Tasmanian Land Company Ltd v Van Dairy Group Pty Ltd - [2022] TASSC 6

[2022] TASSC 6

COURT: SUPREME COURT OF TASMANIA

CITATION: Tasmanian Land Company Ltd v Van Dairy Group Pty Ltd [2022] TASSC 6

PARTIES:  TASMANIAN LAND COMPANY LTD
  v
  VAN DAIRY GROUP PTY LTD

FILE NO:  2988/2018
DELIVERED ON:  9 February 2022
DELIVERED AT:  Hobart
HEARING DATE:  8-10 December 2021
JUDGMENT OF:  Brett J
CATCHWORDS:

Contracts – General contractual principles – Construction and interpretation of contracts – Interpretation of miscellaneous contracts and other matters – Sale agreement for purchase of dairy farm and exclusive milk supply agreement – Provision made in post-closing price adjustment for income paid to the vendor in advance of completion – Construction of clause which provided for ongoing accounting of income received after completion – Whether that clause required compensation for vendor in respect of prospective benefits paid to purchaser which changed the basis upon which the post-closing adjustment had been calculated – Clause does not apply to prospective benefits.

Hansen Yuncken Pty Ltd v Parliament Square Hobart Landowner Pty Ltd [2021] TASSC 7; Hansen Yuncken Pty Ltd v Parliament Square Hobart Landowner Pty Ltd [2021] TASFC 11, applied.

Aust Digest Contracts [120]

Equity – General principles – Unjust enrichment – General principles.
Roxborough v Rothmans of Pall Mall Australia Ltd [2001] HCA 68, 208 CLR 516; Bofinger v Kingsway Group Limited [2009] HCA 44, 239 CLR 269, considered.
David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, referred to.

Aust Digest Equity [1100]

Restitution – Generally – On the basis of unjust enrichment – No qualifying or vitiating factor identified – Financial windfall – Purchasing party entitled to benefits of ownership of assets.

Roxborough v Rothmans of Pall Mall Australia Ltd [2001] HCA 68, 208 CLR 516; Bofinger v Kingsway Group Limited [2009] HCA 44, 239 CLR 269, considered.
David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, referred to.
Aust Digest Restitution [1002]

REPRESENTATION:

Counsel:
             Plaintiff:  C Gunson SC, J Sawyer
             Defendant:  G Donaldson SC, P Murray
Solicitors:
             Plaintiff:  Clayton Utz
             Defendant:  K & L Gates

Judgment Number: [2022] TASSC 6
Number of paragraphs: 57

Serial No 6/2022
File No 2988/2018

TASMANIAN LAND COMPANY LTD v VAN DAIRY GROUP PTY LTD

REASONS FOR JUDGMENT BRETT J

9 February 2022

In 2015, the plaintiff sold its dairy farming business to the defendant. The sale included a number of dairy farms and related assets. The purchase price was $275 million, subject to a post-closing adjustment. The sale agreement was entered into on 20 November 2015, and closing of the sale took place on 31 March 2016.
The assets sold included the benefit of an exclusive milk supply agreement (the EMSA) between companies through which the plaintiff conducted the dairy farming business, and a milk processor, Fonterra Milk Australia Pty Ltd (Fonterra). Under this agreement, the plaintiff agreed to supply milk exclusively to Fonterra for 10 years commencing 1 July 2011. The price of the milk was determined by Fonterra from time to time, but guaranteed under the EMSA to not fall below a benchmark price. This price was determined on a seasonal basis according to the milk price paid by a comparable and larger milk processor operating in Victoria, Murray Goulburn. The season was between 1 July and 30 June each year. The EMSA specified the process for determination of the milk price. The price was nominated by Fonterra at the start of each season, and reviewed, and, if necessary, adjusted at regular intervals throughout the season. At the end of the season, any shortfall between the price actually paid throughout the year and the benchmark price was to be paid to the supplier as a lump sum, but the supplier was not required to repay any excess. The reviews responded to prevailing market conditions, but it can be inferred that an important consideration was to calibrate the actual payments so that the average across the season remained in the desired relationship with the anticipated average benchmark price. Mid-season increases in the actual price were described as "step-ups" and reimbursed to the supplier on a retrospective basis from the beginning of the year. The EMSA also noted the possibility of decreases, although these were not applied retrospectively. However, identification in the latter part of the season of an anticipated decrease in the benchmark price could have the practical effect of a sharp decline in the farm gate price for the balance of the year, because of the need to bring down the average price actually paid across the whole season to the desired level.
This was the situation which pertained in the 2015-16 season. The opening price announced by Fonterra and paid by it throughout the bulk of the season was the subject of a significant decrease, which was announced in, and took effect from, May 2016. This was about one month after the closing of the sale agreement. The decision to reduce the overall price for that season resulted from a severe decline in market conditions. This had been reflected in an earlier announcement by Murray Goulburn, which predicted a sharp decline in the benchmark price. The decrease in the milk price significantly disadvantaged the defendant, because the practical effect was that the defendant would, for the balance of the season, bear the full burden of the average reduction across the whole year. The plaintiff, of course, had received a much higher actual price for milk supplied before closing than the new anticipated average price. However, the contract provided for a post-closing adjustment of the purchase price. After negotiation, the parties agreed that the plaintiff would compensate the defendant by way of a lump sum adjustment in the defendant's favour in the sum of $2.2 million to account for the disadvantage sustained by it as a result of the post-closing price decrease. This adjustment was achieved by showing the payment as reflecting "income in advance" received by the plaintiff prior to closing, and this was included as an item in the defendant's favour in the post-closing accounts prepared as the basis for the broader contractual post-closing adjustment. This process was finalised in July 2016.
In May 2017, Murray Goulburn took certain steps which were intended to ameliorate the impact of the reduction of the price which it paid to its suppliers in the 2015-16 season. Fonterra responded soon after by agreeing to pay its suppliers, including the defendant, an extra payment of 40¢ per kg/MS (per kilogram of milk solids) in addition to the price which would normally be paid under the EMSA for milk supplied to it during the 2017-18 season. The defendant, in fact, received such payments for milk supplied during that year. For ease of reference, I will hereafter describe this arrangement, and the actual payments made pursuant to it, as "the additional payments". The plaintiff's case is that the additional payments, although calculated on milk produced and supplied during the 2017-18 season, were in fact intended to reverse the reduction in the milk price in the 2015-16 season, which was the basis for the payment to the defendant of $2.2 million in the post-closing adjustment. The plaintiff argues that the defendant should pay to it the amount received by the defendant under this arrangement, at least in respect of milk supplied during that part of the 2017-18 season which corresponds to the period prior to closing in the 2015-16 season. The plaintiff makes this claim on any or all of the following bases:
(a)Pursuant to a provision in the sale agreement which provides for payment to it of step-ups or closing price adjustments in the milk price for the 2015-16 season to the extent that the same relates to milk supplied by the plaintiff in the period prior to the closing of the contract.
(b)Pursuant to an implied term in the contract providing for compensation in such circumstances.
(c)Because it is subrogated to the defendant's right to receive the additional payments, at least during the part of the 2017-18 year which corresponds to the period prior to closing in the earlier season, on the basis that the defendant would be unjustly enriched by retention of both those payments and the closing adjustment of $2.2 million.
The defendant argues that although the circumstances which led to the decision to make the additional payments responded to the price reduction in the 2015-16 year, and Murray Goulburn's subsequent action to ameliorate the effect of the reduction on its suppliers, that response was, in fact, the provision of a prospective benefit to its suppliers in respect of milk production in the 2017-18 year. The defendant's position is that having purchased the assets of the business, including the benefit of the EMSA, it is entitled, as the owner of the business, to the additional payment for milk it has produced and sold to Fonterra in 2017-18, and that the motivation for that payment is irrelevant to its entitlement. It disputes that the express provision of the contract relied upon by the plaintiff is applicable, or that there is an implied term in the contract as claimed. It disputes also that it has been unjustly enriched by the receipt and retention of both the income in advance adjustment and the additional payments. It argues that the $2.2 million adjustment was properly payable under the contract, and the additional payments are a benefit of its subsequent ownership of the business. It submits that the plaintiff is not entitled to restitution, whether by way of subrogation or otherwise.

The milk price

I have already described the general basis on which the milk price was fixed under the EMSA. By definition, the EMSA includes the actual document executed by the parties, together with a milk supply handbook published by Fonterra from time to time, and an opening price letter provided at the commencement of each season. The role of the letter is explained in the handbook. As the name suggests, it nominates the opening price for the season. Part 10 of the handbook contains information concerning pricing and payments for milk. The price paid depends not on volume but on the weight of the fat and protein components of the milk. Hence, the price is expressed not on a per litre basis, but rather per kilogram of milk solids (kg/MS). The handbook makes the point that there is not a single farm gate milk price, but rather the price actually received by the supplier will depend on the quality and composition of the milk provided to Fonterra.
Variations of the price during a season are also dealt with in Part 10. A step-up is "generally backdated and paid retrospectively for milk supplied from the beginning of the season". It is noted that retrospective payments will only be made to ongoing suppliers or those who have retired from dairy farming. The intention is to exclude those who unilaterally withdraw from the agreement in favour of a different supplier.
The handbook also notes the possibility of "a mid-season price decrease", but asserts that a decrease is rare.
The guarantee of a minimum average payment fixed by the benchmark price, and the mechanism for the end of season adjustment is provided for by cl 3.1 of the EMSA document. That clause provides as follows:
"3.1   Benchmark Price
(a)   Fonterra will pay Supplier for Milk supplied under the Agreement each Season a price that is not less than the Benchmark Price.
(b)   At the end of each Season, the parties will compare the actual price paid by Fonterra to Supplier for Milk supplied during the Season with the Benchmark Price for the Season. If the actual price paid by Fonterra is lower than the Benchmark Price for the Season, Fonterra will pay Supplier the amount of the shortfall calculated in respect of all Milk supplied under the Agreement during the Season. Fonterra will pay the amount of the shortfall (if any) within two months after all of the information that is necessary to determine the benchmark Price becomes publicly available."
According to the definition of "benchmark price" contained in the agreement, its determination depends on the milk price paid by the "volume leading milk processor" (as identified from time to time by Fonterra) in Victoria. As already noted, at all times relevant to this case, the volume leading processor was Murray Goulburn.
There is no provision for a supplier to repay any of the payments made to it during the course of the season, once the benchmark price has been determined at the end of the season. It was for this reason that it was in Fonterra's interests to ensure that it regularly reviewed payments made during the course of the season to ensure that the average actual price paid during the year matched as closely as possible the anticipated benchmark price.
The EMSA provides for other payments made by way of incentive and adjustment. With one exception, these are not relevant to this case.

The 2015-16 season

The opening price letter for the 2015-16 season was dated 29 June 2015. It nominated an opening average farm gate milk price of $5.60 per kg/MS. It forecast the likelihood of an increase in the price to between $5.80 and $6 per kg/MS, on the basis of an anticipated recovery in global prices in the first half of 2016. This prediction proved to be inaccurate.
The price remained at $5.60 per kg/MS until 5 May 2016. On that day, Fonterra notified its suppliers by email that the current farm gate milk price would be reduced from $5.60 per kg/MS to $5 per kg/MS, applied retrospectively throughout the whole season. In order to achieve this retrospective reduction, the prospective payment during May and June would be reduced to $1.91 per kg/MS. However, on 13 May 2016, Fonterra revisited this decrease by increasing the price for the months of May and June 2016 by $2.50 per kg/MS. The result was an effective price paid over those two months of $4.41 per kg/MS, which took the average price for the 2015-16 season to $5.13 per kg/MS.
Public statements made by officers of Fonterra at the time explained the price decrease as being driven by global market conditions. This is consistent with similar action taken by Murray Goulburn at around this time and public information released by that company to explain its decisions. Murray Goulburn had also until this time paid a farm gate milk price of $5.60 per kg/MS to its suppliers. In a supplier briefing dated 27 April 2016, it advised that this price was no longer achievable and lowered its forecast for the season to a price of between $4.75 and $5 per kg/MS. In the same announcement, Murray Goulburn advised that it would seek to maintain the effective average milk price at $5.47 per kg/MS across the season, by introducing a mechanism known as the "Milk Supply Support Package" (MSSP). The MSSP, in essence, was a compulsory loan of the difference between the average price actually paid throughout the year and the reduced price which would be determined at the end of the year. The package provided for the MSSP component of the actual payments to be recovered from future milk payments over the ensuing three financial years. The rationale was to reduce the impact of the price decrease by spreading it across that time period rather than drastically reducing the actual payment to ensure full recovery by the end of the 2015-16 season.
The final result was described by the chairman of Murray Goulburn in the company's annual report for the year in the following way:
"In the end MG delivered an average cash price for milk to suppliers of $5.53 per kg/MS in FY 16, made up of the final FMP of $4.80 per kg/MS and 0.73 cents of MSSP support."
Fonterra also introduced a support package to assist its suppliers to cope with the sharp price decrease. However, it was of a different nature to that which applied under the Murray Goulburn MSSP. Whereas the MSSP was imposed on all of Murray Goulburn's suppliers, Fonterra made available a voluntary loan, known as the "FASL". Suppliers were able to borrow "up to 60c/kg/MS based on milk supplied in the past 12 months". The loan would be paid in addition to base payments for milk supplied during the balance of the season. Repayments were not required until July 2017 and thereafter would be deducted from monthly milk payments at a rate which depended on the individual circumstances of each supplier. The voluntary nature of the FASL meant that Fonterra's suppliers had the option of maintaining cash flow by accepting the loan, or alternatively bearing the brunt of the reduced payments immediately. In the end, only about half of Fonterra's suppliers accessed the loan. Others sought to minimise the impact by reducing production for the remainder of the season.
The evidence suggests that over the ensuing months there was considerable backlash against both companies with respect to the sharp price decreases. The backlash and controversy was reflected in parliamentary investigations by the Australian Senate and the Tasmanian Legislative Council.

The sale agreement

The sale agreement was entered into by the parties on 20 November 2015. As one would expect, it is a relatively complex document that was drafted by lawyers. The initial purchase price of $275 million was payable by way of a non-refundable deposit of $20 million, payable by 26 November 2015, with the balance payable at closing. Closing under the contract occurred on 31 March 2016.
Unsurprisingly, cl 6.4 of the agreement provided that upon closing, "title to, possession of, property in, and the benefit and risk of the Business and the Assets" passed to the defendant.
Clause 4.2(c) provided for the post-closing adjustment of the purchase price. The calculation of the adjustment required the preparation of closing accounts relating to various aspects of the assets which were being sold under the agreement. The contractual scheme was that the accounts prepared after closing would give both parties the opportunity to calculate with precision the actual value of the specified assets. The accounts were then to be compared to fixed sums which comprised provisional constituents of the initial purchase price in respect of those assets, and adjustments made accordingly. Once the aggregate final adjustment had been calculated, any residual payment was to be made within three business days of the date on which the closing accounts were agreed or otherwise determined in accordance with the provisions of Schedule 4. Schedule 4 sets out in some detail the process and requirements in respect of the preparation of the closing accounts. That process required the defendant to prepare and deliver draft closing accounts to the plaintiff "by no later than 30 business days after closing". The plaintiff was then required to notify the defendant in writing within 15 business days as to whether it accepted the accounts. If it did not accept the accounts, then the process prescribed a timeline for negotiation and the opportunity for referral of any dispute for independent determination.
As will be apparent from the history already discussed, the retrospective decrease of the milk price imposed by Fonterra occurred approximately one month after the closing of the contract. A dispute arose between the parties as to whether the defendant should be compensated for the effect of the price decrease as part of the post-closing adjustment. The defendant's position was that the timing of the price decrease meant that it would bear the full brunt of the decrease, because it was averaged across the entire year, and hence the plaintiff had until closing received a milk price which was higher than the end of year average price. The price paid to the defendant was commensurately lower. After negotiations, the parties agreed that an adjustment should be made in the purchaser's favour in the sum of $2,200,000 for this reason. The adjustment was shown in the closing accounts as "income in advance". Income in advance is included as a specific item in the draft closing account contained in Schedule 4 but is not defined in the contract. The parties' agreement appeared to accept that the plaintiff had had the benefit of income which, as a result of the retrospective price decrease, became income paid "in advance" of the ultimate entitlement to be determined at the end of the season. This is consistent with the contents of a letter written by the defendant to the plaintiff dated 28 July 2016 in which it noted that the closing accounts "reflect income received in advance by (the plaintiff) in respect of the price paid by Fonterra for milk solids supplied by (the defendant)". The letter also notes that the payment of the adjustment amount is "in full and final settlement of any amount due and payable under clause 4.2(c) of the Agreement". It can be inferred that the plaintiff agreed to those terms.

The forgiveness of the MSSP and Fonterra's reaction

On 2 May 2017, Murray Goulburn announced that it would cease all future repayments of the MSSP and reimburse current and retired suppliers for payments already deducted. In press releases placed into evidence, it explained this decision as a consequence of its recognition "of the unintended impact of the MSSP". The decision followed advice received from a consulting firm. That advice recommended an abandonment of the recovery of payments due by suppliers under the MSSP as part of a raft of measures designed to address a loss of milk supply during the 2017 season which, in turn, was having a significant impact on the efficacy of Murray Goulburn's business. This was a significant step, the negative impact on Murray Goulburn's profit was estimated to be in the vicinity of $148 million. It is obvious that Murray Goulburn took this expensive measure for the predominant reason of ensuring the maintenance of milk supply as an essential precondition to the future viability of its business.
On 10 May 2017, in an email which I infer had been sent by the milk supply manager of Fonterra to the company's suppliers, the following announcements were made:
·     It was noted that the forecast full year farm gate milk price range was $5.30 to $5.70 per kg/MS for the 2017-2018 season.
·     Fonterra would "also pay an additional payment of 40 cents per kg/MS on top of our forecast full year price range for season 2017/2018". It was noted that this would bring the full year price range to between $5.70 and $6.10 per kg/MS.
·     The email explained that the "additional 40 cent payment" was introduced as a response to Murray Goulburn's "recent announcements including the decision to forgive its Milk Supply Support Package". The email noted that in the light of this announcement "we will also pay an additional payment 40 cents per kg/MS next season".
·     Ongoing suppliers would have the option to receive the payment as a lump sum advance paid by 31 July 2017.
·     Retired suppliers who did not supply any other company after retirement, would also receive the payment as a lump sum. It is clear from other documents that, in contrast to the position in respect of ongoing suppliers, this payment would be calculated on the basis of production figures achieved by the retired supplier during the 2015-16 season.
In a joint letter to suppliers dated 12 May 2017, the Managing Director and General Manager Milk Supply of Fonterra explained that the decision to pay the additional 40¢ per kg/MS in 2017-18 was taken after consideration of Murray Goulburn's "recent announcements including the decision to forgive its … MSSP". It described the additional payment as "the most fair and equitable response". It also explained why Fonterra had decided to pay the additional payment on future production, rather than retrospectively on production during the 2015-16 season:
"Every supplier was affected differently by last season's step down, and we know that there were a range of different business decisions made. We knew that a retrospective payment couldn't cater for all of the different scenarios. By paying this forward, we believe that farmers will have the best possible opportunity to make the most of this payment. Having access to this payment now enables farmers to reduce or pay off FASL debt where they have one, or use the cash to underpin their business."
This topic was also addressed in another Fonterra document clearly intended for publication, dated May 2017 and entitled "Global Dairy Update Australia". The document contains what is asserted to be a summary of discussions between office holders, which included the managing director and general manager of Fonterra and suppliers during an information tour. That document includes the following passages:
"Why did you decide to pay it on next season's volumes, rather than 2015/16?
Many made decisions after our price revision that impacted milk volumes – some dried off early or sold or culled cows, meaning that May and June 2015/16 are not a true reflection of regular milk volumes for those months.
After consultation with BSC and the Supplier Forum, paying the 40 cents/kgMS on next season's milk provides opportunity to increase production and capture more of the benefit of the additional payment."
In a further document produced by Fonterra dated 15 May 2017 and entitled "The Facts – Australian Milk Pricing Announcement", Fonterra dealt with the question of why it had decided to provide an additional payment to suppliers rather than forgive its support loans (FASL). It explained this decision as follows:
"Why is Fonterra not forgiving its support loan?
Unlike Murray Goulburn, our support loan was optional around 40% of our suppliers took out a loan and there was significant variation in the amount borrowed among that 40%.
There are farmers who did not take out a loan and they were just as affected by last year's milk price revision. If we forgave the loan, only 40% of our farmers would benefit from that decision and it would be inequitable for our total supply base."

Additional payments to defendant during 2017-18 season

The parties have produced slightly different calculations of the aggregate sum paid by Fonterra to the defendant during the 2017-18 season, by way of the additional payments. The defendant calculates a gross payment of $3,423,247.24, and the plaintiff a gross payment of $3,112,040 for the same period. Because the plaintiff's claim is based on the lesser sum, it is not necessary for me to resolve this discrepancy. In respect of this sum, the plaintiff's company secretary, Mr Taylor, has calculated the amount attributable to the first nine months of the 2017-18 season at $2,266,760 on a weighted percentage split basis in respect of milk solids contained in the milk supplied during that period.
It is uncontroversial that the defendant applied for and received payments in advance, in accordance with the arrangement proposed by Fonterra. It is also uncontroversial that these advances are irrelevant to the resolution of this case. They were truly in the nature of a short term loan, and repayment of the advances was recouped by Fonterra from monies which became payable from time to time under the additional payment arrangement.

The plaintiff's claim under the sale agreement

The plaintiff asserts that the defendant is contractually bound to pay to it the aggregate sum received by the defendant by way of additional payments during the first nine months of the 2017-18 season. It claims that this obligation arises from the express or alternatively implied terms of the sale agreement. In submissions, counsel for the plaintiff suggested alternative relief, in particular that in order to give effect to the contractual position, the defendant should refund to the plaintiff the income in advance payment contained in the closing adjustment. As will be apparent from the foregoing discussion, the relevant sums are approximately equal.
Clause 7 of the sale agreement is headed "Milk Price Step Up". Its terms are as follows:
"7        MILK PRICE STEP UP
7.1Any milk step up and closing price adjustment for the milk price for the year to 30 June 2016 will be paid to TLC to the extent that it relates to milk supplied by the Group in the period prior to Closing. For the avoidance of doubt, the parties agree that the intention and purpose for this clause 7 is to accurately and fairly reflect the milk price and payment mechanisms in force at the time of Closing.
7.2the Purchaser will use its best endeavours to collect any milk step up or closing price adjustment for the Group on the following basis:
(a)Collection of Funds:    funds paid by the Fonterra Co-Operative Group and received by the Purchaser from the collection of milk step ups or closing price adjustment will be paid into a separate account and remitted to the VDL Account monthly;
(b)Monthly Report:        the Purchaser will give TLC a monthly report summarising the amounts collected (under clause 7.2(a)) in that month and any other matters material to the collection; and
(c)No Interference:         TLC will not interfere with the Purchaser's collection of the funds paid by the Fonterra Co-operative Group under this Clause 7, but may, at any time, following written notice to the Purchaser, take over collection of the milk step ups and closing price adjustments."
The plaintiff's claim under the express terms of the contract turns upon the construction of this provision, in particular cl 7.1. The plaintiff submits that the additional payment in respect of milk to be supplied during the 2017-18 season constitutes a milk step up and/or closing price adjustment "for the milk price for the year to 30 June 2016", and should accordingly be paid to the plaintiff "to the extent that it relates to milk supplied … in the period prior to closing". The plaintiff submits that the words "relates to" should be interpreted broadly and beneficially, and on that interpretation, there is the requisite nexus between milk supplied during the first nine months of the 2015-16 season and the additional payments. The basis of the argument is that these payments were clearly intended to provide retrospective compensation for, and effectively reversed, the price decrease relating to the 2015-16 season. The plaintiff's argument is that the payments received by the plaintiff for milk supplied during that period had only been characterised as income in advance and therefore paid over to the defendant under the closing price adjustment of the contract, because of the price reduction which flowed from the reduction of the benchmark price to $4.80 kg/MS. However, when Murray Goulburn forgave the MSSP, it effectively added .73¢ kg/MS to the benchmark price, bringing it from $4.80 to $5.53 kg/MS. Hence, Fonterra was obligated to match this, and did so by paying the extra 40¢ kg/MS. This can be inferred from the quantum of the additional payment. When 40¢ per kg/MS is added to the actual average price paid by Fonterra for the 2015-16 season, $5.13 kg/MS, the result matches precisely the revised benchmark price actually paid by Murray Goulburn.
The defendant argues that the additional payment does not constitute a milk step up or closing price adjustment within the meaning of cl 7.1 and, in any event, is not related to milk supplied during the 2015-16 season. The defendant argues that although the additional payment might have been motivated by a perceived need to rectify the effect of the price decrease in respect of the earlier season, the means chosen by Fonterra to address the problem was to put in place prospective arrangements in respect of milk to be supplied in the future, in particular during the 2017-18 season. The parties' mutual obligations under the sale agreement had, by this time, been carried into effect in full, and the defendant was entitled to the benefit of the assets which it purchased, including its rights under the EMSA and its ongoing relationship with Fonterra. As a matter of record, the defendant had been formally substituted for the plaintiff and its associated companies as a party to the EMSA under a deed of novation dated 14 December 2016. Finally, the defendant argues that there is no legitimate basis upon which to revisit the closing adjustment under the contract. The plaintiff has not sought in its pleadings to attack or set aside that process or its result. The agreement and payment of the adjustment constituted a full and final settlement of the parties' rights under the contract. Any perceived unfairness to the plaintiff arising from the change of attitude on the part of Fonterra is simply a consequence of the business implications of the sale of the assets, and the coincidence of prevailing market conditions.
The principles which apply to the construction of a commercial contract are well settled. It is sufficient for me to restate a passage contained in my reasons for judgment at first instance in Hanson Yuncken Pty Ltd v Parliament Square Hobart Landowner Pty Ltd [2021] TASSC 7, which was quoted with approval by the Full Court on appeal: Hansen Yuncken Pty Ltd v Parliament Square Hobart Landowner Pty Ltd [2021] TASFC 11:
"There is no controversy concerning the general principles to be applied with respect to the construction of the contract. Once again, the case of JKC Australia LNG Pty Ltd v CH2M Hill Companies Ltd [No 2], contains a convenient summary, drawing upon principles restated by the High Court in Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7, 251 CLR 640 [35] and Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37, 256 CLR 104 [46]‑[52]. The pertinent part of that summary is as follows:
'1The rights and liabilities of parties under a provision of a contract are determined objectively by reference to its text, context (the entire text of the contract) and purpose.
2In determining the meaning of the terms of a commercial contract it is necessary to ask what a reasonable business person would have understood the terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purposes or objects to be secured by the contract.
3The court approaches the task of giving a commercial contract an interpretation on the assumption that the parties intended to produce a commercial result - one which makes commercial sense. (This has been said to require that the construction to be placed on the relevant provision be consistent with the commercial object of the agreement.) Thus a commercial contract should be construed so as to avoid it making commercial nonsense or working commercial inconvenience'."
The application of these principles to this case requires that cl 7 be construed according to its commercial purpose, and cohesively with the balance of the contract. In my view, the commercial purpose of the clause is to ensure that the plaintiff receives the benefit of changes in the milk price, irrespective of when they occur, which relate to milk supplied prior to closing. Hence, the clause contemplates an operation which is not limited by the timing or finality of closing, or even the post-closing price adjustment. This would seem to follow from the provision for discrete payment and a separate collection and payment mechanism under cl 7.2. Had it been intended that any such rights be resolved finally with settlement of the closing accounts, the issue could have been left for resolution under the process contemplated by cl 4.2 and Schedule 4. Those provisions include adjustment of "Working Capital", which includes components such as "income in advance" and trade receivables. Payments due by Fonterra for milk supplied prior to closing, but not then paid, would therefore be adjusted under this process. It can therefore be concluded that cl 7 was intended to have a more extensive application, which can have effect beyond the post-closing adjustment.
The terms "milk step up" and "closing price adjustment" are not defined in the sale agreement. However, their meaning can be determined by considering what "a reasonable business person" in the position of the parties to this contract "would have understood the terms to mean", at the time of entry into the contract. In my view, the construction of these terms is also assisted by other aspects of the text of the provision, in particular, the final sentence of cl 7.1 which expressly states that its intention and purpose is to "accurately and fairly reflect the milk price and payment mechanisms in force at the time of closing". The only relevant payment mechanisms in force at that time were those contained in the EMSA. Both terms can be clearly identified as references to specific mechanisms contained in the EMSA. A "step up" is referred to under cl 10.3 of the handbook which is incorporated as part of the EMSA by definition. As already discussed, these are price increases in the discretion of Fonterra applied during the year after a periodic review, and "generally backdated and paid retrospectively for milk supplied from the beginning of the season". The reference to a closing price adjustment, although not defined and referred to in those terms, can only be the adjustment made in the case of a shortfall between the amount actually paid by Fonterra during the year and the benchmark price determined at the end of the year. This is provided for in cl 3.1(b) of the EMSA. The purpose of cl 7.1 is to ensure that the plaintiff receives the benefit of any payment received under either mechanism by the defendant after closing, but referable to milk supplied by the plaintiff prior to closing.
The question, therefore, is whether the payment by Fonterra of the additional payments on milk supplied in the 2017-18 season amounted to a step up or closing price adjustment that "relates to milk supplied … in the period prior to closing". Having regard to the analysis of the clause already discussed, there is no reason why a reversal of the price decrease after closing and resolution of the post-closing accounts could not fall within this definition, and hence lead to a payment back to the plaintiff. For example, if Fonterra had decided to make a back payment calculated at 40¢ kg/MS on milk actually supplied during the 2015-16 season, the clause would clearly require the defendant to pay to the plaintiff a share of the back payment calculated by reference to milk supplied prior to closing. A payment of that nature would, in my view, without doubt, amount to a step up or closing price adjustment.
The difficulty for the plaintiff's case, however, is that that is not how Fonterra chose to deal with the problem which arose from Murray Goulburn's forgiveness of the MSSP. There is no question that an inference arises from all of the evidence that the additional payment was intended to rectify and reverse the problems and losses suffered by suppliers as the result of the price decrease, and further was a reaction and response to the decision taken by Murray Goulburn. The choice of 40¢ kg/MS was clearly intended to provide an equitable link to the notional increase in the benchmark price. However, Fonterra was paying this as an additional price for milk which would be produced by the defendant in the future. It differed in a critical way to the step up and/or closing price adjustment contemplated by cl 7.1. The payment contemplated by cl 7.1 is an aggregate sum, calculated by the multiplication of the adjusted price per kg/MS on the milk produced by the supplier at the time during the 2015-16 year. The adjustments to the price can occur through the mechanisms of step up or a closing price adjustment, but must in my view be applied to milk produced by the plaintiff prior to closing.
This construction is consistent with the commercial purpose of the agreement. Clause 7 is intended to regulate the ongoing relationship of the parties in the light of a situation where the underlying assets had been sold and transferred between them. It is a transitional provision, which maintains the rights of the vendor beyond the final completion of the sale. It operates as an exception to the fundamental commercial purpose of the contract, which is to transfer the benefit and risk of the assets to the defendant in exchange for monetary consideration. Because of this purpose, the clause should be construed in a way which provides the parties with certainty and finality, and accordingly should be applied with precision, according to its terms. On this construction, its operation is limited to payments calculated in respect only of milk produced and supplied by the plaintiff to Fonterra prior to closing. The clause is, in my view, intended to provide a mechanism for the defendant to account to the plaintiff for money received by the defendant after closing, effectively to the use of the plaintiff, which was paid as consideration for milk produced by the plaintiff prior to closing. It applies where the payment arises because of an adjustment to the price for milk supplied in that year, flowing from and calculated by reference to one of the mechanisms referred to in the clause. Its operation goes no further than that. In particular, it will not apply to a benefit arising in respect of milk produced by the defendant after closing, irrespective of the reason for the conferral of that benefit.

This outcome is also consistent with the expectations of a reasonable business person. It is completely understandable that the plaintiff should receive the benefit of any prospective adjustment in the milk price on milk actually produced by it, and in respect of quantities which were completely under its control. However, in respect of the additional payments, the amount received by the defendant, depended on the work which would be performed by the defendant in the future and over an extended period. It would be achieved by the prospective use by the defendant of the assets which it had purchased from the plaintiff. The ultimate aggregate payment would be determined, not just by decisions taken by the defendant, but by a variety of potential external factors. It is inconsistent with the commercial purpose of the agreement that the plaintiff should receive the benefit of a payment made for milk produced by the defendant in such circumstances.
The plaintiff argues that notwithstanding such an analysis, the arrangement in substance responds to the definitions in the clause. It argues that the additional payment relates to milk supplied by the plaintiff in the 2016 year prior to closing, notwithstanding that Fonterra has chosen to assess the payment on the basis of future production. This argument, however, does no more than identify Fonterra's motivation for the additional payments. There is no real doubt that Fonterra felt obligated to match the remedial step taken by Murray Goulburn, if only to keep faith with its ongoing suppliers and retain their loyalty. As already noted, the choice of the rate of 40¢ per kg/MS was closely linked to the ultimate price effectively paid by Murray Goulburn. However, the decisions of both companies were also just as clearly related to their ongoing and future relationships with suppliers. Further, and in any event, Fonterra's motivation has nothing to do with the contractual relationship between the parties. The critical question is not what Fonterra wanted to achieve by the additional payments, but whether those payments fell within the ambit of cl 7. In my view, for the reasons already discussed, they did not do so.
It follows that the defendant is not obligated by the terms of the sale agreement to pay to the plaintiff the additional payments received by it in respect of milk production during the 2017-18 season.

Implied term

The plaintiff pleads as an additional or alternative allegation, that there is an implied term in the sale agreement that the defendant "would account for and pay to [the plaintiff] any payments that it received from Fonterra in respect of milk supplied by [the plaintiff] to Fonterra for the period 1 July 2015 to 31 March 2016".
This assertion can be disposed of briefly. Firstly, there is no basis for the implication of such a term into the sale agreement. The parties have expressly dealt with the subject of the asserted term in cl 7 of the contract. It is clear that cl 7 represents the extent of the plaintiff's ongoing entitlement to money received for milk supplied to Fonterra by the business at any time. The term is not required to give business efficacy to the agreement. It is reasonable that there is a limit to this entitlement. The limit, as expressed, is certain and enforceable. Any uncertainty around this question in fact detracts from the business efficacy of the contract. Certainty and finality can be seen as important commercial aspects of an agreement of this nature.
Further, and in any event, for the reasons already explained, even if such a term were implied in the contract, it would not entitle the plaintiff to recover the payments made to the defendant in respect of the 2017-18 year. The reasoning applicable to cl 7.1 would also apply to the asserted implied term. The defendant was entitled to the benefit of the use by it of the assets of the business after closing.

Subrogation

The plaintiff claims, as alternative relief, a declaration that the defendant's entitlement to receive the additional payments has been subrogated to it. The basis of the claimed subrogation is restitution arising from the unjust enrichment of the defendant. As pleaded, this is based on an assertion that the defendant has become liable to Fonterra for the overpayment to the plaintiff in respect of milk supplied prior to closing, and that this liability has been partially discharged by the payment by the plaintiff to the defendant of the $2.2 million as income in advance in the closing accounts. It seems to be asserted that the defendant has received this payment to the use of the plaintiff in respect of the discharge of a joint liability, and hence, upon the removal of the liability by virtue of the additional payment arrangement, the plaintiff is entitled to restitution.
It is not entirely clear to me, assuming that all this can be made out, how those assertions give rise to a claim of subrogation, as opposed simply to repayment of the money paid by way of the post-closing adjustment. However, it is not necessary to resolve this question. I accept the submissions of counsel for the defendant that there is no basis in fact for the claim that the defendant was liable to Fonterra in respect of actual payments which ultimately exceeded the average price determined at the end of the year. There is nothing in the EMSA which requires repayment of such amounts. On the contrary, the clear effect of cl 3(1)(b) of the EMSA is that the only liability which arises upon reconciliation at the end of the year is liability on the part of Fonterra to make up any shortfall between the amount actually paid and the benchmark price. The adjustment in the defendant's favour in the closing accounts was a matter of agreement between them, intended to resolve the unfairness resulting from the artificially large reduction in the milk price after closing. There is no question that Fonterra was contractually entitled to reduce those payments so as to average the decrease across the entire year, but it did not involve the creation of any liability on the part of either the plaintiff or the defendant. It simply resulted in Fonterra deciding to pay a lesser sum for the balance of the year, as it was entitled to do.
Having said this, it is not difficult to understand why the plaintiff says that the defendant will effectively receive double compensation for the inequity it suffered as a result of the May 2016 price decrease. In practical terms, it will benefit from both the income in advance item in the post-closing adjustment, and the additional payments in respect of milk produced in the 2017-18 year. It does raise a question of fairness as to whether the defendant should be entitled to retain the benefit of the post-closing adjustment for income in advance. As already noted, the plaintiff has not pleaded its case on this basis, but the question of fairness does arise. However, as will be seen, while considerations of fairness are capable, in appropriate circumstances, of informing a grant of legal or equitable relief, they cannot of themselves form a basis for such. In this case, I am satisfied that there is no basis, pleaded or otherwise, which would justify the claim of subrogation.
In Bofinger v Kingsway Group Limited [2009] HCA 44, 239 CLR 269, the High Court in a joint judgment referred to comments of Lord Hoffman in Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221, who had referred to the use of the term "subrogation", "to describe an equitable remedy to reverse or prevent unjust enrichment which is not based upon any agreement or common intention of the party enriched and the party deprived". Their Honours quoted Lord Hoffman further at [96]:
"I think it should be recognised that one is here concerned with a restitutionary remedy and that the appropriate questions are therefore, first, whether the defendant would be enriched at the plaintiff's expense; secondly, whether such enrichment would be unjust; and thirdly, whether there are nevertheless reasons of policy for denying a remedy."
It is, accordingly, critical to any claim by the plaintiff based in restitution that it establish that the defendant has been unjustly enriched by Fonterra's payment of the additional 40¢ per kg/MS in respect to the 2017-18 year, combined with its retention of the full benefit of the post-closing adjustment. Unjust enrichment is established by the receipt or retention of a benefit to which the recipient is not entitled: David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353. The unjust element does not depend upon "a judicial discretion to do whatever idiosyncratic notions of what is fair and just might dictate" per Deane J (with whom Mason and Wilson JJ agreed) in Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 14. This was endorsed by the plurality in David Securities at 379:
"Accordingly, it is not legitimate to determine whether an enrichment is unjust by reference to some subjective evaluation of what is fair or unconscionable. Instead, recovery depends upon the existence of a qualifying or vitiating factor such as mistake, duress or illegality."
In addition to mistake, duress or illegality, some cases have also recognised a total failure of consideration as such a factor. But, in this case, the plaintiff has not identified a "qualifying or vitiating factor" sufficient to establish the claim of unjust enrichment. It is the absence of legal entitlement to receive or retain the benefit which is critical. Nothing of that nature is alleged here. The income in advance payment was legitimately made after negotiation and in full and final settlement of the parties' rights under the contract. It was clearly justified on the basis of the contractual rights and obligations of each party at the time. In respect of the additional payments, the defendant was entitled to the fruits of its ownership of the assets and its production of milk in the 2017-18 year. The strongest argument available to the plaintiff is that the basis upon which the income in advance payment was made has altered to the extent that it is now inequitable and unjust for the defendant to retain that payment. However, something more than a windfall gain to the defendant will be necessary to establish a "qualifying or vitiating factor", sufficient to ground restitution.
A case in which a future change of the basis upon which a payment was made was held to be sufficient to found a claim in restitution is Roxborough v Rothmans of Pall Mall Australia Ltd [2001] HCA 68, 208 CLR 516. That case concerned the agreed price for the sale of cigarettes by a wholesaler to retailers, for on-sale to the public. The price included an identified component which represented a licence fee, which needed to be paid by either the wholesaler or the retailer, but which both parties expected would be paid by the wholesaler. The licence fee was dependent upon a tax which subsequent to the formation of the agreement and payment of the price, was struck down as invalid by a court. The High Court ultimately allowed the claim in restitution on the basis that the wholesaler had been unjustly enriched by being paid a price which included an identifiable component for the invalid tax, which it characterised as money received to the use of the retailers. In particular, it had been expected that this payment would settle the tax liability, which did not now exist. A further complication was that the retailers had already passed the tax component onto their customers through the retail price. The High Court held that this was not a case of a total failure of consideration but rather a change in the underlying basis of the payment which occurred when the tax was subsequently struck down. Gummow J explained the decision in this way:
"[104] In the present case, there has been no failure in the performance by Rothmans of any promise it made. No question of repudiation by it of its contractual obligations arises. The question is that stated by Deane J in Muschinski set out earlier in these reasons. Is it unconscionable for Rothmans to enjoy the payments in respect of the tobacco licence fee, in circumstances in which it was not specifically intended or specially provided that Rothmans should so enjoy them? The answer should be in the affirmative. Here, 'failure of consideration' identifies the failure to sustain itself of the state of affairs contemplated as a basis for the payments the appellants seek to recover." [Footnote omitted.'
Gleeson CJ, Gaudron and Hayne JJ, who agreed in substance with Gummow J, emphasised that the mere existence of a "windfall gain" was not sufficient to justify the court's intervention. It was noted that, given the passing on of the tax to the public, there would be a windfall whatever the decision. Their Honours emphasised that the context of the determination must be the contracts entered into by the parties:
"But here we are concerned with reputable commercial people, who entered into ordinary business dealings, and whose expectations were defeated by the supervening illegality of one aspect of those dealings. They made contracts. The justice of the situation in which they now find themselves must lie in the principles of law and equity which governed their dealings. Those principles, in turn, must be related to the contracts into which they entered. The contracts, both in form and in substance, were strongly influenced by the prevailing fiscal regime."
This case could fairly be described as the high water mark of circumstances in which a subsequent change in the basis upon which a payment was made justifies a claim in restitution. However, it is distinguishable from the case before me. While the defendant will gain a financial windfall in a general sense, it has not been unjustly enriched as a consequence. It fairly and lawfully purchased for consideration, the assets through which it will derive the financial benefit. The income in advance payment was agreed by the parties after negotiation as fairly reflecting the adjustment required by the payment mechanisms in force at the time of closing. While the decision to pay the extra sum in respect of production in the 2017-18 year may well have been influenced by and responded to the events which occurred at that time, it is a benefit derived by the defendant's ongoing enjoyment of the assets which it purchased from the plaintiff.
Further, it cannot be said that restitution is justified on the basis of mistake. It is well established that a mistaken prediction or expectation as to the future, will not support a claim of unjust enrichment: Strang Patrick Stevedoring Pty Ltd v Owners of "MV Slatter" (1992) 38 FCR 501.
In my view, it is simply not possible for the plaintiff to establish unjust enrichment in the circumstances of this case. The claim of subrogation must fail.

Conclusion

The plaintiff has not established its claim on any basis. The action is dismissed.