the annual Net Purchases during the last three (3) financial years (that is: 0.20 times (the sum of the annual Net Purchases during the last three (3) financial years divided by 3) completed on or prior to the date of termination of this Agreement (for the removal of any doubt the parties agree that this date is not the date of any written notice of termination but the date as at which that notice become effective, namely June 30 of either 2015, 2016 or 2017). The Distributor shall not be entitled to the payment if as at the date of termination of this Agreement it is in breach of Clause 11(i) (a).

  1. “Net Purchases” is defined to mean:

… the gross invoice price of Products sold to the Distributor by the Company or its affiliates, less sales taxes, freight and insurance, the amounts of credit normally allowed for returns, normal trade discounts and volume rebates actually granted to Distributor. Advertising and promotional expenditures are not permitted to be deducted in computing Net Purchases. A Product will be deemed sold to the Distributor on the date of the relevant invoice issued by the Company.

It is common ground that RSN followed a practice by which it issued invoices for product supplied by it at the time that product was delivered to Casama. Consequently, the effect of the last sentence of the definition of “Net Purchases” is that product was deemed to be sold at the time of delivery to Casama.

  1. Clause 9 of the DA relevantly provides:

Turnover Projections

In partial consideration for the grant of the Distribution rights in Section 3, the Distributor agrees to purchase from the Company in each financial year an amount of Products at least equal to the following Turnover Projections for those financial years:

2012 / 2013 : $AUD1,200,000.00

2013 / 2014 : $AUD1,440,000.00

2014 / 2015 : $AUD1,584,000.00

Products will count towards the Turnover Projections only when:

(a)   they have been deemed to have been sold to the Distributor pursuant to the definition of “Net Purchases” set out in clause 1; or

(b)   if (a) does not apply but the order for the Products was placed with the Company prior to 1 April with the instruction that the order was to be included in “Net Purchases” for a particular financial year and the Company was unable to supply the order due to circumstances under clause 3(ix) the “Net Purchases” value of the order will be deducted from the agreed turnover projection for that financial year.

By an amendment agreement entered into in December 2013, the parties agreed to narrow the scope of the customers to whom Casama was entitled to sell product and the Turnover Projections for the 2013/2014 and 2014/2015 years were reduced to AUD1,152,000 and AUD1,267,000 respectively. By a second amendment agreement entered into in June 2015, the Turnover Projection for 2015/2016 was agreed to be AUD1,400,035.

  1. Clause 11 dealt with early termination. It relevantly provides:

(i)   Following the occurrence of any of the following events the Company may deliver a written notice of default to the Distributor requiring the Distributor within a reasonable period of not less than 28 days after the day of the notice (“Notice Period”) to remedy the default so far as it is capable of being remedied:

(a)   The failure of the Distributor to purchase from the Company in a financial year an amount of Products at least equal to ninety-five per cent (95%) of the Turnover Projection for that financial year as set out in Section 9;

(b)   …

Clause 11(ii) provides that, following the expiration of the notice period set out in the notice of default, if Casama has not remedied the default or the default is incapable of being remedied, RSN has a right to give a further written notice varying the terms of the agreement or terminating the agreement.

The issues

  1. There are two principal issues between the parties. The first is the amount Casama is entitled to be paid for the product held by it at the date of termination and returned to RSN. That, in turn, raises two questions. The first is whether RSN is entitled to deduct 15 percent of the price paid by Casama for the product under cl 3(vii) of the DA. The second is whether Casama is required to reimburse RSN in respect of freight costs incurred by RSN in collecting the product from Casama’s premises.

  2. The second issue is whether Casama is entitled to be paid an amount under cl 8(iv) of the DA and, if so, the calculation of that amount. That, in turn, raises a number of questions concerning whether it can be said that Casama was in breach of cl 11(i)(a) of the DA “as at the date of termination” and what amounts are to be included in the calculation of “annual Net Purchases” in the three years prior to termination.

Relevant legal principles

  1. The principles applicable to the interpretation of commercial contracts are not in dispute. They were recently summarised by French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]–[51] in these terms:

[46]   The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.

[47]   In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.

[48]Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.

[49]   However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”. It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.

[50]   Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.

[51]   Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption “that the parties … intended to produce a commercial result”. Put another way, a commercial contract should be construed so as to avoid it “making commercial nonsense or working commercial inconvenience”.

See also Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35] per French CJ, Hayne, Crennan and Kiefel JJ; Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 90 ALJR 392 at [51].

Amount payable in respect of returned stock

  1. Clause 3(vii) of the DA relevantly states “For goods returned in accordance with these provisions, the cost valid at the date of the purchase will be credited less 15% restocking fee”. RSN contends that this provision applies to all returns of product including product returned in accordance with cl 8(iii). RSN accepts that that necessarily involves reading the phrase “these provisions” as including a reference to cl 8(iii). That it is said is consistent with the fact that the phrase is in the plural. According to RSN, if the phrase was intended only to refer to returns in accordance with cl 3(vii) it would have been expressed in the singular.

  2. I do not accept that submission. Clauses 3(vii) and 8(iii) both deal with the return of product, but both clauses plainly operate in different circumstances. Clause 3(vii) gives Casama a right to return product during the term of the agreement. In order to exercise that right Casama requires RSN’s “pre-approval” and the returned product must be of a particular description (“in the current Riedel collection and in mint resalable condition in original sealed master packs”). The returned product must be “shipped within 30 days”, which presumably means 30 days of its receipt. RSN must “credit” Casama with “the cost valid at the date of the purchase” for the returned stock less 15 percent of that amount. On the other hand, clause 8(iii) requires Casama to return product on termination of the agreement. The product that must be returned is described differently from product that may be returned under cl 3(vii) (that is, it is product that is in “sellable condition held at the date of termination in their original packages”). RSN is required to “reimburse” Casama for that stock “for the ex factory price paid by [Casama]”. On the face of it, both clauses operate independently and in different circumstances.

  3. In addition, leaving the 15 percent discount to one side, either the amount to be reimbursed in accordance with cl 8(iii) is inconsistent with the amount to be credited in accordance with cl 3(vii) (because “the ex factory price paid by [Casama]” is different from “the cost valid at the date of purchase”) or the two amounts are the same, in which case on RSN’s interpretation the specification of a price in cl 8(iii) is redundant. The inconsistency or redundancy can only be avoided by reading the two clauses as operating independently.

  4. It makes commercial sense to apply a deduction to the amount payable under cl 3(vii) but not under cl 8(iii). Clause 3(vii) grants Casama an indulgence to return product that it has ordered. It is natural that it should pay a price if it seeks to exercise that indulgence. On the other hand, cl 8(iii) prevents Casama from selling product following termination of the agreement subject to an exception that is not presently relevant. At the same time, it is required by cl 4 to retain sufficient inventory before termination so as to be able to fill orders efficiently and promptly. In circumstances where it is required both to hold product up until the date of termination and not to sell product following termination, it makes commercial sense for RSN to be required to repurchase unsold product for the price that was paid for that product without deduction.

  5. The reference to “these provisions” must be understood as a reference to the provisions of cl 3(vii). Clause 3(vii) contains more than one provision because it contains a number of requirements relating to the circumstances in which Casama is entitled to exercise the right conferred by cl 3(vii). That is why the phrase is in the plural. On the other hand, the use of the adjective “these” suggests that the only right of return with which the last sentence of cl 3(vii) is concerned is the right conferred by that clause. In that context, the phrase “these provisions” is inapposite to describe all the terms of the agreement relating to the return of product. The use of the adjective “these” suggests a closer proximity between the provisions with which it is concerned and the 15 percent reduction than simply that the provisions are contained in the agreement; and if what the parties had intended was that the reduction of 15 percent would apply to the amount payable in respect of the return of product under any provision of the DA it is to be expected that they would have said so expressly.

  6. The obligation under cl 8(iii) of the DA is forthwith to return to RSN “any stocks of the Products that are in sellable condition”. The amount that RSN must pay Casama for the returned product is the “ex factory price paid by [Casama]”. It appears to be common ground that the “ex factory price” is the price paid by Casama for the relevant product excluding shipping, handling and taxes. Implicit in an obligation to return product is an obligation to bear any costs associated with returning the product. The price that Casama is entitled to receive for the returned product is the ex factory price. It follows that Casama must bear the costs of returning the product and is not entitled to recover those costs from RSN.

Is Casama entitled to an amount under clause 8(iv)?

  1. The answer to this question turns on whether Casama was “in breach of Clause 11(i)(a)” as at “the date of termination of this Agreement”.

  2. The first issue is what is meant by a “breach of Clause 11(i)(a)”. Casama contends that, in order for there to be a beach of that clause, RSN must have served a written notice of default in respect of a failure by Casama to purchase the amount of product specified in sub-cl (a) (as amended) which has not been remedied in accordance with the notice. On the other hand, RSN contends that all that is required is that Casama fail to purchase the amount of product specified in the sub-clause (as amended).

  3. The expression “in breach of Clause 11(i)(a)” as used in cl 8(iv) is ambiguous. Both the failure to comply with a notice requiring Casama to remedy a default in respect of the event described in sub-cl (a) and the event itself can be described as a breach of cl 11(i)(a). The ambiguity arises from two matters. The first is that the expression “Clause 11(i)(a)” can be used to refer to sub-cl 11(i)(a) alone or can be used to describe sub-cl (a) together with its chapeau contained in clause 11(i). The second is that, in each case, there has been a failure to comply with an obligation arising from the relevant clause, and, as a matter of ordinary English usage, that failure can be described as a “breach” of that clause.

  1. In my opinion, the interpretation advanced by RSN is preferable. The requirement on RSN to give a notice of default and to give Casama an opportunity to remedy the default (if it is capable of being remedied) provides a mechanism by which RSN can terminate the agreement early for breach. If the contract is terminated in accordance with that mechanism, Casama is not entitled to a payment in accordance with cl 8(iv). In other words, cl 11(i)(a) provides a mechanism by which RSN may terminate the agreement if Casama fails to achieve 95 percent of the Turnover Projection for a particular year and, if RSN exercises that right, Casama is not entitled to a termination payment in accordance with cl 8(iv).

  2. On the other hand, the termination mechanism has no application in cases where the agreement expires either because the renewal periods have come to an end or a termination notice is given in accordance with cl 8(i) before the agreement is renewed. The agreement comes to an end by its own terms. The question, then, is under what circumstances Casama should be entitled to a payment in accordance with cl 8(iv). The last sentence of that clause should be read as stating that Casama is not entitled to that payment if at the date of termination it has failed to achieve 95 percent of the Turnover Projection for the relevant year. There is no reason to read cl 8(iv) as requiring RSN to engage a mechanism for terminating the contract early before Casama becomes disentitled to a payment in accordance with cl 8(iv). It is logical to treat the question whether Casama is entitled to a payment under cl 8(iv) as turning on the underlying facts – that is, on whether Casama has achieved the relevant target – rather than as turning on whether RSN has engaged an unnecessary mechanism for termination.

  3. Moreover, there are practical difficulties with the interpretation advanced by Casama. The extent of those practical difficulties is tied up with the question of what purchases count towards the Turnover Projection for the year in which the agreement is terminated and, in particular, whether product that was delivered and subsequently returned should be included. That question is dealt with below. If returned product is excluded, which for the reasons given below it should be, it is likely to be difficult to determine whether Casama has achieved 95 percent of the Turnover Projection for a particular year before the end of the year, since it is only then that the value of the returned product and consequently the value of product purchased in that year will be known.

  4. Even if returned product is included, it may still not be possible to make that determination before the end of the relevant year. That may occur, for example, where Casama has ordered sufficient product to achieve the 95 percent threshold, but it is unclear whether that product will be delivered and therefore purchased in the relevant year. But the result in those cases is that RSN will be unable to serve a default notice before the end of the year, with the consequence that it will be liable to make the payment due under cl 8(iv), even though Casama does not achieve the relevant threshold in purchases and, had the agreement continued, RSN would have been entitled to serve a default notice under cl 11(i)(a). The parties could not have intended that consequence.

  5. The next issue is which thresholds are relevant. RSN contends that, if Casama failed to purchase an amount of product the value of which is at least equal to 95 percent of the Turnover Projection for any year, that is sufficient. On the other hand, Casama contends that the only relevant Turnover Projection is the projection for the year in which the right of termination is exercised.

  6. I prefer the interpretation contended for by Casama. The question raised by the last sentence of cl 8(iv) is whether Casama is in breach of cl 11(i)(a) “as at the date of termination of this Agreement”. In a sense it can be said that, if Casama failed to purchase product to the value of 95 percent of the Turnover Projection for any year in which the agreement was on foot, it was in breach of cl 11(i)(a) as at the date of termination because it will always be the case that Casama failed to reach the relevant threshold for the relevant year. The result would be that, once Casama failed to achieve the relevant threshold for a particular year, it would not be entitled to a payment under cl 8(iv). However, that interpretation gives no meaning to the words “as at the date of termination of this Agreement”. The effect of the clause would be the same if those words were deleted.

  7. In my opinion, by including the words “as at the date of termination of this Agreement” the parties intended to refer to a breach in the year in which the agreement is terminated. That interpretation gives meaning to those words. It also makes commercial sense. If Casama failed to purchase product of the required value in a prior year, RSN had a choice. It could serve a notice under cl 11(i)(a) and, assuming that the relevant breach was incapable of being remedied, it could terminate the agreement and avoid making a payment under cl 8(iv). However, if it chose not to exercise that remedy, it is difficult to see why it should continue to have a right to refuse to make a payment in accordance with cl 8(iv). It elected to continue to receive the benefits of the agreement. It makes commercial sense that it should be liable in those circumstances to make a payment that to some extent at least is intended to reflect the value of that benefit. The position, of course, is different in the year in which the agreement expires or is terminated under cl 8(i). There is no mechanism by which RSN can terminate the agreement for a failure by Casama to sell the required quantity of product at the end of that year. It is for that reason that cl 8(iv) provides that if Casama fails to achieve the relevant threshold in purchases, it is not entitled to a payment in accordance with that clause. It is put in the same position it would have been in had it been entitled to exercise a right of termination based on a failure to reach the relevant threshold.

  8. The third issue is how the amount that counts towards attainment of the relevant threshold is to be determined.

  9. In the present case, the relevant threshold is the threshold for the 2016 financial year, which was 95 percent of $1,400,035 – that is, $1,330,033.25.

  10. The total value of purchases for that financial year was $1,371,413.11. That included an amount of $113,242.38 which related to product that was delivered on or about 24 June 2016. That product had been the subject of a number of outstanding orders, including two orders placed on 7 April 2016. The product had arrived in Australia in early June. Originally, RSN had re-directed the shipment to its new distributor but at Casama’s insistence RSN delivered the product to it. Following termination of the agreement, Casama returned product to the total value of $921,558.33 excluding GST. Of that amount, RSN paid Casama $741,239.87 including GST. The balance of the amount owing by RSN was credited against invoices that had not been paid by Casama at the time the product was returned.

  11. The relevant threshold is expressed in cl 11(i)(a) of the DA to be “an amount of Products at least equal to ninety-five per cent (95%) of the Turnover Projection” for the relevant year. Under cl 9, product is to count towards the Turnover Projections “only when” one of two conditions is satisfied, only one of which is relevant. That condition is where the product is “deemed to have been sold to [Casama] pursuant to the definition of “Net Purchases” set out in clause 1”. The definition of ‘Net Purchases’ deems product to be sold “on the date of the relevant invoice issued by [RSN]”. The definition also states that ‘Net Purchases’ means “the gross invoice price of Products sold to [Casama] by [RSN] less sales taxes, freight and insurance, the amounts of credit normally allowed for returns, normal trade discounts and volume rebates actually granted to [Casama]”.

  12. RSN submits that in order to calculate the amount that is to count towards the Turnover Projection it is necessary to deduct amounts reimbursed by RSN for product returned in accordance with cl 8(iii). It submits that that conclusion is consistent with the definition of “Net Purchases”. It also submits that any other interpretation would leave the operation of cl 8(iv) open to manipulation by Casama, since it could always order sufficient product to take it over the threshold knowing that it would be able to return unsold product at the end of the agreement.

  13. I do not accept RSN’s submission.

  14. Although the wording of cl 9 is not clear, I accept that the amounts stated in the clause must be understood as the value of “Net Purchases” (as defined in cl 1) for the relevant year. Clause 9 does not specifically state how the values set out in that clause are to be determined. However, the only obvious basis is to treat cl 9 as specifying the value of “Net Purchases” of product for the relevant year. That conclusion is consistent with the fact that cl 9 states that Products will count towards the Turnover Projections only when they are deemed to have been sold pursuant to the definition of “Net Purchases”.

  15. The conclusion is also consistent with cl 10(ii), which provides:

As soon as is practicable upon the completion of each of the first three quarterly periods of each 12 month period of the term, Company will deliver Net Purchase reports for the completed quarter to Distributor so that Distributor is able to determine whether it is successfully meeting the Turnover Projections for that 12 month period.

It is plain from this provision that the parties treated the Turnover Projections as projections for the value of Net Purchases (as defined) in each year.

  1. Lastly, the conclusion is consistent with the way in which the amount payable under cl 8(iv) is calculated. That amount is calculated as 20 percent of the average of Net Purchases over three years. It would be odd to calculate the amount payable under cl 8(iv) by reference to the value of Net Purchases but to use some other (unspecified) means for determining the value of products purchased for the purpose of determining whether the condition for the operation of the clause had been satisfied.

  2. However, I do not accept that the reimbursement by RSN for product returned in accordance with cl 8(iii) can be described as “amounts of credit normally allowed for returns”. The phrase “amounts of credit normally allowed for returns” suggests that the amounts with which the definition is concerned are amounts that are credited to a running account as part of the normal incidence of the ordering and return of product during the course of the agreement. It is not apt to describe the amount reimbursed for the return of all product because the DA has come to an end.

  3. That conclusion is supported by the particular words used by the parties. The words used in the definition of Net Purchases (“amounts of credit normally allowed for returns”) mirror the words used in cl 3(vii), which is the clause giving Casama a right to return product during the course of the agreement. That clause also describes the product being returned as “returns” and the amount being refunded (less 15 percent) as being “credited”. In contrast, cl 8(iii) does not use the word “returns” to describe the returned product but instead requires Casama to return “any stocks of the Products” for which it is to be “reimbursed” the specified amount.

  4. It makes commercial sense to treat the return of stock under cl 8(iii) differently from the return of stock under cl 3(vii). Under the terms of cl 4(i) of the DA, Casama is required to retain sufficient inventory in order to carry out orders efficiently and promptly. It is apparent that Casama held inventory at the commencement of the DA which was carried over from inventory held under the preceding distribution agreement and that Casama carried over inventory from one year to the next, and the parties must have understood that to be the case at the time they entered into the DA. The parties must also have understood, as was the fact, that when Casama returned product on termination of the agreement to a substantial extent at least it would be returning the inventory it had held. If the value of returned inventory were deducted from the value of purchases for the year for the purposes of determining whether Casama satisfied the threshold of 95 percent of the relevant Turnover Projection, the purchases made by Casama during the relevant year would be artificially reduced. It is for that reason that the DA draws a distinction between the return of product at the end of the agreement and the return of product during the course of it.

  5. It is true that it may not be possible to characterise the return of all stock at the end of the agreement as a return of inventory, and that a more sophisticated approach to the calculation of the value of product sold each year for the purposes of determining whether the Turnover Projections had been reached would have taken into account the value of inventory at the beginning and at the end of each year. However, the parties chose not to do that, and it is not for the court to rewrite the DA to give it a more sensible commercial operation.

  6. I also accept that the interpretation I prefer would leave the operation of cl 8(iv) open to manipulation. Two points, however, may be made about that.

  7. First, in my opinion, the possibility of manipulation is exaggerated. The carrying cost of excess product is likely to provide a substantial disincentive to over-ordering, at least until it becomes apparent that the DA will terminate in the near future. Once Casama knows or believes that the DA will terminate, it may have a significant incentive to over-order stock in order to achieve the relevant threshold if achievement of that threshold is in doubt. However, under cl 3(viii)(a) RSN reserves the right to reject orders “in full or in part at any time by giving written advice within 5 (five) business days of receiving the Distributor’s purchase order”. If RSN exercises that right, it must give reasons for its decision. In my opinion, one acceptable reason would be that the order is not made genuinely for the purpose of satisfying a demand but instead is made for the purposes of inflating the quantity of product purchased by Casama in order to receive the benefits of cl 8(iv).

  8. Second, there is no suggestion in this case that any of the orders placed by Casama were placed so as deliberately to inflate its purchases for the purposes of meeting a required threshold. Casama’s last orders were placed on 7 April 2016. That was at a time before the DA was terminated and there is no evidence that the person who placed the orders did so in anticipation that the DA would be terminated and for the purpose of inflating the purchase of product for the 2016 financial year. Casama insisted on delivery of a shipment that had arrived in Australia in early June that included product that was the subject of those orders. The effect of that was that the value of the product in the shipment counted towards the Turnover Projection for 2016 in circumstances where, as turned out to be the case, most of that product would be included in the product that was returned in accordance with cl 8(iii). The result was that Casama achieved the relevant threshold. But I do not think that insistence on the delivery of that order amounted to a deliberate manipulation of the operation of cl 8(iv). Rather, Casama was simply taking advantage of the fact that it had placed the orders that were the subject of the shipment and of the way in which the contract operates. The position may have been different if the orders placed on 7 April 2016 were not genuine orders. But, as I have said, there is no evidence that that was the case.

Calculation of the amount payable under cl 8(iv)

  1. It is common ground that, assuming no adjustment is to be made for product returned on termination of the agreement, the total invoiced amounts for the three years relevant to the calculation of that amount payable under cl 8(iv) are:

2013-14

$824,936.73

2014-15

$1,641,709.85

2015-16

$1,371,413.11

  1. Casama contends that two further adjustments, or types of adjustment, need to be made to those figures.

  2. First, in the 2013-14 year, RSN agreed to re-purchase stock at an agreed value of $208,651.78 (including GST) less a restocking fee of $31,294.35. It issued credit note C400039 in respect of the repurchase of stock and invoice I400334 in respect of the restocking fee. That repurchase did not occur in accordance with the terms of the DA. Rather, it was a separate agreement reached in relation to stock held by Casama which was included in Riedel’s retail range. The uncontested evidence from Mr Kraps, a director of Casama, was that that agreement was reached because the parties recognised that it would be difficult for Casama to sell that stock following the signing of the DA, which restricted Casama to selling product to “Permitted Customers”, who largely consisted of customers who held a liquor licence or who operated premises where liquor is consumed and who were unlikely to sell the product in question. Casama submits that those amounts should not be included in the calculation of “Net Purchases” for the 2014-15 financial year.

  3. I accept Casama’s submission. In my opinion, the reference to “returns” in the definition of “Net Purchases” should be read as a reference to returns that occur in accordance with the DA. It should not be read as a reference to the return of product that was acquired before the DA commenced and the return of which was the subject of a separate agreement. The definition of “Net Purchases” is included in the DA in order to provide a means of determining the value of purchases during a financial year falling within the term of the agreement. It would be odd in those circumstances to interpret the definition as including the return of product that was not purchased during the term of the agreement and was itself the subject of a separate agreement. It was open to the parties as part of that separate agreement to agree that the value of the stock returned should be taken into account for the purposes of determining “Net Purchases” under the DA. However, they did not do so.

  4. Second, in April 2013, RSN and Casama agreed to conduct a promotional campaign for two products in the Riedel range of products known as “Degustazione” and “Swirl”. The recommended wholesale price for Casama to sell those two types of glass was $4.95 per glass. Applying a volume discount available under the DA, Casama was able to buy those glasses from RSN for $3.12 per glass. Assuming that Casama sold the glasses for the recommended wholesale price, it was able to earn $1.83 on the sale of each glass. As part of the promotional campaign, RSN proposed a discounted price to wholesale customers of $3.50 per glass, which meant that Casama would earn $0.38 on each glass. In the 2013-14 financial year, RSN issued two credit notes, one for $35,893.99 and one for $19,224.84 (inclusive of GST), which represented 50 percent of the difference between the amount that Casama would normally have made on the sale of those glasses in that year and the amount Casama actually made as a result of the discount. RSN issued a further two credit notes in the 2015-16 financial year for $60,789.10 and $8,824.16 (inclusive of GST) on the same basis. Casama contends that those credits should not reduce the value of Net Purchases in the years to which they relate. According to it, those amounts cannot be described as “normal trade discounts and volume rebates actually granted to Distributor”. Rather, they should be understood as “promotional [expenditure]” that is not permitted to be deducted in computing Net Purchases.

  1. I do not accept Casama’s submission. The amounts credited were in substance discounts on the sale price to Casama of standard product that was intended to be sold by Casama in accordance with the DA. In my opinion, the nature of the discount is not affected by the fact that it was a discount over and above the prices at which RSN agreed to supply product under the DA. There is nothing in the DA which prevented RSN from providing discounts beyond those contained in the DA. Nor do I think that the purpose for which the price reduction was made can affect the nature of the reduction. The fact that the discount was granted to increase sales of the particular products does not prevent the discounts from being “normal trade discounts”. Presumably the reduction in the sale price enabled Casama to sell more of the product in question, which in turned increased the purchases by it of that product. It would be odd if Casama was entitled to the benefit of those increased purchases in meeting the Turnover Projection for the relevant year, but did not have to suffer the consequences of the reduced price in meeting that threshold.

  2. In my opinion, the relevant discounts cannot be described as promotional expenditure. There was no expenditure associated with the promotion. There was simply a reduction in the price Casama bought and sold the relevant product. The fact that the reduction in respect of the price paid by Casama did not correspond to the reduction in the price for which Casama sold the product does not alter the position.

Conclusion and orders

  1. The conclusions I have reached are that:

  1. RSN is not entitled to deduct a restocking fee of 15 percent from the amount payable by it in respect of product returned by Casama under cl 8(iii) of the DA;

  2. RSN is entitled to be reimbursed for the costs of collecting the product returned to it under cl 8(iii).

  3. Casama is entitled to a payment in accordance with cl 8(iv);

  4. In calculating the amount of that payment, no deduction should be made for the credit given to Casama in respect of the repurchase of product the subject of credit note C400039 but deductions should be made for the credits given by RSN in respect of the supply of “Degustazione” and “Swirl” product.

  1. The parties should bring in short minutes of order to give effect to the conclusions I have reached. If agreement can be reached on the terms of the short minutes of order and on costs, I will make final orders in chambers. Otherwise, the matter should be relisted by contacting my Associate to resolve any outstanding issues.

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Decision last updated: 14 December 2016

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