Aci Operations Pty Ltd v Berri Ltd
[2005] VSC 201(Decision by: Habersberger J)
ACI Operations Pty Ltd
vBerri Ltd
Judges:
Dodds-Streeton J
Habersberger J
Judgment date: 9 June 2005
Decision by:
Habersberger J
[105] In the first proceeding, [1] . Habersberger J considered the questions of "the description or identity of the Products, that is, whether they had to be identical". [2] .
[106] ACI argued that the first Brickwood offer did not satisfy the terms of cl 5.5 on a number of grounds. First, it submitted that it was not on the same terms and conditions as ACI's supply, and ACI's price in 12 months' time was not known. Secondly, the first Brickwood offer did not include 15 bottles and three closures from the amended list of products. Berri argued that they were either omitted by oversight, or had been notified or deleted as "no longer required". Thirdly, ACI argued that a further three bottles and closures from the amended list of products were not included in the first Brickwood offer. Berri contended that the first Brickwood offer included items which broadly corresponded to them, arguing that was all that was required for compliance with cl 5.5. The three bottles were described in Sch 1 to the supply agreement as made from PET/PCR material, whereas the first Brickwood offer contained bottles made from PET only. The four closures were similar, but not identical, to the Sch 1 Products. (ACI also challenged the validity of the second Brickwood offer on grounds not relevant to the present proceeding.)
[107] In his judgment delivered on 25 June 2004, Habersberger J found, inter alia, that on a proper construction, cl 5.5 required an offer of the entire range of Products, which must identically match the ACI Products in all respects, including any patented technology. A broad similarity or correspondence would not suffice. His Honour rejected Berri's contention that "near enough was good enough". [3] . He accepted ACI's submission that a bottle which was identical except for a different closure or a different base was not a Product, albeit the differences were insignificant.
[108] Although he acknowledged that his construction of cl 5.5 would, in practice, render it difficult for valid third party offers to be made under it due to ACI's ownership of intellectual property associated with the Products, Habersberger J considered that cl 4.8 played an ameliorating role, as it permitted offers of products which were not identical.
[109] His Honour also found that the Product list could be varied by agreement, but not unilaterally. His Honour accepted that Berri could not unilaterally delete a Product from the range and although the parties might agree that it would no longer be required, or that manufacture could cease, failing agreement to delete it, a Product would remain the subject of ACI's right of exclusive supply.
[110] I agree with and adopt the above conclusions of Habsersberger J.
[111] Habersberger J did not accept that three bottles in the first Brickwood offer (which were to be manufactured only from the material "PET") were identical to (in the sense required in cl 5.5) or constituted, three otherwise identical bottle Products listed in Sch 1 of the supply agreement, there designated to be made of "PET/PCR". His Honour accepted evidence that "PET/PCR" indicated a combination of two material types, namely, PET and PCR. He noted that the evidence in relation to the three bottles established that the relative percentages of "PET" and "PCR" was set out in technical drawings and specifications which had been accepted by Berri. It is not clear from the judgment at what stage those technical drawings and specifications had been accepted by Berri. It is, however, clear that his Honour expressly rejected Berri's argument that because written product specifications in relation to the three bottles in question were not set out in Sch 3 of the supply agreement, the product specifications and technical drawings were not part of the supply agreement. Further, as the three bottles did not conform to the required specifications, he considered that they were not Products. [4] .
Products
[112] On a fair reading, his Honour's observations did not depend upon any factors or circumstances unique to the three bottles (such as the correspondence contained in Sch 4). His analysis applied generally to all Products. His conclusion that the bottles were not the same as the corresponding Products did not depend on the fact that the material, rather than some other feature, was different.
[113] His Honour considered that the terms of the supply agreement would be evidenced, or varied and amended, by specifications and technical drawings agreed on by the parties in relation to Products, whether agreed before or after the making of the supply agreement. Berri was entitled to complain if ACI did not comply with such specifications and drawings.
[114] In my opinion, Habersberger J found that a "Product" was a product which exactly matched the specifications and technical drawings agreed upon by Berri and ACI from time to time. Such specifications, including technical drawings, whether or not part of the supply agreement, would define the Products subject to it. Conformity to the specification was the decisive criterion, not the nature of any different feature. His Honour clearly rejected Berri's submission that the Products in a cl 5.5 offer could correspond in "a more general way, such as bottles and closures of a particular size and material type, and not requiring that each attribute or feature of each Product be precisely matched in every way, including any patented technology aspect". [5] . Rather, he accepted ACI's contention that Products under cl 5.5 must be identical in a total and exact sense.
[115] I agree with the analysis of Habersberger J. The identification and definition of Products subject to the supply agreement depend upon the relevant agreed specifications and drawings which, if extant prior to the execution of the supply agreement, would be at least extrinsic evidence admissible to explain the meaning of terms in Sch 1; and, if agreed upon subsequently, would vary and amend the definition of each relevant "Product". There is no dispute between the parties as to the specifications and technical drawings which currently apply to a Product in any given case.
[116] To the extent to which it was contended that a "Product" means any item with the same weight, volume and material type as a Product listed in the schedule, I do not accept that submission. It would give an unduly wide reach to the plaintiff's right of exclusive supply, which would apply to an item of any appearance or configuration, provided that it conformed to those essential requirements.
[117] Further, such a construction would give no content or meaning to the Product Descriptions set out in Sch I, which refer to items such as "300 MLCSD, 500 ML Kyneton Water, 300 L Swing Carafe, [and] Berri Green Hdle 4H". It would also be difficult to attribute meaning to the phrase "products substantially the same as or substitutable for" any Products, as Products would constitute a category limited only by reference to weight, volume and material type.
CONSTRUCTION OF CLAUSE 4.8
[118] It is against the "Product" (as currently described and specified in the latest applicable agreed specifications and technical drawings) that the meaning of "all Products" under cl 5.5, and "products substantially the same as or substitutable for "any Products" in cl 4.8 must be measured.
[119] Mr Mukhtar stressed that the plaintiff's grant of exclusivity was "omnipotent" and central to the supply agreement, so that its maintenance should govern the construction of cl 4.8. The nature and extent of the grant of exclusivity can, however, be ascertained only by a reading of the supply agreement as a whole.
[120] Berri's obligation to purchase only from ACI is, in terms, restricted to "Products" as defined, that is, Products which conform precisely to the currently agreed specifications and technical drawings.
[121] The definition of the Products as agreed from time to time governs the ambit of both the right of ACI exclusively to supply Products and Berri's entitlements founded on the limitations on ACI's right.
[122] The plaintiff's primary argument was that "substantially the same as" excludes products with the same essential characteristics (volume, weight and material type) as Products.
[123] Mason, Wilson, Brennan, Deane and Dawson JJ, in their joint judgment in Darlington Futures Ltd v Deko Australia Pty Ltd , [6] . recognised that that the usual approach to the construction of a contract is to accord to the language "its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract ... ". [7] .
[124] While the above statement was articulated in relation to an exclusion clause, their Honours observed that the principle was of general application to the construction of contracts. Their Honours stated: "And the principle, in the form in which the laws expressed it, does no more than express the general approach to the interpretation of contracts ... ". [8] .
[125] The term "products substantially the same as Products" in my opinion, excludes identical items because they would, by definition, be Products themselves which, independently of cl 4.8, Berri would be obliged to purchase only from ACI.
[126] Clause 4.8 implicitly extends Berri's obligation to purchase only from ACI beyond Products, to products "substantially the same as any Products or substitutable for them". ACI's concomitant extended right is, again, defeasible by a complying third party offer which ACI fails to match. In contrast to cl 5.5, cl 4.8 does not expressly provide that Berri may purchase from the third party if ACI does not match the offer. That may be because the restriction on Berri in relation to such products is not express, or because a third party offer would not necessarily put an end to the supply agreement, or it may simply be a quirk of drafting. It is implicit that Berri may purchase from a third party if ACI fails to match the offer.
[127] Clause 4.8 constitutes the sole source of the supplier's rights in relation to items other than Products. Its construction is a double-edged sword for the supplier. A narrow construction of the subject matter of cl 4.8 reduces the customer's capacity to put a conforming offer, but it correspondingly reduces the scope of the supplier's extended rights. If the definition of "Products" requires exact conformity to the agreed specifications and technical drawings, the supplier is advantaged by a broader construction of "products substantially the same as or substitutable for any Products" under cl 4.8. The supplier's extended rights under the clause are necessarily co-extensive with its vulnerability to a third party offer which it must match in order to maintain its right of supply.
[128] In my view, cl 4.8 balances the commercial interests of both parties. It extends ACI's rights beyond Products as defined, to similar products, so that Berri cannot accept a third party offer for such products without giving ACI the opportunity to match it. Subject to ACI's right to match, Berri's right to purchase products "substantially the same as any Products" from a third party is, however, equally fundamental to cl 4.8.
[129] The plaintiff argued that cl 4.8 should be construed so as to restrict Berri to dealing exclusively with ACI in order to secure alterations, improvements or modifications to Products, in accordance with the parties' established practice.
[130] Such a restriction would effectively deny Berri the opportunity to achieve competitive, improved terms and conditions, including lower prices, for "products substantially the same as or substitutable for any Products". Berri would be effectively "locked in", for the term of the supply agreement, to supply by ACI of both existing Products and products substantially the same as or substitutable for them, on terms and price agreeable to ACI. Its capacity to achieve better terms and conditions by requiring ACI to match a conforming offer under cl 4.8 would be rendered largely ineffective.
[131] "Substantially the same", by its plain and literal meaning, indicates a high degree of similarity in fundamentals, substance and essentials. It contemplates slight or minor differences, which are not matters of substance. On that construction, cl 4.8 bears a coherent relationship to cl 5.5, as construed by Habersberger J in the context of the supply agreement as a whole. If cl 5.5 applies to the entire range of identical Products as Habersberger J found, cl 4.8 has a valid role in its application to an item with a slight or minor difference.
[132] In contrast to cl 5.5, which expressly refers to an offer to supply "all of the Products", cl 4.8 simply refers to an offer for the supply of products" which are substantially the same as or substitutable for any Products". Although "Products" is plural, "any" suggests the singular. It would appear that there is no requirement that an offer under cl 4.8 relate to the entire range of Products.
[133] If ACI's primary construction of cl 4.8 be correct, in the light of Habersberger J's construction of cl 5.5, ACI would have no rights in relation to items which possessed the same essential Product description, weight, volume and material as Products, but had some less significant differences. On the other hand, ACI would have rights under cl 4.8 in relation to items which had different essential characteristics from Products, but had some other, less essential similarities. That would appear to be an ironic outcome, which would serve no rational or coherent commercial goal.
[134] ACI's primary construction of cl 4.8 does not accord with the plain language employed, but posits the reverse of it, in indicating that items substantially the same as Products must have differences of an essential nature. While the plaintiff's primary construction may provide clear criteria for determining what would be excluded from an offer under cl 4.8, it provides no clear guidance on what could be included. The construction depends on the somewhat chimerical concept of an item which is neither identical to a Product nor the same in essential characteristics, but nevertheless has differences which are more than minor.
[135] The construction does not accord with the coherent mutual operation of cll 5.5 and 4.8. It is underpinned by an overstatement of the plaintiff's rights under the supply agreement. The supply agreement balances the mutual entitlements of supplier and customer through, inter alia, the interaction of cll 5.5 and 4.8. ACI's exclusive right of supply is not absolute. It is conditional upon its matching complying third party offers (which must, however, be bona fide arm's length).
[136] The plaintiff's secondary construction of the phrase "substantially the same as or substitutable for" also involves a significant departure from the plain, literal meaning of the language employed. It requires "or "to be read as introducing the subject-matter, rather than disjunctively. It also requires "substitutable for" to be read as requiring novelty or innovation.
[137] In GPI Leisure Corporation Ld v Yuill , [9] . Young J considered whether and in what circumstances the word "and" should be read disjunctively to mean "or", rather than accorded its ordinary conjunctive meaning. His Honour recognised that, although a "misuse" of language could justify the conclusion that "and" meant "or" in the context of a particular document, such a conclusion would be rare and not lightly reached. [10] . It would largely be limited to a case where, if the natural meaning were applied, the result would be so extraordinary as to create virtual unintelligibility (as distinct from commercial inconvenience) or where the word "and" could be plainly seen to refer to a class of alternatives. [11] . Young J's approach is equally relevant to a determination of whether "or" should be construed as "that is to say".
[138] There is, in my opinion, no warrant for reading "or" as introductory of the phrase "substitutable for", rather than according it the usual, literal, disjunctive meaning. The relevant phrase is not unintelligible if "or" is read disjunctively. Its natural meaning does not produce a commercially inconvenient or otherwise irrational outcome. Equally, there is no basis on which to impose a gloss of novelty or innovation on the term "substitutable for".
[139] The plaintiff's secondary construction of cl 4.8 fails to accord with the literal, ordinary meaning of the language employed. It would also mean that the plaintiff's extended rights of exclusive supply applied only to innovations to Products. As ACI does not contend that the products included in the Brickwood offer incorporate innovation or inventiveness, it could not avail the plaintiff in this case.
[140] In my opinion, cl 4.8 comprehends items which have the same essential Product descriptions and qualities, but are not identical (and hence Products themselves). Even a small difference (if it has some real commercial, marketing, functional or aesthetic advantage or purpose) would suffice to distinguish an item from a Product. The incorporation of a merely colourable distinction would not, in my view, be in "good faith arm's length" and hence the subject of a valid offer. Put another way, a merely colourable distinction would be ineffective.
WHETHER ITEMS INCLUDED IN BRICKWOOD OFFER SUBSTANTIALLY THE SAME AS PRODUCTS
[141] ACI argued that ten bottles included in the Brickwood offer were not substantially the same as the corresponding ACI bottles in the sense required by ACI. Berri maintained that the ten bottles were substantially the same, but had material differences, so that they were not identical. I do not consider ACI's constructions of the subject matter of cl 4.8 persuasive. It remains necessary to determine whether, on the construction I have adopted, the disputed items are "substantially the same as" the corresponding ACI Products, or whether they are identical because the differences are merely colourable or immaterial.
Evidence of Mr Grob
[142] Mr Grob, ACI's design engineer in plastics packaging, gave evidence on behalf of ACI. I considered Mr Grob to be a generally credible witness. In his witness statement, stated that the ten bottles in the Brickwood offer were of the same essential descriptive characteristics as corresponding ACI bottles and that the various differences identified by Berri were slight, insignificant, served no purpose or did not involve technical know how. At trial, Mr Grob made a number of concessions.
Slotted Neck
[143] Mr Grob agreed that the slotted neck used in all ten Brickwood bottles could eliminate liquid spilt in the filling process. However, he stated that the slotted neck (which was absent in the ACI 300, 400 and 600ml bottles) served no purpose in the Brickwood bottles, because they were filled well below the brim and were not squeezed in the filling process. There was thus no natural spillage, nor any expectation of spillage.
[144] In cross-examination, Mr Grob conceded that spillage might nevertheless occur from time to time. He agreed that the slotted neck was a significant difference with the valid purpose of elimination of spillage.
[145] In re-examination, Mr Grob explained that ACI had recommended against slots in the necks of the relevant bottles, because they could weaken the neck of bottles typically used for products with up to 83° filling temperatures. Berri had not complained or requested ACI to redesign the neck finish.
Double sealed cap
[146] ACI did not use the double sealed cap, which is a new technology. It creates a seal between the cap and the bottle on the rim of the neck of the bottle, rather than at the top of the cap. Mr Grob was not familiar with the double sealed cap. On examination at trial, he conceded that it appeared to be an improvement on existing technology. He was unable to say whether ACI could provide a double seal cap. He conceded that the ACI bottle necks were too narrow in diameter to fit a double sealed cap and change would involve tooling changes and increased capital cost.
[147] Mr Grob stated that Berri had never requested ACI to revise the neck finish of the ACI bottles so that it could take multiple or different caps.
Batch traceability
[148] Mr Grob conceded that Brickwood's batch traceability produced by laser engraving constituted a difference from the ACI bottles. He agreed that the Brickwood batch traceability could be an advantage.
[149] Mr Grob stated that Berri had never requested batch traceability to be added to any bottle in the ACI range. ACI could print information on bottles by means of inkjet printers.
Vacuum panel differences
[150] Save for the 300 millilitre bottle, the ACI bottles differed from the Brickwood bottles in that the ACI bottles had thin vertical grooves between each vacuum panel and two other grooves horizontally around the circumference. The grooves had been the subject of ACI's patent and kept the bottle in shape during the heating and cooling process.
[151] Mr Grob, with some qualifications, conceded that the location of panels and grooves on the ACI bottles could result in faults and that the corresponding Brickwood bottle might reduce faults in "wrap around" label application.
[152] He stated that Berri had never requested ACI to modify, add or remove ridges or grooves around the panels of any bottle.
High shoulder or low shoulder
[153] The proposed Brickwood one litre bottle differed from the corresponding ACi one litre bottle in that it was high shouldered, as opposed to low shouldered. Mr Grob agreed that other Berri bottles were high shouldered and the high shoulder rendered the one litre bottle consistent, thus aiding customer identification.
[154] He stated that Berri had never requested ACI to change the shape of the one litre bottle.
[155] Mr Grob agreed that like considerations applied to the design of the sides and base of the bottles.
Swing handles
[156] Mr Grob disputed the defendant's claim that the swing handles of the three and 3.3 litre bottles of ACI and Berri were different. He claimed that both were made of HDPE. Annexed to an ACI internal email dated 21 January 2004 was a table which suggested that the ACI swing handle was now made of polypropylene. Ultimately, Mr Grob's evidence established that the swing handle on the ACI bottle was indeed HDPE.
[157] Mr Grob conceded that the swing handles on the proposed Brickwood bottles appeared to be smaller than those on the corresponding ACI bottles. He agreed that the swing handle of ACI 2.4 litre bottle extended beyond the "footprint" of the bottle, which was a disadvantage in packing. He agreed that the size of the handle had been the subject of discussion between Berri and ACI. Mr Grob could not dispute that the Brickwood swing handles were lighter, but did not concede that they had a stronger locking mechanism.
"Eyebrows"
[158] The ACI bottles had an "eyebrow" indentation. The corresponding proposed Brickwood bottles did not.
[159] Mr Grob conceded that the removal of the "eyebrow" had, in one case, reduced the faulty application of labels.
Brimful Volume
[160] Brimful volume is the actual, as distinct from the nominal, volume of the bottles. Brimful volume can have a range or tolerance. The Brickwood bottles had tolerances for brimful volume. Mr Grob conceded there might be a good reason for decreasing the tolerance allowed in the manufacturing process.
Weight
[161] The Brickwood bottles also had a tolerance for weight. Weight ultimately depended on the amount of resin and could thus affect cost. Mr Grob conceded that a customer might require the weight tolerances to be tightened, due to budgeting or other concerns.
Grooves
[162] Mr Grob conceded that the different grooves on the base of the Brickwood 2 litre Berri International bottle were noticeable, and gave strength to the base of the bottle.
Evidence of Mr Stephens
[163] Mr Llewellyn Stephens, Berri's Packaging Development Manager, is experienced in technical aspects of food packaging. He is responsible for achieving quality and improvements to Berri's finished products. Mr Stephens presented as a clear and credible witness.
[164] Mr Stephens testified that he was the principal producer of the Explanatory Notes included in the invitation to treat. He also put together the attached diagrams.
[165] The Explanatory Notes specified the features which distinguish the Brickwood bottles from the ACI bottles. Mr Stephens testified that those features were "what we determined we wanted in our bottles ... over the years I've worked with Berri ... it was a development process and I picked everything I thought was better for Berri to incorporate in this from the experience we had already started with which is really why they were incorporated".
[166] Mr Stephens was familiar with the bottles and closures the subject of both the supply agreement and the Brickwood offer, including the particular features of the items. He stated that each of the differences identified by Berri in the ten bottles which were alleged by ACI to be identical in "essential characteristics of product description" were important differences. Many of the differences were specified in the invitation to treat "in order both to improve the performance of Berri's manufacturing process and to improve the quality of the finished product". Batch traceability, brand embossing, cap switchability, consistent shoulder and sides at base design, label protrusions, neck threads and slotted necks, were such features. Other such features were vacuum panel differences, base appearance and handle appearance. He testified that unlike the ACI bottles, the ten Brickwood bottles also had a brimful volume, different from the nominal volume with a specified tolerance. The weight tolerance for nine of the ten bottles was also different.
Brickwood bottles substantially the same
[167] The evidence establishes that the ten bottles in the Brickwood offer are the same in essential respects as the corresponding ACI bottles, but that each has some differences that, although minor, serve some perceived genuine purpose or confer some advantage, in a design context where it is unrealistic to expect radical or extensive alteration to a Product.
[168] It follows that, in my opinion, the bottles included in the Brickwood offer, including the ten disputed bottles, are "substantially the same" as the corresponding ACI bottles. The bottles are thus the legitimate subject matter of an offer under cl 4.8.
WHETHER BRICKWOOD OFFER "GOOD FAITH ARM'S LENGTH"
[169] Berri's receipt of a valid offer under cl 4.8 exposes ACI to the challenge of meeting its terms and conditions, on pain of losing its right to supply. If it wishes to retain that right, ACI may be constrained to supply the relevant products at lower prices or on more advantageous terms than currently apply, or, (if such products are not currently being supplied), on less advantageous prices or terms than it would otherwise impose.
[170] A valid offer under cl 4.8 must apply to conforming subject-matter. It must also be a "good faith arm's length" offer. ACI's rights under the supply agreement could be negated if it were required to meet the terms of sham, contrived, collusive or dishonest offers, or terms concluded by parties who were not at arm's length.
[171] The requirements of "good faith" and "arm's length" are distinct, although there is considerable potential for overlap.
Good Faith
[172] ACI does not allege that Berri was guilty of collusion, dishonesty or sham. It argues, however, that Berri's use of cl 4.8 in relation to the Brickwood offer breached an implied obligation of good faith and fair dealing, in that it was aimed at depriving ACI of its exclusive grant under the supply agreement. Further, relying on the same facts and circumstances, ACI contends that Berri's use of cl 4.8 was actuated by the improper purpose of "extricating itself from its own legal mess" springing from its entry into the Brickwood contract. Such a purpose was, it is said, extraneous or ulterior to the fundamental objects of the supply agreement, and bespoke a want of good faith within terms of cl 4.8.
[173] The possibility that a term requiring the exercise of good faith may be implied into at least some commercial contracts has been widely recognised by Australian courts. [12] . Some courts have adopted a reserved approach [13] . and the High Court has not expressly endorsed it. [14] .
[174] Although the precise content of an implied obligation to exercise contractual discretions and powers in good faith (if applicable) remains unsettled, on one view, it would prohibit a party from conduct which would derogate from the benefit granted to the other party under the contract.
[175] It has been recognised that any implied duty of good faith must be consistent with the express terms of the contract. [15] .
[176] It is also clear that a party will not act in breach of good faith where its action is consistent with promotion of its legitimate interests; that is, those interests consistent with the basis on which the parties may be taken to have entered into the contract.
[177] In Alcatel Australia v Scarcella & Ors [16] . Sheller JA stated:
In Gateway Realty Ltd v Arton Holdings (No 3 ) (1991) 106 NSR (2d) 180 Kelly J at 192 held in apparently general terms that contracting parties are obliged to exercise their rights under an agreement honestly, fairly and in good faith. "In most cases, bad faith can be said to occur when one party, without reasonable justification, acts in relation to the contracts in a manner where the result would be to substantially nullify the bargained objective or benefit contracted for by the other, or to cause significant harm to the other, contrary to the original purpose and expectation of the parties (at 197). [17] .
[178] In Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [18] . Finkelstein J stated:
In my view, a term of a contract that requires a party to act in good faith and fairly imposes an obligation upon that party not to act capriciously. It would not operate so as to restrict actions designed to promote the legitimate interests of that party. That is to say, provided the party exercising the power acts reasonably in all the circumstances, the duty to act fairly and in good faith will ordinarily be satisfied. [19] .
[179] In Burger King Corporation v Hungry Jack's [20] . the Court stated:
That does not mean that [Burger King] is not entitled to have regard only to its legitimate interests in exercising its discretion. However, it must not do so for a purpose extraneous to the contract -- for example, by withholding financial or operational approval where there is no basis to do so, so as to thwart [Hungry Jack's] rights under the contract. [21] .
[180] In Overlook v Foxtel [22] . Barret J stated:
It must be accepted that the party subject to the obligation is not required to subordinate the party's own interests, so long as pursuit of those interests does not entail unreasonable interference with the enjoyment of a benefit conferred by the express contractual terms so that the enjoyment becomes (or could become) ... "nugatory, worthless or, perhaps, seriously undermined. This seems to me to be the principle emerging from ... the joint judgment in Burger King ... [23] .
[181] Further, in Pacific Brands Sport & Leisure v Underworks Pty Ltd [24] . Finkelstein J stated:
a good starting point in any particular enquiry is to see whether the impugned conduct (in this case a termination) was motivated by bad faith, or was for an ulterior motive or, if it be any different, whether the defendant acted arbitrarily or capriciously. It may also be proper to investigate whether the impugned act was oppressive or unfair in its result. If any of these things can be established then, in all probability, the obligation will be breached and the resultant act (or omission) of no effect. [25] .
[182] In the present case, the defendant argued that the express reference to a "good faith arm's length" offer excluded any general implied obligation of good faith. The defendant further contended that Berri's conduct was in furtherance of its legitimate commercial interests under the express terms of the supply agreement.
[183] The valid objects of the supply agreement are equally relevant to the determination of whether Berri breached an implied obligation of good faith or a requirement of good faith under cl 4.8 by using the clause for an improper purpose.
[184] As discussed in detail above, the supply agreement does not confer an absolute exclusive right to supply on ACI. More accurately, Berri is subject to an obligation restraining it from purchasing relevant Products, or cl 4.8 products, from third parties, save in specified circumstances. The restraint on Berri is not absolute. In the case of both cll 4.8 and 5.5, it will be released if Berri receives a bona fide arm's length offer (for all of the Products or cl 4.8 products as defined) from a third party, which ACI does not match in accordance with the requirements of each relevant clause.
[185] Under cl 4.8, ACI has the right of last refusal to match the terms and conditions set out in the third party offer with ACI products. Under cl 5.5, ACI has the right to match the price set out in the third party offer, but the third party offer itself must be on the same terms and conditions as those set out in the supply agreement.
[186] As Habersberger J found, cl 5.5 requires an offer of the entire range of identical Products. The incorporation of ACI's intellectual property in the Products may therefore pose a practical impediment to Berri's invocation of that clause. Those practical difficulties do not appear to apply under cl 4.8.
[187] Clause 4.8 extends the restriction on Berri, but only in circumstances where ACI fails to meet a conforming offer.
[188] The receipt of a conforming offer relieves Berri from an obligation to purchase cl 4.8 products only from ACI on terms agreed with ACI. It does not, however, free Berri from the obligation to purchase only from ACI, because that will continue unless ACI fails to make a matching offer.
[189] In my opinion, the supply agreement recognises Berri's legitimate commercial interest in securing a competitive price or terms for the supply of cl 4.8 products, either from ACI or the third party. The putting to ACI of a third party offer to supply products which Berri genuinely requires, in order to achieve a more advantageous price or terms, would not constitute an extraneous or improper purpose.
[190] The plaintiff argues that Berri should not ordinarily be entitled to "proactively engage cl 4.8" by instigating an offer. I do not consider that an implied general duty of good faith (if applicable) or a requirement of good faith specific to cl 4.8 would confine Berri to the passive receipt of a third party offer. That would leave entirely to chance whether an offer were received at all, when it was received and whether the offered products were both the legitimate subject-matter of the clause and suitable to Berri's current needs. The prospects of receiving a suitable complying offer "out of the blue" would be so low as to render nugatory any potential benefit to Berri from competition under cl 4.8.
[191] The plaintiff's contention that Berri is not entitled to instigate an offer under cl 4.8 is based on the assumption that "the clause is there for ACI's benefit". Berri, however, has a legitimate commercial interest in obtaining a competitive market price and terms for products under cl 4.8, which would be defeated if it were absolutely precluded from inviting third party offers and specifying required products which were within the ambit of cl 4.8. ACI's protection in this context lies in the requirement that the customer receive a "bona fide arm's length" offer.
[192] In the present case, Mr Kop and Mr Buckner gave evidence of Berri's aims and motivation. I considered them to be credible witnesses. Mr Kop stated that Berri's "primary objective has always been to get a competitive supply of our products and that was our number one objective".
[193] Mr Buckner testified that Berri decided to terminate the Brickwood contract "because we effectively had two contracts on foot. The strategy was also then to gain the improvements that had been designed in bottles and enjoy ... the true market price for bottles ... The strategy of Berri was to achieve the market value price for bottles and gain the benefits of design. Whether that's supply from Brickwood or ACI ... we would go with either supplier but we wanted those improvements in both price and design and we gave ACI the opportunity to match the Brickwood offer."
[194] Mr Buckner stated that Berri's decision to terminate the Brickwood contract, rather than the supply agreement, was based on Habersberger J's determination in the second proceeding that the Brickwood contract was concluded pursuant to an invalid offer.
[195] He denied that Berri's strategy was to put an invitation to treat in order to get a replacement contract. It was rather, he said, to put "a replacement offer -- we had an obligation to ACI to tender that to ACI ... "
[196] Mr Buckner agreed that Berri was aware that the items included in any offer would have to fall within cl 4.8, but testified that the required features had been developed over the preceding twelve months.
[197] The evidence establishes that the relationship of Berri and ACI had become troubled and that Berri desired to terminate it. Following the judgment of Habersberger J Berri perceived the necessity to terminate either the supply agreement or the Brickwood contract. Despite its dissatisfaction with ACI, it terminated the Brickwood contract. Berri saw the conclusion of a new contract with Brickwood pursuant to a valid Brickwood offer, as a means of mitigating damages for breach of the Brickwood contract. The invitation to treat was inextricably linked to the termination of the Brickwood contract. The conclusion of a contract with Brickwood, rather than the continuation of the supply agreement with ACI, was clearly Berri's preferred outcome. I am not satisfied, however, that Berri devised the invitation to treat and stipulated the features of the products actuated by a purpose of defeating ACI's entitlement to put a matching offer under the supply agreement. The evidence does not, in my view, establish that Berri manipulated or contrived the timing or terms of the invitation to treat in order to preclude a matching offer, or was guilty of conduct otherwise calculated to deny ACI the opportunity to match an offer based on the invitation to treat.
[198] I am satisfied that the disputed features of the items were improvements which, although not radical or extensive, were developed and genuinely desired by Berri. There is no suggestion that they were selected due to an apprehension that ACI could not match them. Further, Berri put the Brickwood offer to ACI and obtained an extension of time for it to respond.
[199] The plaintiff contends that Berri's improper purpose was the resolution of its legal problems by the termination of the supply agreement. That goal could only be achieved if ACI ultimately failed to match the offer, thus allowing Berri to conclude a new valid contract with Brickwood. While the evidence establishes that Berri desired that outcome, it does not permit me to conclude that it improperly manipulated the circumstances or terms of the Brickwood offer in such a way as to defeat ACI's right to put a matching bid, or to otherwise nullify or unreasonably interfere with its enjoyment of benefits conferred by the express contractual terms.
[200] I am therefore not satisfied that the alleged want of good faith is established. As discussed in detail below, however, I am satisfied on the basis of substantially the same facts and circumstances relied upon by the plaintiff to establish a want of bona fides, that the Brickwood offer was not "arm's length".
Arm's Length Transaction
[201] Clause 4.8 provides that "if the customer receives a bona fide arm's length offer from a third party", the supplier will have the right of last refusal. Berri contended that the requirement of "arm's length" directed attention only to the conduct and the motivation of the offeror. The concept of "arm's length" in my view inherently adverts to the relationship and dealings of the parties, together with the offer itself. The terminology of cl 4.8 fortifies the conclusion that the circumstances surrounding receipt of the offeror, and the interaction of offeror and offeree, are relevant considerations.
[202] Most recent Australian judicial constructions of the term "arm's length" have applied to that phrase as it appears in various provisions of taxation legislation.
[203] The application of some aspects of those constructions is limited to a particular statutory or revenue law context. The relevant cases nevertheless provide valuable guidance on the construction of the term "good faith arm's length offer" in the context of cl 4.8 of the supply agreement.
[204] In Granby Pty Ltd v Federal Commissioner of Taxation , [26] . Lee J dismissed a taxpayer's appeal from the decision of the Commissioner of Taxation which disallowed its objection to an assessment of income tax. The taxpayer was a member of a partnership which had purchased the drilling equipment and vehicles it had leased from various financiers at the expiration of the lease, for the residual value.
[205] The partnership paid the residual value nominated in the leases. There was no negotiation. The taxpayer sold its interest in the partnership for a consideration calculated on a value allocated to the equipment and vehicles which exceeded the prices paid by the partnership and was assessed for a capital gain. The capital gain payable depended, inter alia, on whether the consideration paid by the taxpayer for the items was (with terms of the applicable provision of the Income Tax Assessment Act) greater or lesser than its market value at the time and the vendor and the taxpayer were not "dealing with each other at arm's length" in connection with the acquisition of the asset.
[206] Lee J stated that:
The expression 'dealing with each other at arm's length' involves an analysis of the manner in which the parties to a transaction conducted themselves in forming that transaction. What is asked is whether the parties behaved in the manner in which parties at arm's length would be expected to behave in conducting their affairs. Of course, it is relevant to that inquiry to determine the nature of the relationship between the parties, for if the parties are not parties at arm's length, the inference may be drawn that they did not deal with each other at arm's length. [27] .
[207] His Honour referred to authorities which drew a distinction between "dealing with each other at arm's length" and an arm's length relationship, and in which it had been acknowledged that, although those concepts did not necessarily coincide, the existence of a relationship might be relevant to the nature of dealing.
[208] He endorsed the view of Hill J in Trustee for the Estate of the late A W Furse No 5 Will Trust v FCT [28] . that dealing at arm's length at least required the parties to act severally and independently in forming their bargains, so that the outcome of their dealing was a matter of real bargaining.
[209] Lee J acknowledged that if the parties to the transaction were at arm's length, it would usually follow that their dealing would also be at arm's length in the sense that "the separate minds and wills of the parties will be applied to the bargaining process whatever the outcome of the bargaining may be". [29] .
[210] He further observed:
That is not to say, however, that the parties at arm's length will be dealing with each other at arm's length in a transaction in which they collude to achieve a particular result, or in which one of the parties submits the exercise of its will to the dictation of the other, perhaps to promote the interests of the other. [30] .
[211] He referred to Minister of National Revenue v Merritt [31] . in which, although the parties were at arm's length, the terms of a loan transaction were dictated by the unilateral decision of one of them, and there was no independent will in the formation of the transaction exercised by the other. [32] .
[212] Lee J found that in the case before him "there was no evidence that the lessor corporations and the partnership acted in concert with an ulterior purpose, or that the lessor corporations accepted dictation or instruction from the partnership to the exclusion of the exercise of the independent minds of the corporations, when the partnership acquired the motor vehicles and drilling rigs from the corporations ... ". [33] .
[213] He found that the lessor corporations set the residual values and in accepting the tendered amount they made decisions which they perceived to serve the interests of their businesses. As such "the independent will of the lessor corporations was not merged in collusive activity with the partnership, nor subjugated to direction from the partnership". [34] .
[214] His Honour concluded that there was no evidence that the parties dealt with each other, other than at arm's length. [35] .
[215] In Australian Trade Commission v WA Meat Exports , [36] . the Full Court of the Federal Court held that a consultant under a consultancy agreement with a company in which he had formerly had a large shareholding was "at arm's length", as neither party, in negotiating the agreement, had any interest to pay more or receive less than was necessary to secure the consultant's service, and neither had any claim to the profits or assets of the others business.
[216] In determining the ordinary meaning of "arm's length" the Full Court referred to the definition of "arm's length" in Osborn's Concise Law Dictionary 6th ed, p 32 as "The relationship which exists between parties who are strangers to each other, and who bear no special duty, obligation, or relation to each other, vendor and purchaser ... ". Further, they referred to the definition in Black's Law Dictionary 5th ed, p 100: "Arm's length transaction; said of a transaction negotiated by unrelated parties, each acting in his or her own self-interest; the basis for a fair market value determination ... The standard under which unrelated parties, each acting in his or her own best interest, would carry out a particular transaction -- For example, if a corporation sells property to its sole shareholder for $10,000, in testing whether $10,000 is an arm's length price it must be ascertained for how much the corporation could have sold the property to a disinterested third party in a bargained transaction". [37] .
[217] In Collis v Federal Commissioner of Taxation , [38] . taxpayers sold at auction property comprising four parcels of abutting land as a single lot to a purchaser for $1.43million. Three parcels had been owned by the taxpayer for some time, but the remaining parcel had been purchased recently (within 12 months of the sale). Following the auction, the land was transferred by two contracts. The recently-purchased parcel was sold separately for a price of $200,000. The purchaser inquired about the stamp duty implications of using the two contracts, but was indifferent unless he would be prejudiced by that course.
[218] Jenkinson J concluded that there was nothing to suggest that the purchaser and the taxpayers were not dealing with each other at arm's length at the fall of the hammer. It could be inferred, however, that the purchaser was subsequently indifferent as to whether he signed one or two contracts (save for any prejudice to himself) and as such he, "being indifferent, submitted the exercise of his will to the applicants' wishes in acceding to their request." [39] . His Honour concluded that the purchaser did not deal with the taxpayers at arm's length in relation to the purchase of the relevant parcel of land.
[219] In the Trustee for the Estate of the late AW Furse (No 5) Will Trust v FC of T , [40] . Hill J stated that whether the parties to the relevant agreement were dealing with each other at arm's length was "not to be decided solely by asking whether the parties to the relevant agreement were at arm's length to each other. The emphasis in the subsection is rather upon whether those parties, in relation to the agreement, dealt with each other at arm's length. This is not to say that the relationship between the parties is irrelevant to the issue to be determined under the subsection ... What is required in determining whether the parties dealt with each other in respect of a particular dealing at arm's length is an assessment whether in respect of that dealing they dealt with each other as arm's length parties would normally do, so that the outcome of the dealings is a matter of real bargaining." [41] .
[220] In Re Haines (deceased ); Barnsdall v Federal Commissioner of Taxation , [42] . a taxpayer sold some shares to a company in which he was the beneficial owner of all issued shares and chairman of the board of directors. The only other director of the purchaser company was a partner in the vendor's stockbroking firm.
[221] Davies J noted that "The term 'at arm's length' was developed in the law of trust with respect to transactions between persons, one of whom, such as a trustee or solicitor, is in a position of special influence with the respect to the other, a beneficiary or client." [43] .
[222] His Honour accepted that an arm's length relationship was distinct from dealing with each other at arm's length. He observed that although some Canadian authorities "looked primarily to the relationship between the contracting parties and to influence and control ... there may be transactions between related parties in which the parties deal with each other at arm's length. This may occur notwithstanding a close relationship between the parties or the power of one party to control the other". [44] . An example would be where shares were offered for sale on the stock exchange.
[223] The above authorities indicate that an arm's length relationship is that of strangers, or parties who are unaffected by existing mutual duties, liabilities, obligations, cross-ownership of assets, or identity of interests which present a capacity in either party to influence or control the other, or an inducement to serve that common interest, which might operate to modify the terms on which strangers would deal.
[224] The concept of an arm's length relationship is distinct from that of an arm's length dealing or transaction, despite the potential overlap. Unrelated parties may collude or otherwise deal with each other in an interested way, so that neither the dealing nor the resultant transaction may properly be considered arm's length.
[225] Where the parties are not in an arm's length relationship, it is recognised that the inference may be drawn that they did not deal with each other at arm's length. [45] . It may further be inferred that the resultant transaction is not arm's length.
[226] Related parties may nevertheless, in some circumstances, demonstrate a dealing which displaces the inference based on their relationship. They may engage in the disinterested bargaining characteristic of strangers, applying independent separate wills. The circumstances of the impugned transaction may be such that, despite the parties' connection or common interest, the interposition of some independent process (such as the sale of shares on the stock exchange) ensures that the transaction itself is arm's length, in the sense that it could equally have been concluded by unrelated parties, consulting their own self-interest and uninfluenced by any particular association or interest in common.
[227] In the present case, Brickwood and Berri were not, in my opinion, at arm's length in relation to the Brickwood offer. From January 2004, they were parties to the Brickwood contract, a significant "rival" contract to the supply agreement. The Brickwood contract created mutual rights and obligations between Berri and Brickwood. Until June 2004, the Brickwood contract was of uncertain legal validity. It was subject to challenge by ACI. From June 2004 to 3 December 2004, although the Brickwood contract had been adjudged invalid, it continued to co-exist with the supply agreement. It was then clear that only one of those contracts could be maintained and performed. Brickwood and Berri formed a group which worked on the development of product improvements from the date of entry into the Brickwood contract for approximately one year.
[228] On 3 December 2004, Berri terminated the Brickwood contract. The relationship of Berri and Brickwood was transformed to one of potential litigants in relation to Berri's repudiation of the Brickwood contract. Their mutual legal rights, entitlements, duties and obligations shifted from a context of anticipated performance of the Brickwood contract to one of breach. Brickwood had "geared up" and borrowed significantly from its bankers in relation to the Brickwood contract. The concrete benefit of cash flows anticipated by Brickwood from February 2005 was replaced by a claim to damages. Berri, conversely, was liable to pay damages for its repudiation, that would potentially increase with Brickwood's losses. Brickwood, as Berri pointed out, had an obligation to mitigate its damages.
[229] Brickwood and Berri thus had a common interest in minimising damages for breach of the Brickwood contract through the conclusion of a replacement contract (which necessarily required an offer which ACI failed to match).
[230] Brickwood did not have prior knowledge of Berri's termination on 3 December 2004. It is not disputed that real bargaining on the terms of the Brickwood offer occurred between Brickwood and Berri, which were both advised by their own legal representatives. The evidence does not establish that Brickwood acquiesced in, or accepted with indifference, Berri's dictation of the terms of the offer. Brickwood initially requested payment of $476,000 per month in damages, pursuant to a side deed, which it required as a prerequisite to making an offer. When Berri rejected that proposal, Brickwood did not submit an offer which was open for acceptance for the period requested by Berri. The offer received on 16 December 2004 was open only until 21 December 2004.
[231] Berri requested a variation extending the period for acceptance until 30 June 2005 or acceptance, in return for monthly payments by Berri of $476,000.
[232] The letter of Corrs Chambers Westgarth to Monahan & Rowell dated 20 December 2004 expressly acknowledged that "Berri's position with respect to the Brickwood offer can only be explained in the context of the recent history of Brickwood and Berri's commercial relationship". The letter referred to the termination of the Brickwood contract, the invitation to treat, the concerns of Brickwood's financiers and Brickwood's requirement for monthly payments of $476,000 in order to keep the offer open until 1 May 2005 or such later time as the parties agreed.
[233] On 21 December 2004, Brickwood agreed to the extension of the term of the Brickwood offer on the basis that Berri would pay $476,000 per month.
[234] The Brickwood offer is thus not that received on 16 December 2003. Rather, it is that offer as varied by subsequent agreement on 21 December 2004 to extend the period for acceptance, subject to the monthly payment.
[235] The sum of $476,000 per month, when first requested by Brickwood, was characterised as an amount representing the lower calculation of its monthly loss as a result of the repudiation of the Brickwood contract.
[236] As the letter of Corrs Chambers Westgarth dated 20 December 2004 expressly noted, the payments of $476,000 will be deducted from any amount of such loss and damage or would be refunded, if applicable.
[237] Thus, the Brickwood offer as extended provides for a maximum payment to Brickwood of almost $2.5 million representing estimated damages due to Brickwood for breach of the Brickwood contract, in addition to the agreed prices of any products which Brickwood might in future supply to Berri.
[238] Clause 4.8 provides that ACI "will have the right of last refusal to match the terms and conditions set out in the ... offer". That phraseology does not appear to contemplate the situation which has arisen in the present case, where the third party offer, as varied, provides for a substantial payment to the third party offeror, by Berri as offeree. It is not clear what matching the terms and conditions of the Brickwood offer as varied would entail.
[239] The overriding requirement that the third party offer be "arm's length" is, in my view, incompatible with Berri's liability to pay a sum of dual character, which is both essential to procure the extended term of the offer and also constitutes the prepayment of estimated damages for an antecedent breach of legal obligation.
[240] In my opinion, Berri and Brickwood commenced and conducted negotiations in relation to the Brickwood offer as parties who shared a common interest in minimising damages for the breach of the Brickwood contract. Berri's breach of the Brickwood contract, its solicitation of the Brickwood offer, and the making of the Brickwood offer were inter-dependent.
[241] Although "real bargaining" occurred between Berri and Brickwood, their dealings were, throughout, permeated and dominated by the mutual claims arising from the breach of the Brickwood contract. It cannot be said that neither party had any interest to pay more or receive less for the specified products, [46] . the prices of which ACI would be obliged to match in order to keep Berri's business. The evidence of the dealings does not rebut, but rather confirms, the inference that the parties were not dealing arm's length. An integral element of the resultant Brickwood offer as extended is the provision for a series of payments by Berri to Brickwood which simultaneously secures its extended term and satisfies Brickwood's estimated damages claim.
[242] The Brickwood offer as extended is not, on analysis, an offer which could be put by a disinterested stranger. It depends upon payments by the offeree to the offeror in relation to a dispute particular to them. The basis of the additional amounts to be paid by Berri to Brickwood under the Brickwood offer as extended is peculiarly within their knowledge. The relationship, if any, of those additional amounts to the prices specified for the products, cannot be ascertained by a stranger to the transaction.
[243] In those circumstances, the bargaining between Berri and Brickwood assumed, rather than excluded, the interaction of special mutual duties and obligations arising from the legal complexities of their pre-existing commercial relationship.