Starlink International Group Pty Ltd v Coles Supermarkets Australia Pty Ltd
[2011] NSWSC 1154
•27 September 2011
Supreme Court
New South Wales
Medium Neutral Citation: Starlink International Group Pty Ltd v Coles Supermarkets Australia Pty Ltd & Anor [2011] NSWSC 1154 Hearing dates: 29, 30 and 31 August 2011 Decision date: 27 September 2011 Jurisdiction: Equity Division Before: Bergin CJ in Eq Decision: Plaintiff's claims dismissed
Catchwords: [CONTRACT] - termination of plaintiff's contract - whether implied duty of good faith to act reasonably in terminating contract pursuant to special condition that provides for termination "at any time without a reason"
[ESTOPPEL] - whether representation made that defendants would only exercise right to terminate under special condition if plaintiff guilty of poor performance - whether defendants estopped from exercising right under special conditionCases Cited: B.P. Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266
Codelfa Construction Pty Ltd v State Rail Authority of N.S.W. (1982) 149 CLR 337
Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL (Receivers and Managers Appointed) (Administrators Appointed) [2005] VSCA 228
Insight Oceania Pty Ltd v Philips Electronics Australia Ltd [2008] NSWSC 710
Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234Category: Principal judgment Parties: Starlink International Group Pty Ltd (Plaintiff)
Coles Supermarkets Australia Pty Ltd (First Defendant)
Kmart Australia Limited (Second Defendant)Representation: DE Grieve QC/M McHugh (Plaintiff)
MA Ashhurst SC/SB Docker (First and Second Defendants)
Prime Lawyers (Plaintiff)
Lander & Rogers Lawyers (First and Second Defendants)
File Number(s): 2011/248798 Publication restriction: Nil
Judgment
The plaintiff, Starlink International Group Pty Limited, provides "Trolley Collection Services" (the Services) to the defendants, Coles Supermarkets Australia Pty Limited and Kmart Australia Limited. The Services are the collection of shopping trolleys from car parks and other areas near the defendants' shopping centres and their return to designated locations for use by the defendants' customers. The plaintiff has been providing the Services to Coles since 2005. However other companies controlled by the Managing Director of the plaintiff have been providing the Services to Coles for approximately 17 years. These proceedings arise out of a dispute in relation to the defendants' purported termination of the commercial relationship with the plaintiff on 13 July 2011.
The Agreement
There are a number of different agreements between the plaintiff and the defendants in respect of the provision of the Services in various States and Territories of Australia. They are in identical terms and it is appropriate to refer to the terms of just one agreement (the Agreement). There is no issue that the Agreement was for a period of 36 months (excluding options) expiring in early March 2012. The plaintiff was contracted to provide the Services at various "Sites" in a particular "Municipality" (Sch 3 and Sch 4). The number of Sites in each Municipality varied, as did the number of "street collections" per week that the plaintiff was required to provide at a Site. The "Service Fee" that the plaintiff was entitled to charge was the "Weekly Normalised Recommended Price" that varied from Site to Site (Sch 4). The Service Fees were adjusted annually in accordance with an agreed formula (Sch 4). The plaintiff was obliged to comply with certain standards of performance, failing which the defendants could pursue various options including removing Sites from the scope of the plaintiff's Services (cl 3.5).
The parties agreed that during the term of the Agreement and after its termination, the plaintiff would keep the defendants' "confidential information", as defined, "strictly confidential" (cl 1.1 and 10). It was also agreed that the defendants were entitled on reasonable notice to audit all of the plaintiff's "files, records and invoices" pertaining to the Services and related expenditure (cl 7). The parties agreed on Key Performance Indicators, or KPIs, to measure the plaintiff's performance "with the aim of continuous improvement in meeting the identified service levels and increasing the benefits" to the defendants and the plaintiff "during the Term" (cl 1.1, cl 14 and sch 7). The plaintiff was entitled to use subcontractors with the prior written consent of the defendants that they agreed would "not be unreasonably withheld" (cl 15).
The parties agreed that "any conflict or inconsistency" between the terms of the Agreement "and other documents to which it refers" were to be resolved according to an order of precedence that gave priority to the Special Conditions (cl 1.3).
The Agreement included the following terms:
17. Termination
17.1 Early termination by either party
Either party may terminate this Agreement by providing the other with written notice if:
(a) the other party breaches a material provision of this Agreement and fails to remedy that breach within 14 days of receiving notice from the non-breaching party requiring it to do so; or
(b) the other party becomes Insolvent.
17.2 Early termination by Coles
Coles may terminate this Agreement by providing the Service Provider with 30 days notice if:
(a) the Service Provider repeatedly and consistently fails to perform the Services in accordance with the measurements of the KPIs;
(b) there is any material change in the direct or indirect beneficial ownership or control of the Service Provider which, in the reasonable opinion of Coles, will affect the Service Provider's ability to perform its obligations under this Agreement; or
(c) the Service Provider commits any act or does any thing which is (sic) brings the Service Provider's reputation into disrepute and as a consequence Coles believes that to continue to associate with the Service Provider would be detrimental to its own reputation.
...
18. Disputes
18.1 Parties to try to resolve
(a) If a Dispute arises about the operation of this Agreement, the parties should first attempt to resolve it at Brand level, as appropriate. In general, this means between the relevant Brand contact and the Service Providers primary contact responsible for the supply of Services to that Brand.
(b) If resolution of the Dispute cannot be achieved at Brand level within a reasonable period, the Dispute should then be escalated to more senior management for both parties. In the case of Coles, the Coles Representative must also be included in resolving the Dispute.
(c) If a party considers that a Dispute has still not been resolved under clause 18.1(b), that party must promptly send a notice to the other party ( Dispute Notice ) setting out a full description of the Dispute.
(d) Once a Dispute Notice has been given under clause 18.1(c) the Chief Executive or Managing Director of each party (or their nominee or delegate) must attempt to resolve the Dispute in good faith, on the basis that the parties wish to retain a long term commercial relationship.
18.2 Proceedings are last resort
(a) If the Dispute is not resolved within 30 calendar days of the Dispute Notice, or any longer time the parties may agree, either party may commence or initiate appropriate legal proceedings.
(b) Neither party may commence nor initiate any court proceedings (except applications for urgent injunctive relief) until the procedures set out in clauses 18.1(c) and 18.1(d) have been followed.
18.3 Contract performance
Each party must continue to perform this Agreement despite the existence of a Dispute or any proceedings under this clause, except if the Dispute renders it impossible to do so.
...
20.4 Entire agreement
This Agreement, including its schedules and annexures:
(a) constitutes the entire agreement between the parties as to its subject matter; and
(b) in relation to that subject matter, supersedes any prior understanding or agreement between the parties.
20.5 Governing law
This Agreement is governed by the laws of the State of Victoria, Australia. The parties submit to the non-exclusive jurisdiction of the courts of Victoria.
...
Schedule 3 - Specifications
...
8 REPORTING & KPI'S
8.1 On a frequency advised by each brand, the Service Provider will ensure that its Key Personnel are available to participate in performance reviews to review the Service Provider's performance of the Services under this Agreement against the KPIs.
8.2 Among other things, at any performance review meetings with Coles Group, the Service Provider:
must advise Coles Group of any problems encountered in the course of providing the Services and the suggested steps that could be taken to remedy those problems; and
should identify further efficiencies or innovations to reduce cost and improve performance levels, in line with generally accepted industry best practices.
8.3 Coles Group will advise the Service Provider the format and nature of Reports (if any) required during the Term. The content of Reports and frequency of production may vary from time to time.
8.4 During the Term, the Service Provider must keep accurate records relating to the provision of the Services, its performance of its obligations under this Agreement, and of all information and data necessary to produce the Reports.
8.5 If Coles Group is not satisfied with the performance of the Services at a particular Site, the parties will follow the Escalation Procedures to attempt to rectify the performance issue. If after finishing the Escalation Procedures the issue has not been rectified to Coles Group's satisfaction, Coles Group will be entitled to terminate the Services from that Site by giving the Service Provider 30 days written notice.
8.6 If a party considers that a dispute has arisen, that party must notify the other party of the dispute and specify in detail the matters in dispute or over which there is a difference.
8.7 The Brand Expenses Manager and Vendor Manager of Coles Group and Key Personnel of the Service Provider (or their nominees) must attempt to resolve the dispute on the basis that Coles Group and the Service Provider wish to retain a continuing commercial relationship.
8.8 In the event the Service Provider fails to meet the benchmark on the Period Report on two consecutive occasions, the Service Provider must provide an action plan to bring the store up to standard. In the event they fail to deliver on the action plan, the site may be taken off them.
8.9 Service Providers that have in excess of 10% of their total sites not achieving the benchmark at any given time may be excluded from quoting for new and or additional business at that point in time.
...
Schedule 9 - Special Conditions
1. Early termination without cause by Coles
During the Term, Coles may terminate this Agreement at any time without a reason by giving the Service Provider 45 days written notice.
2. Early termination for non-performance
It is Coles Group's expectation that contractors awarded a municipality of stores will perform well on all stores. If performance is consistently poor (as per the Coles Contract Manager's viewpoint) at 1 or multiple stores, Coles Group may terminate all sites within a municipality.
Background
Daniel Thomas Crofts, the Expenses Manager for Coles, gave evidence that he and Joseph Robert Gallo, also employed with Coles at the time, formed a view between May and November 2010 that the Agreement with the plaintiff should be terminated. Mr Crofts had been made aware of a number of allegations about the plaintiff's conduct and on 14 November 2010 Mr Gallo informed him of another allegation, this time in relation to a payment to a family member of one of the plaintiff's officers, Mr Ferriere, in connection with a particular subcontractor. Mr Crofts was cross-examined in relation to this matter as follows (tr 100-102):
Q. And that allegation was an allegation of serious misconduct on a person associated with Starlink, wasn't it?
A. It certainly was.
Q. And you nonetheless, despite its gravity, considered that it was credible, notwithstanding the lack of so much as a scrap of corroborative evidence in support of it. Is that right?
A. As I've stated, it was one of a number of allegations, so it wasn't considered in isolation.
Q. My question, if you don't mind, Mr Crofts. You considered the allegation, not withstanding its gravity and notwithstanding the lack of so much as a scrap of corroborative evidence, to be quite credible; is that right?
A. Correct.
...
Q. Did you not consider that it would have been reasonable for you, as an executive officer in Coles' employ, not to act at all upon the strength of these uncorroborated allegations without first referring it to the police force?
A. It was one of a number of allegations that were made. It was followed up with requests for validation and it was one of a number of considerations.
...
Q. And yet you never did refer the matter to the police, did you?
A. No, we did not.
Q. But you acted on it nonetheless, didn't you?
A. We did not act on that incident in isolation.
Q. You acted on it nonetheless, didn't you?
A. It formed one of a number of allegations that were made and helped form an opinion, yes.
Q. And at no stage did you or to your knowledge any other employee of Coles raise that allegation with Mr Ferriere and put it to him in order to see what his response to it was, did you?
A. No, I did not.
Q. And did you consider that that was a reasonable approach to take in the context of such a serious allegation, having regard to the antecedent history to which I have referred?
A. I think the multiple allegations and the method in which they were provided did not fit with a discussion with Starlink directly on those matters. ... It was provided in confidence and as such it would not have been right to take that information and pass it directly to Starlink.
Q. Why not? Why not give Mr Ferriere a fair and reasonable opportunity to deny the allegation if he saw fit to do so when it was put to him?
A. If that was the only allegation, if that was an isolated incident, if it didn't fit with other information regarding Starlink in regards to performance, that might have been appropriate. But when you have had a wholesale list of allegations, coupled with ongoing performance issues, it was not something that you would address that incident in isolation.
Q. We will come to those wholesale allegations in a little while. You accept, do you, that the allegation made against Mr Ferriere's daughter had nothing to do with any issue of performance. You accept that, don't you?
A. Correct.
Q. And do you accept that Coles at no stage sought, let alone obtained, any evidence in proof of that allegation beyond the statement made by the person who made the allegation?
A. No. We certainly sought that information, but we did not obtain it.
An internal document prepared by Coles (Ex C) in support of the termination of the Agreement with the plaintiff included statements that the plaintiff "ranks bottom" of all store performance and had already been removed from 8 sites for gross failure of service and was facing removal from a further 4 sites. It records that Coles had received allegations of improper behaviour by the plaintiff and its owner and management on a monthly basis that ranged from "collectors being paid $5 through to death threats and arson". It was suggested that the business was being run through "intimidation and violence". It included the following:
The change over is requirement to retain our ethical responsibility to exploited individuals and mitigate brand risk from our relationship with Starlink, it will come at a $1.4M increase on a PA base of $5.6M, a 26% upwards shift.
The document also referred to the plaintiff having the "worst performance record of the top 12 contractors" and that significant resources were being spent and support teams were being diverted from managing other duties. The document also included the following:
Allegations and Findings
As at December 2010 an investigation into Starlink was launched by the internal investigations team to address the consistent allegations received against Starlink and its operation. At the completion of this investigation, records of allegations where (sic ) substantially increased however sufficient evidence to support prosecution was not established.
The allegations and findings can be categorised as thus;
1. Selling Coles work to sub contractors
2. Breaching labour laws - Under payments, visa violations
3. Allegations of 'Mob' like behaviour - beatings, car-bombings, threats of death & violence - maintaining an atmosphere of fear of violence for people who speak out.
4. Allegations of theft of Coles property (trolleys)
5. Intimidation of individuals working for competitors & vandalism of their equipment
6. Known to operate multiple shell companies & firmly suspected of passing audits through fabrication of records
7. Review of subcontractors contracts indicates Starlink withholding 50-60% of Coles payments from such sub contractor
Another internal document (Ex D) included the following:
Starlink has broken the terms of their contract with Coles multiple times by consistently re-subcontracting Coles work without notification to Coles (Section 15a of trolley collection services agreement).
Is known to with-hold up to and above 60% of Coles payments from the sub-contractor resulting in the sub-contractor either servicing sites well below contracted service levels or forcing them to pay wages below legal award.
This document contained a section on "Risks and Mitigating Action". Under "Legal Risk" the document recorded "termination of contract may lead to Starlink taking legal recourse". The "Mitigation Action" in respect of this risk was recorded as: "Document the events and allegations that trigger termination outlined in Clause 17 (Termination) of the contract to ensure that there is a fair termination of contract".
These documents (Ex C and Ex D) were sent to Mr Crofts' superior, Paul Bradshaw, in March 2011 who responded as follows:
Why on earth are we with these guys, fully support removal of contract, do we have any more like the attached!!
Mr Crofts conceded that part of his concern that led him to recommend the invocation of Special Condition 1 (SC 1) in Schedule 9, was that the plaintiff may have invoked clause 8.5 of Schedule 3 of the Agreement to attempt to resolve a "dispute". One of the reasons that SC 1 was chosen as the mechanism to terminate the Agreement was because of legal advice that was received (tr 109).
There was no evidence to support any of the matters raised in Exhibit C referred to as "findings". It is accepted by the defendants that the highest any of these matters could be put is that they are and were "allegations".
Termination
The defendants terminated the Agreement pursuant to SC 1 by Notice dated 13 July 2011. There is an agreed interlocutory regime in place to accommodate the urgent hearing of the matter.
Proceedings commenced
The plaintiff commenced these proceedings on 2 August 2011. Although there was an initial challenge to the validity of the Notice, as opposed to the validity of the termination that is no longer in issue. Although there were other claims made by the plaintiff, the parties proceeded at trial on two issues. The plaintiff claims that the Agreement includes the implied term that the defendants would act in good faith when exercising the power under SC 1 and that the defendant breached that obligation (Implied Term Claim). The plaintiff also claims that the defendants are estopped from relying upon SC 1 by reason of a representation that they would not rely upon SC 1 unless the plaintiff was guilty of poor performance (Estoppel Claim). The plaintiff seeks a declaration that the Agreement was not validly terminated.
The proceedings were heard on 29, 30 and 31 August 2011 when Mr DE Grieve QC, leading Mr M McHugh, of counsel, appeared for the plaintiff and Mr MA Ashhurst SC, leading Mr SB Docker, of counsel, appeared for the defendants.
Implied Term Claim
The plaintiff claims that the Agreement includes an implied term that the defendants would act towards them in good faith or that the defendants owed the plaintiff a duty to act in good faith in the performance of the Agreement. There does not appear to be any real distinction between these alternatives.
The plaintiff submitted that the duty of good faith is implied as a matter of law into the Agreement. I am of the view that commercial contracts are not a class of contract that, as a legal incident, have an implied obligation of good faith. It will depend upon the individual contract: Insight Oceania Pty Ltd v Philips Electronics Australia Ltd [2008] NSWSC 710 at [157]-[175]. Alternatively it was submitted that the duty of good faith is implied as a matter of fact having regard to the terms of the Agreement.
In response to a request for particulars of its claim the plaintiff's solicitors advised:
(a) The plaintiff does not allege that the defendants terminated the contracts for an ulterior purpose;
(b) The substance of the plaintiff's claim that the defendants acted in breach of the duty of good faith in terminating the contracts is that the defendants failed to act " honestly and reasonably " because " the Defendants acted in the unwarranted belief that in the performance of the contracts with the Defendants, the Plaintiff and certain of its officers or employees had habitually engaged in serious criminal conduct including assault, theft, arson, car-bombings, making threats of death, vandalism, fabrication of financial records and fraud, without having any evidence at all in proof of any such alleged conduct and without having made any report of same to the police".
Although the particulars make the claim that the defendants failed to act honestly there is no evidence to justify such a claim. Indeed it was not put to any of the defendants' witnesses that they had not acted honestly. It is clear from the evidence that although the defendants were concerned about the allegations that had been made against the plaintiff, they felt somewhat constrained in responding to them because they did want not to identify the sources of the information. In those circumstances there was no justification for applying the description "findings" (in Ex C) to the information the defendants had received.
The law of Victoria, as the governing law of the Agreement, includes the principle of contract law that before a term will be implied into a commercial contract it must be: reasonable and equitable; necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it; so obvious that 'it goes without saying'; capable of clear expression; and must not contradict any express term of the contract: BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283: Codelfa Construction Pty Ltd v State Rail Authority of N.S.W. (1982) 149 CLR 337.
The parties clearly intended that either of them could terminate the Agreement if the other had not remedied a breach of a material provision of the Agreement within 14 days of receiving notice of it (cl 17.1). They also decided on a regime in which the Agreement could be terminated with reason on 30 days notice. Those reasons were threefold: (1) if the plaintiff repeatedly and consistently failed to perform the Services in accordance with the measurements with the KPIs; (2) if there was any material change in the beneficial ownership of the plaintiff which in the "reasonable opinion" of the defendants would affect the plaintiff's ability to perform its obligations under the Agreement; and (3) if the plaintiff committed any act or did anything which brought the reputation of the plaintiff into disrepute and as a consequence the defendants believed that to continue to associate with the plaintiff would be detrimental to its own reputation (cl 17.2). The defendants agreed that in forming an opinion in relation to whether the material change in the ownership of the plaintiff would affect the plaintiff's ability to perform the Agreement, it would act reasonably. Quite clearly it was not entitled to form an opinion about the plaintiff's ability in that regard capriciously or unreasonably.
The structure in the Agreement for dealing with a dispute imposed the express obligation on each party to attempt to resolve it in good faith and also obliged them to act on the basis of their respective wishes to retain a long term commercial relationship. The structure for resolving a dispute set out in Schedule 3 reiterated the parties' "wish" in this regard (cl 8.7). However on this occasion it was referred to as a "continuing commercial relationship" as opposed to the earlier mentioned "long term commercial relationship". Clause 8.7 of Schedule 3 does not impose an express requirement to act in "good faith" however when it is read with cl 18.1(d) I am satisfied that the parties intended that any attempt to resolve a dispute would proceed in "good faith", that is, they would attempt to resolve their dispute honestly and reasonably.
When the parties dealt with the early termination of the Agreement by the defendant without cause or reason pursuant to SC 1, there was no reference to acting in good faith and there was no mention of the parties' wish to retain a continuing or long-term commercial relationship. However SC 1 must be read in the context of the Agreement as a whole. It allows the defendant to terminate the Agreement "at any time without a reason". The only prerequisite imposed on the defendant is that it provide 45 days written notice to the plaintiff, as opposed to the lesser notice of 14 days in clause 17.1 and 30 days in clause 17.2. This was a "special" power identified in a special condition that notwithstanding the parties wishes in relation to their long term or continuing commercial relationship, the defendants were able to exercise "at any time".
The plaintiff submitted that the implication of a term that the defendants were to act in good faith in the exercise of the power under SC 1 is not discordant with any of the five conditions referred to above. It was submitted that such term is reasonable and equitable and necessary to give business efficacy to the Agreement. It was submitted that were SC 1 to be construed literally so as to confer on the defendants an unqualified right to terminate the Agreement from its very outset simply by serving a 45 days notice the plaintiff would have committed commercial suicide by entering into the arrangement.
It was submitted that throughout the life of the Agreement the dispute resolution process has worked quite well and effectively in all but a few isolated instances. It was submitted therefore that there was no legitimate occasion for the defendants, either in the interests of performance or in the interests of reputation, to use a "sledgehammer to crack the nut" when the alternative of the dispute resolution process was available. It was further submitted that the fact that the defendants had successfully implemented a process within the Agreement to resolve previous problems as to performance, exposes its decision not to have recourse to that contractual mechanism but rather to crack the nut with a sledgehammer under SC 1. It was submitted that this demonstrates a lack of good faith. In addition it was submitted that the way in which the defendants accepted the extraordinary allegations on their face without any corroborative evidence and took no steps of any significance to ascertain whether or not the allegations had substance also demonstrates a lack of good faith.
Mr Grieve gave an example of circumstances in which he submitted the defendants would be justified in exercising their rights under SC 1. He submitted that if a contractor were engaged in a series of localities that the defendants decided were no longer commercially warranted, the defendants could decide to simply close the majority of them and terminate the Agreement under SC 1. It was submitted that another "classic" example that might warrant the use of the SC 1 power would be if the defendants were to make a decision that trolleys were no longer an appropriate way for groceries to be transported and brought in some other method of transportation of groceries and the like.
Commercial contract law has developed "on the premise of achieving certainty in commerce": Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL (Receivers and Managers Appointed) (Administrators Appointed) [2005] VSCA 228, at [3] per Warren CJ. The acceptance of the plaintiff's submissions would result in the creation of contractual and commercial uncertainty. The so-called "classic" example is itself riddled with uncertainty. Would it be permissible to exercise the power if the defendants' decision were to provide a lesser number of trolleys combined with personal carrying services? Would it be reasonable to exercise the power if they decided to use employees rather than contractors to provide the trolley services? It seems to me that these examples are flawed because they focus on whether the "reason" justifies the exercise of the power when the express power is that there is no need for any reason. The acceptance of the plaintiff's submissions would mean that the defendants would not be entitled to terminate under SC 1 "at any time" but perhaps at an unspecified time so as not to result in what the plaintiff described as its "commercial suicide". That notion is also rather uncertain. Does it mean total financial ruin or some lesser outcome in which losses are suffered? It requires the subjective assessment of the plaintiff's financial wherewithal at any particular time to see whether the impact of termination on 45 days notice would cause such outcome.
Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 was a case in which the Court considered a clause in the relevant contract that permitted the principal to serve a notice to show cause on the contractor as to why the principal should not exercise its powers under the contract. Those powers included taking over the whole or any part of the work and cancelling the contract. Handley JA observed that the express power covered many cases where the principal would have no power to rescind the contract for breach under the general law and said at 279:
It is clear that the power is only exercisable for "cause" and after the contractor has been given an opportunity to be heard. This is some indication that the contractor is entitled to appeal to objective considerations including questions of reasonableness in showing cause against the exercise of the powers. The very notion of showing cause seems inconsistent with the view that the principal will be entitled to act, within the limits of honesty, on his own idiosyncratic opinion.
In the present case the Agreement expressly provides that there is no necessity for any "cause" or "reason" for the exercise of the power under SC 1. The corollary of what Handley JA said in Renard Constructions, as it applies to this case, is that the very notion of there being no necessity for a cause or a reason prior to the defendants' being entitled to exercise the power under SC 1 is inconsistent with the view that the defendants were not entitled to act according to their own idiosyncrasies.
The plaintiff's case seems to be that the defendants had an obligation to approach the plaintiff to advise it of the allegations that had been made against it and give it the opportunity to address them before exercising the power under SC 1 to terminate the Agreement. The parties agreed that they would approach their dispute resolution processes in good faith and on the basis that they wished to continue their long-term commercial relationship. Although the defendants gave consideration to termination under clause 17 of the Agreement, a decision was made on legal advice to take a different course. The defendants decided to exercise the power to terminate on 45 days notice without a reason rather than to exercise any of the other mechanisms to terminate on the basis of the specified grounds in the Agreement. That was the option that the parties agreed the defendants could utilise.
The provisions of SC 1 do not mean that the termination must occur for no reason. Obviously parties will act for some reason and sometimes for a reason that may not present to others as a good reason. The provisions of SC 1 allow the defendants to terminate for their own reason and to keep that reason to themselves. In the present case it appears that the defendants reached the point where their tolerance of the repeated allegations about the plaintiff wore thin, in particular because of the diversion of their officers having to deal with them.
These are commercial parties that have been engaged in a commercial relationship for a number of years. SC 1 has formed part of their contractual relationship since 2005. The plaintiff was willing to enter into this Agreement on the basis that the defendants had an entitlement to terminate it on 45 days written notice at any time without a reason. The implication of a duty to act in good faith in exercising the right under SC 1 would be to impose a condition on the defendants inconsistently with the express term of the contract. It would be to impose a condition on the defendants that not only must they have a reason to exercise the right under SC 1 but also that it must be a good reason. There is no justification to imply the term as claimed.
Estoppel
The plaintiff relied upon the evidence of its Managing Director, Nidal Albarouki, and its General Manager, Clency Ferriere. The affidavit evidence of Mr Albarouki includes a claim that in 2005 he and Mr Ferriere discussed the terms of a draft Agreement (which contained a provision in identical terms to SC 1). His affidavit included a claim that it was brought to his attention that Coles had included a termination clause that enabled the Agreement to be terminated on 45 days notice without Coles having to give any reason. It was his recollection that such a clause had not appeared in earlier contracts.
Mr Albarouki and Mr Ferriere flew to Melbourne and met with Andrew John Little who is now a Procurement Consultant but at the time was the Vendor Manager of Contracts with Coles. Mr Albarouki claimed that the following conversation took place
Mr Albarouki: Andrew this clause could terminate us in 45 days without reason; that is not acceptable.
Mr Little: Don't worry as Coles has no intention to use it, only on performance.
Mr Albarouki: OK, because there is a lot of investment at stake here.
Mr Little: We know that you are our biggest preferred supplier.
Mr Albarouki: That's good I feel better about it now.
Mr Ferriere claimed that the following conversation took place at the meeting with Mr Little:
Mr Albarouki: Andrew what about this clause in the contract which could terminate us in 45 days without reason; we can't agree to that.
Mr Little: Don't worry, as Coles has no intention to use it - only if you don't perform to the specification of the contract.
Mr Albarouki: OK, because there are lots of people putting lots of money into this. There is a lot of investment at stake here Andrew.
Mr Little: We know that you are one of our biggest suppliers. You would not be one of our biggest if you were not a preferred supplier. Nidal, I am telling you, we won't be terminating if you perform to the specifications of the contract.
Mr Albarouki: OK, now that you have put it this way I feel reassured that Coles will honour its part of the bargain.
The 2005 Agreements were for a period of three years. The usual tendering process took place in 2008 and new contracts were executed in 2009.
Mr Albarouki claimed in his affidavit that during the tender process in September 2008 he and Mr Ferriere met with Mr Tony Manitta, who was at the time a Vendor Manager of Print with Coles. Mr Albarouki claimed that a conversation took place in the following terms:
Mr Ferriere: Look the price we offer to you is going to depend on the length of the contract. The longer you give us the better our price can be, because we invest so much in the initial stages to bring everything up to your new standards and we are forced to buy new equipment too.
Mr Manitta: Yes I understand that.
Mr Ferriere: Well what sort of term are you willing to offer given that we have been doing this for Coles for 15 years. You know that we have never had a problem and if Coles can give us a longer term we can make sure the prices are the best.
Mr Manitta: To tell you the truth we were actually looking at doing 1 or 2 year contracts. What about if we give you a 1 or 2 year contract?
Mr Ferriere: 1 or 2 years? We were looking at 5 years.
Mr Albarouki: 2 years, absolutely not. My people will not agree with this.
Mr Ferriere: Tony it's not viable for us to do anything less than 3 years. We would prefer 5, but we just can't even submit costings for 1 or 2 years as it's not worthwhile. You have to understand that our margins are so small that we cannot recoup our investment until the end of the term; and we need to give our subcontractors fixed terms or else there is no way that they are going to invest in this.
Mr Albarouki: Tony, after 15 years of service, we can give you a really good price, but not for 2 years. No way.
Mr Manitta: Yes, look I understand. But Coles won't agree to a 5 year contract. But would look at doing a 3 year one. How about we work off 3?
Mr Clency: We would prefer 5, but if you can't we can submit on 3, but it's not viable for anything less than 3.
Mr Albarouki also claimed that a conversation took place in February 2009 with Mr Mark Franke who was then the Senior Buyer in the tendering and contracts team within Coles. Mr Albarouki claimed that a telephone conference occurred between Mr Ferriere, Mr Franke and himself in the following terms:
Mr Ferriere: Mark, a point of concern with the contract is that it says that Coles can terminate the agreement for any reason at any time within 45 days. You know that the prices we have submitted depend on the contract running for the full 3 year term. I want to ask you this. What guarantee can Coles give me that the contract will run to term?
Mr Franke: Look you know what Coles are going through at the moment; there is no way that we are going to terminate. Even if we wanted to it would take more than 3 years to get around to it. There is no chance of it happening unless on bad performance.
Mr Ferriere: Yes, but what guarantee is Coles going to give that the contract is going to run to term? We are about to invest so much money into this. A heap of money, there will be hundreds of families that are relying on this. We cannot run a business if Coles can just terminate. No way.
Mr Franke: At the end of the day it's all based on performance. You are very competitive, you should know by now that Coles don't just terminate agreements, it's all based on performance, that's why we have the performance clauses. If you do a good job why would we want to get rid of you? We will have to just pay someone else to do it; so as long as you are performing then we won't get rid of you.
Mr Ferriere: But, special condition 1, why is that included if it's just based on performance.
Mr Franke: Guys, that's in all our contracts, we just put that it in there to scare the shit out of all the contractors - it's just there to make sure that you do a good job and to scare you.
Mr Albarouki: Mark if you say that's all it is then we trust you as we have been a family for a long time.
Mr Franke: Performance, Nidal. Performance, performance, performance. That's all we want. Perform and you're fine.
After the plaintiff was served with the Notices under SC 1, Mr Albarouki had a conversation with Mr Crofts who advised Mr Albarouki that Coles did not need to give a reason for the termination of the Agreement because the clause in the contract provided that it was not necessary. After further discussion Mr Crofts suggested that Mr Albarouki should put something in writing if he had further concerns. Mr Albarouki then instructed his lawyers who wrote to the lawyers for the defendants. However Mr Albarouki also wrote personally to the Managing Director of each of the defendants. Those letters substantially in the same terms and include the following (with reference only to the Coles letter):
Please understand that as a last resort I am sending you this email in the hope that you will comprehend the profound impact that this decision by Coles has had on our people and our company. The reason for the decision made by Coles escapes us at present, maybe you can enlighten us.
The agreement between Coles and Starlink has a number of clauses which state that Coles can terminate the contract if Starlink do not perform, and this we have always respected. Coles does not rely on those clauses and instead rely on the last clause of its Trolley collection agreement which states the termination can be affected without any reason whatsoever.
We are at a loss as to why? If you ask any of your past and present procurement managers we have tried to help in any way we could and at great costs to ourselves (many thousands) to reduce costs and to lift the standards in the industry. You are perhaps also unaware of all what we have been through over the last 17 years with Coles to reach this aim, but I make no lie when I say that I have never said no to Coles. I have always worked with you and then out of the blue 8 months before our contract finishes Coles tries to terminate my contract without a chance for me to salvage or resolve any issues you may have with me and my team.
If, for whatever reason I am in the wrong then please tell me, please make me and my company aware for any actions which were not acceptable to you. Please note again that we are not aware of any issues which would substantiate the excessive action taken by Coles to cancel our contract in its entirety and without dialogue.
We recognise that if this was a performance issue Coles has the right to terminate any of the sites which they consider we were not performing. If it was a commercial decision we can easily match our competitors on price. We can match our competitors on anything as long as we are given a fair and reasonable chance to do so.
We implore you to look into this matter to see if Coles could reconsider its decision. We are, to say the least, distressed and overwhelmed with the way we have been terminated. If we knew of the nature as to why we have been terminated at least we could justify it to ourselves and our people who take pride in their work.
...
We do not want to fight with our partner of so many years. We want to dialogue with Coles so we can have an effective dispute resolution process employed in this matter.
Mr Albarouki was cross-examined in relation to these letters as follows (tr 49-51):
Q. In the e-mail that you instructed Mr Murphy to send to the solicitors for Coles and K-Mart there is no reference in that e-mail to any arrangement you had with Mr Little or Mr Franke in relation to the 45 day termination clause, is there?
A. That's right.
Q. Indeed, you sent a letter yourself, did you not, to both Coles and K-Mart in relation to the termination of these supply contracts?
A. I send letters.
Q. Yes?
A. Yes.
...
Q. Nowhere in those letters do you make any reference at all to any arrangement that you had with Mr Little?
A. Why should I?
Q. Or Mr Franke in respect of the termination clause do you?
A. Why should I?
HER HONOUR
Q. But you didn't, did you?
A. No, I didn't.
ASHHURST
...
Q. Have a look at the third paragraph down which commences "the agreement" and read that to yourself silently please - have you read that paragraph to yourself Mr Albarouki?
A. Yeah.
Q. In that paragraph you are referring specifically to the 45 day notice clause, aren't you?
A. To the termination.
Q. But you are referring specifically to the clause that allowed K-Mart and Coles to terminate on 45 day's notice without reason as you have described it, aren't you?
A. As I said yes, termination.
Q. What I want to suggest to you is that if there really had been any arrangement between you and Mr Little or you and Mr Franke about when that clause would or would not have been enforced you would have said something about it in this paragraph, do you agree with that?
A. No.
Q. I want to suggest to you the reason why there's not a word in relation to any such arrangement with either Mr Little or Mr Franke in this paragraph is because there was no such arrangement, was there?
A. This letter is clearly trying to communicate with the directors to resolve with a nice way.
Q. Don't you think Mr Albarouki that if there really had been an arrangement with Mr Little or Mr Franke that they wouldn't terminate or rely on that clause to terminate this would have been the time to have told the executives of Coles or K-Mart?
A. That's not my job to do it, that's, if it's something to do with correspondence there is a lawyer look after this. I don't, the main reason for this letter just to resolve the, you know, the problem with a nice way, for the best way, the easiest way without to go to escalate it further.
Q. What do you say you couldn't have said in a nice way by the way Mr Russo, I had an arrangement with Mr Franke that Coles wouldn't rely on this clause to terminate the contract, you couldn't have said that in a nice way?
A. As I said, no, I am not there to complain about anyone, I was there just to talk to them nicely.
Q. But you were extremely concerned that these contracts had been terminated, weren't you?
A. Yes.
...
Q. You say, do you not, that you had an arrangement firstly with Mr Little then with Mr Franke that Coles and K-Mart wouldn't rely on this clause to terminate those contracts?
A. As I said to you this is something to do with the lawyer, that, that's not position to say she said, he said, she said, he said.
Q. Don't you think it might have assisted your position with either Mr Russo or with Mr McCloud to have said that they have terminated these contracts in circumstances where Coles representatives had said to you they would never rely on those clauses, don't you think that might have helped your case?
A. Again, I was talking to them trying to get to some sort of good conclusion.
Q. You didn't think it was something you should bring to their attention?
A. Why should it?
Q. I want to suggest to you Mr Albarouki that the reason why you didn't bring it to their attention is because you had no such arrangement with Mr Little or Mr Franke?
A. That's your suggestion.
Q. What was the response?
A. That's your suggestion.
Mr Little denied the conversation and did his best to reconstruct the conversation some six years after the event. He ultimately agreed that he was reconstructing and he could not remember every meeting that he had in the previous six or seven years. Mr Little agreed that he had met with Mr Albarouki on at least twenty occasions over the years. He claimed that he would not have said the words attributed to him by Mr Albarouki and Mr Ferrier because it was not up to him, but rather it was up to the legal department to change any terms of the proposed contracts. He said that he did not have authority to change anything in the contract or to even imply that a clause in the contract was not binding. He accepted that he may have said that the plaintiff was the biggest preferred supplier but not in the context of any discussion about the 45 days notice.
Mr Franke's evidence was a little more complicated in that he claimed in his affidavit that he had said to some of the contractors who asked about the 45 day notice clause:
Coles cannot guarantee the contract will run for the full term because we may exercise our rights under the contract if circumstances permit Coles to do so.
This seemed inconsistent with other parts of Mr Franke's evidence in which he claimed that he did not have authority to answer a question about whether SC 1 meant that Coles could terminate the agreement at any time after it was made and would have requested a person asking such a question "to put it in writing" (tr 79).
Mr Franke was cross-examined about his claim in his affidavit in which he said that he did not recall whether the plaintiff was one of the contractors that sought clarification of the termination clause. He gave the following evidence (tr 81-82):
Q. May we take it from that statement that you acknowledge the possibility that Starlink may well have raised clarification of the termination clause with you but that that's a matter that you don't presently remember?
A. I don't recall and normally it is made and brought to my attention and it is the type of thing that I would remember.
Q. Let me put my question to you again. May we take it that you have used the expression "I do not recall" in the first sentence of subparagraph (h) to accommodate the possibility that Starlink may well have raised an issue of the termination clause but that you do not presently remember that?
A. All it means is that I do not recall the conversation, that I had a conversation.
Q. Do you accept that it's at least possible that Starlink may have done so and that you have since forgotten about it?
A. If it had occurred I would have written it down because that is my standard practice.
Q. You don't make any statement to the effect of making a note about subcontractors or prospective subcontractors raising queries about the termination clause do you?
A. I have numerous emails asking if they have any problem with the clause and on all cases I have no issues raised.
Q. Go back to subparagraph (f). There you say that you recall that about 10 per cent of some 200 tenderers raised the termination clause in schedule 9 clause 2 of the 2009 agreement with you. You do not go on to say there that in each of those cases you made a note of the query, do you?
A. I should say raised in writing.
Q. Are you saying now that you would prefer subparagraph (f) to read, "I recall that about 10 per cent of some 200 tenderers raised in writing the termination clause" et cetera?
A. They normally did, but if they didn't I would say, "This is a show-stopper. You need to come back and put it to us in writing."
...
Q. Your evidence is, is it, that whenever any query was raised by a prospective tenderer about the termination clause orally you made a note of the conversation. Is that your evidence?
A. Yes.
Q. You did not mention that anywhere in your affidavit, did you?
A. No.
Q. And you have not produced any of the notes?
A. Can I please rephrase that?
Q. Yes.
A. I apologise, your Honour, I misunderstood the question. I didn't write every single time someone raised it in writing. I asked them to put it in writing if it was a matter of concern to them.
Q. Your evidence is, Mr Franke, that you made a note of the conversations in which the prospective tenderers raised a query about the termination clause. That's what you have told us, is it not?
A. I said if there's a significant matter raised that I would put it in writing.
Mr Franke went on to say that "communications were dealt with predominately in writing, followed up in writing" (tr 83). He had no written record of any conversation with any representatives of the plaintiff in relation to SC 1.
It is always difficult for witnesses to recall the terms of conversations that took place some years prior to the time they are asked to recall them and particularly when there are no contemporaneous documents to assist them in their recollections. However there was nothing in the plaintiff's solicitor's letters to the defendants' solicitors suggesting that there had been a representation made by the defendants that SC 1 would not be relied upon except where there was poor performance. Mr Albarouki's personal letters to the directors of the defendants dealt specifically with SC 1 that he claimed the defendants promised they would not rely upon except in the circumstances of poor performance. I am satisfied that the absence of any mention of these alleged promises in the solicitor's letters and in Mr Albarouki's letters is a significant factor in the determination of whether the conversations took place.
Mr Albarouki's explanation for not mentioning the promise was that he was trying to deal with the directors in a friendly fashion. I am not satisfied that such an approach would prevent him from raising the pivotal matter that there had been a promise by the defendants not to exercise their rights under SC 1 except on the basis of the plaintiff's poor performance. I am satisfied that if such a promise had been made, Mr Albarouki would have raised it in his letters or he would have instructed his solicitors to raise it in their letters. I am satisfied that the representations as claimed were not made.
The plaintiff's estoppel claims will be dismissed.
Conclusion
The plaintiff's claims are dismissed. If the parties are unable to agree on a costs order I will hear argument on a mutually convenient date to be fixed by arrangement with my Associate by no later than 14 October.
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Decision last updated: 27 September 2011
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