Sampford IXL Pty Ltd & Anor v Whirlpool (Australia) Pty Ltd
[2009] VSC 335
•14 August 2009
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
List C
No. 6086 of 2009
| SAMPFORD IXL PTY LTD (ACN 123 411 898) and SAMPFORD & STAFF PTY LTD (ACN 005 137 039) | First Plaintiff Second Plaintiff |
| v | |
| WHIRLPOOL (AUSTRALIA) PTY LTD (ACN 003 578 023) | Defendant |
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JUDGE: | BYRNE | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 27 July 2009 | |
DATE OF JUDGMENT | 14 August 2009 | |
CASE MAY BE CITED AS: | Sampford IXL Pty Ltd v Whirlpool (Australia) Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2009] VSC 335 | |
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Contract – interpretation of contract – distributorship agreement – provision that upon termination supplier “will take on any unexpired warranty liabilities of” distributor – what warranty liabilities? – matrix evidence – evidence of facts known to predecessors of negotiating parties – whether available as an aid to construction.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr James D Elliot SC and Dr Michael D Rush | Deacons |
| For the Defendant | Mr Michael F Wheelahan SC and Mr Timothy JF McEvoy | Freehills |
HIS HONOUR:
By a distributor agreement dated 20 April 2007 entered into between the firstnamed plaintiff, Sampford IXL Pty Ltd (“SIXL”), as distributor and the defendant, Whirlpool (Australia) Pty Ltd (“Whirlpool”), as supplier, Whirlpool appointed SIXL as exclusive distributor to sell and service in Australia its Jenn-Air branded refrigerators and parts.[1] The Whirlpool agreement, which was for a term of three years, contained a provision for termination by either party upon 12 months notice. On 26 February 2008 SIXL gave notice of termination so that the agreement was terminated on 26 February 2009. The agreement also contained in cl 14.(c)(5) a provision that, upon termination, “[Whirlpool] will take on any unexpired warranty liabilities of [SIXL]”.
[1]I shall refer to this agreement as “the Whirlpool agreement” where it is necessary to distinguish it from a distributor agreement enetered into some five years earlier with Maytag
The parties have fallen into dispute as to a number of matters arising out of their relationship which are the subject of this proceeding. They have agreed that the determination of the following question might assist them in resolving these matters. Accordingly, on 29 June 2009 I ordered pursuant to Rule 47.04 that the following question be tried and determined before other questions in the proceeding.
Having regard to such relevant and admissible evidence as may be adduced, on the proper construction of the Distributor Agreement (as defined in paragraph 13 of the Further Amended Statement of Claim), what are the obligations of:
(a) Whirlpool; and
(b) SIXL,
in relation to claims, made after 26 February 2009, which give rise to a warranty liability of SIXL?
In response to my request each of the parties has submitted a proposed answer to this preliminary question. The suggested answer of the plaintiffs was as follows:
(a)SIXL has primary liability to purchasers of Jenn-Air refrigerators for the performance of its warranty obligations, namely, a 5 year warranty for all parts and labour and a further 5 years for compressors (parts only);
(b)the Distributor Agreement imposes a duty on Whirlpool to take on the performance and cost of all of SIXL’s warranty obligations upon the effective date of termination.
The answer proposed by Whirlpool is as follows:
(a)Whirlpool is obliged to take on the servicing of any such claims (being the responsibility for the actual performance and cost of such service) if –
(i)the claim relates to a failure of parts occurring within the term of the 12 months manufacturer’s warranty referred to in clause 9(a) of the Distributor Agreement, or
(ii)there has been an “epidemic failure” for the purposes of clause 9(b) of the Distributor Agreement, and the claim relates to a fault in respect of such epidemic failure.
(b)SIXL is solely responsible for any claims against it which are not referred to in part (a)(i) and (ii) above; and are the subject of SIXL’s own re-sale or extended warranties or warranties arising under local laws in respect of which it is liable.
The Terms of the Agreement
Clause 13 provides for six circumstances in which the agreement may be terminated prior to the end of its term. It is sufficient that I summarise them briefly.
(1)Whirlpool or SIXL may terminate the agreement “without prejudice to other claims” upon the happening of any of certain specified events – these include uncured defaults and breaches of the agreement of various kinds;
(2)Whirlpool or SIXL may immediately terminate the agreement upon one or other of them becoming insolvent or bankrupt or breaching the agreement;
(3)Whirlpool may terminate the agreement upon 12 months notice if SIXL sells its business or becomes distributor for a competing product;
(4)SIXL may terminate the agreement upon 12 months notice if Whirlpool or its business is sold to another party or restructured;
(5)Whirlpool or SIXL may terminate the agreement with or without cause upon 12 months written notice; and
(6)the agreement may be terminated or varied by mutual agreement of the parties.
I pause to observe that there is a good deal of overlap in these terminating events.
Clause 14 deals with the effects of termination. It is in the following terms:
14. EFFECTS OF TERMINATION
(a)Termination shall not create any liability unless explicitly set forth in this Agreement. [Whirlpool] and [SIXL] have fully considered the need to make expenditures incident to performance of this Agreement and assume the risk of loss upon termination by expiration or otherwise. [Whirlpool] and [SIXL] not be liable in law or equity to the other for the loss of present or prospective profits or expenditures, investments or commitments made in connection with establishment, development or maintenance of its business or be entitled to any compensation whatsoever, and [SIXL] not be entitled to any severance and/or termination compensation whatsoever.
(b)Notwithstanding anything to the contrary, termination not affect the rights or obligations of [Whirlpool] or [SIXL] intended to survive termination, including but not limited to rights and obligations under clauses 7, 9, 10, 11, 12, 14, 17 and 18.
(c) Upon the effective date of termination:
(1)The entire balance of any and all monies owed by [SIXL] to [Whirlpool] or any of its affiliated or related corporations or assignees mature and become immediately due and payable in full;
(2)[Whirlpool] will repurchase the inventory of Contract Product or Parts in [SIXL’s] possession at the lower of the then current net list prices for such Contract Product or Parts or the net prices actually paid by [SIXL] for such Contract Product or Parts. The net price shall be calculated to include transportation, finance, tax, duty and import charges. A complete inventory of Contract Product and Parts shall be provided by [SIXL] to [Whirlpool] upon contract execution and every year thereafter. Contract Product held for twelve months and Parts held for three years will be discounted by 50% of the above net price paid;
(3)[SIXL] shall immediately return all technical and Proprietary Information provided by [Whirlpool] and shall not thereafter use or disclose any information relating to Contract Product or Parts unless such information becomes public through no fault of [SIXL];
(4)[SIXL] shall immediately take all action necessary to terminate all registrations, licenses, consents and authorisations obtained by [SIXL] pursuant to this Agreement; and
(5)[Whirlpool] will take on any unexpired warranty liabilities of [SIXL].
(d)Acceptance of any order and sale of any Contract Product or Parts after notice of default or termination of the Agreement by expiration or otherwise is not a waiver of such or a renewal or extension of the Agreement. Any such transactions shall be governed by the terms and conditions of this Agreement including but not limited to [SIXL’s] obligations of repair and service.
(e)[SIXL] acknowledges and agrees that any breach of the terms of this Agreement by [SIXL] shall constitute “good cause” for termination by [Whirlpool] under any laws or regulations of the Territory.[2]
[2]This is a very puzzling provision. It is not necessary that I interpret its meaning or make a finding as to its function in the agreement.
As appears from my summary of cl 13, premature determination of the agreement may occur in any of a number of circumstances. These include the agreement of the parties to do so, the unilateral act of giving notice with or without cause and for a breach of the agreement. Clause 14, dealing with the effects of termination, applies to each of these causes of termination without distinction. This is a little surprising given that cl 14(a) provides that termination, presumably even for breach, does not create any liability in either party. It was put on behalf of SIXL that this was an indication of the decision of the parties to make a “clean break” when the agreement is terminated for whatever reason.
The critical provision of cl 14 for present purposes is cl 14(c)(5) which I set out again:
(c) Upon the effective date of termination:
(5)[Whirlpool] will take on any unexpired warranty liabilities of [SIXL].
The preliminary question requires me to identify the warranty liabilities of SIXL which are referred to in this paragraph and which Whirlpool is to take on. On behalf of SIXL, it was said that these were the liabilities which it owed to its customers. The submission of Whirlpool was that these were the liabilities which SIXL had assumed under cl 9.
And so it is to this clause that I now turn. It is in the following terms:
9. WARRANTIES
(a)Subject to clause 11.2, Contract Product is sold by [Whirlpool] to [SIXL] with 12 months Parts only warranty with the exception of Epidemic Failures detailed in clauses 9(b)(1)-(10).
(b)Epidemic Failures
(1) …
(c)[SIXL] shall follow the [Whirlpool] warranty procedures annexed to this Agreement[3], as modified by [Whirlpool] from time to time, of which it has been notified; arrange for prompt and conclusive settlement of all consumer and dealer complaints regarding Contract Product at [SIXL’s] expense; and make all necessary Contract Product repairs and replacements including product enhancements made by [SIXL].
(d)[SIXL] is solely responsible for any re-sale or extended warranties provided by [SIXL] or required by local laws which exceed that provided by [Whirlpool] as stipulated in 9(a).
(e)[SIXL’s] warranty and service obligations survive termination of this Agreement and continue for the duration of those obligations, unless otherwise determined by [Whirlpool].
(f)[SIXL] warrants that its performance covered by this Agreement shall be of a high standard compared to other industry standards.
[3]There is no such annexure.
Clause 9 deals with a number of different “warranties”:
· warranties owed by Whirlpool to SIXL;[4]
· warranties owed by SIXL to its customers;[5]
· warranties owed by SIXL to Whirlpool;[6]
·the apportionment of responsibility to the customers of SIXL in the event of an “epidemic failure”.[7]
[4]Clause 9(a).
[5]Clauses 9(c) and (d).
[6]Clauses 9(c) and (f).
[7]Clause 9(b).
The agreement is, of course, one made between Whirlpool and SIXL; the customers of SIXL are not parties. Its provisions, therefore, cannot affect the warranties and other liabilities which may arise from agreements entered into between SIXL and its customers for the sale and service of the product, except insofar as the agreement requires SIXL to attend to the customers’ requirements in a particular way[8] or Whirlpool agrees to indemnify or contribute to the cost of SIXL’s performance of its obligations to its customers.[9]
[8]Clause 9(c) and (f). See also cl 3(a).
[9]See cl 9(b).
With this in mind, I look more closely at cl 9. As will appear, its drafting might be criticised but its intent is clear. Part (a) sets out the warranty offered by Whirlpool to SIXL. It is a 12 months parts only warranty. This may be of very limited benefit to SIXL since the 12 month term presumably runs from the date of its purchase of the part from Whirlpool or, perhaps, from the date of its delivery. Given the interval which might exist between this time and the on-sale to the customer of SIXL, the defect may not appear until after the expiry of Whirlpool’s warranty period. Nevertheless, the intent of the provision appears to be clear. Within its limitations, Whirlpool will pay for parts only if a defect should appear within its warranty period, whether or not the product has been sold to an SIXL customer. If labour should be required to remedy the defect, this will be the responsibility of SIXL. This Whirlpool warranty is, therefore, unrelated to a sale by SIXL or to any warranty given by SIXL or imposed by law in the event of sale to its customer. Any SIXL sale warranty to its customer is its own responsibility; the legal effect of cl 9(a) is only that SIXL might look to Whirlpool for the free supply of a part or for payment for a part, if the defect appears within the Whirlpool 12 month warranty period.
Clause 9(d), rather awkwardly, makes this plain:
(d)[SIXL] is solely responsible for any re-sale or extended warranties provided by [SIXL] or required by local laws which exceed that provided by [Whirlpool] as stipulated in 9(a).
The awkwardness arises from a confusion, which is present throughout the agreement, between the liabilities of Whirlpool to SIXL and those of SIXL to its customers.
Part (d) appears to be drawn on the erroneous basis that, if a defect appears within the Whirlpool warranty period, SIXL is not solely responsible to its customer. What is clear from part (d), however, is that, apart from the comfort given by part (a), Whirlpool will not stand behind its distributor for any other of its warranty liabilities to its customers. Notwithstanding the unqualified terms of part (d), it appears to be subject to the provisions of part (b) which are specifically referable to epidemic failures. Broadly speaking, where the number of failures within a period exceeds a stipulated base number, part (b) provides a specific and rather complicated regime for them to be dealt with, with a greater responsibility imposed on Whirlpool. Again, the drafting displays a confusion between the responsibilities of SIXL and Whirlpool to each other, and those of SIXL to its customers. SIXL remains liable to its customers in terms of its contract with them or otherwise under law, irrespective of whether the defect is one of an epidemic failure and notwithstanding that Whirlpool does or does not assume responsibility under part (b). In the event that SIXL be not so liable to its customers, part (b) has no work to do unless, perhaps, Whirlpool decides that it is expedient to attend to the defect.
This said, part (b) provides for different results with respect to a defective product upon epidemic failure depending upon whether Whirlpool, not SIXL, decides to repair it, to replace it or to reimburse the customer. It is not necessary that I attempt to summarise these complicated and often inconsistent provisions dealing with the respective responsibilities of SIXL and Whirlpool. It is sufficient that I note that they do not deal with the warranty liabilities of SIXL to its customers, as such. They create liabilities in Whirlpool in favour of SIXL.
Part (c) obliges SIXL to deal with complaints of its customers in a particular way: they are to be dealt with promptly and resolved conclusively. It may be that part (f) imposes an associated obligation. SIXL undertakes in that part that its performance, covered by the agreement, including, it may be supposed, its performance of its warranty and service obligations, will be of a proper standard.
Finally, there is part (e) which is in these terms:
[SIXL’s] warranty and service obligations survive termination of this Agreement and continue for the duration of those obligations, unless otherwise determined by [Whirlpool].
This appears to be a duplication of cl 14(b), and perhaps cl 14(d), which I have already set out.[10] It is not altogether clear what it refers to. It ought not to be a reference to a warranty and service obligation of SIXL to its own customers because these arise and continue irrespective of the distributorship agreement to which the customer is not a party. It will be recalled that, under cll 2 and 3 of this agreement, SIXL assumes obligations and functions with respect to both sale and service of the Whirlpool product. In the normal course, these obligations might be expected to cease upon termination of the agreement. Nevertheless, after termination, it is likely that SIXL has continuing obligations to its customers to service and repair defective product in terms of its own sale agreements with them or by law. It is not difficult to understand that Whirlpool has an interest in ensuring that these ultimate purchasers and users of its product remain satisfied. It must be, then, that what is to survive the termination of the agreement is the obligation imposed upon SIXL by cll 9(c) and (f) to resolve complaints and to carry out repairs to perform servicing promptly and to an appropriate standard in accordance with the terms of the warranties which it has given to its customers under its sale agreements. If the expression “[SIXL’s} warranty and service obligations” in part (e) is to have any meaning, it must mean the obligations which SIXL has under its agreement with Whirlpool which relate to its own warranty and service obligations to its own customers.
[10]See para [6] above.
It was argued, too, on behalf of Whirlpool, that the warranty and service obligations mentioned in part (e) include the obligations which SIXL undertook in respect of epidemic failures under part (b). Reference was made, by way of example, to cl 9(b)(6) which deals with the responsibilities of Whirlpool and SIXL where Whirlpool elects to have the defective product replaced. As best I can understand this provision, Whirlpool agrees to replace the product in its unimproved condition at no cost or expense to SIXL. This said, it goes on to provide that SIXL must bear the cost of any product enhancements required to replace the product and, where the replacement is to be delivered outside Victoria, Whirlpool will pay only 34% of the freight. It will be seen that this provision, like other provisions of part (b), does not impose on SIXL any warranty obligation. If it has an obligation to its customer to replace a defective product, this arises as a legal incident of its sale to the customer. The warranty and service obligations of SIXL which are referred to in part (e) cannot, therefore, include such an obligation arising under part (b); there is none.
I return now to cl 14(c)(5) and to the fundamental question which it raises. What are the unexpired warranty liabilities of SIXL to which it refers? Having regard to my analysis of cl 9, the choice lies between the liabilities of SIXL to its customers and the liabilities of SIXL to Whirlpool to ensure that it fulfils its own obligations towards its customers. So expressed, the answer is apparent; the reference in cl 14(c)(5) must be a reference to the liabilities of SIXL to its own customers. The alternative would be productive of little value to either party. It would have the consequence that Whirlpool took on those liabilities of SIXL to Whirlpool which require that SIXL must promptly and properly fulfil its obligations to its customers.
This conclusion must address a serious practical difficulty which was much relied upon by counsel for Whirlpool. It is that I should not lightly infer that Whirlpool would have agreed to assume the liabilities of SIXL where these are liabilities over which it has no control and of which it may have no knowledge. Furthermore, they contended, such a conclusion flies in the face of cl 9(d). Add to this, another consideration which was not mentioned in argument before me. It is that the warranty liabilities of SIXL might arise through no fault of Whirlpool. For example, a service call badly performed, perhaps carried out in breach of cl 9(f), by SIXL may lead to further defects. It would be unreasonable for Whirlpool to take on this liability which would be covered by SIXL’s warranties to its customer.
Counsel on behalf of SIXL pointed in response to the fact that Whirlpool would be aware of the SIXL marketing strategies.[11] These strategies in 2005 included the fact that SIXL sold the refrigerators with a five year warranty for parts and labour and a further five year warranty for the compressor (parts only). This fact, however, cannot assist me in the task of construing an agreement made previously. SIXL also argued that, if the warranties covered by cl 14(c)(5) were restricted to those mentioned in cl 9, the benefit to it would be largely illusory. Finally, they argued that the construction of cl 14(c)(5) for which they contended was consistent with the other parts of cl 14(c) which contemplate that, upon termination, there should be a clean break. How, they argued, could SIXL be expected to carry out its warranty obligations when its inventory of product and parts had been repurchased by Whirlpool[12] and it is no longer entitled to the intellectual property required for the purpose of carrying out those obligations[13]?
[11]See cl 3(b).
[12]Pursuant to cl 14(c)(2).
[13]Pursuant to cl 14(c)(3) and (4).
Further practical difficulties were raised in the way of the construction offered by Whirlpool. Following the termination of the distributorship agreement, where are the customers to turn for their entitlements under the warranties given by SIXL? They would normally turn to SIXL for all of these.[14] They would be entirely unaware of arrangements in place between SIXL and Whirlpool. If a defect arose including a defective part within the Whirlpool warranty under cl 9(a), how is Whirlpool to “take on” this liability?
[14]This is contemplated in cl 9(d).
At a purely construction level, it was acknowledged by both parties that cll 14(c)(5) and 9(d) did not sit easily together. The interpretation contended for by SIXL would require the insertion in cl 9(d) of words such as “subject to cl 14(c)(5)”; that urged on behalf of Whirlpool would require the modification of cl 14(c)(5) so that it referred only to “those unexpired warranty obligations of [SIXL] to Whirlpool, pursuant to cl 9”. For reasons which I have endeavoured to expound in my analysis of cl 9, it is not at all clear what those warranty obligations are.[15]
[15]It may be, too, that some consequential accommodation would have to be made for cl 11(a).
I will not hesitate in this case to insert words in one or other of these provisions in order to provide a commercially sensible solution to these apparent inconsistencies. I will do so because the agreement is a commercial document prepared by commercial parties to achieve a commercial result. Furthermore, the document bears the hallmarks of confused legal thinking and poor drafting, to some of which I have already referred. I would, therefore, approach the task in a practical rather then an overly technical way. This does not mean, however, that I must neglect entirely the words the parties have chosen to employ.
The use of the expression “take on” in cl 14(c)(5) provides a significant clue for the resolution of the present case. It, too, appears to spring from the confusion between the liabilities existing as between Whirlpool and SIXL, and those between SIXL and its customers. In a context such as the present, the expression must mean that Whirlpool will assume responsibility for the warranty liabilities. This must refer to an assumption of commercial responsibility: the person legally liable is, of course, SIXL. This legal liability cannot be taken on by Whirlpool without some agreement with the customer - the person to whom it is owed. Looking at the expression from a commercial, rather than a legal, perspective, it must be assumed that the parties expected that, when the distributorship agreement was terminated, the SIXL customers would be informed that they should look to Whirlpool, or to the new distributor which might be appointed in replacement for SIXL, to perform any warranty obligations which have arisen or might arise. Again, looking at the problem from the same perspective, it is not difficult to suppose that Whirlpool would have a commercial interest in achieving such an outcome. It would ensure that the important work of preserving goodwill attaching to its product by meeting customers’ expectations is handled by itself or by others over whom it may have some control. This might be of particular concern to it in the event that cl 14 came into play as a consequence of poor performance by SIXL.
I should emphasise that, at this point, I have considered the question purely as a question of construction of the distributor agreement giving its words their ordinary everyday meaning, having regard to the commercial purpose exposed by the document. In particular, I have had no regard to the matrix evidence to which I shall now turn. At this point I am persuaded that, upon termination, cl 14(c)(5), prevails over cl 9 so that the construction of the Whirlpool agreement contended for on behalf of SIXL is essentially correct.
The Matrix Evidence
Counsel for SIXL invited me, as an aid to construction, to have regard to evidence of matters and circumstances known to the parties which underlay the contract including its genesis, background, context and its commercial purpose.[16] These background circumstances may also include statements as to the intentions and objectives of the negotiating parties providing there is evidence that they concurred in these.[17]
[16]See Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2001) 219 CLR 165 at 179; Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289 at 293 (HCA).
[17]BP Australia Pty Ltd v NyranPty Ltd (2003) 198 ALR 442 at 458 [34], per RD Nicholson J .
In substance, what appeared was this. The secondnamed plaintiff, Sampford & Staff Pty Ltd (“S&S”), had for many years prior to 2002 conducted the business of importing and retailing products including refrigerators. Since 1980 its products included Jenn-Air refrigerators and this continued when the US corporation, Maytag Corporation, took over Jenn-Air and distributed this product in Australia through a local subsidiary, Maytag (Australia) Pty Ltd (“Maytag”) .
In about September 2002, S&S entered into a distributorship agreement with Maytag under which it became the exclusive distributor of Jenn-Air refrigerators and parts in Australia from 1 July 2002 until 1 January 2006. This agreement contained in cl 14(c)(v) a provision in terms identical to those of cl 14(c)(5), which is the subject of the preliminary question. This Maytag agreement also contained in cl 9 provisions which in some respects resemble cl 9 of the Whirlpool agreement.
Notwithstanding that the Maytag agreement expired in January 2006, the arrangements between Maytag and S&S continued until April of that year. No extension or fresh agreement was entered into. It seems that the parties were content to continue as before.
In March 2006, Whirlpool assumed all the assets and liabilities of Maytag[18] and became the supplier of Jenn-Air refrigerators to S&S. This change in supplier does not appear to have been documented in any formal way.
[18]Statement of claim, para 3(b), defence para 3(a).
In February 2007, S&S sold all of its assets and liabilities to SIXL, an associated company, and thereafter SIXL acted as distributor of the Whirlpool products. Charles Sampford was and is a director of both of these companies.
Following the purchase by Whirlpool of the Maytag business, Professor Sampford, in 2006, set about preparing a new distributor agreement. In August of that year, at the suggestion of Mark Poole, managing director of Whirlpool, the Maytag agreement was adopted as a draft for the purpose of these discussions. On 21 August 2006, Professor Sampford forwarded to Mr Poole a draft agreement which was, in effect, a marked up copy of the Maytag agreement, incorporating his suggested amendments. After some discussion, and further modifications to the draft, the Whirlpool agreement, the subject-matter of this preliminary trial, was agreed to and, in due course, it was executed on 20 April 2007.
This rather long introduction sets the scene for the matrix evidence argument. What was put on behalf of SIXL was that I should receive evidence of the development of the Maytag agreement because this was adopted as a basis for the Whirlpool agreement. Further, I was asked to receive evidence of the negotiations leading to the execution of the Whirlpool agreement as an aid to its construction.
Counsel for Whirlpool adopted a number of positions as to this evidence. First, it was said to be irrelevant, alternatively that it would not be helpful for my task. Then, they contended that, since the evidence with respect to the provenance of the Maytag agreement did not involve Whirlpool, it could not be said to be part of the common understanding underlying the Whirlpool agreement. Finally, they argued that particular passages in the witness statement of Professor Sampford should be excluded as inadmissible.
Turning first to the admissibility question, it was said that, because the evidence of Professor Sampford was uncertain, I should take it as being his impression of what he wanted to achieve in the 2002 negotiations rather than mutually known objective facts. I do not accept this argument. If, as is the case, Professor Sampford’s recollection as to the detail of the conversations is affected by the passage of time, this is a matter which I might bring to bear in assessing its weight. I am mindful also of the dangers referred to by the House of Lords in Prenn v Simmonds.[19] Accepting the relevance of this type of evidence, it attracts no exclusionary rule. This means that I will accept into evidence paragraphs 8, 9, 10 and 18 of Professor Sampford’s witness statement.
[19][1971] 1 WLR 1381 at 1384-5, per Lord Wilberforce.
More difficult is the question whether the evidence is admissible as material relevant to the task of construing the agreement. The conversations and communications leading to the entering into of the Maytag agreement, including the drafts, might be admissible in aid of the construction of that agreement. They could not, however, be used as an aid to the construction of the Whirlpool agreement, unless it were demonstrated that the negotiating parties were aware of them. No evidence was led to suggest that Mr Poole, or any other person on behalf of Whirlpool who was involved in negotiating the Whirlpool agreement, was aware of these things, other than the fact and terms of the Maytag agreement. Accordingly, I decline to act upon this material.
With respect to the negotiations leading to the Whirlpool agreement, the agreed starting point was the Maytag agreement. A copy of this draft with marked up changes and comments was emailed by Professor Sampford to Mr Poole on 21 August 2006. Discussions continued into 2007.
A matter of concern to S&S, as appears in the correspondence, was a recent increase in warranty claims. Under the Maytag agreement the supplier’s warranty was in these terms:
9(a)[Maytag] warrants Product and Parts to [S&S] only in accordance with [Maytag’s] written warranties in effect at the time of sale.
There is no evidence as to the terms of Maytag’s written warranties. Clause 9 concludes with the following provision written in capitals, presumably to provide emphasis.
EXCEPT AS SPECIFICALLY STATED IN THIS AGREEMENT, [MAYTAG] MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS, IMPLIED OR STATUTORY INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR CONFORMITY TO ANY REPRESENTATION OR DESCRIPTION, EXCEPT AS REQUIRED BY APPLICABLE LAW.
The clause also provides that S&S is solely responsible for any resale or extended warranties provided by it or required by local laws.[20] What is known is that, in October 2005, S&S was offering Jenn-Air refrigerators to its customers with a five year warranty for parts and labour and a further five year warranty for the compressor, parts only. In its brochure prepared in December 2006 a similar warranty was offered. In his letter to Mr Poole dated 31 December 2006, Professor Sampford says this:
At the moment we provide the warranty labour and you provide warranty parts…[21]
This assertion was not challenged. It may be, then, that the Maytag warranty referred to in cl 9(a) of the Maytag agreement matched that offered by S&S to its customers, at least from October 2005. Under this Maytag agreement there was, too, in cl 14(c)(v), a provision whereby, upon termination, Maytag “will take on any unexpired warranty liabilities of [S&S]”.
[20]Clause 9(c). Compare Whirlpool 2007 agreement cl 9(d) which is set out at para [10] above.
[21]CB172.
As things apparently stood in 2006, this seems to mean that Maytag was agreeing to take responsibility upon termination for the labour component of the warranty claims, which component had previously been the responsibility of S&S.
One thing appears to be clear in this Maytag agreement. It is that, notwithstanding the statement in cl 9(a) as to the warranties given by Maytag to S&S, confirmed as it is by the capitalised statement in cl 9 quoted above, and notwithstanding the provision of cl 9(c) that S&S was solely responsible for its own resale and extended warranties – notwithstanding all of this, cl 14(c)(v) contained a covenant by Maytag that it “will take on any unexpired warranty liabilities of [S&S]”. In the context of this agreement, this must mean that Maytag, upon termination, was assuming a responsibility for warranties, responsibility for which it had expressly disclaimed in cl 9. The provisions of cl 9 must, therefore, be subject to the specific provision of cl 14(c)(v) in the circumstances where cl 14 operates.
In his letter of 31 December 2006 to Mr Poole, Professor Sampford expresses concern at the cost of current warranty claims and about delays by Whirlpool in processing these claims. He offers two alternative solutions. The first was that Whirlpool should assume responsibility for all warranty obligations, that is, labour as well as parts, and that the cost of this be built into the wholesale price of the product to S&S. The second was that S&S should continue to meet labour costs, but that these costs be shared where the number of claims exceeds an agreed threshold. This second proposal appears to be the genesis for the epidemic failure provision which did not exist in the Maytag agreement but which found its way into cl 9(b) of the Whirlpool agreement.
There must have been some further discussions regarding the warranty claim problems because Professor Sampford on 30 January 2007 sent a letter by email to Mr Poole dealing with this. In a passage in the letter under the heading “Contract”, Professor Sampford sets out his views. The “Paul” referred to is Paul Bridgeford, managing director of S&S:
CONTRACT
Of the various suggestions made by me earlier and discussed the other day, Paul and I think that the following is preferable:
1. 1 year’s parts only warranty as per draft agreement.
2.Further payment only arising for ‘epidemic’ failures (6% failure rates in any part) equal to the parts, labour and transport costs beyond the 6% figure.
The latter reflects what our other partners do in assisting us when we suffer significant service issues with their product – whether or not it is in their contract. Your suggestion goes one better by making explicit the threshold at which the extra assistance kicks in.
The alternative of your taking on all warranty responsibilities (as you would do if the contract ended) for a reasonable increase in price remains open.
It is of interest for present purposes to read here that there is to be a “1 year’s parts only warranty as per draft agreement”. This is different from the Maytag agreement[22] and from any draft of the 2007 agreement which is in evidence. How it came to be is not clear. The allocations of the cost of epidemic failure are now beginning to take their shape.
[22]See para [40] above.
The words in the parenthesis in the last sentence in the quoted passage are tantalising. Counsel for SIXL contended that this brought to the attention of Mr Poole the understanding of Professor Sampford as to the meaning of the provision of cl 14(c)(v) of the Maytag agreement, which was to form part of the new agreement. It was argued that this became part of the matrix because Mr Poole appears not to have challenged Professor Sampford’s assertion as to the meaning of this clause. Nor was the wording of the provision changed; the old cl 14(c)(v) was included as cl 14(c)(5) in the new agreement then under negotiation.
The Whirlpool agreement appears to have been executed on 20 April 2007. What happened between 30 January 2007, when the Sampford email was sent, and the date of execution, is not known. I must assume that, if anything of present significance occurred, it would have been the subject of evidence from one or other of the parties.
Notwithstanding this, I am not prepared to act upon this evidence of Professor Sampford’s understanding and the absence of response. While matrix evidence is often helpful, I approach it with considerable caution. The passage in the email which is relied upon is an aside made in the context of the discussion of a topic which was of some moment for the negotiating parties. This topic was the subject of considerable drafting in cl 9. It is clear, too, that cl 9 was the subject of further drafting both in sub-cl (a) and in sub-cl (d). In this context I am reluctant to place reliance upon Mr Poole’s failure to challenge Professor Sampford’s statement. As appears from the observations of Lord Wilberforce in Prenn v Simmonds,[23] there may be many reasons for a negotiating party to make a statement or not to make a statement. If such a statement is to be used for the purpose of interpreting the document which ultimately comes into existence, it must be clear that both parties understood the statement and accepted it, so that it is objective evidence of their consensus.
[23][1971] 1 WLR 1381 at 1385.
In summary, I will not rely upon the specific matrix evidence offered in aid of my task of construing the agreement. I do, however, have regard to the general background to the 2007 agreement, which comprises the Maytag agreement and its terms as well as the evident commercial purpose of the Whirlpool agreement. In particular, I rely upon the fact that the Maytag agreement contained in cl 14(c)v) a provision identical to that in cl 14(c)(5) of the Whirlpool agreement and that this provision played in the Maytag agreement the role which I have identified.[24]
[24]See para [42] above.
Conclusion
The answer to the preliminary question proposed on behalf of Whirlpool[25] is that the obligation which it is to take on must in some way be identified by reference to the liability of SIXL under the warranties given to its customers. The proposed answer identifies these liabilities as being for claims of customers, but only those where the claim relates to a failure of a part occurring within the Whirlpool 12 month warranty period or where the claim relates to a fault in respect of an epidemic failure, within the meaning of cl 9(b). For reasons which I have set out, I am persuaded that this interpretation does great violence to the words of cl 14(c)(5), it ignores the true operation of cl 9 and it is not commercially practical.
[25]See para [4] above.
The answer to the preliminary question proposed by SIXL[26] is in part, not really responsive to the question. I make no finding as to what is the primary liability of SIXL to its customers as is set out in paragraph (a) of the proposed answer. The effect of its proposed answer is, however, that SIXL remains liable to its customers in terms of its sale warranties but that Whirlpool must perform the obligations of SIXL under those warranties at its own expense or pay SIXL for performing them.
[26]See para [3] above.
I am satisfied that this is the correct construction of cl 14 of the Whirlpool agreement. I am persuaded that the regime established by cl 9 of that agreement for the allocation as between SIXL and Whirlpool of the responsibility and consequent cost of satisfying the claims of SIXL’s customers under their warranties, must yield, upon termination of the agreement to the provisions of cl 14.
I would, therefore, give the following answer to the question for my decision in this preliminary trial.
Question
Having regard to such relevant and admissible evidence as may be adduced, on the proper construction of the Distributor Agreement (as defined in paragraph 13 of the Further Amended Statement of Claim), what are the obligations of:
(a) Whirlpool; and
(b) SIXL,
in relation to claims, made after 26 February 2009, which give rise to a warranty liability of SIXL?
Answer
(a)The obligations of Whirlpool under the Distributor Agreement are to indemnify SIXL for its reasonable costs incurred in relation to claims made after 26 February 2009 which give rise to warranty liability of SIXL.
(b)The obligations of SIXL under its contracts with the claimants are to meet those claims.
I have expressed the answer in this way, rather than in the terms proposed by the parties, because the commercial, but not legal, alternative to Whirlpool’s obligation to indemnify SIXL for meeting those claims is for Whirlpool itself, directly or through some contractor, to meet those claims. I will hear counsel further as to the precise terms of this answer and as to costs.
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