Aci Operations Pty Ltd v Berri Ltd

[2005] VSC 201

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(Judgment by: Dodds-Streeton J)

ACI Operations Pty Ltd
vBerri Ltd

Court:

Judges:
Dodds-Streeton JHabersberger J

Hearing date: 11-14, 18 April 2005
Judgment date: 9 June 2005

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Judgment by:
Dodds-Streeton J

INTRODUCTION AND BACKGROUND

[1] In this proceeding, the plaintiff, ACI Operations Ltd ("ACI") by third amended statement of claim dated 13 April 2005, seeks declaratory and injunctive relief, including an order restraining the defendant, Berri Ltd ("Berri") from accepting, acting on, or purchasing plastic beverage bottles pursuant to an offer from Brickwood Holdings Ltd ("Brickwood") dated 16 December 2004 ("the Brickwood offer") to supply those products.

[2] ACI and Berri are parties to a supply agreement dated 30 May 2001 under which Berri must purchase all of its requirements for defined beverage bottles and bottle tops and products "substantially the same as or substitutable for" any such products, for, inter alia, an initial five year term expiring on 30 May 2006, subject to Berri's right to accept a third party's "bona fide arm's length" offer to supply the products under either cl 4.8 or cl 5.5 of the supply agreement if ACI does not match the third party offer. In the present case, Berri contends that the Brickwood offer complies with cl 4.8 of the supply agreement and that Berri may accept it, as ACI has failed to match the offer within a reasonable time. ACI contends that some of the products included in the Brickwood offer are not "substantially the same as or substitutable for" the specified products under the supply agreement and further, that the Brickwood offer is not "bona fide arm's length" as required by cl 4.8. ACI argues that the requirements of cl 4.8 are therefore not satisfied and Berri is not entitled to accept the Brickwood offer.

SUMMARY OF FACTS AND EVIDENCE

[3] ACI is a manufacturer and supplier of plastic beverage bottles and bottle tops (known as "closures"). Berri is a bottler and supplier of fruit juices and other beverages.

[4] By an agreement dated 30 May 2001 ("the supply agreement") between ACI and Berri, ACI agreed to supply Berri with various plastic bottles and closures ("Products") specified in Sch 1 of the supply agreement for an initial five year term from 30 May 2001, that is, until 30 May 2006. Under the supply agreement, Berri agreed to purchase all of its requirements for the Products from ACI. The Products originally comprised 33 bottles and eight closures. The original Products are identified in Sch 1 to the supply agreement by reference to Product description, material type, weight, Berri's delivery site and price. Despite the statement in Recital B of the supply agreement that "specifications of the Products" were "set out in Sch 3", Sch 3 was in fact blank. There were no specifications or drawings attached to the supply agreement.

[5] It is undisputed that the parties from time to time modified or amended the range of Products the subject of the supply agreement by adding or deleting a Product or by modifying features of an existing Product so that its specifications and drawings changed.

[6] During the course of the supply agreement, monthly project meetings attended by representatives of ACI and Berri took place. The meetings were attended by persons with technical expertise, including Mr Llewellyn Stephens, Berri's packaging development manager, and Mr Rolf Grob, ACI's design engineer. The matters discussed included product development and product enhancement. The proposed changes discussed at the meetings would be implemented by, in the first instance, preparing drawings or revising existing drawings.

[7] During the course of the supply agreement, the parties agreed to vary the list of Products by adding a further 21 bottles and one closure, which are listed in Annex A to the third amended statement of claim. The supply agreement was also amended in June 2003 by the agreement of the parties to delete a 20 litre Coles handle bottle.

[8] The bottles are typical "supermarket" containers of long life fruit juices, sports drinks, chilled fruit juices, cordials and similar products. They are all made of plastic and are usually either transparent or translucent. Some bottles have a moulded handle forming part of the bottle itself, while other bottles have a swing handle. Some bottles belong to ACI's stock range, for which ACI owns the tooling and the designs. Other bottles are produced only for Berri.

Terms of the Supply Agreement

[9] The supply agreement is entitled "Heads of Agreement". Recital B states that the parties had entered the binding agreement "pending the negotiation and execution of definitive documentation". Clause 2.4 states that the parties would use their best endeavours to enter into a definitive agreement. It is, however, undisputed that no further formal agreement was subsequently executed.

[10] The Supply Agreement also relevantly provides:

Clause 1. Definitions.

"Products" means the products listed in Schedule 1.

"Specifications" means the specifications of the Products as set out in Schedule 3.

3. TERM

3.1

Initial Term This agreement shall be in effect for 5 years from the date of execution ('Initial Term').

3.2

Extension of Term At the expiration of the Initial Term, if the parties agree, this Agreement shall be extended for a further term of five years.

3.3

Right to match on expiry of Term If the Initial Term is not extended and the Customer receives a bona fide arm's length offer from a third party for the supply of Products following the Initial Term but before the date which is 5 years after the expiration of the Initial Term (an 'Offer'), the Supplier will have the right of last refusal to match the terms and conditions set out in the Offer.

4. SALE AND PURCHASE OF PRODUCTS

4.1

Supply of Products The Customer shall purchase from the Supplier all of the Customer's requirements of Products.

4.2

Forecasts and firm orders

(a)

The Customer will:

(i)

on 1 July each year, provide the Supplier with a forecast of its requirements for Products for the following 12 months;

(ii)

on the first business day of each month, provide the Supplier with a rolling revised forecast of its requirements for Products for the following 4 months;

(iii)

on a weekly basis, provide the Supplier with a rolling 6 week forecast of its requirements for Products. The initial 4 week period of each such rolling forecast will constitute a firm order (a 'Firm Order'); and

(iv)

on a weekly basis, provide the Supplier with details (and an order number) of its requirements for Products for each day during the immediately following week.

(b)

The forecasts referred to in clauses 4.2(a)(i) and 4.2(a)(ii) will not be binding. The quantity of Products set out in each Firm Order referred to in clause 4.2(a)(iii) will be binding upon the Customer, although the Customer may vary its weekly drawdown volume in respect of such Products (provided that the full quantity of Products referred to in the relevant Firm Order are taken by the Customer within 2 months from the commencement of the period the subject of the Firm Order).

4.3

Capacity

(a)

The Supplier will supply to the Customer the Products the subject of a Firm Order to the extent of the most recent forecasts.

(b)

The Supplier will use its best endeavours to give priority of supply to the Customer and to meet the Customer's requirements for Products in excess of its forecast requirements by ensuring that:

(i)

any excess capacity in relevant manufacturing facilities of the Supplier is employed to satisfy such requirements of the Customer; and

(ii)

any excess capacity in relevant manufacturing facilities of the Supplier is employed to satisfy such requirements of the Customer in priority to any other customer of the Supplier whose requirements for Products exceeds the requirements as set out in the firm orders of that other customer.

(c)

The Supplier will review each of its manufacturing lines on a monthly basis to assess its ability to satisfy the Customer's forecast requirements for Products. In the event that it appears that the Supplier may not be able to meet the Customer's forecast requirements for Products, it will immediately notify the Customer accordingly, and use its best endeavours to meet the Customer's forecast requirements.

4.4

Delivery The Supplier will deliver the Products to the Customer's premises as specified in a Firm Order.

4.5

Title and risk ...

4.6

Specifications. Clause 4.6 specifications.

(a)

The Products supplied to the customer will conform to the specifications.

(b)

If Products supplied to the customer do not conform to the specifications, the customer may reject the Products by notifying the supplier of the relevant defect immediately upon its becoming aware of the defect.

4.7

Force majeure ...

4.8

Right to match in respect of the Products If the Customer receives a bona fide arm's length offer from a third party for the supply of products which are substantially the same as or substitutable for any Products ('ACI Product Offer'), the Supplier will have the right of last refusal to match the terms and conditions set out in the ACI Product Offer with the relevant products from the ACI Group.

5. PRICING

5.1

Prices The price payable by the Customer for each Product is set out in Schedule 1.

5.2

GST ...

5.3

Payment ...

5.4

Review of prices

(a)

The prices for the Products will be reviewed as set out in Schedule 2.

(b)

At the beginning of each financial year during the Term, representatives of each party will meet to assess the competitiveness of the prices payable by the Customer for Products, and to ensure that the Supplier and the Customer share equally in mutual cost reduction benefits (after the recovery of capital costs).

5.5

Meeting competition If the Customer receives a bona fide arm's length offer from a third party supplier for the supply of all of the Products on the same terms and conditions as those set out in this Agreement, and the overall price which would be payable by the Customer for the Products from the third party is lower than the overall prevailing price of the Products under this Agreement ('Competitive Offer'), the Supplier will have the right of last refusal to match the price set out in the Competitive Offer, failing which the Customer may acquire the Products from the relevant third party.

6. CHANGES TO TECHNOLOGY AND PROCESS

The Customer may request the Supplier to implement new technology to improve the quality of the Products or the manner of supply of the Products, or may request that the Supplier manufacture some or all of the Products at the Customer's premises. The Supplier and the Customer will meet and discuss any such request in good faith, with a view to implementing the request.

[11] Schedule 2 to the supply agreement deals with the mechanism by which the prices for Products would be reviewed. The plastic bottles are manufactured from resin. Paragraph 2 states that adjustments to the prices would take account of variations in: "(a) the cost of resin, as nominated by the Customer; and (b) other costs of manufacturing Products, as indicated by changes in the CPI; and (c) currency changes." The cost of resin adjustment requires, inter alia, ACI to advise Berri of the fixed price for resin to be used in the manufacture of Products for periods of three months, six months and twelve months and Berri to nominate which fixed resin price it wished to apply.

[12] The supply agreement does not oblige Berri to order any minimum quantity of Products, or indeed any Products at all. Pursuant to cl 4.1, Berri is required to purchase all of its requirements for Products from ACI. The price for Products is set out in a schedule and is subject to review based largely on the prevailing price of resin. Although it is not expressly stated, by necessary inference, Berri is also obliged to buy "products substantially the same as or substitutable for any Products" only from ACI. Berri's obligation is subject to the terms of cll 3.3, 5.5 and 4.8. Clause 3.3 applies in relation to the period after the expiry of the initial term. It provides that if the initial term (of five years) is not extended and the customer receives a bona fide third party offer to supply Products (after the expiry of the initial term, but before the date which is five years from the expiry of the initial term) the supplier will have the right of last refusal to match that offer. Clause 5.5 applies during the initial term. It provides that if Berri receives a bona fide arm's length third party offer to supply all of the Products, ACI will have a right of last refusal to put a matching offer, failing which it may purchase from the third party. By cl 4.8, during the initial term ACI also has a right to put a matching offer if Berri receives a bona fide arm's length offer from a third party to supply "products substantially the same as or substitutable for, any Products". Under the supply agreement, Berri is required to provide annual, monthly and weekly forecasts of its requirements to ACI. ACI undertakes to use its best endeavours to give priority of supply to Berri and to meet its requirements for Products in excess of the forecasts by employing any excess capacity of its manufacturing facilities. ACI must notify Berri if it appears unable to satisfy Berri's forecast requirements and must deliver the Products to Berri's premises as specified in a firm order.

[13] The supply agreement is a significant commercial contract, which has resulted in orders to ACI totalling up to approximately $40 million per year.

[14] The supply agreement was executed following a tender process in 1999, in which ACI was the successful bidder. Brickwood was also invited to tender. Brickwood and other parties have continued to supply Berri with products which are not covered by the supply agreement.

[15] In about October 2003 (the third year of the supply agreement) Berri received an offer from Visy, which it put to ACI under the supply agreement. ACI challenged the validity of the Visy offer and Berri did not pursue it.

[16] In December 2003, Berri received two offers from Brickwood. Brickwood was, at the, time, a supplier of other products to Berri. By letter dated 11 December 2003, Brickwood offered to supply products to Berri from the date of acceptance to 29 May 2006 ("first Brickwood offer") and for the period from 30 May 2006 to 29 May 2013 ("second Brickwood offer"). Berri regarded the first and second Brickwood offers as financially advantageous. It forwarded both offers to ACI, requiring a response to them by 9 January 2004. It put the first Brickwood offer to ACI under cl 5.5 and the second Brickwood offer to ACI under cl 3.3. ACI did not respond.

[17] Rather, ACI disputed that the first and second Brickwood offers were validly put to it pursuant to cll 5.5 and 3.3. By a proceeding commenced in this Court on 13 January 2004 ("the first proceeding"), ACI sought declarations that the first Brickwood offer was not within cl 5.5 of the supply agreement and that the second Brickwood offer was not within cl 3.3 of the supply agreement.

[18] Despite the challenge to their validity in the first proceeding, Berri accepted the first Brickwood offer, thus concluding a contract dated 27 January 2004 ("the Brickwood contract"). It also accepted the second Brickwood offer. By letter dated 28 January 2004, Berri advised ACI that it had accepted both the first and second Brickwood offers and that Brickwood would, from 27 January 2005, commence to supply Berri with the products it currently supplied to Berri under the supply agreement.

[19] Following Berri's acceptance of the first Brickwood offer, in early 2004 a group of personnel from both Berri and Brickwood was formed to discuss the transfer of supply to Brickwood, including the improvement of bottle design. It met weekly and a steering committee held monthly meetings. Mr Stephens, Berri's product packaging manager, was a member of the group.

[20] At trial, Mr Kop, Berri's Chief Financial Officer and a director, conceded that on Berri's acceptance of the first and second Brickwood offers, at a time when the outcome of the first proceeding was still unknown, Berri faced the problem of ensuring that the supply of products continued until supply from Brickwood could commence in February 2005. The Brickwood contract had a 12 months lead time before Brickwood could be "geared up" to commence supply.

[21] Mr Kop testified that, prior to the delivery of judgment in the first proceeding, Berri contemplated that in the event of an adverse decision in the litigation, any defects or deficiencies which the court identified in the first Brickwood offer might be addressed by re-submitting it under an alternative clause of the supply agreement. Mr Kop testified that "that is what I saw as the most likely outcome". He stated that, at that time, there was no intention immediately to terminate the supply agreement.

[22] The decision of Habersberger J was handed down on 25 June 2004. His Honour concluded that the first Brickwood offer was not within the terms of cl 5.5 and the second Brickwood offer was not within terms of cl 3.3.

[23] In his witness statement, Mr Kop acknowledged that following Habersberger J's decision in the first proceeding, it became clear to Berri that the first and second Brickwood offers were invalid and it was impossible for Berri lawfully to comply with the terms of both the Brickwood contract and the supply agreement.

[24] Berri took no action in relation to the mutually inconsistent contacts for some months. Both contracts remained on foot until 3 December 2004.

[25] Supply under the Brickwood contract was not scheduled to commence until 27 January 2005. Although ACI continued during this period to supply Berri with all its requirement for Products pursuant to the supply agreement, the relationship between ACI and Berri was not harmonious. By August 2004, Berri expressed complaints about ACI's performance under the supply agreement. ACI denied that its performance was unsatisfactory. Acrimonious correspondence ensued.

[26] Mr Kop conceded that by September 2004, Berri contemplated the termination of the supply agreement, but it did not take action, because, inter alia, that would mean an immediate cessation of supply, given that Brickwood would not be ready to provide alternative supply until January 2005.

[27] By letter dated 6 October 2004, Berri again put the first Brickwood offer to ACI, but this time under cl 4.8 of the supply agreement, giving ACI 30 days to consider the offer. The resubmission of the first Brickwood offer pursuant to cl 4.8 thus occurred several months after the judgment in the first proceeding. In the intervening period, Berri had changed its legal advisers. Mr Kop testified that Berri sought to "take care" in the process of resubmission.

[28] On 4 November 2004, ACI issued a proceeding challenging the validity of the first Brickwood offer as resubmitted to it pursuant to cl 4.8 ("the second proceeding").

[29] The relationship between Berri and ACI was, by this stage, further strained. At trial, Mr Kop agreed that at the beginning of December 2004, Berri decided to terminate the Brickwood contract, pursuant to a "corporate stratagem to solicit an offer from Brickwood for a replacement contract", under cl 4.8. However, Mr Kop denied that Berri set out to devise the products to be included in an invitation to treat in order to ensure that they would fit within cl 4.8. He agreed that Berri was aware that any products would have to comply with cl 4.8, but strongly denied that the features of the products included in the invitation to treat had been developed as a device to make possible an offer under cl 4.8. He testified that, rather, the products contained in the invitation to treat incorporated improvements. They were the outcome of nine or ten months of joint product development by Berri and Brickwood, which had commenced when the Brickwood contract was concluded.

[30] Mr Kop asserted that Berri's decision to terminate the Brickwood contract was independent of devising the list of products under cl 4.8, which was the subject of the invitation to treat. He stated that "the judgments of the court highlighted there was a mistake with the original offer".

[31] Ultimately, Mr Kop testified that Berri's intention in putting the first and second Brickwood offers to ACI was to obtain the competitive pricing to which Berri believed it was entitled under the supply agreement.

[32] Mr Kop conceded that despite the termination of the Brickwood contract, Brickwood continued to gear up and "those wheels hadn't stopped turning". He agreed that Brickwood did not have facilities in Western Australia and South Australia, which meant that it was in Berri's interests to keep ACI "on the hook" to supply those states.

[33] On 3 December 2004, Berri advised Brickwood that it had terminated the Brickwood contract. The letter of Corrs Chambers Westgarth, solicitors for Berri, to Brickwood's solicitors, Monahan and Rowell, dated 3 December 2004, stated that as a result of the judgment of 3 June 2004 and the current challenge by ACI to the resubmitted offer Berri no longer intended to be bound by its contract with Brickwood. It had decided to bring it to an end. The letter stated that "It may now be open" for Brickwood to claim damages as a result of Berri's repudiatory conduct. Further, it stated that Brickwood had a duty to endeavour to mitigate any damage that it might suffer as a result of the repudiatory conduct. It stated that Berri would provide to Brickwood that day an invitation to treat, and trusted that Brickwood would respond in good faith expeditiously in exercise of its duty to mitigate properly.

[34] On 3 December 2004, Berri's Chief Executive officer, Ms Alison Watkins and Mr Alan Buckner, Berri's Managing Director of Operations, attended a meeting at Brickwood's premises. The meeting was also attended by Mr William Vautin, Brickwood's Managing Director, and other Brickwood representatives. Mr Vautin stated that he had just been informed by his solicitor that Berri had terminated the Brickwood contract.

[35] Ms Watkins handed the invitation to treat dated 3 December 2004 to Mr Vautin.

[36] Mr Vautin asked why Berri had terminated the Brickwood contract rather than the supply agreement. Ms Watkins explained that under the court's determination, Berri had found that it had not had the right to enter the Brickwood contract. She recognised that Berri might have exposure to a damages claim, but said that Berri expected Brickwood to take all reasonable steps to mitigate any loss and had "prepared [the] invitation to treat which sets out one avenue by which Brickwood could act to mitigate".

[37] The commencement date and supply date for a new contract were discussed. Mr Vautin stated that Brickwood needed time to discuss matters internally. He observed that he was "very disappointed with the way this was handled by Berri". Among other matters, Ms Watkins said that Berri needed the offer to be open until 30 April 2005 as "we cannot put ourselves in the position of having two supply contracts again". Mr Vautin said that Brickwood had invested a lot of money in the relationship. It had to have an early start date, in order to get cash flow from the investment as soon as possible.

[38] The invitation to treat provided at the above meeting by Berri to Brickwood referred to the supply agreement with ACI, and to the terms of cl 4.8, which gave ACI a right to match. It stated that Berri invited Brickwood to make an offer for products listed in an attachment to the invitation to treat, on the terms and conditions set out in an attachment ("which may be amended by Brickwood"). It stated that Berri considered the listed products to be "substantially the same or substitutable for any products, within the meaning of cl 4.8". The invitation to treat required Brickwood to make a written offer which would remain open and unconditional until 1 May 2005 and would not be withdrawn without Berri's prior consent. It sought that any offer by Brickwood should be received by Berri within 14 days from the date of the invitation to treat. It further provided that, after receipt of an offer, Berri could request Brickwood to discuss it and could request Brickwood to amend and resubmit the offer.

[39] Attachment 1 to the invitation to treat listed 45 bottles, with specified weight, length, depth and height. It gave a description of the relevant bottle, and, in most cases, a reference to attached drawings and Explanatory Notes. There was also a reference to the delivery site.

[40] The Explanatory Notes to the invitation to treat set out "bottle and closure requirements", which included requirements relevant to the present dispute. For example, the requirements for "warm fill" PET bottles required certain bottle designs to be such that there were no label protection protrusions or indentations on the front and rear bottle label panels; the 1, 1.5, 2.4, 3 and 3.3 litre bottles to be of "high shouldered" design; and the PET bottle design to be such that the bottle contact footprint was maximised, to optimise line stability. Various bottles were required to have bottle necks with slotted threads, a handle design such that the handle did not protrude beyond the footprint, and batch traceability.

[41] The invitation to treat required the agreement to start on the commencement date (defined to mean at Berri's election by written notice to Brickwood, at any date between 1 February 2005 and 30 April 2005).

[42] On 7 December 2004, a further meeting took place at Brickwood's premises. It was attended by Mr Buckner and Ms Whiting of Corrs Chambers Westgarth on behalf of Berri and by Mr Vautin, other Brickwood officers and Brickwood's solicitor, Mr Patrick Monahan of Monahan & Rowell, on behalf of Brickwood. Mr Monahan stated that Brickwood was not happy with the situation. It did not understand why Berri had terminated the Brickwood contract, rather than the supply agreement. Brickwood was very exposed and would be claiming damages. He further stated that if Brickwood could not commence supply on 27 January 2005, it would incur large cash costs. He observed that, although Brickwood had a duty to mitigate, "the invitation to treat is not reasonable". It gave no certainty that a new contract would be formed. Ms Whiting replied that it was up to Brickwood to determine how it would respond to the invitation to treat. She said that Brickwood could amend clauses in the invitation to treat and Berri would consider them and, if satisfied, would then invoke cl 4.8. Ms Whiting and Mr Buckner then left the room while Brickwood's representatives discussed the position. When they returned, there as a short discussion of Brickwood's losses. Ms Whiting asked for a quantification of the losses.

[43] A further meeting between officers of Berri, including Mr Kop, and officers of Brickwood, took place on 8 December 2004. At the meeting, the Brickwood officers stated that Brickwood would not bid to supply Berri in Western Australia. The relevant Western Australian information was deleted, at Brickwood's request.

[44] The letter of Monahan & Rowell to Corrs Chambers Westgarth dated 8 December 2004, reserved Brickwood's rights. It required a signed agreement (a working draft of which was attached) before Brickwood would take any further step in the matter.

[45] The attached draft agreement included recitals of: the entry into the Brickwood contract; Brickwood's considerable expenditure to gear up to commence production under the contract; its consequent substantial borrowing and anticipation of a substantial cashflow to commence on 27 February 2005; Berri's purported repudiation; Berri's assertion that Brickwood had a duty to mitigate; the invitation to treat and Berri's desire (despite the purported repudiation of the contract) that Brickwood would continue to gear up to be able to supply products by a nominated date between 1 February 2005 and 30 April 2005.

[46] The draft agreement further recited that "Berri accepts that by submitting an offer in response to Berri's Invitation to Treat dated 3 December 2004, Brickwood is performing its obligations under its duty to mitigate its loss flowing from Berri's repudiatory conduct".

[47] It further recited that Berri would not, in the future, argue that Brickwood's continued gearing up did not fall properly within Brickwood's duty to mitigate. It recited that by submitting an offer, Brickwood would not waive any of its rights flowing from Berri's repudiatory conduct.

[48] By cl 3, the draft agreement provided that "Berri will pay Brickwood the sum of $476,000 per calendar month commencing 27 February 2005 (and on the 27th of each month thereafter) to assist Brickwood in meeting its financial obligations pending commencement of any contract". By cl 4, such payments were to continue until the earlier of the commencement date of a new contract between Berri and Brickwood to supply the products (assuming Berri accepted Brickwood's offer) or until 27 May 2004. By cl 7, such payments were to be credited against Brickwood's claim against Berri for loss and damage.

[49] An email of Monahan & Rowell to Janet Whiting of Corrs Chambers Westgarth dated 9 December 2004 gave a break down of the figure of $476,000, and stated "that is a very hurriedly calculated figure, and must not be taken as representing the full amount of the monthly loss which Brickwood will suffer as a result of the repudiation of its contract (assuming that it accepts that repudiation"). The email explained that there were two calculations of such loss. The figure of $476,000 represented the lower figure, which excluded the capital repayments of Brickwood's loans. It stated that a sum including capital repayments could be argued to be closer to a real reflection of Brickwood's loss, which would also incorporate its loss of anticipated profit on the contract.

[50] The letter of Corrs Chambers Westgarth to Monahan & Rowell dated 9 December 2004 stated that instructions were being obtained, but Berri accepted that an offer would be consistent with Brickwood performing its obligations to mitigate any loss.

[51] The email of Mr Monahan of Monahan & Rowell to Ben Cowling of Corrs Chambers Westgarth dated 9 December 2004 stated, inter alia, "please ask Janet to ring me as SOON AS POSSIBLE to discuss the matter -- your client is pressing Brickwood to submit its response to the invitation to treat this afternoon and, as has been explained, Brickwood cannot and will not do so until we FIRST have agreement on the issues raised in the side agreement."

[52] A file note of Corrs Chambers Westgarth dated 9 December 2004 noted, " ... put position -- advice is ... can't do an agreement now if B going to respond to I to T we meet that independent of damages ... ".

[53] The letter of Monahan & Rowell dated 9 December 2004 enclosed an amended version of the draft agreement.

[54] At a directions hearing before Habersberger J on 10 December 2004, Berri disclosed that it had terminated the Brickwood contract.

[55] The letter of Corrs Chambers Westgarth to Monahan & Rowell dated 10 December 2004 stated that Berri was not prepared to enter into the proposed side agreement.

[56] By letter dated 14 December 2004 to Berri, Brickwood forwarded an offer to Berri.

[57] On 16 December 2004, Brickwood forwarded a second offer to Berri dated 14 December, but in fact received on 16 December 2004 ("the Brickwood offer") in identical terms to the first offer dated 14 December 2004, save that it recorded an alteration to Sch 2, altering the commencement of the quarter year for price review to 1 April 2005.

[58] The Brickwood offer relevantly stated:

Invitation to Treat

Brickwood offer

1.

Tender Pricing

Pricing effective 1 February 2005 is attached based on the revised pricing protocols.

Acceptance of this Tender must be received in writing by close of business on 21 December 2004.

2.

Terms and Conditions

Amendments as per attached.

[59] Attachment 2 set out terms and conditions. Clause 2 provided that the agreement commences on the commencement date (defined in cl 1 as 1 February 2005) and will expire on 29 May 2006, unless terminated earlier in accordance with cl 11.

[60] Schedule 1, entitled "Specifications, Products and Prices", set out a table containing numbered items (bottles or closures). The items are described, and bottle weight and dimensions, site, and drawing and Explanatory Note references were set out.

[61] Attached Explanatory Notes amplified the bottle and closure requirements in considerable detail. Attached drawings illustrated particular numbered items. An attached "Pricing for Tender effective to 31 March 2005" listed items, sites, bottle weights, resin costs, non-resin costs, tender prices and indicative total units.

[62] An attached "invitation to treat pricing protocols" gave prices of different materials, duty, insurance, freight, total resin cost per kilogram, exchange rate (US$), and wastage rates.

[63] Schedule 2 set out price review, giving a summary of price review, mechanism and price adjustment for resin costs and non-resin costs and resin price adjustment.

[64] The Brickwood offer received on 16 December 2004 did not provide for payment by Berri of $476,000 per month, as Brickwood had sought. It was not open for the term sought by Berri, but required acceptance by 21 December 2004.

[65] By letter dated 16 December 2004, couriered to ACI on that day, Berri stated that it had that morning received an offer from Brickwood constituted by the letter dated 14 December 2004 received that morning and the facsimile dated 16 December 2004, which it forwarded to ACI pursuant to cl 4.8 of the supply agreement. The letter stated that the Brickwood offer, by its terms, remained open for acceptance until close of business on 21 December 2004, but that Berri would seek to have the time for acceptance extended, and would advise ACI if that occurred. The letter sought ACI's "urgent advice" on whether it would exercise its right of last refusal in respect of the Brickwood offer.

[66] On 17 December 2004 Habersberger J heard ACI's application for leave to discontinue the second proceeding on the basis that Berri pay indemnity costs.

[67] On 17 December 2004, Berri served a notice of material breach on ACI, giving it 30 days to rectify the alleged breach. (Berri subsequently did not act upon the notice in order to terminate the supply agreement, although it asserted that there had been a number of significant breaches by ACI)

[68] The letter of Janet Whiting of Corrs Chambers Westgarth to Patrick Monahan of Monahan & Rowell dated 20 December 2004 stated that the Brickwood offer:

... provides that acceptance of this tender must be received in writing by close of business on 21 December 2004" 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.

A brief summary is as follows:

•

By a letter from Corrs to your firm dated 3 December 2004, Berri terminated the contract with Brickwood that arose from acceptance of the offer set out in Brickwood's letter dated 11 December 2003 ( the Bid I Contract ). Later on 3 December 2004, by letter from Berri to Brickwood bearing the same date, Berri invited Brickwood to make an offer to supply Berri with particular products on terms and conditions ( the Invitation to Treat ).

•

On 7 December2004, Brickwood informed Berri that its financiers were likely to be seriously concerned by the termination of the Bid 1 Contract. As such. Brickwood advised that it could not make an offer as set out in the Invitation to Treat due to the stated requirement that the offer remain "open and unconditional until 1 May 2005 or such longer period as Brickwood and Berri agree in writing and may not be withdrawn by Brickwood without the prior consent of Berri. Brickwood held the view that making an offer of this nature would leave it exposed for a significant period of time and this was unacceptable to it.

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Brickwood stated that in order to keep an offer open for the period specified in the Invitation to Treat it would require monthly payments of $476,000. Such payments were to be made conditionally.

The parties could not reach agreement on this matter and ultimately Brickwood submitted the Brickwood Offer on 16 December 2004. The Brickwood Offer remains open for acceptance until close of business on Tuesday 21 December 2004.

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The terms of the Brickwood Offer were acceptable to Berri and have been furnished to ACI pursuant to cl 4.8 of the Berri/ACI contract.

However, our client is concerned that ACI will complain that as the Brickwood Offer is only open for acceptance for such a short time, that ACI is not in a position to respond, either at all or in a substantive way, will assert that ACI is being denied the opportunity to properly exercise its rights under cl 4.8 of the Berri/ACI contract.

For this reason, our client has requested that:

1

we ask that your client reconsider its position and extend the time for acceptance of the Brickwood Offer from close of business on 21 December 2004 until the earlier of:

(a)

30 June 2005; or

(b)

Berri accepts the Brickwood Offer.

2

Berri would be prepared to agree to the above variation on the following terms:

(a)

Berri will pay to Brickwood the sum of $476,000 on 27 February 2005 and on the 27th day of each month thereafter until the Brickwood Offer is no longer open pursuant to cl 1 hereof;

(b)

any amount to be paid by Berri to Brickwood pursuant to this arrangement is in reduction of any loss and damage suffered by Brickwood as a result of Berri's termination of the Bid 1 Contract; and

(c)

if Berri pays amounts to Brickwood pursuant to this arrangement that are in excess of any amount that Brickwood would be entitled to claim from Berri as a result of Berri's termination of the Bid 1 Contract, then Brickwood will be required to reimburse Berri such excess amounts.

We note that the above does not seek to vary or extinguish any rights that either your client or our client may have as a result of the termination of the Bid 1 Contract.

In the circumstances, we would ask that you seek your client's instructions in relation to this as a matter of urgency.

[69] By letter to Corrs Chambers Westgarth dated 21 December 2004, Monahan & Rowell advised that Brickwood would extend the time for acceptance of the Brickwood offer until 30 June 2005 or until acceptance, on the terms offered by Berri.

[70] The letter of Clayton Utz to Corrs Chambers Westgarth dated 21 December 2004, enclosed a statement of claim. It stated that for the reasons set out in the accompanying statement of claim, the Brickwood offer was not an offer within cl 4.8 of the supply agreement. It enclosed a statement of claim dated 21 December 2004.

[71] By letter dated 21 December 2004, Berri advised ACI that the time for acceptance of the offer had been extended to 30 June 2005.

THE PLEADINGS

Amended statement of claim

[72] By a third amended statement of claim dated 13 April 2004 and filed by leave granted on 12 April 2004, the plaintiff alleges that the Brickwood offer is not an offer within terms of cl 4.8 of the supply agreement because the expression "products which are substantially the same as, or substitutable for any Products" referred to products which, while not identical to Products, were different in their "essential characteristics of product description", including volume, material type and weight.

[73] The plaintiff alleges that ten of the 23 bottles in the Brickwood offer have the same volume, material type and weight as the corresponding ACI Products and that the Brickwood offer thus does not fall within the terms of cl 4.8.

[74] Alternatively, the plaintiff alleges that, on a proper construction, the expression "products which are substantially the same as or substitutable for any Products" means a product which is different in material type, method of manufacture or by reason of some other innovation, but is reasonably interchangeable with an ACI Product.

[75] The plaintiff alleges that all 23 bottles in the Brickwood offer use the same material and the same method of manufacture as the corresponding ACI Product, and contain no innovation. It is alleged that they are therefore not "substitutable for" the ACI Products within the meaning of cl 4.8.

[76] The plaintiff alternatively alleges that the Brickwood offer was not "bona fide arm's length", but was instigated by Berri for an extraneous purpose, in circumstances where:

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Berri had forwarded on 12 December 2003 the first Brickwood offer which, if accepted, would result in a binding contract between Brickwood and Berri not operative until 12 months after the date of acceptance. It was expressed to be forwarded pursuant to cl 5.5 of the supply agreement and Berri required ACI to respond by 9 January 2004.

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Berri had forwarded the second Brickwood offer to ACI on 12 December 2003 pursuant to cl 3.3 of the supply agreement and required ACI to respond by 9 January 2004.

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ACI on 13 January 2004 commenced the first proceeding, seeking a declaration that the first Brickwood offer did not comply with cl 5.5 of the supply agreement and the second Brickwood offer did not comply with cl 3.3

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Berri accepted the first Brickwood offer on 27 January 2004, (thereby creating a contract which was to commence on 27 January 2005.)

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Berri also accepted the second Brickwood offer, creating a contract for supply from 20 May 2006 to 29 May 2013.

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Habersberger J, by a judgment given on 25 June 2004 in the first proceeding, declared that the first Brickwood offer did not satisfy cl 5.5 of the supply agreement and the second Brickwood offer did not satisfy cl 3.3

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By letter to Brickwood dated 3 December 2004, Berri stated that it would no longer be bound by the Brickwood contract, and that Brickwood had a duty to endeavour to mitigate damage and Berri would provide Brickwood that day with an invitation to treat to which Brickwood should respond expeditiously, in exercise of its duty to mitigate properly.

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By invitation to treat dated 3 December 2004, Berri invited Brickwood to make an offer in accordance with terms and conditions and bottle designs prepared by Berri, which it asserted to be "substantially the same as or substitutable for any Products" within terms of cl 4.8, and required that any offer remain open and unconditional until 1 May 2005 and not be withdrawn without Berri's prior consent.

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On 14 December 2004, Brickwood made the Brickwood offer to Berri, which was to remain open for acceptance only until 21 December 2004.

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By an agreement between Berri and Brickwood made on 21 December 2004, Brickwood extended the acceptance date to the earlier of 30 June 2005 or the date when Berri accepted the offer, in consideration of Berri paying Brickwood $476,000 on 27 February 2005 and thereafter on the 27th of each month until the Brickwood offer was no longer open.

[77] The plaintiff alleges that in order to carry out the extraneous purpose of protecting or extricating itself from its legal difficulties, Berri conceived and prepared the invitation to treat, conceived and stipulated to Brickwood some differences from ACI's Products sufficient to fall within cl 4.8, invited Brickwood to respond in the exercise of its duty to mitigate and offered to pay Brickwood $476,000 per month to extend the offer.

Amended Defence

[78] By its amended defence, the defendant denies that products "substantially the same as or substitutable for" a Product excludes a product with the "essential characteristics of Product description" including volume, material, weight and type.

[79] The defendant also denies that the Brickwood offer included 10 products identical to ACI's Products, although of the same volume, material type and weight, and particularises alleged differences.

[80] The defendant further denies the plaintiff's allegation that the words in cl 4.8 should be considered a "composite expression" meaning "substantially the same as in that they are substitutable for" the Products.

[81] The defendant admits that it requested that Brickwood extend its offer to 30 June 2005, in consideration of the defendant paying Brickwood $476,000 per month, but says that its proposal was:

due to concern 'that ACI will complain that, as the Brickwood Offer is only open for acceptance for such a short time, that ACI is not in a position to respond, either at all or in a substantive way, [and that ACI will assert that [it] is being denied the opportunity to properly exercise its rights under clause 4.8 of the Berri/ACI contract.

[82] The defendant denies that, in issuing the invitation to treat to Brickwood and agreeing the payment to extend the offer, Berri acted for an extraneous purpose or in breach of any implied duty of good faith, or the requirement that the offer be "bona fide arm's length'.

[83] The defendant does not dispute that under cl 4.8 of the supply agreement, ACI would have a "reasonable time" within which to match any third party offer, but says that, (given that the Brickwood offer was forwarded by Berri to ACI on 16 December 2004), a "reasonable time" for ACI to exercise its right of last refusal would have expired before 11 March 2005, the date on which Berri notified ACI that it had elected not to match the offer.

Amended Reply

[84] By amended reply dated 21 March 2005, the plaintiff admits that the ten bottles incorporate the features particularised by the defendant, but says that such features do not render the products "substantially the same as or substitutable for any Products" where characteristics of volume, weight and material type remain identical.

THE PARTIES' PRINCIPAL CONTENTIONS

(I) The plaintiff's contentions

[85] The plaintiff argued that cl 4.8 must be accorded a construction which would uphold the paramountcy of plaintiff's grant of exclusivity under the supply agreement, in accordance with the parties' intentions. A construction which legitimised loopholes for avoidance by Berri, or other vitiation or dilution of the plaintiff's grant, would defeat the basic objects of the supply agreement. In that context, Mr Mukhtar, senior counsel for the plaintiff, contended that the plaintiff had assumed onerous burdens under the supply agreement in order to secure its grant of exclusivity. Further, the supply agreement did not set a market price for the Products or provide for price review on the basis of market price.

[86] The plaintiff's submissions on the definition of "Product" (on which the construction of cl 4.8 necessarily depends) appeared to shift somewhat during the course of the trial. At one stage, I understood its argument to be that a "Product" was simply an item with the essential characteristics of product description, volume, weight and material type specified in Sch 1 to the supply agreement, or specified in respect of a later amendment set out in Annex A.

[87] Ultimately, however, Mr Mukhtar argued that, on close analysis, Habsersberger J did not determine that the technical drawings and specifications of the Products formed part of the supply agreement, but rather, proceeded on the basis (which the plaintiff accepted) that the technical drawings and product specifications constituted extrinsic evidence of the features of the Products.

[88] The plaintiff apparently accepted Habersberger J's construction of cl 5.5, but questioned the width of the ratio of his decision. It argued, however, that the heading of cl 5.5 ("meeting competition") pointed to a significant distinction from cl 4.8, which was headed "right to match in respect of the Products", thus indicating that it was not aimed at meeting competition.

[89] Mr Mukhtar argued that "substantially the same as" must be construed to exclude a merely colourable distinction, because a very slight difference could otherwise undermine ACI's pivotal exclusivity. At the other extreme, a sufficiently great difference from a Product would mean that an item was not covered by cl 4.8 at all. Between those extremes, the content of the term "substantially the same as" was imprecise and ambiguous. The court, he said, should therefore fix upon the objective determinants of weight, volume and material type in order to exclude from cl 4.8 items with the same weight, volume and material type as the corresponding Products. Put another way, the plaintiff's primary submission was that a product with the same weight, volume and material type as the corresponding Product would not be "substantially the same". Applied to the present case, as ten of the 23 bottles in the Brickwood offer have the same weight, volume and material types as the corresponding ACI Products, the plaintiff contended that the Brickwood offer does not come within cl 4.8. That contention assumes that the inclusion of some non-conforming products in an offer will render the entire offer invalid. Ultimately, the plaintiff appeared to concede that its complaint based on the construction of "substantially the same as" related only to the ten bottles.

[90] Alternatively, the plaintiff argued that the expression "substantially the same as or substitutable for" applied only to products using a different material or method of manufacture from the ACI Products, or included some other innovation, but were reasonably interchangeable. On that secondary construction, only innovative and new commodities would fall within cl 4.8. That construction requires the term "substitutable for" to be read with "substantially the same as" as a composite expression in which the word "or" does not bear its usual meaning, but means "that is to say". The plaintiff did not contend that the products the subject of the Brickwood offer incorporated novel material, manufacturing methods or other innovations.

[91] The plaintiff conceded that its constructions of cl 4.8 were specialised, but argued that specialised construction was necessary in order to uphold its paramount exclusivity under the supply agreement.

[92] The plaintiff further argued that the Brickwood offer was not "bona fide arm's length" and hence fell outside cl 4.8 on that basis. In that context, Mr Mukhtar expressly disclaimed any suggestion of dishonesty or "odious" collaboration. Rather, he argued that Berri had used cl 4.8 for the extraneous or improper purpose of extricating itself from the dilemma posed by its simultaneous commitment to two inconsistent contracts by terminating the supply agreement. Further, Berri "conceived and stipulated" the Brickwood offer, not primarily to obtain product improvements, but in order to escape from the legal quagmire into which it had fallen.

[93] The plaintiff did not dispute that genuine bargaining had occurred between Berri and Brickwood in the negotiation of the Brickwood offer. It contended, however, that where the invitation to treat was inextricably linked to Berri's decision to terminate the Brickwood contract and its assertion that Brickwood's duty to mitigate required an offer in accordance with the invitation to treat, there were "forced circumstances" which precluded a "bona fide arm's length" offer.

[94] Finally, the plaintiff contended that if the Brickwood offer were valid, in the absence of a specific time to put a matching offer under cl 4.8, it had a "reasonable time" to do so, which should be measured by the period for which the Brickwood offer was open -- that is, until 30 June 2005. ( II) The defendant's contentions

[95] Mr Houghton, senior counsel for the defendant, contended that the relevant clauses of the supply agreement must be construed in the context of a long term commercial agreement in which the parties had addressed the prospect that price reductions might be achieved over its course by improvements in technology, productivity, economics of scale or other factors. The supply agreement provided an incentive to the supplier to make improvements and achieve cost reductions by rendering ACI vulnerable to the possibility of third part offers which it must match, or lose the business.

[96] Further, Mr Houghton submitted that, practically speaking, there was no scope for introducing extensive or radical differences to Products. Realistically, differences from Products as defined could only be achieved within a very fine compass.

[97] He argued that cl 4.8, construed with the above matters in mind, reconciled the competing interests of ACI and Berri. It effectively extended ACI's exclusive right of supply to encompass not just Products as defined, but products which were "substantially the same as or substitutable for" them, thus preventing Berri from defeating ACI's grant by incorporating merely colourable differences. At the same time, it recognised Berri's entitlement to obtain a cheaper price for any such product, because ACI's exclusive right to supply was dependent upon its capacity and willingness to match a bona fide third party offer. Berri could thus obtain a cheaper price, whether from the third party or ACI, for any products "substantially the same as or substitutable for" any Products, subject to the requirement for a bona fide arm's length third party offer.

[98] The defendant contended that Habersberger J correctly construed cl 5.5 as applicable to the entire range of exactly identical Products and correctly recognised that, because it was virtually impossible to satisfy cl 5.5 (given ACI's ownership of intellectual property), cl 4.8 constituted the only effective brake on what would otherwise be ACI's exclusive long-term right of supply, with no real prospect of reduced prices for Berri.

[99] The defendant argued that the plaintiff's specialised construction of "substantially the same as" to exclude products with the same essential characteristics constituted an inversion of its plain meaning to "substantially different from". As such, it did violence to the language. Nor was the plaintiff's construction necessary in order to uphold any legitimate commercial objective of the supply agreement. Mr Houghton argued that, on the contrary, the plaintiff's exclusivity was inherently vulnerable to third party offers under the supply agreement. Its protection lay in the requirement of a bona fide arm's length third party offer and the commercially valuable right to match any such offer, rather than in a construction of cl 4.8 which distorted the plain meaning of terms.

[100] The defendant contended that the term "Products" was correctly construed by Habersberger J to mean the Products listed in Sch 1 and subsequently added (or deleted) by agreement, together with the relevant specifications, including the technical drawings. The defendant argued that that construction was supported by cl 4.6 of the supply agreement, which expressly provides that the "Products" must conform to the specifications, including the drawings, or Berri may reject them.

[101] The defendant argued that a Product was a "product which matched the specifications and technical drawings agreed upon by Berri and ACI from time to time".

[102] In relation to the allegation that the Brickwood offer was not "bona fide arm's length", Mr Houghton contended that the fundamental commercial objectives of the supply agreement permitted Berri to secure a cheaper source of supply through competition. Such a purpose was not extraneous and or improper and could not be impugned for a want of bona fides.

[103] Further, Mr Houghton submitted that:

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Berri did not collaborate with Brickwood about the termination of the Brickwood contract. Rather, Brickwood was surprised by the termination.

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The invitation to treat was not in breach of an obligation of good faith. Rather, it was sent out after the termination of the Brickwood contract and was followed by several meetings and further negotiations.

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Berri did not manufacture or devise artificial or merely colourable differences to Products simply to bring the relevant items within the ambit of cl 4.8. Rather, the evidence established that prior to and during the Brickwood contract, Berri and Brickwood discussed the new and different features, in order to work out the best design to achieve legitimate product advantages for particular bottles.

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The Brickwood offer received on 16 December 2004 was different in some important respects from the terms and conditions set out in the invitation to treat. First, the Brickwood offer was open only until 21 December 2004 at Brickwood's insistence, due to Brickwood's concern that a breach of covenants with its bankers could occur. Berri, in turn, refused to execute a deed sought by Brickwood. Further, the commencement date was ultimately 1 February 2005, rather than any time between 1 February and 1 April, as requested by Berri.

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In order to keep the Brickwood offer open beyond 21 December 2004 as requested by Berri, Brickwood required payment of $476,000 per month. The prices offered by Brickwood were 15-28% higher than those sought by Berri. Brickwood, however, consented to the price review mechanism sought by Berri in the offer received on 16 December 2004.

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The reference to "a duty to mitigate" in the letter of Corrs Chambers Westgarth to Monahan & Rowell dated 3 December 2004, did not mean that there was a lack of "arm's length bona fides", in circumstances where Brickwood had its own legal advisers and there was nothing to prevent it from declining to make any offer at all and suing Berri for damages for breach of the Brickwood contract.

[104] In relation to the plaintiff's contention that it had a reasonable time (until 30 June 2005) in order to match the Brickwood offer (if valid), the defendant argued that the plaintiff had accepted the risks of challenging the validity of the offer by litigation, and had elected by March 2005 not to put a matching offer. In Berri's submission, the time for ACI to put a matching offer had expired.

MEANING OF "PRODUCTS"