Safety Mate Pty Ltd v Atg Lanka (Pvt) Limited
[2022] VSCA 273
•14 December 2022
| SUPREME COURT OF VICTORIA COURT OF APPEAL |
| S EAPCI 2022 0011 |
| SAFETY MATE PTY LTD (ACN 104 784 241) | Applicant |
| v | |
| ATG LANKA (PVT) LIMITED | Respondent |
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| JUDGES: | BEACH, SIFRIS and MACAULAY JJA |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 7 November 2022 |
| DATE OF JUDGMENT: | 14 December 2022 |
| MEDIUM NEUTRAL CITATION: | [2022] VSCA 273 |
| JUDGMENT APPEALED FROM: | [2021] VSC 820 (Connock J) |
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CONTRACT – Termination of distribution agreement – Construction of termination clauses – Validity of termination notice – Termination notice valid – Leave to appeal refused.
CONTRACT – Good faith – Express term to act in good faith – Alleged failure to act in good faith – Whether disclosure of confidential information not in good faith – Whether as a consequence such disclosure prevents the giving of a termination notice – Termination notice valid – Giving of termination notice in good faith and not affected by disclosure of confidential information – Leave to appeal refused.
CONTRACT – Exclusion clauses – Whether loss and damage covered by exclusion clauses – Exclusion clauses effective to deny liability – Leave to appeal refused.
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| Counsel | |||
| Applicant: | Mr P D Corbett KC with Mr H Forrester | ||
| Respondent: | Mr D J Williams KC with Mr S Cromb | ||
Solicitors | |||
| Applicant: | Patane Lawyers Pty Ltd | ||
| Respondent: | HDL Legal & Consulting Pty Ltd | ||
BEACH JA
SIFRIS JA
MACAULAY JA:
Introduction
On or about 18 October 2017, the applicant (‘Safety Mate’) and the respondent (‘ATG’) entered into a distribution agreement for a period of two years (‘the Initial Term’) commencing on 1 October 2017 and ending on 30 September 2019 (‘the Agreement’).
ATG is a large international manufacturer and supplier of ATG safety gloves. Safety Mate[1] was appointed under the Agreement as exclusive distributor of the gloves in Australia, New Zealand and Papua New Guinea (‘the Territory’).
[1]Defined as the ‘PSP’ (the primary sales partner) in the Agreement.
Clause 2.2 of the Agreement is in the following terms:
This Agreement shall come into effect on the Commencement Date [1 October 2017] and shall continue in force for the Initial Term unless:
2. 2. 1terminated earlier by either party giving not less than (6 months’) prior written notice to expire on the expiry date of the Initial Term, or
2.2.2the Agreement is continued for further 2 year + 2 year periods, Contract Term, on the same terms, by either party giving not less than six (6) months’ prior written notice to the second and forth [sic] anniversary of the expiry date of the Initial Term, or
2.2.3the Agreement is terminated in accordance with the provisions of Clause 14 (Termination) below.
By letter dated 21 March 2019 (‘the Termination Notice’), ATG terminated the Agreement pursuant to clause 2.2.1 of the Agreement, with effect from midnight on 30 September 2019, being the expiry date of the Initial Term.
By letter dated 26 March 2019 (‘the Extension Letter’), Safety Mate purported to extend the Agreement for a further period of two years with effect from 1 October 2019, pursuant to clause 2.2.2 of the Agreement.
Safety Mate contended that the Termination Notice was invalid for two main reasons:
(a)On a proper construction of clause 2.2.1 of the Agreement, the words ‘to expire on the expiry date of the Initial Term’ should be understood to mean ‘to expire before the expiry of the Initial Term’. As the Termination Notice did not specify such earlier date, it was invalid (‘the Construction issue’).
(b)The Termination Notice was given in breach of a good faith obligation imposed by clause 12.2 of the Agreement (‘the Good Faith issue’).
The findings of the primary judge, which also deal with other matters, are set out in paragraph [5] of the reasons for judgment,[2] as follows:
[2]ATG Lanka (PVT) Limited v Safety Mate Pty Ltd [2021] VSC 820 (‘Reasons’).
For the reasons that follow I have determined that:
(a)ATG did not breach the Agreement by failing to act in good faith in the exercise of its termination right under clause 2.2.1 of the Agreement.
(b)The Agreement was validly terminated by ATG’s Termination Notice with effect from midnight on 30 September 2019.
(c)The Agreement was not extended for a further two-year period from 1 October 2019 by Safety Mate’s Extension Letter.
(d)ATG breached clauses 4.1.1 and 4.3 of the Agreement by failing to use reasonable endeavours to supply to Safety Mate the goods the subject of what are defined later in these reasons as the Four Purchase Orders.
(e)Safety Mate established that it suffered loss and damage, being loss of profits of $25,266 in respect of purchase order PO 964.
(f)Safety Mate did not establish that it suffered any loss and damage by reason of ATG’s failure to use reasonable endeavours to supply to Safety Mate the goods the subject of purchase orders PO 965, PO 974, and PO 980.
(g)ATG’s liability to Safety Mate for the loss of $25,266 in respect of purchase order PO 964 is excluded by clauses 13.1 and 13.2 of the Agreement.
The Reasons deal with matters not relevant to and not the subject of this application for leave to appeal (henceforth referred to as the appeal).[3]
[3]The proposed grounds of appeal are simply referred to as grounds.
Ground 1 relates to the Construction issue. Grounds 2 and 3 relate to the Good Faith issue and ground 4 relates to the exclusion clause referred to in paragraph [5(g)] of the Reasons set out above (‘the Exclusion Clause issue’).
For reasons that follow, leave to appeal is refused.
Relevant background
The Agreement
In addition to clause 2.2, referred to above, the relevant terms of the Agreement are set out below.
Clause 12.2 further provided that ATG warrants and undertakes that it shall at all times act in its relations with the PSP in good faith.
Clauses 13.1 and 13.2 provided that:
13.1To the extent permitted by law, ATG shall not be liable for and excludes any liability or claims or costs incurred resulting from or arising in the course of this Agreement except for:
13.1.1death or personal injury arising from any fault or defect in the materials or workmanship of the Products, or performance of ATG, or
13.1. 2any other liability which cannot be excluded or limited under applicable law,
to the extent that the liability arises as a result of the breach, negligent performance or omission of action or by negligent action of ATG, its agents or subcontractors.
13. 2Subject to Clause 13.1 ATG shall not be liable to the PSP for any damage or loss of goods, data, loss of profit, anticipated profits, revenues, anticipated savings, goodwill or business opportunity, loss of reputation and all interest, penalties and legal and other reasonable professional costs and expenses or for any direct, indirect or consequential loss or damage incurred resulting from or arising in the course of this Agreement.
‘Confidential Information’ is defined in clause 1.1 of the Agreement to mean:
any knowledge of whatever nature, that the PSP has gained, relating to ATG’s, or that ATG has gained relating to the PSP’s information and intellectual property, including, methods of manufacture of, Products, and Other Products, materials, suppliers, know how, trade secrets, information of commercial value, ideas, patents, granted, pending or applied for, research and development, sales and marketing plans, customer lists, financials, prices, payment terms, personnel, or any matter of whatsoever nature relating to ATG, or communicated to the PSP through dealings with ATG.
Clause 15.3 provided that:
The termination of this Agreement shall not give rise to any liability on the part of ATG to pay any compensation to the PSP for loss of profits or goodwill.
Clauses 16.1 and 16.2 provided that:
16.1Each party agrees and undertakes that during the term of this Agreement and thereafter it will keep confidential and will not use for its own purposes nor without the prior written consent of the other party disclose to any third party any Confidential Information unless the information is:
16.1.1public knowledge or already known to that party at the time of disclosure or subsequently becomes public knowledge other than by breach of this Agreement; or
16.1.2subsequently comes lawfully into the possession of that party from a third party; or
16.1.3is independently developed by the party.
16.2Each party may disclose the other party’s Confidential Information:
16.2.1to those of its personnel, officers, representatives or advisers who need to know such information for the purpose of carrying out the party’s obligations under this Agreement. Each party shall ensure that its personnel, officers, representatives or advisers to whom it discloses the other party’s confidential information comply with this clause 16; and
16.2.2as may be required by a law court order or any governmental or regulatory authority, or to any customers or prospective customers;
16.2.3(where the party is a body corporate) to any member of the same group of companies, and to any employees of the party or of any of the above;
provided that before any such disclosure the PSP and ATG shall make those persons aware of its obligations of confidentiality under this Agreement and shall obtain a binding undertaking as to confidentiality from all such persons.
ATG’s focus areas were referred to in its brand charter at Schedule 7, the first in importance of which stated:
Proximity and presence: of the ATG® offering delivered through the primary sales and channel partners. At ATG® we know that it is the primary sales and channel partners that primarily deliver the ATG® message and promise on a daily basis. ATG® sees it as its role to ensure the appropriate level/quality of services to support.
Schedule 8 was a template key performance indicator (‘KPI’) scorecard containing five KPIs, all five of which referred to channel partners and the first of which was headed: ‘KPI 1 Australian Channel Partner Engagement’.
Events prior to the Termination Notice
In November 2007, ATG and Safety Mate signed a five-year exclusive distribution agreement. On 1 January 2012, the parties entered into a further distribution agreement which continued to 30 September 2017.
Throughout 2017, representatives of Safety Mate and ATG engaged in negotiations relating to the Agreement. Areas in contention in those discussions were:
(a)the term of the Agreement, in which Safety Mate sought a 10-year initial term and ATG expressly refused this and required a two-year initial term; and
(b)Safety Mate’s approach to the market and in particular, its direct dealing with distributors.
As already stated, the Agreement (as finally negotiated) commenced on 1 October 2017. Pursuant to clause 2.1 of the Agreement, ATG appointed Safety Mate as an exclusive distributor to import and distribute certain ‘Products’ in the Territory. The Products were the glove products of particular types and specifications manufactured and packed under ATG’s trademarks (clause 1.1).
During the Initial Term (of two years) there had been regular quarterly review meetings between ATG and Safety Mate. Safety Mate generally ‘met’ but did not ‘exceed’ the KPIs, which were reflected in the KPI Scorecards.
By September 2018, ATG was exploring the possibility of terminating the Agreement.
Mr Kyle Browning, ATG’s director of global sales, held the view that ATG could not consider terminating Safety Mate or bringing the matter to the board of ATG until there was a viable replacement PSP for Safety Mate. This was because if the Agreement with Safety Mate was to be terminated and no replacement PSP was in place, it would cause commercial problems with distribution throughout the market, leading to potential lost market share and damage to ATG’s reputation. Mr Browning decided that, until a replacement PSP could be found, he would hold off on the decision to terminate the Agreement with Safety Mate and bringing that issue to ATG’s directors.
Mr Jason Sheerin, ATG’s country manager for the Territory, first contacted Mayo Hardware Pty Ltd (‘Mayo’), a competitor of Safety Mate, in December 2018. By 16 January 2019, Mr Sheerin was having formal discussions with Mayo. Further communications with Mayo continued thereafter, and on 11 February 2019, Mayo executed a deed of confidentiality.
In early February 2019, a meeting was arranged between Mr Sheerin and Mayo representatives, which took place at Mayo’s premises on 13 February 2019. Mr Sheerin stated in his email to Mayo dated 28 January 2019 (which enclosed the confidentiality deed) that he aimed ‘during that meeting to be able to share with you enough information enabling Mayo Hardware to make a very well informed review of the opportunity ATG is presenting in terms of company synergies, growth prospects and commercial considerations’.
By email of 11 February 2019, Mr Sheerin informed Mayo’s Mr Thame that he had a short PowerPoint presentation to present at the meeting, and invited Mr Thame to let him know if there was anything in particular he wanted to see so he could do his best to have it with him, but otherwise he believed that what he had pulled together would cover most questions.
Mr Thame responded by email dated 12 February 2019, which noted Mayo’s desire to get an understanding of inter alia: the current customer mix and focus on reseller versus end user and types of end user industries; the current distributor’s model and what kind of resources they are allocating to the business; the geographical split of the business; size of the market, current share and future opportunities; and market dynamics, positioning versus other leading brands.
The PowerPoint presentation by ATG to Mayo at the meeting on 13 February 2019 included numerous matters that Safety Mate contended was its confidential information. ATG maintained it was not ‘Confidential Information’ within the meaning of clause 16.1 of the Agreement, or alternatively if it was confidential information, disclosure was permitted under clause 16.2.2 of the Agreement. A proforma Safety Mate invoice dated 31 October 2018 was also provided to Mayo on 15 March 2019.
Following the meeting, on 14 February 2019, Mayo’s board resolved to go ahead and seek to become the new PSP in the Territory with effect from 1 October 2019.
The Termination Notice
At a meeting of directors of ATG, held in February 2019, Mr Browning (who was not a member of the board) recommended that the Agreement with Safety Mate be terminated and that Mayo be appointed as new PSP. The directors accepted the recommendation to terminate the Agreement with Safety Mate and appoint Mayo as new PSP. Mr Browning told Mr Sheerin to implement that decision. Mr Browning believed that the Agreement should end because of the state of the relationship between the parties and Safety Mate’s approach to the market. ATG’s approach to market was a very important matter to ATG, and the differences in sales approach between it and Safety Mate had led to real challenges in the business relationship.[4]
[4]These matters are referred to by the primary judge (see below).
On 15 March 2019, further information was provided by ATG to Mayo, which Safety Mate alleged was its confidential information, and which ATG maintained was not provided in breach of the Agreement.
By its Termination Notice, ATG sought to terminate the Agreement. The Termination Notice was served on Safety Mate on 26 March 2019.
By letter dated 26 March 2019, Safety Mate served the Extension Letter and sought to extend the Agreement for a further period of two years.
The Extension Letter was sent by facsimile to ATG on 26 March 2019 at 2:26 pm following receipt of the Termination Notice.
Events after the Termination Notice
On 17 April 2019, further information was provided by ATG to Mayo, which Safety Mate contended was its confidential information and which ATG maintained was not provided in breach of the Agreement.
On 1 May 2019, Mayo placed its first order with ATG for July shipping. On 3 May 2019, ATG informed Safety Mate that it would no longer be accepting orders from Safety Mate for gloves to be produced in the month of August 2019 or thereafter.
On 14 June 2019, Mayo placed its second order with ATG.
Between 29 May and 3 July 2019, Safety Mate sent ATG four purchase orders, all of which were rejected by ATG.
On 11 July 2019, Mayo placed its third order with ATG.
On 2 August 2019, Safety Mate sent ATG two purchase orders, both of which were rejected by ATG on 6 August 2019.
The proceedings
ATG issued proceedings on 29 March 2019 seeking declaratory relief. Safety Mate made a counterclaim for declaratory relief, alternatively damages.
Judge’s reasons
The primary judge dealt with all issues in a careful, considered and comprehensive manner. The judge’s reasons for each of the grounds of appeal will be dealt with more fully under the particular ground. However, it is convenient, useful and informative to set out a number of relevant passages of the Reasons at the this stage. Many passages, which add to and contextualise the relevant background, contain findings of fact that are not the subject of any ground of appeal.
In relation to the relationship between the parties prior to the Termination Notice, the judge said:
Before addressing the particular acts and omissions of ATG alleged by Safety Mate to have constituted the breach of good faith by ATG in the exercise of its right to terminate the Agreement, and at the risk of some repetition, it is convenient first to briefly outline again some, but not all, of the factual context and timeline relevant to the termination decision and the serving of the Termination Notice, most of which has been referred to earlier in these reasons. Relevant matters in this context include (but are not limited to) the following:
(a)ATG and Safety Mate are and were at all relevant times experienced commercial entities who were parties to a commercial distribution agreement, being the Agreement.
(b)The people involved on each side were experienced businesspeople.
(c)Although ATG and Safety Mate were parties to the 2012 distribution agreement, the term of that agreement was expiring in circumstances where each party was free to go their separate way if no new agreement was reached between them.
(d)The evidence established that at the time of, and during the extended negotiations for, the new Agreement, and for some period before, the relationship between ATG and Safety Mate was at least strained and challenged in various ways. Differences and tensions over time in the relationship included, for example, those relating to: ATG’s desired approach to the market through its focus on channel partners and Safety Mate’s differences of view in relation to the same; the role of Mr Sheerin; ATG’s desire that Safety Mate expand its product lines; ATG’s view regarding Safety Mate being adversarial; a lack of trust; ATG’s position in relation to distribution in Japan; costs, expenses and other amounts being sought by Safety Mate connected with its failure to secure Japan as a territory; Safety Mate’s desire for, and unsuccessful attempts to achieve, a 10-year, or 5-plus-5-year term for the proposed new agreement; various terms proposed by ATG for the new Agreement; issues between Mr Sheerin and Mr Roberson; the limited proposed two-year Initial Term under the Agreement and ATG’s refusal to provide a longer term; the introduction of KPIs into the Agreement when they had not been included in the previous agreement; Safety Mate’s perception and expressed disdain about ATG trying to run a PSP’s business and ‘inject’ its country manager into a PSP’s business which it considered ‘is not on’; a dislike and distrust of Mr Sheerin; Mr Browning’s concern about Mr Sheerin’s exclusion and treatment by Safety Mate; Safety Mate’s concern about Mr Browning’s support of Mr Sheerin and his insistence that Mr Sheerin be included; and the extent of the involvement of Mr Sheerin in the negotiations and the process leading to the entry into the Agreement.
(e)As part of its approach to distribution around the world ATG desired to have positive, close, open and strong working relationships with its PSPs. At times this was expressed by ATG as the relationship needing to have qualities akin to a ‘partnership’ and by reference to the fact that there were things more important than money or figures. Other language used to describe the desired nature of the relationship was ‘a true sales partner’. Mr Sheerin shared the view that there was ‘more to a partnership than just the ability to generate sales’ and that this was a key reason why he believed ATG and Mayo would work well together.
(f)ATG was aware of and concerned about the strained and challenged nature of the relationship at the time of the negotiations, before then, and at the time of entry into the Agreement in October 2017. It was apparent from the direct evidence, and could be inferred from the communications relating to the negotiation of the Agreement in any event, that ATG wanted and hoped for change and an improved and better commercial relationship with Safety Mate as its PSP for the Territory. As Mr Browning said, from ATG’s perspective, things needed to change.
(g)The terms of the Agreement provided for a fixed Initial Term of two years, with two further options, each of two years. Importantly, each of ATG and Safety Mate had a contractual right to terminate the Agreement at the end of the Initial Term by giving not less than six months’ written notice to the other, with such notice to expire on the expiry of the Initial Term. In effect, and as each of the parties described it during the hearing, this ‘no cause’ termination right allowed either party to terminate the Agreement without cause at the end of the Initial Term.
(h)In contrast to aspects of the ‘termination for cause’ provisions in clause 14, the termination right of each of the parties in clause 2.2.1 was not subject to any other pre-conditions, process, or machinery provisions requiring prior steps to be taken in advance of giving notice of termination pursuant to clause 2.2.1. This operated equally and for the benefit of both parties.
(i)Email communications and the other evidence revealed that the relationship between ATG and Safety Mate remained, at least, strained and challenged after the Agreement was entered into and that the issues that remained, included, for example: ongoing differences of view between ATG and Safety Mate regarding the approach to market and ATG’s level of desired focus on channel partners; an ongoing strained and difficult relationship with ATG’s now longstanding country manager, Mr Sheerin; ATG’s concern about how it understood Safety Mate was approaching the market; ATG’s view regarding Safety Mate being adversarial; a lack of trust; issues between Mr Roberson and Mr Sheerin, and Mr Tee’s involvement in the same; lingering issues in relation to Japan compensation; and the extent to which ATG wanted to engage with aspects of Safety Mate’s activities or business, including with channel partners.
(j)On any view of the evidence, the relationship between Safety Mate and ATG before and after the entry into the Agreement and prior to termination was not the positive, open, close and effective working relationship that ATG desired to have with its PSPs. The evidence established that it was far from a relationship of that character and that it was and remained at least strained and challenged. A review of the full run of communications in evidence, both internal and external to the parties, and the oral evidence, demonstrated that to be so. It is also evidence from which the same position can be inferred had it not been so demonstrated. I note in passing that some aspects of the approach to ATG addressed between Mr Tee and Mr Temperton (and revealed in the internal emails passing between them) provided some colourful examples of the strained relationship, including, for example: the exchange during negotiations in which Mr Tee raised the suggestion of paying ‘lip service’ to ATG’s position regarding its preferred market approach; the proposal to bring ‘the war’ to Mr Sheerin after the Agreement was finalised; and the reference to Mr Temperton having observed a number of times that Mr Sheerin was a ‘dangerous animal’, which was a view Mr Tee shared. However, even if such colourful examples are put to one side, the position remains the same. For completeness, I add that the fact that the review meetings occurred as they did and KPIs were generally shown as being ‘met’ does not detract from this conclusion regarding the nature of the relationship, or that which is expressed in the previous paragraphs when considered in the context of all of the evidence regarding the relationship between the parties.
(k)During the Initial Term there had been regular quarterly review meetings between ATG and Safety Mate. Safety Mate generally ‘met’ but did not ‘exceed’ the KPIs, which was reflected in the KPI Scorecards.
(l)The possibility of terminating the Agreement arose between Mr Browning and Mr Sheerin in late 2018. This did not occur immediately and it was apparent that it was being further considered by Mr Sheerin and Mr Browning, and that legal advice was sought and obtained by ATG. Mr Sheerin ascertained that the Agreement could be terminated if notice was given by 31 March 2019, which he supported doing. He remained not satisfied with Safety Mate’s approach to its dealings with ATG, which he regarded as secretive and adversarial and generally difficult, also being of the view that the relationship was not one of a ‘true sales partner’.
(m)Mr Sheerin had been earlier tasked by Mr Browning with identifying a distributor who could replace Safety Mate if the Agreement was terminated and Mr Sheerin identified Mayo, as earlier referred to. The position of Mayo and its dealings and communications with ATG upon which Safety Mate relies in support of its breach of good faith allegations, are addressed in detail further below — including the sharing of information with Mayo, selecting it as the new PSP, and supplying gloves to it so as to enable it to commence operating as PSP from 1 October 2019.
(n)Mr Browning did not have the authority to make the decision to terminate Safety Mate and the issue was addressed at a meeting of three ATG directors in February 2019, being Mr Abdeen the Managing Director, Mr Taylor and Mr Goth. Mr Browning and Mr Sheerin held the view that the Agreement should end. Mr Browning considered that the relationship was poor, that it lacked collaboration, and that there seemed to be a barrier between ATG’s view and approach and Safety Mate’s view that could not be overcome.
(o)The ATG directors accepted the recommendation to terminate Safety Mate as the PSP for the Territory with effect from the end of the Initial Term and to appoint Mayo in its place. Mr Browning tasked Mr Sheerin with implementing the termination decision, which he did in the manner referred to in the evidence and outlined earlier in these reasons.
(p)The Termination Notice was prepared and provided to Safety Mate on 25, 26, and 27 March 2019 by the various methods earlier referred to.
(q)Safety Mate was not given advance notice of the proposed termination and alleges that the failure to consult it involved a breach of ATG’s obligation of good faith in the exercise of its termination right. This is further addressed later in this section of the reasons.
(r)The Extension Letter was sent to ATG by facsimile at 2:23 pm on 26 March 2019.
(s)Preparations for Mayo to take over as the PSP for the Territory from 1 October 2019 continued between Mayo and ATG, as in part is outlined in the Background and factual matters section above.
(t)Because the goods the subject of the Four Purchase Orders were to arrive in Australia on and after the Termination Date, ATG refused to accept them.
(u)Safety Mate ceased operating as the PSP for the Territory on 30 September 2019 and Mayo commenced operating as PSP from 1 October 2019.[5]
[5]Reasons, [317] (citations omitted).
In relation to the Construction issue, the judge held that, although not well drafted, there was no difficulty in construing the language without changing or inserting words. Clause 2.2.1 simply identified the end point (the expiry of the Initial Term) and required not less than six months’ written notice. The detailed reasons are referred to below.
In relation to the Good Faith issue, the judge held that each of the instances or particulars of lack of good faith did not (even if established) in any way impede or restrict the ability on the part of ATG to give the Termination Notice, given its terms. Rather, the judge held that the giving of such notice was not capricious, dishonest, unfair or arbitrary, but to the contrary, was the proper exercise of a right exercised in good faith and based on reasonable grounds. Further, the judge noted on several occasions that the alleged breaches of good faith were not pleaded as breaches in and of themselves, but rather as part of the submission directed to the validity of the Termination Notice. These findings are critical and represent a significant hurdle for the applicant. The detailed reasons are referred to below.
Further, these findings of fact and available inferences that form the basis of the judge’s evaluation and determination of the Good Faith issue, were in large part based on the judge’s assessment of the credibility of the witnesses. Although we have conducted a real review, we have not had such benefit. This represents a further significant hurdle for Safety Mate.[6]
[6]Robinson Helicopter Company Inc v McDermott (2016) 331 ALR 550, 558–59 [43] (French CJ, Bell, Keane, Nettle and Gordon JJ); [2016] HCA 22; Lee v Lee (2019) 266 CLR 129, 148–49 [55] (Bell, Gageler, Nettle and Edelman JJ); [2019] HCA 28.
Grounds of appeal
The grounds of appeal are as follows:
Ground 1
On the proper construction of cl 2.2.1 of the Distribution Agreement, the words ‘to expire on the expiry date on the Initial Term’ should be understood to mean ‘to expire before the expiry of the Initial Term’.
Ground 2
The judge erred in failing to find that the notice of termination was given by ATG in breach of the good faith obligation imposed by cl 12.2 and was therefore of no effect.
Ground 3
The judge erred in his consideration of the breach of the good faith obligation by:
(a)failing to consider whether Safety Mate’s commercial information ATG gave to Mayo was confidential information;
(b)not finding that the information was confidential and should not have been given to Mayo.
Ground 4
The judge erred in the construction of cls 13.1 and 13.2 (the exclusion of liability clauses) in finding that ATG was not liable for the loss and damage suffered by Safety Mate as a result of ATG’s refusal to produce and supply safety gloves pursuant to orders made.
Ground 1: The Construction issue
The critical issue is whether the expiry date referred to in clause 2.2.1 is the end of the Initial Term, as specifically referred to in the clause, or an earlier date.
Judge’s reasons
In concluding that the notice of termination must expire on the expiry date of the Initial Term and not earlier, the judge said:
By mandating in plain terms that the written notice of termination is ‘to expire on the expiry date of the Initial Term’ the clause makes tolerably clear that, notwithstanding the tension that arises given the opening words of clause 2.2 and the existence of the word ‘earlier’ in clause 2.2.1, termination under clause 2.2.1 is not to, and cannot, take effect earlier than the expiry of the Initial Term. That being so, it also relevantly defines or identifies the end point from which the not less than six months’ written notice of termination may be given under the clause.
Although the parties were correct in their common view that clause 2.2 of the Agreement is one of the many clauses of the Agreement that is not well drafted, in my view a reasonable businessperson would have understood clause 2.2.1 to have operated in the way that I have described, which is supported by the language used, the terms of the Agreement as a whole, and the purpose or object to be secured by the Agreement. In this regard I draw attention to the following:
(a)The Agreement is an exclusive distribution agreement containing rights and obligations in respect of the distribution of particular products in the Territory for the mutual benefit of each of ATG and Safety Mate. As earlier noted, the distribution of the products involves a lead time of a number of months between order initiation by Safety Mate and product manufacture and supply by ATG.
(b)Construed in the way that I have determined, and absent termination for cause, the substantive commercial effect of clause 2.2.1 is to provide for a minimum, but clear and certain, initial period of two years of supply and distribution under the Agreement for the benefit of each of ATG and Safety Mate. Subject to the other terms of the Agreement, the construction of the Agreement gives commercial certainty to the parties regarding the existence and operation of their relationship for that period.
(c)As Safety Mate accepted, if its contended construction was correct then ATG would have been able to give six months’ notice of termination moments after entering into the Agreement (or at various other times thereafter). I do not accept that this is a meaning that a reasonable businessperson would have understood clause 2.2.1 to have had. Further, in the context of the terms of the Agreement as a whole and the commercial relationship that it embodies, such a position would in my view be an uncommercial and absurd result — although it does not matter even if Safety Mate was correct in its contention that the result would not be absurd. This is because the meaning supported by Safety Mate is not a meaning that would be given to it by a reasonable businessperson in the circumstances in any event.
(d)If the objective intent of clause 2.2.1 had been to allow notice of termination to be given in the way contended for by Safety Mate it would also require material revision to the clear and definite language employed in what I have concluded to be the determinative aspects of the terms of clause 2.2.1.
(e)Construing the Agreement in the way I have described sits comfortably and harmoniously with the object and purpose of the Agreement, which at its core, is the appointment of Safety Mate as ATG’s exclusive distributor in the Territory on the terms of the Agreement. If clause 2.2.1 were to be construed as permitting ATG to give six months’ notice of termination immediately upon (or shortly after) entering into the Agreement, this in my view sits far less comfortably, and in greater tension, with the object and purpose of the Agreement. It also does not sit well with the ordering, manufacturing and supply process and timeline reflected in the Agreement, which takes place over a number of months for each monthly order — which the parties were also well familiar with given their past dealings over many years, and is reflected in aspects of the Agreement in any event.
(f)The construction I have arrived at also sits comfortably and harmoniously with the potential extension periods referred to in clause 2.2.2 of the Agreement. This is because, upon its proper construction, clause 2.2.1 allows for a certain two-year Initial Term, and each of the potential extension periods are also each for a two-year period. Further, in the context of the entry into a new distribution agreement for the exclusive distribution in the Territory, construing the clause to reflect a certain two-year Initial Term is a businesslike interpretation, whereas a construction allowing a fresh commercial relationship to be terminated on giving six months’ notice is not.
(g)Even if it is correct that, when considered with the definition of ‘Initial Term’, the words in the chapeau of clause 2.2 operate so that the Agreement would expire at the end of the two-year Initial Term, this does not in my view materially assist Safety Mate with its primary contention regarding the construction of clause 2.2.1. This is because it does not assist in resolving the tension that exists with the clear and direct language regarding the requirement that the ‘written notice’ is ‘to expire on the expiry date of the Initial Term…’. As has been seen, that expiry date is discernible from the definition of ‘Initial Term’ because it ‘means 2 years from the Commencement Date’. Further, it is not the case that clause 2.2.1 would be without utility if the Initial Term lapses in any event. Termination is a different matter and the clause requires not less than six months’ notice to be given by a terminating party. Such notice may also have utility for either party in and of itself. In addition, other terms of the Agreement engage where the Agreement is terminated (as opposed to lapses), a good example of which is clause 15.
(h)Further, and notwithstanding the poor and clumsy drafting of various aspects of clause 2.2, it is in my view evident from the terms, framework, and structure of clause 2.2 that the objective intention of the parties is for the clause to operate in respect of set two-year blocks, subject to termination under clause 2.2.1 or termination for cause under clause 14. So much is apparent from the terms of clause 2.2 itself and the definition of Initial Term, which is stated to mean ‘2 years from the Commencement Date’. Commencement Date is defined to mean 1 October 2017.
(i)Having regard to the observations in the preceding sub-paragraph, construing clause 2.2.1 in the way that I have sits harmoniously and comfortably with the structure and framework of all of clause 2.2 and its place in the Agreement, including its relationship with the termination for cause provisions in clause 14. It also sits well with the object and purpose of the Agreement insofar as that relates to the grant of exclusive distributorship rights in the Territory for the benefit of both parties.[7]
Submissions
[7]Reasons, [213]–[214] (emphasis in original) (citations omitted).
Safety Mate submitted that clause 2.2.1 contained an obvious error in drafting and the task of the judge was to fix the mistake rather than resolve any ambiguity in the language of the clause. Safety Mate emphasised the word ‘earlier’ and submitted that a notice provided under clause 2.2.1, which must expire on the expiry date of the Initial Term, cannot be described as an ‘early’ termination. It submitted that properly interpreted, the ‘earlier’ termination in clause 2.2.1 must therefore mean termination before the expiry date of the Initial Term. It submitted that this was not ‘uncommercial and absurd’ in light of the increased use of termination for convenience clauses in commercial contracts.
ATG submitted that clause 2.2.1 is ambiguous, as conceded by Safety Mate at the trial, and contains a constructional choice between ‘early’ termination and the expiry of the notice on the expiry date of the Initial Term. ATG submitted that a reasonable businessperson is likely to consider that the key element of clause 2.2.1 is the precision which it affords as to how notice is to be given, rather than the ‘earlier’ termination. It also submitted in the context of the Agreement, considering the months of negotiations and extensive lead times involved in the manufacturing and distribution process, ‘early’ termination would be ‘uncommercial and absurd’.
Analysis
The several matters referred to by the primary judge in paragraph [214] (see [50] above) point conclusively to the way in which a reasonable businessperson would have understood clause 2.2.1. There is no error in the reasoning of the primary judge and we agree with the reasons, which we do not need to repeat.
If the written notice is given, as contemplated by clause 2.2.1, the termination of the Agreement is clearly expressed to be the end of the Initial Term and not some other date. As noted by the primary judge, the use of the word ‘earlier’, although unfortunate, does not undermine or affect the clearly expressed words relating to the termination date.
Although the Agreement terminated automatically after the Initial Term, the giving of the notice referred to in clause 2.2.1 would have the effect of foreclosing any attempt by Safety Mate to extend the Agreement under clause 2.2.2.
As submitted by ATG, the construction advanced by Safety Mate would lead to the peculiar situation where notice could be given immediately after execution of the Agreement and any time thereafter, to terminate six months later, and that the only notice that could not be given was a notice (given at least six months earlier) terminating on the expiry of the Initial Term, the very termination date specifically referred to in the Agreement. Such a construction is entirely illogical for the reasons given by the judge. Further, had the notice referred to an earlier termination date of 21 September 2019, that is nine days earlier than the Termination Notice, such notice would, according to Safety Mate, be valid, an extremely peculiar situation.
Accordingly, the constructional choice between termination earlier or on the expiry date compels a conclusion that termination is on the expiry date of the Initial Term. Earlier is simply too elusive a concept compared to the certainty of the termination at the end of the Initial Term.
Leave to appeal on this ground is refused.
Grounds 2 and 3: The Good Faith issue
As noted earlier, the alleged failure to act in good faith in relation to the four identified matters are not relevant as independent grounds or breaches but rather in the context of the ability to give the Termination Notice. Therefore, it is important to understand the relationship between the parties prior to the Termination Notice and the reasons that informed the decision to terminate.
Judge’s reasons
After setting out the relationship between the parties in detail (see [44] above), the judge said:
The decision to terminate the Agreement came about in the manner and circumstances outlined earlier in these reasons. It was apparent that Mr Browning and Mr Sheerin each held the view that the relationship between ATG and Safety Mate was strained and challenged, that Safety Mate was difficult to deal with, and that there remained material differences between ATG and Safety Mate regarding ATG’s desired approach to the market. I accept that these views were genuinely held by each of Mr Browning and Mr Sheerin — noting also that the evidence established that the relationship was at least strained and challenged and that there remained material differences between ATG and Safety Mate regarding ATG’s desired approach to the market. I also accept, as the evidence established, that each of Mr Browning and Mr Sheerin genuinely considered that Mayo would be a good replacement, more collaborative, and a better overall partner than Safety Mate. This was based upon aspects of Mr Sheerin’s industry knowledge and experience, some background work he had done, and his communications with Mayo regarding the prospect of being appointed.
…
As will be seen from the discussion that follows on the good faith issue in this section of the reasons, no ulterior or improper motive or purpose emerged from the evidence and it was apparent that the position taken by ATG was seen by Mr Browning and Mr Sheerin to be a genuine and rational commercial decision in the circumstances, which the evidence also demonstrated to be so. The evidence did not show or suggest that the decision was dishonest, capricious, arbitrary, or unreasonable — or even that it was hastily reached. It was also apparent that ATG genuinely and reasonably considered that it was entitled to terminate the Agreement pursuant to clause 2.2.1. Safety Mate has not established that the exercise of the right to terminate the Agreement was exercised in breach of ATG’s obligation to act in good faith. On the contrary, the evidence established that ATG was exercising a contractual right in what it genuinely and honestly considered to be its legitimate commercial interests, as it was entitled to do. In so acting ATG was acting in accordance with the terms of the Agreement. It was not acting for a purpose extraneous to the contract, acting in a way that substantially nullified the bargained for objective or benefit, acting oppressively, or acting in a way that otherwise reflected any of the hallmarks of an absence of good faith.[8]
[8]Ibid [318], [322] (citations omitted).
In addition, the judge dealt with the substance of each of the four matters alleged to constitute breaches of the duty of good faith, and found that they were not made out. The only relevant matter, the subject of the appeal, is the alleged use of the confidential information of Safety Mate in breach of the Agreement, with the contended consequence, namely, that the Termination Notice was not given in good faith.[9]
[9]The other three matters are:
•appointing Mayo as PSP (breach of clause 4.2.1);
•refusing to accept four purchase orders (breach of clause 4.3);
•supplying gloves to Mayo (breach of clauses 4.1.1, 4.1.5, 4.1.6 and 4.3).
Submissions
Safety Mate submitted that the use of confidential information by ATG, in order to engage Mayo as the new PSP, and in breach of clause 16 of the Agreement, was an act of bad faith, thereby effectively precluding ATG from issuing the Termination Notice.
ATG submitted that there was no breach of clause 16, but even if there was, this did not prevent ATG from issuing the Termination Notice substantially for the reasons given by the judge.
Further submissions will be referred to where relevant.
Analysis
As noted, the judge dealt with this submission on the basis that any breach of clause 16 did not impugn ATG’s decision to terminate the Agreement pursuant to its contractual right because the decision was not dishonest, capricious, arbitrary or unreasonable. The judge said:
Although there were contested issues regarding, among other things: whether various aspects of the information referred to in the Information Table were captured by the broad but somewhat poorly drafted definition of ‘Confidential Information’; whether much of the information was ATG’s own information; whether Safety Mate’s claims of misuse of information were exaggerated; and whether ATG was permitted to disclose the information under clause 16.2.2, it is not necessary to determine these issues. Much of the detail of the issues is apparent from the Information Table comprising Annexure A to these reasons. It is not necessary to determine these issues because even if what is alleged by Safety Mate to be captured by the definition of Confidential Information is assumed to be correct, and it is assumed that disclosure of the information breached clause 16 of the Agreement, it does not give rise to a breach of good faith by ATG in the exercise of the termination right under clause 2.2.1 that would invalidate the termination decision or the Termination Notice.
…
The decision to terminate came about and the Termination Notice was issued in the circumstances earlier referred to. It involved the exercise by ATG of an express contractual termination right that each of ATG and Safety Mate had the right to exercise. That right was exercised by ATG against the backdrop that I have earlier described and in circumstances where it was exercised on the basis of honestly and, genuinely held views regarding the commercial relationship between the parties. It has not been shown to have been exercised for a motive or purpose antithetical to the Agreement or to have been exercised arbitrarily, capriciously, unfairly, oppressively or unreasonably.
The essential point is this: even assuming that ATG disclosed ‘Confidential Information’ to Mayo in breach of clause 16 in the way that was alleged, it does not relevantly impugn ATG’s decision to terminate the Agreement, the exercise of its contractual right pursuant to clause 2.2.1, or the Termination Notice. Whilst such disclosure would, on the assumptions made, be a breach of clause 16.1, it does not in the circumstances establish that ATG breached its good faith obligation in the exercise of its power to decide to terminate the Agreement. This remains the case even if by so acting it is assumed that such disclosure would also constitute a separate breach of the good faith obligation in clause 12.2. This does no injustice to Safety Mate because it would have been open to Safety Mate to pursue, for example, separate claims for the relevant breaches of contract, including claims for damages, if any damage was suffered by reason of such breaches. That course was not taken, no doubt responsibly by counsel and solicitors for Safety Mate, and these observations do not imply any criticism of that course. However, the assumed breach of clause 16.1 in the present circumstances cannot be fashioned or reshaped into a breach of good faith by ATG in the exercise of its contractual right to exercise the reciprocal power to terminate the Agreement pursuant to clause 2.2.1 so as to impugn or invalidate that termination.
…
Given the above and the absence of any separate claim in relation to the alleged disclosure of confidential information it is not necessary to determine the contested issues as to whether the information in question was ‘Confidential Information’ or whether ATG was entitled to disclose it pursuant to clause 16.2 of the Agreement by reason of, among other things, the execution of the confidentiality deed.[10]
[10]Reasons, [333], [335]–[336], [341] (emphasis in original) (citations omitted).
The ability to terminate the Agreement is clear and unconditional, and does not depend on and is not conditioned by ATG not being in breach of the Agreement. As noted by the judge on several occasions, there is no separate claim for breach. Rather, the suggested breaches were specifically tied to the Termination Notice. We agree with the analysis by the primary judge referred to above.
There is no specific challenge to the judge’s findings and conclusion based on the circumstances that the decision to terminate was not exercised ‘arbitrarily, capriciously, unfairly, oppressively or unreasonably’.[11]
[11]Ibid [335].
We do not accept the submission that the Termination Notice was not given in good faith because ATG allegedly supplied confidential information to Mayo, which lead to the appointment of Mayo as the new PSP, thereby enabling the Termination Notice to be given.
There is no error in the judge’s reasoning or analysis.
The content of the duty of good faith in relation to the Termination Notice must be assessed in context and having regard to the particular facts and circumstances. The analysis is not the same as a claim for breach of a specific obligation. In fact, as pointed out by the judge, whether or not there is a breach does not necessarily impact upon or control the honesty that informs the good faith obligation.
ATG did not regard the provision of such information (the PowerPoint presentation and the proforma invoice)[12] as a breach of clause 16. Further, it took steps to protect Safety Mate’s interests by requiring the execution of a non-disclosure agreement by Mayo.[13] ATG was entitled to deal with Mayo. The reasons for termination had emerged much earlier and it is not surprising that ATG wished to identify a new distributor before terminating the Agreement. This is not bad faith or dishonesty, but an honest and legitimate manifestation of its commercial interests and contractual right.
[12]This was the only suggested confidential information given before the Termination Notice.
[13]Cf clause 16.2, which required ATG to obtain a binding undertaking as to confidentiality before any otherwise permitted disclosure of Safety Mate’s confidential information.
As the cases to which the judge referred illustrate,[14] good faith means honesty and acting with propriety. The use of the suggested confidential information — not pursued as a separate breach — does not mean that the Termination Notice was not given in good faith, following the ‘lining up’ of Mayo to take over from Safety Mate as the new PSP from 1 October 2019.
[14]See Reasons, [303]–[312].
No point as such was made about the ‘lining up’ of Mayo and discussions in relation thereto. Rather, the only point made was that the disclosure to Mayo of confidential information set in motion a chain of events that led to the Termination Notice, itself an act of bad faith. The logic is erroneous and involves a series of non sequiturs.
Accepting that the information comprising the PowerPoint presentation and the proforma invoice was confidential, as apparently conceded, there was no misuse of such information. ATG considered that it was entitled to use this information pursuant to clause 16.1.3 or clause 16.2.2, or both. ATG honestly believed that it was entitled to use the information and that such use would not constitute a breach of clause 16. It took steps that it thought were required in order to avoid breaching the clause. It may have been mistaken — a matter not necessary to decide — but nonetheless acted honestly. Having secured Mayo in circumstances that it considered to be entirely appropriate and available, ATG genuinely believed that, as was its right, the Termination Notice should be given. There is nothing dishonest about such behaviour. ATG, as demonstrated, had good reason to terminate and the anterior conduct in ‘lining up’ Mayo was both understandable and honest.
Further, there is no evidence that Mayo only agreed to become a PSP because of the receipt of the suggested confidential information and not otherwise.
Finally, unlike the Canadian case[15] relied on by Safety Mate, the anterior conduct of ATG was not dishonest or deceptive. In Bhasin, the relevant anterior conduct was dishonest and deceptive, and it continued and informed the very decision to terminate.
[15]Bhasin v Hrynew [2014] 3 SCR 494 (Supreme Court of Canada); [2014] SCC 71 (‘Bhasin’).
We do not accept the submission by Safety Mate that the whole of the conduct must be examined. The decision to terminate did not require the formation of any opinion or basis for such termination. Rather, it was a termination as of right and for the benefit and convenience of both parties. The evidence is clear as to why the decision was made. It was not arbitrary or capricious and did not offend the standard of honesty or reasonable conduct because information was given to a potential successor, information that ATG believed was necessary, relevant and that it believed it was entitled to give and (although not necessary to decide) probably was.[16] We agree with the judge that the conduct of ATG was entirely appropriate in the circumstances.
[16]Clause 16.2.2 specifically permitted disclosure of ‘Confidential Information’ ‘as may be required … or to any … prospective customers’. For the reasons given, disclosure to Mayo was required. Further, the evidence of Mr Sheerin is to the effect that the suggested confidential information was in any event ‘independently developed’ by ATG (clause 16.1.3).
Leave to appeal on this ground is refused.
Ground 4: The Exclusion Clause issue
This relates only to the sum of $25,266 comprising order PO 964. The judge held that the failure by ATG to supply the order, although a breach of clause 13.1 of the Agreement, was not recoverable because of the exclusion clause.
Judge’s reasons
After setting out the relevant clause and the submissions of the parties, the judge said:
Applying the established principles of construction referred to above, ATG’s liability to pay Safety Mate the Loss Amount is a liability captured and excluded by the terms and operation of clause 13.1. Although not eloquently drafted, it is evident that the terms engage with the liability and capture it. The liability in respect of the Loss Amount is captured by the language of clause 13.1 because it was in respect of a ‘claim’ ‘arising in the course’ of the Agreement and arising ‘as a result’ of the ‘breach’ of the Agreement by ATG.
Upon its proper construction, the reference to ‘breach’ includes a breach of the Agreement, subject to the carve outs in clauses 13.1.1 and 13.1.2. Whilst the liability cannot be said to ‘result’ from the Agreement, it does arise ‘in the course’ of it. Upon its proper construction this expression means during its course — as opposed to before the Agreement or after it has ended. These are meanings that a reasonable businessperson would give to the terms. I add that it was not submitted that the liability was excluded by the terms of the carve outs to the exclusions in clauses 13.1.1 and 13.1.2, which was not surprising.
Assuming for the moment that clause 13.2 is to be seen as a stand-alone exclusion clause rather than a qualification or elaboration on the kinds of loss to which the exclusion in clause 13.1 applies, then this would also capture ATG’s liability for the Loss Amount. This is because the liability for the Loss Amount is in respect of a claim for damages for one or more of: loss of profit; loss of anticipated profit; loss of revenue; and indirect or consequential loss or damage, arising during or in the course of the Agreement (but not resulting from it).
If, however, clause 13.2 was to be construed as a qualification or elaboration on the kinds of loss to which the liability exclusion in clause 13.1 applies, the position is no different. This is because each of the clauses would still engage for the reasons mentioned.
The end point is that ATG’s liability to Safety Mate for the Loss Amount is excluded by the terms and operation of clauses 13.1 and 13.2 of the Agreement.[17]
Analysis
[17]Reasons, [534]–[538] (citations omitted).
In our opinion, there is no error in the primary judge’s reasons and finding that the loss and damage suffered in relation to order PO 964 ($25,266) was excluded by clauses 13.1 and 13.2 of the Agreement. It is not necessary to read down these provisions and they are clearly directly and self-evidently applicable.
We reject Safety Mate’s submissions to the effect that there is any ambiguity in the clauses so as to require their construction contra proferentem.
Leave to appeal on this ground is refused.
Disposition
For the reasons given, leave to appeal is refused on all grounds.
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