Sunset Vineyard Management Pty Ltd v Southcorp Wines Pty Ltd
[2006] VSC 234
•5 July 2006
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL LIST
No. 974 of 2005
F5924
| SUNSET VINEYARD MANAGEMENT PTY LTD (ACN 073 453 764) | Plaintiff |
| v | |
| SOUTHCORP WINES PTY LTD (ACN 000 009 763) | Defendant |
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JUDGE: | HARGRAVE J | |
WHERE HELD: | Melbourne | |
DATES OF HEARING: | 26 and 27 June 2006 | |
DATE OF JUDGMENT: | 5 July 2006 | |
CASE MAY BE CITED AS: | Sunset Vineyard Management Pty Ltd v Southcorp Wines Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2006] VSC 234 | |
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Contract – Interpretation – Extrinsic evidence as to mutual subjective intention admitted.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P Lacava SC and Mr P Crennan | Ryan Moloney Anderson |
| For the Defendant | Mr M Hoffmann QC and Mr J Shortt-Smith | Mills Oakley (as agents for Finlaysons, Adelaide) |
HIS HONOUR:
Introduction
The plaintiff is a grape grower. It grows grapes at a vineyard situated at Nangiloc in the Sunraysia District in Victoria (“the Vineyard”). It conducts its business as a management company representing the interests of the owners of the Vineyard.
The defendant is a wine producer. It purchases grapes from various growers for the purposes of its operations.
By an agreement made on 21 February 1998 between the plaintiff and the defendant[1], the plaintiff agreed to supply grapes to the defendant (“the Agreement”). In the Agreement, the plaintiff is described as “the Grower” and the defendant is described as “Southcorp”.
[1]The joint venture company which owns the Vineyard on behalf of the beneficial owners is also a party to the Agreement. However, it is unnecessary to refer to it further.
The Agreement was to operate for an initial term of seven years, from 1 July 1997 to 30 June 2004 (the “Initial Term”). Further, the Agreement provides that either the plaintiff or the defendant may at its option extend the term of the Agreement for a further period of five years, from 1 July 2004 to 30 June 2009 (“the Option Term”). The plaintiff has exercised this option. As a result, the term of the Agreement has been extended until 30 June 2009.
A dispute has arisen as to the price payable by the defendant to the plaintiff for the supply of grapes to the defendant in the first year of the Option Term, being the year ended 30 June 2005. Resolution of the dispute is likely to affect the price payable for the remaining four years of the Option Term.
In summary, the dispute arises in the following way.
The Agreement provides that the price payable by the defendant for grapes supplied by the plaintiff differs according to the variety of grapes and the quality of those grapes. A base price, which is called a “Variety Price” or “Base Grape Value” [2], is specified. In addition, at least for the Initial Term, the price is to include a quality bonus, called a “Grade Premium”, for grapes of a higher quality than the quality upon which the base price was set. The Agreement also provides for price reductions where grapes are supplied which suffer from specified quality defects.
[2]These terms have the same meaning in the Agreement.
Whether a particular parcel of grapes attracts a price reduction for quality defects depends upon a points system contained in the Agreement. The possibility of a reduction under this system applies to grapes supplied in both the Initial Term and the Option Term.
Whether a particular parcel of grapes attracts the payment of a Grade Premium depends upon the application of a formula in the Agreement for the calculation of a Grade Premium. However, one of these elements is not specified in the Agreement for the Option Term. As a result, the defendant contends that, upon a proper construction of the Agreement, it did not agree to pay any Grade Premium for grapes supplied by the plaintiff in the Option Term.
The plaintiff acknowledges that there is no express specification in the Agreement of one of the elements of the formula for calculating Grade Premium during the Option Term. However, it contends that the content of this element can be discerned on a proper construction of the Agreement as a whole. Alternatively, if the Agreement is incomplete in this respect, the plaintiff contends that the Court should imply a term to fill the void.
No party alleged or argued that the Agreement, insofar as it relates to the Option Term, is incomplete as to an essential term and thus void for uncertainty.
In the event that the Court decides that the Agreement provides that the defendant is obliged to pay a Grade Premium for grapes supplied to it during the Option Term, it is agreed that the grapes supplied in the first year of the Option Term were of a quality attracting a Grade Premium in an agreed amount.
The Agreement
The Agreement is made up of a number of documents. First, there is a document called “MEMO OF AGREEMENT – VARIETY PRICE” (“Memo of Agreement”). Secondly, there are attached schedules of Block Details, Production Details, Pricing Details and Quality Control Standards (“the Schedules”). Thirdly, there is a document called “TERMS AND CONDITIONS” (the “terms and conditions”).
The Memo of Agreement states:
“This is the MEMO OF AGREEMENT between the Grower and Southcorp for the supply of the Grapes described herein. The terms and conditions and Schedules attached to the Memo of Agreement are incorporated into this document to constitute the ‘Agreement’ as defined in cl. 26.1 of those terms and conditions.”
Clause 5.1 of the terms and conditions provides:
“5.1The price payable by Southcorp... is the Variety Price plus a Grade Premium, and subject to any adjustments under clause 15.”
“Grade Premium” is defined in cl. 26.1 of the terms and conditions to mean:
“... the premium payable in respect of a variety of Grapes, as determined in accordance with Southcorp’s Grape Value Grade scale, with the fruit quality determined by Southcorp’s winemakers for deliveries in each Vintage Year.”
Clause 5.4 of the terms and conditions provides that cl. 5.1 is “subject to the Grapes complying with the Quality Control Standards set out in cl. 15.” Clause 15 refers to the quality standards specified in the Schedules. The relevant schedule contains details of a “Defect Points” system which allows reduction of the base Variety Price according to the number of defect points assigned to a parcel of grapes.
Clause 6.1 of the terms and conditions provides:
“In each Vintage Year Southcorp will pay to the Grower a Grade Premium in respect of any Parcel of Fruit which is of a higher grade rating than the Base Grape Value Grade for the relevant variety specified in Item 5 in the Memo of Agreement.”
Clause 6.3 of the terms and conditions provides:
“The amount of any Grade Premium will be calculated by subtracting the relevant Base Grape Value Grade from the Vintage Grape Value Grade and then multiplying the difference by the Grape Value Grade scale set out in Item 5 in the Memo of Agreement.”
I will refer to this calculation as the “Grade Premium formula”.
Item 5 of the Memo of Agreement states:
“5. Production & Pricing Details • Refer attached Schedule.”
I will refer to this schedule as the “Pricing Details schedule”.
A copy of the Pricing Details schedule is Annexed to these reasons for judgment. As can be seen, the parties have expressly agreed the following matters relevant to the calculation of the Grade Premium formula for each variety of grapes in the Initial Term:
(1)The Base Grape Value Grade (upon which the Base Grape Value or Variety Price is based).
(2)The Grape Value Grade scales for each Vintage Year.
The other element in the Grade Premium formula is the “Vintage Grape Value Grade.” This is the actual grade rating of a parcel of grapes, as determined by Southcorp.
Clause 2.7 of the terms and conditions provides:
“During the Option Term or any Holdover,[3] the Agreement continues to be governed by these terms and conditions, except that there is no equivalent to clause 2.3[4], and:
2.7.1in the case of an Option Term, the parties must agree on each Variety Price not less than three months prior to the expiry of the Initial Term. The Variety Price applicable during the Option Term must not be less than the Minimum Price for each variety specified in Item 5 of the Memo of Agreement, or
2.7.2in the case of a Holdover, if the parties can’t agree on a Variety Price, then that Variety Price is the same as in the previous Vintage Year.”
[3]“Holdover” is defined in cl. 2.5 to cover the situation where the Agreement continues from year to year after the Initial Term without either party having exercised its option to extend the term of the agreement for the Option Term.
[4]Clause 2.3 provides for the Option Term.
Insofar as is relevant, cl. 2.7 of the terms and conditions unambiguously states that the terms and conditions apply to the Option Term, with the exception that the Variety Price is to be the subject of agreement between the parties and, in default of agreement, is to be the minimum price for each variety specified in the Pricing Details schedule. Importantly, there is no reference in cl. 2.7 to any element of the Grade Premium formula. In that regard, cll. 5 and 6 of the terms and conditions are to govern the issue of whether any Grade Premium is payable during the Option Term.
In respect of the Initial Term, the Agreement operates in the following way.
The starting point is the concept of a Base Grape Value, or Variety Price, for each Vintage Year in the Initial Term. This is the base price per tonne which is payable for grapes, before the addition of any Grade Premium.
If a parcel of grapes is classified by Southcorp as achieving a Vintage Grape Value Grade which is higher than the Base Grape Value Grade, a Grade Premium calculated in accordance with Southcorp’s Grape Value Grade scale is payable. For example, using the figures specified in the Pricing Details schedule for the 1998 Vintage Year:
(1)Chardonnay grapes with a quality grade of between 1 and 10 attract a premium of $63 per tonne for each grade above the Base Grape Value Grade of 7.
(2)Chardonnay grapes with a quality grade of between 10.1 and 20 attract a premium of $115 per tonne for each grade above 10.
(3)Cabernet sauvignon and shiraz grapes with a quality grade of between 1 and 10 attract a premium of $80 per tonne for each grade above the Base Grape Value Grade of 6.
(4)Cabernet sauvignon and shiraz grapes with a quality grade of between 10.1 and 20 attract a premium of $130 per tonne for each grade above 10.
Both the Base Grape Values, or Variety Prices, and the Grape Value Grade scales increased in every year of the Initial Period. It was submitted on behalf of the plaintiff that the Grape Value Grade scales increased by a rounded amount of 3 per cent in each year of the Initial Term. This is conceded by the defendant.
A Grade Premium is to be calculated by reference to the three elements of the Grade Premium formula set out in cl. 6.3. The first element is the Base Grape Value Grade. The definition of this term in cl. 26.1 of the terms and conditions indicates that the same Base Grape Value Grade is to apply in both the Initial Term and the Option Term. This follows from the definition of “Term” in cl. 21.1 of the terms and conditions.
The second element of the Grade Premium formula is the Vintage Grape Value Grade of the relevant parcel of grapes, as determined by Southcorp.
The third element of the Grade Premium formula is the Grape Value Grade scale. Clause 6.3 of the terms and conditions provides that this element is that “set out in” the Pricing Details schedule.
For example, the calculation of a Grade Premium for a parcel of chardonnay grapes supplied in 1998 with a grade of 9 would be as follows:
(9 – 7) x 63 = $126.
This calculation is possible during the Initial Term, because the Pricing Details schedule sets out the Grape Value Grade scales for each variety of grapes in each Vintage Year of the Initial Term.
However, the Pricing Details schedule does not set out a Base Grape Value Grade or a Grape Value Grade scale in respect of any variety of grapes for any Vintage Year in the Option Term. All that appears in the Pricing Details schedule for the Option Term is a reference to an “Option Term Minimum Price” per tonne of grapes. Reference to cl. 2.7.1 of the terms and conditions indicates that this is intended to be the Variety Price, or Base Grape Value, for the whole of the Option Period in the absence of contrary agreement.
Interpretation of the Agreement
The question arises as to whether, on a proper construction of the Agreement, the parties intended that a Grade Premium would be payable during the Option Term. The relevant principles of contractual interpretation are not in doubt. The meaning of a commercial contract is to be determined objectively, by reference to what a reasonable person in the position of the parties would understand the language used in the contract to mean.[5]
[5]Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [40].
On behalf of Southcorp, it was submitted that the omission from the Pricing Details schedule of any Grape Value Grade scale for the Option Term indicates that the parties considered whether a Grade Premium would be payable in respect of grapes supplied during the Option Term and decided that no such premium would be payable. If they had intended that such a premium would be payable, it would have been a simple matter to specify in the Pricing Details schedule a Grape Value Grade scale for each year of the Option Term in respect of each grape variety. The fact that the parties have chosen to specify only that the sum of $600 will be payable as the “Option Term Minimum Price” per tonne indicates an unambiguous intention that no Grade Premium is payable during the Option Term.
On behalf of the plaintiff, it was submitted that, when the Agreement is construed as a whole, it discloses an objective intention that the quality of the grapes to be supplied by the plaintiff was of critical importance to Southcorp. This obvious intention is discernable from the many terms of the Agreement concerning quality issues. Based upon this objective purpose, it was submitted on behalf of the plaintiff that the Court should give primacy to the intention expressed in cll. 2.7, 5.1 and 6.1 of the terms and conditions, which state that Southcorp will pay a Grade Premium in each Vintage Year of the operation of the Agreement, including during the Option Term. Having regard to the obvious intention expressed in these clauses that a Grade Premium would be payable during the Option Term, it was submitted that the Court should strive to construe the Agreement to make it work. The suggested approach was that the Court should attribute to the parties an intention that the Grape Value Grade scale for the Initial Term should be extrapolated at the rate of 3 per cent per annum throughout the Option Term.
It was also submitted on behalf of the plaintiff that this approach should be adopted because the interpretation suggested by the defendant would lead to a result which was capricious, unreasonable, inconvenient or unjust. It was submitted that this result would follow because the clear purpose of the pricing structure in the Agreement was to reward good quality grapes and punish bad quality grapes. An interpretation which involved no Grade Premium being payable during the Option Term would have the effect that any reward for good quality fruit would vanish.
I reject the arguments advanced on behalf of the plaintiff. In my view, they involve the Court in re-writing the Pricing Details schedule so as to attribute to the parties an intention for which they have not made any provision.[6] The Grade Premium formula requires, for its operation, a Grape Value Grade scale to be set out in the Pricing Details schedule. It would have been a simple matter for the parties to include a Grape Value Grade scale for the Option Term in the Pricing Details schedule if that was their intention. They have not done so. Instead, there is a simple reference to “Option Term Minimum Price” per tonne for the Option Term. This is to be contrasted with the detailed specification in the Pricing Details schedule of a Grape Value Grade scale for each Vintage Year in the Initial Term.
[6]Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 105, 109.
I accept that a less obvious interpretation of the words of an agreement may be adopted where the result is properly characterised as capricious, unreasonable, inconvenient or unjust.[7] However, the result of the interpretation of the Agreement which I prefer in this case is not, in my view, capable of being so characterised. However, even if it were, there are no words or figures in the Pricing Details schedule or in the Agreement which are capable of supplying the Grape Value Grade scale for the Option Term. In short, there is no alternative interpretation open, merely the suggestion that the Court should guess what the parties would likely have agreed if they had chosen to express Grape Value Grade scales for the Option Term. In my view, that is not a proper role for the Court in the interpretation of an agreement. In this regard, I adopt the statement of Lord Mustill in Charter Reinsurance Co Ltd v Fagan[8] concerning the interpretation of commercial agreements where it is suggested that a particular interpretation leads to an unreasonable result:
“There comes a point at which the court should remind itself that the task is to discover what the parties meant from what they have said, and that to force upon the words a meaning which they cannot fairly bear is to substitute for the bargain actually made one which the court believes could better have been made. This is an illegitimate role for a court. Particularly in the field of commerce where the parties need to know what they must do and what they can insist on not doing, it is essential for them to be confident that they can rely on the court to enforce their contract according to its terms.”[9]
[7]Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109.
[8][1997] AC 313.
[9][1997] AC 313 at 388.
In my view, the specific contents of the Pricing Details schedule should prevail over the general intention which may be disclosed by cll. 2.7, 5.1 and 6.1 of the terms and conditions. The Pricing Details schedule contains the specific matters agreed between the parties. The terms and conditions are, on their face, generic in character and obviously designed to operate upon matters which have been specifically agreed in the Memo of Agreement and the Schedules, including the Pricing Details schedule.
Implied Term Submission
An alternative argument was put on behalf of the plaintiff. It was submitted that the Court should imply a term in the Agreement to the effect that the Grape Value Grade scale for each Vintage Year in the Option Term is to be determined by extrapolation, at the rate of 3 per cent per annum, of the Grape Value Grade scale set out in the Pricing Details schedule for the Initial Term.
I reject the alternative argument based upon an implied term. The conditions necessary for the implication of a term are not in doubt. In Codelfa Construction Pty Ltd v State Rail Authority of NSW,[10] Mason J adopted the summary of the necessary conditions to ground the implication of a term, as expressed in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council[11], as follows:
“(1)It must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.”[12]
[10](1982) 149 CLR 337.
[11](1977) 180 CLR 266 at 283.
[12](1982) 149 CLR 337 at 347.
In my view, the suggested implied term is not established in respect of three of the conditions specified in the BP Refinery case:
(1)It is not reasonable and equitable to attribute to the parties an intention in accordance with the implied term. In circumstance where the parties have not included a Grape Value Grade scale in the Agreement, it is not for the Court to guess at what they might have agreed if they had turned their minds to the issue. In this regard, it must be recalled that the Option Term commences seven years after the initial operation of the Agreement, in circumstances where the parties have agreed to renegotiate the Variety Price and have set a minimum price of approximately 40 per cent less than the Variety Price for the final year of the Initial Term.
(2)It is not necessary to imply the term suggested in order to give the Agreement business efficacy. The Agreement is effective without these implied term. It provides a minimum price which must be payable for grapes supplied.
(3)The implied term is not so obvious that it goes without saying. The Court can only guess as to what the parties would have agreed if they considered what Grape Value Grade scale was to apply for the Option Term. In circumstances where the minimum Variety Price for the Option Term is approximately 40 per cent less than the Variety Price for the final year of the Initial Term, it is not obvious that the parties would have agreed that the quality bonuses would continue to increase in the extrapolated fashion suggested.
For the above reasons, the suggested implied term is not established.
Surrounding Circumstances
My view as to the proper interpretation of the Agreement, and as to the suggested implied term, is confirmed by the extrinsic evidence which was led at the trial as to the surrounding circumstances in which the Agreement was entered into.
Other than tendering the Agreement in evidence, the plaintiff called no evidence.
The defendant called one witness, Bruce McDougall. At material times, McDougall was the General Manager – Supply and Business Development of the defendant. He was responsible for all external grower-contracted fruit, including the negotiation of and signing of grape supply contracts with growers in Australia and California. He had delegated authority to make decisions on and sign grower contracts on behalf of the defendant. He in fact signed the Agreement on behalf of the defendant.
In cross-examination, McDougall accepted that, at the time of entry into the Agreement, “the supply of grapes was short in some areas” of Australia and that Southcorp had targeted certain areas to ensure supply of good quality grapes. However, he did not recall the specifics of the Sunraysia area, in which the Vineyard is located. This was the only evidence of prevailing market conditions at the time of the Agreement. This evidence does not cause me to alter my view on the issues of interpretation or implied terms of the Agreement.
McDougall gave evidence as to the specific circumstances in which the Agreement was signed, as appears below.
The Vineyard was previously managed by Murray Bend Management Pty Ltd (“Murray Bend”). Murray Bend entered into an agreement with the defendant dated 30 May 1997 (“Murray Bend Agreement”). Insofar as is relevant, the Murray Bend Agreement contains the same terms and conditions as the Agreement. Murray Bend encountered financial difficulties very soon after the execution of the Murray Bend Agreement. Administrators were appointed. In the result, a firm of accountants, Thomsons, and a firm of solicitors formed the plaintiff and promoted a new venture to investors under which investors could invest in the Vineyard under the management of the plaintiff.
In November 1997, the plaintiff issued an Information Memorandum (“the Information Memorandum”) to potential investors, seeking investment in the Vineyard. Although the plaintiff had not then finalised arrangements with the defendant to enter into the Agreement, it is apparent that there were discussions between Thomsons and the defendant about the “transfer” of the existing Murray Bend contract to the plaintiff.
In the Information Memorandum, potential investors were asked to invest on the assumption that the plaintiff would obtain a supply agreement with the defendant. The Information Memorandum states:
“A 7 year grape supply Contract (‘Contract’) has been negotiated with Southcorp Wines Pty Ltd with an additional 5 year term at the option of both parties for grapes grown on 400 acres designated on the property.
The Contract will expire on 30 June 2004. The contract is based on 1996 grape prices. These prices will be increased in accordance with the schedule to the contract. Base prices in the year 1999 for Cabernet Sauvignon, Shiraz and Chardonnay are due to increase annually by 3 per cent. Financial projections have been based upon these prices.
The Contract also has provisions for a Points Bonus Payments System where the grapes meet specified quality incentive standards. The technological advantage of the Vineyard and the high levels of performance demanded of the Vineyard management enhance the possibility of these bonuses being achievable.
The Southcorp Wines bonus structure is well designed and uncomplicated. It does rely on the integrity of the winemaker at the cellar. However, Southcorp’s system of tracking grape juice to the end product is very sophisticated and unrivalled in the industry. The proximity of the property to the Winery will enable the winemaker to liaise closely with the Vineyard management.
The new and innovative Points Bonus Payments System for quality fruit reflects a reward for effort on the part of the grower. Given normal climatic conditions it would not be unreasonable to assume bonuses throughout the term of the Contract.” (Emphasis added.)
The Information Memorandum contains financial projections of returns to investors. The following statement appears in the Information Memorandum concerning these financial projections:
“Grape prices are based on the Southcorp Wines grape supply Contract, and allow for modest and achievable quality bonuses in Term 1 of the contract.
The minimum price for Term 2 is $600 per tonne. From 2005, this price has been used to determine returns.” (Emphasis added.)
The financial projections include two scenarios. One scenario assumes the payment of “modest quality bonuses”. The other scenario assumes that no quality bonuses are payable. In each scenario, the financial projections include forecast crop income for the first three years of the Option Term. This forecast income is based upon a return of $600 per tonne only, with no quality bonus or Grade Premium.
A copy of the Information Memorandum was provided to the defendant.
By letter dated 18 December 1997 from Thomsons to McDougall, Thomsons sought confirmation from McDougall of “our arrangement to transfer the existing contract to the new management company on behalf of the sixteen landowners”.
McDougall responded to Thomsons by letter dated 23 December 1997. In his letter, McDougall confirmed the “preparedness” of the defendant to execute a supply agreement with the plaintiff on the same terms and conditions as the Murray Bend Agreement, subject to certain exceptions which are not relevant. Further, in his letter, McDougall stated:
“We have to hand a copy of your draft(?) Information Memorandum and, while we are comfortable with the Southcorp references in the document which are confirmed by this letter, we would have preferred to sight the draft for approval of the Southcorp reference prior to its distribution to prospective investors.” (Emphasis added.)
The evidence concerning the Information Memorandum was initially objected to by the plaintiff. Written submissions were filed by the parties on the question of admissibility of this evidence. At trial, the plaintiff withdrew its objections to the evidence concerning the Information Memorandum, including the December 1997 correspondence. However, it is still necessary to consider whether this evidence may properly be referred to on the interpretation of the Agreement or in respect of the suggested implied term. In my view, some of the evidence concerning the Information Memorandum was relevant and admissible for these purposes.
In Royal Botanic Gardens and Domain Trust v South Sydney City Council[13] Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ considered the admissibility of evidence of surrounding circumstances to assist in the interpretation of a written contract if the language be ambiguous or susceptible of more than one meaning and, in that regard, stated:
“In Codelfa, Mason J (with whose Stephen J and Wilson J agreed) referred to authorities which indicated that, even in respect of agreements under seal, it is appropriate to have regard to more than internal linguistic considerations and to consider the circumstances with reference to which the words in question were used and, from those circumstances, to discern the objective which the parties had in view.”[14] (Citations omitted.)
[13](2002) 186 ALR 289.
[14](2002) 186 ALR 289 at [10].
In Pacific Carriers Ltd v BNP Paribas[15] Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ stated:
“The construction of the letters of indemnity is to be determined by what a reasonable person in the position of Pacific would have understood them to mean. That requires consideration, not only of the text of the documents, but also the surrounding circumstances known to Pacific and BNP, and the purpose and object of the transaction.”[16] (Citations omitted.)
[15](2004) 218 CLR 451.
[16](2004) 218 CLR 451 at [22]; see also Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [40].
In BP Australia Pty Ltd v Nyran Pty Ltd[17] RD Nicholson J considered whether evidence of surrounding circumstances known to the parties included the circumstance that, prior to the execution of the contract in question, one party communicated its subjective understanding of the meaning of a provision in a contract to the other party and, in response, the other party communicated its agreement with that understanding. In this regard, RD Nicholson J stated:
“Objective background facts can include statements and actions of the parties which reflect their mutual actual intentions. That is, evidence of the mutual subjective intention of the parties to a contract may be part of the objective framework of the facts within which the contract came into existence. It is the mutuality which makes the evidence admissible.”[18]
[17](2003) 198 ALR 442.
[18](2003) 198 ALR 442 at [34].
RD Nicholson J emphasised the obvious point that communication by one party to the other of its subjective intention is not enough to make the evidence admissible:
“I accept the submission for the respondent that communication of a subjective intention by one party to another in the course of contractual negotiations does not of itself result in the subjective intention becoming a mutually known objective background fact of the type qualifying for admission. What is needed in addition to the fact of communication is the element of concurrence. It is the concurrence which creates the mutuality.”[19]
[19](2003) 198 ALR 442 at [46].
In my view, these statements by RD Nicholson J are correct and applicable to this proceeding. They are consistent with the following statement by Mason J in Codelfa, concerning the admissibility of evidence of mutual intention of the contracting parties that a particular provision in a proposed contract should not be included:
“There may perhaps be one situation in which evidence of the actual intention of the parties should be allowed to prevail over their presumed intention. If it transpires that the parties have refused to include in the contract a provision that would give effect to the presumed intention of persons in their position it may be proper to receive evidence of that refusal. After all, the court is interpreting the contract which the parties have made and in that exercise the court takes into account what reasonable men in that situation would have intended to convey by the words chosen. But is it right to carry that exercise to the point of placing on the words of the contract a meaning which the parties have been united in rejecting? It is possible that evidence of mutual intention, if amounting to concurrence, is receivable so as to negative an inference sought to be drawn from surrounding circumstances.”[20]
[20](1982) 149 CLR 337 at 352–3.
It follows that evidence of the Information Memorandum and of Southcorp’s concurrence in it is admissible in determining the intention of the parties as to whether a Grade Premium is payable during the Option Term, or as to whether the Court should imply a term to the effect suggested. The Information Memorandum, when read as a whole, makes a number of references to the proposed contractual arrangements with Southcorp. I have set these out above. In my view, these references unambiguously record an understanding by the plaintiff that no Grade Premium was payable during the Option Term. The statement by McDougall in his letter of 23 December 1997, that Southcorp was “comfortable with the Southcorp references” in the Information Memorandum, should be understood as Southcorp’s concurrence with the plaintiff’s understanding, as recorded in the Information Memorandum, that no Grade Premium was payable during the Option Term.
Accordingly, the admissible extrinsic evidence as to the surrounding circumstances in which the Agreement was entered into confirms that no Grade Premium is payable under the Agreement during the Option Term, either expressly or by implication.
There was also some evidence which was led and cross-examined about which, upon reflection following full argument, is not admissible on the issues of interpretation or implied term. This evidence has not influenced my decision in any way.
In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd[21] Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ voiced their disapproval of inadmissible evidence being received without objection in cases concerning the interpretation of commercial contracts, and referred to the difficulties which may be experienced on appeal in knowing “the extent to which the inadmissible material influenced the judgment at first instance.” Accordingly, I will refer briefly to those items of evidence which I have not taken into account in reaching my decision.
[21](2004) 219 CLR 165 at [35].
In his witness statement, McDougall stated the following in respect of the Information Memorandum:
“I read and considered the Sunset Vineyards Information Memorandum in December 1997 and noted its contents prior to executing the Sunset contract. There was nothing in the Sunset Vineyards Information Memorandum that was inconsistent with the proposed Southcorp contract. It reflected the returns which the then existing Murray Bend contract would achieve by application of the contract pricing on their assumed tonnages and quality grades.”
In oral evidence, McDougall said that he had regard to the entirety of the Information Memorandum in forming his opinion that there was nothing in it that was inconsistent with the proposed supply agreement. Further, he stated that he understood the statement in the Information Memorandum that “it would not be unreasonable to assume bonuses throughout the term of the Contract” as referring to the Initial Term.
In my view, although this paragraph of McDougall’s witness statement was admitted without objection, the evidence contained in that paragraph, and McDougall’s oral evidence referred to above, is not admissible in aid of construction of the Agreement or in determining whether any terms should be implied in the Agreement. The evidence is of McDougall’s subjective understanding as to the contents of the Information Memorandum in relation to the proposed agreement with the plaintiff.
McDougall stated in his witness statement that “the Murray Bend contract was based on one of Southcorp’s standard form contracts known as the ‘variety price’ contract”. Although I admitted this statement in evidence, it has played no part in my reasoning. As I have said, the terms and conditions are, on their face, generic in character and obviously designed to operate upon matters which have been specifically agreed in the Memo of Agreement and the Schedules.
Some admitted facts were placed in evidence as to the average weighted prices of chardonnay, shiraz and cabernet sauvignon grapes in the Murray Darling and Swan Hill wine regions, in which the Vineyard is situated. The admissions establish that for the 2005 Vintage Year, the district weighted averages per tonne were $377.54 for cabernet sauvignon, $523.79 for shiraz and $651.87 for chardonnay. Although the plaintiff did not object to the admissions being received in evidence, it was submitted on behalf of the plaintiff that the evidence was irrelevant to the task of interpreting the Agreement. It is not evidence of surrounding circumstances in which the Agreement was made and, in any event, the district weighted average price for grapes has no relevance to the payment of a premium for grapes of a higher quality than a base value adopted by the parties. In my view, the plaintiff’s submissions in this regard were correct. Accordingly, I have taken no account of this evidence in reaching my conclusions as to the proper interpretation of the Agreement and in rejecting the implied term.
Conclusion
For the above reasons, the proceeding should be dismissed. I will hear the parties as to costs.
APPENDIX
MEMO OF AGREEMENT - VARIETY PRICE
Pricing Details - Item 5
| Variety | Block | Base Grape Value | Base Grape Value ($/Tonne) - Vintage Year | Option Term Minimum | ||||||
| Grade (1-20) | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | Price ($/Tonne) | ||
| Chardonnay | 7 | 780 | 805 | 830 | 855 | 880 | 905 | 930 | 600 | |
| Grape Value Grade Scale | 1-10 | 63 | 65 | 67 | 69 | 71 | 73 | 75 | ||
| Grape Value Grade Scale | 10.1-20 | 115 | 118 | 122 | 126 | 130 | 134 | 138 | ||
| Cabernet Sauvignon | 6 | 800 | 825 | 850 | 875 | 900 | 925 | 950 | 600 |
| Grape Value Grade Scale | 1-10 | 80 | 83 | 86 | 89 | 92 | 95 | 98 | |
| Grape Value Grade Scale | 10.1-20 | 130 | 134 | 138 | 142 | 146 | 150 | 155 |
| Shiraz | 6 | 800 | 825 | 850 | 875 | 900 | 925 | 950 | 600 |
| Grape Value Grade Scale | 1-10 | 80 | 83 | 86 | 89 | 92 | 95 | 98 | |
| Grape Value Grade Scale | 10.1-20 | 130 | 134 | 138 | 142 | 146 | 150 | 155 |
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