- Supreme Court of New South Wales - Court of Appeal
- FRANKLINS PTY LTD v METCASH TRADING LTD
LONG-TERM CONTRACTS - SUPPLY CONTRACT - BETWEEN TWO AUSTRALIAN COMPANIES - REFERENCE TO UNIDROIT PRINCIPLES AND CISG AS MEANS OF INTERPRETING APPLICABLE DOMESTIC LAW (AUSTRALIAN LAW)
PRE-CONTRACTUAL NEGOTIATIONS AND POST-CONTRACTUAL CONDUCT AS AID TO INTERPRETATION OF WRITTEN CONTRACT - NOT ADMISSIBLE UNDER AUSTRALIAN LAW - REFERENCE TO UNIDROIT PRINCIPLES (ARTICLES 4.1-4.3) AND TO CISG (ARTICLE 8) - IRRELEVANCE OF BOTH INSTRUMENTS IN THE CASE AT HAND
In a dispute between two Australian companies relating to a supply contract, one of the questions to be decided was whether, and if so, to what extent, the parties’ post-contractual conduct was admissible as an aid to the interpretation of their written contract. In his opinion Justice Allsop, while pointing out that the prevailing view under Australian law was that on account of the so-called objective theory of contract such evidence was not admissible, admitted that a different solution could be reached under legal instruments such as the UNIDROIT Principles (Articles 4.1 to 4.3, which he quoted in extenso) and the CISG (Article 8), both of which give a primary role to the ascertainment of the actual common intention of the parties. However, after pointing out that “[...] the approach to the construction and interpretation of contracts in the UNIDROIT Principles and the CISG reflects to a significant degree civil law principles”, he concluded that in the case at hand it was unnecessary to discuss the effect, if any, the adoption of the CISG in Australia, and in particular in New South Wales by the Sale of Goods (Vienna Convention) Act 1986, will have on the primacy of the objective theory.
1 I have had the advantage of reading the reasons in draft of Campbell JA. I agree with his Honour’s view as to the proper construction of the definition of “Wholesale Price” in cl 1.1 of the Supply Agreement and with the orders he proposes as to rectification. I agree with his Honour’s analysis of the facts and I adopt his Honour’s conclusions and reasons in that respect. I would prefer to express my own reasons in relation to some of the legal issues in the case. I will deal with the balance of his Honour’s reasons after I have dealt with these legal issues.
2 A number of important propositions concerning the law of contract were canvassed in argument and are dealt with by Campbell JA: the objective theory of contract; the circumstances in which and the extent to which surrounding circumstances can be examined in the process of construction and interpretation of a written contract; the approach to construction and interpretation of a commercial contract; and whether post-contractual conduct can be utilised in aid of the construction and interpretation of a written agreement.
3 Binding and authoritative decisions provide the answers for all these questions for an Australian intermediate appellate court.
THE OBJECTIVE THEORY OF CONTRACT
4 There can be no doubt that until the High Court of Australia says otherwise the underpinning legal theory in the law concerning the formation, construction and interpretation of contracts is the so-called objective theory of contract: Taylor v Johnson  HCA 5; 151 CLR 422 at 428-432 and especially 429 where Mason ACJ, Murphy J and Deane J said that “the clear trend in decided cases and academic writings has been to leave the objective theory in command of the field”; Ermogenous v Greek Orthodox Community of SA Inc  HCA 8; 209 CLR 95 at 105  where Gaudron J, McHugh J, Hayne J and Callinan J stated clearly that contract formation was to be objectively assessed; Pacific Carriers Ltd v BNP Paribas  HCA 35; 218 CLR 451 at 461-462  where the Court (Gleeson CJ, Gummow J, Hayne J, Callinan J and Heydon J) made clear the objective task of ascertaining of the meaning of documents; Equuscorp Pty Ltd v Glengallan Investments Pty Ltd  HCA 55; 218 CLR 471 at 483  where the Court (Gleeson CJ, McHugh J, Kirby J, Hayne J and Callinan J) referred with approval to the expression of the matter by Gleeson CJ in the New South Wales Court of Appeal in Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 549 that the “general test of objectivity … is of pervasive influence in the law of contract”; and Toll (FGCT) Pty Limited v Alphapharm Pty Limited  HCA 52; 219 CLR 165 at 179-182 - where the Court (Gleeson CJ, Gummow J, Hayne J, Callinan J and Heydon J) reiterated the primacy of the objective theory in the determination of rights and liabilities in contract.
5 No further analysis of, or citation about, that basal proposition need therefore be undertaken. There may be residual debate about how the objective theory applies in particular cases: Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309.
LATER CONDUCT AND THE CONSTRUCTION AND INTERPRETATION OF WRITTEN CONTRACTS
6 Much ink has been spilt over the last 30 years on this topic. It is intimately connected in analysis with the applicable underpinning theory of the determination of contractual rights and liabilities. If, as the above references make clear, the governing theoretical framework as to the determination of contractual rights and obligations is the objective theory, it is difficult to see how later conduct has a place in the ascertainment of the parties’ objectively assessed intentions. As the High Court made pellucid in Pacific Carriers v BNP Paribas at 461-462 , Equuscorp v Glengallan at 483  and Toll v Alphapharm at 179 , the construction of a written contract is to be determined by what a reasonable person in the parties’ position would have understood it to mean in the circumstances and context in question. How parties later acted, probative of what they themselves thought their obligations were, is difficult to reconcile with the objective paradigm.
7 Of course, if another paradigm were to be put in place, no such difficulty would arise. For instance, Arts 4.1-4.3 of the UNIDROIT Principles of International Commercial Contracts (3rd Ed) gives a primary role to the ascertainment of the actual common intention of the parties:
“ARTICLE 4.1 (Intention of the parties)
(1) A contract shall be interpreted according to the common intention of the parties.
(2) If such an intention cannot be established, the contract shall be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it in the same circumstances.
ARTICLE 4.2 (Interpretation of statements and other conduct)
(1) The statements and other conduct of a party shall be interpreted according to that party’s intention if the other party knew or could not have been unaware of that intention.
(2) If the preceding paragraph is not applicable, such statements and other conduct shall be interpreted according to the meaning that a reasonable person of the same kind as the other party would give to it in the same circumstances.
ARTICLE 4.3 (Relevant circumstances)
In applying Articles 4.1 and 4.2, regard shall be had to all the circumstances, including
(a) preliminary negotiations between the parties;
(b) practices which the parties have established between themselves;
(c) the conduct of the parties subsequent to the conclusion of the contract;
(d) the nature and purpose of the contract;
(e) the meaning commonly given to terms and expressions in the trade concerned;
8 Article 8 of the Vienna Convention on International Sale of Goods (1980) (the “CISG”) is to similar effect to Art 4.2 of the UNIDROIT Principles. It is unnecessary to discuss the effect, if any, which the adoption of the CISG into the laws of all States and Territories (see, as to New South Wales, the Sale of Goods (Vienna Convention) Act 1986) will have on the primacy of the objective theory. See generally, R Burnett and V Bath Law of International Business in Australia (Federation Press 2009) at 13-14 and in particular the United States cases at footnote 51; and see E A Farnsworth Farnsworth on Contracts (3rd Ed Aspen Publishers 2004) at [7.12].
9 To a significant degree the approach to the construction and interpretation of contracts in the UNIDROIT Principles and the CISG reflects civil law principles: see Lord Hoffmann’s comments in Chartbrook Limited v Persimmon Homes Limited  UKHL 38;  AC 1101 at 1119-20 . This underlying difference in basal framework explains the brevity of the reference to the civil law by Lord Hoffmann in his discussion of the admissibility of pre-contractual negotiations in Chartbrook Limited v Persimmon Homes Limited at 1119-20  and the absence of any such reference in Lord Mance’s restatement of the principles of interpretation of a legal document in In re Sigma Finance Corporation  UKSC 2 at -.
10 In Agricultural and Rural Finance Pty Limited v Gardiner  HCA 57; 83 ALJR 196, Gummow J, Hayne J and Kiefel J formed a majority of the Court and at 205  clearly and unequivocally stated “the general principle [is] that ‘it is not legitimate to use as an aid in the construction of [a] contract anything which the parties said or did after it was made’”, citing James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd  AC 583 at 603; and Administration of Papua and New Guinea v Daera Guba  HCA 59; 130 CLR 353 at 446. Heydon J at 232  was to the same effect as a matter of principle; to the contrary, Kirby J at 220-221 .
11 I note that in Australian Medic-Care Company Ltd v Hamilton Pharmaceutical Pty Limited  FCA 1220 at , Finn J expressed the view that the present state of the law in Australia is not yet settled on whether it is possible to use post-contractual conduct as an aid to construction of a written document, though his Honour accepted that the “more favoured view” was that it is not. By reason of what was said in the High Court in Agricultural and Rural Finance v Gardiner, I would respectfully differ from Finn J. In regard to this question, I respectfully agree with Campbell JA that the expressed approach of the majority High Court judgment in Agricultural and Rural v Gardiner evidences a departure from statements in earlier High Court authorities to the contrary, being in particular Farmer v Honan and Dunne  HCA 13; 26 CLR 183 at 197 where Isaacs J and Rich J expressly followed Watcham v Attorney-General of the East Africa Protectorate  AC 533 at 540, being the Privy Council decision taken as authority for the use of the later conduct to construe a written agreement; Thornley v Tilley  HCA 13; 36 CLR 1 at 11 where Isaacs J expressly referred to utilising later conduct in the process of construction; Sinclair Scott & Company Limited v Naughton  HCA 34; 43 CLR 310 at 327 per Isaacs J; E.T. Fisher & Company Pty Limited v The English Scottish and Australian Bank Ltd  HCA 42; 64 CLR 84 at 102 where Williams J applied Watcham; and White v Australian and New Zealand Theatres Limited  HCA 6; 67 CLR 266 at 275 and 281 where Starke J and Williams J, respectively, expressly permitted later conduct to construe a document. These cases can be taken to have been departed from by Agricultural and Rural Finance v Gardiner.
12 By 1974, English law stood firmly against Watcham and any general principle of contractual interpretation permitting later conduct to construe a written agreement to be taken from it: L Schuler AG v Wickman Machine Tool Sales Ltd  AC 235 at 252 (Lord Reid), 260 (Lord Morris), 261-262 (Lord Wilberforce), 265-270 (Lord Simon) and 272 (Lord Kilbrandon). Lord Wilberforce (at 261) called Watcham a precedent he had thought to be “nothing but the refuge of the desperate”. To the extent that prior to Agricultural and Rural Finance v Gardiner an absence of authoritative statement by the High Court to the contrary permitted that “refuge” to be availed of (albeit supported by earlier High Court authority), that is no longer so.
13 This clearing of the ground in respect of contractual construction and interpretation leaves untouched the role, if the facts admit, of “later” conduct in: (a) ascertaining whether there was a contract formed and when it was formed: Howard Smith and Company Limited v Varawa  HCA 38; 5 CLR 68 at 78; Barrier Wharfs Limited v W Scott Fell & Company Limited  HCA 88; 5 CLR 647 at 668-669 and 672; and ABC v XIV Commonwealth Games at 547-548 and cases there cited; (b) revealing probative evidence of antecedent surrounding circumstances; and (c) revealing probative evidence of facts relevant to rectification, estoppel or any other legal, equitable or statutory rights or remedies that may impinge on an otherwise concluded, construed and interpreted contract.
THE APPROACH TO THE CONSTRUCTION OF COMMERCIAL CONTRACTS
19 The essential character of the task of construction of commercial contracts can be seen in a number of authoritative decisions of the High Court, and of other courts authoritatively endorsed by the High Court. A commercial contract should be given a businesslike interpretation: McCann at 589 . Thus, the nature and extent of the commercial aims and purposes of the agreement or parts thereof are part of the essential background circumstances: “the genesis of the transaction, the background, the context, the market in which the parties are operating”: Codelfa at 350 quoting Reardon Smith at 995-996 cited by the Court in Zhu at 559  and see Lake v Simmons at 509 cited by Gleeson CJ in McCann at 589  and IATA at 160 . The need for a businesslike construction not only informs the nature and extent of the extrinsic material legitimately of assistance, but it also directs the approach to be taken to the ascription of meaning to the words used by the parties. The words should be given a construction so as “to avoid … [making] commercial nonsense or is shown to be commercially inconvenient”: Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at 313-314 (Kirby P) cited by the Court in Zhu at 559 . This is not only a reflection of the place of the informing surrounding circumstances, it is also a requirement not to approach words in a business contract pedantically or in a manner prone to defeat the evident commercial purpose. They should be read “fairly and broadly, without [the court] being too astute or subtle in finding defects”: Hillas & Co Limited v Arcos Limited (1932) 147 LT 503 at 514 per Lord Wright cited in Australian Broadcasting Commission v Australasian Performing Right Association Limited  HCA 36; 129 CLR 99 at 109-110. Similar expressions of the correct approach eschewing detailed semantic and syntactical analysis to lead to a construction contrary to business commonsense can be seen in what Lord Diplock said in Miramar Maritime Corporation v Holborn Oil Trading Ltd  AC 676 at 682 and Antaios Compania Naviera SA v Salen Rederierna AB  AC 191 at 201. As Gleeson CJ, Gummow J and Hayne J said in Maggbury at 198  in the context of citing the relevant passage from Lord Diplock’s speech in Antaios, what is “business commonsense” is an objectively ascertained matter and thus referable to the evidence, and a matter about which there may be dispute. (It is not to be forgotten that shipping cases such as Miramar and Antaois were dealt with by judges of great stature and experience in the context of markets and practices with which they were intimately familiar.)
66 CAMPBELL JA:
NATURE OF THE CASE
67 In 2001 the Appellant (“Franklins”) was a new entrant to the retail level of the Australian grocery and supermarket industry. It was in the process of acquiring 76 stores in New South Wales and the right to use the long-established “Franklins” name. It was also contemplating opening additional stores in New South Wales and elsewhere in Australia. However, it did not have any warehouse of its own.
68 The Respondent (“Metcash”) was already involved in the Australian grocery and supermarket industry. It had acquired the warehouse operation previously conducted in several States by Davids’ Holdings, and also operated a franchising business under which it franchised the right to operate retail outlets under the “IGA” brand.
69 Over the period April 2001 to September 2001 Franklins and Metcash negotiated, and ultimately entered, a contract whereby Franklins agreed to purchase exclusively from Metcash those products that Metcash stocked at the time of Franklins submitting an order. That agreement was ultimately embodied in a contract dated 14 September 2001 (the “Supply Agreement”). [...]
70 The Supply Agreement was terminated on 31 January 2005.
71 On 8 February 2005 Franklins began litigation in the Commercial List of the Supreme Court of New South Wales against Metcash, alleging (in broad terms) that it had been overcharged by Metcash for products supplied while the Agreement was on foot, and that Metcash was denying Franklins its contractual right to inspect and copy documentation of Metcash to ascertain the extent of the overcharge.
76 The dispute about the price at which the goods were sold arises from the fact that in the grocery and supermarket industry it is common for a supplier of goods to have a wholesale list price, and for a purchaser to be able to obtain various kinds of discounts or rebates from that price, or to obtain an allowance (which might be in cash or kind) as a result of purchasing the goods.
77 Some of those benefits (to adopt a neutral term that I will use elsewhere in this judgment) are referred to as being “published”. [...]
78 Other benefits are referred to as confidential ones, and are negotiated individually between a supplier and a particular purchaser.
79 The essence of Franklins’ complaint about the price at which it was charged for goods is that Metcash obtained from suppliers various confidential benefits on goods that were on-sold to Franklins, but did not pass on to Franklins the benefit of those confidential benefits.
80 In broad terms, the primary judge held that the correct construction of the Supply Agreement required Metcash to calculate the price at which it sold goods to Franklins on a basis that passed on to Franklins all discounts and allowances whatsoever that it received from a supplier, whether or not they were published. However, he held that it had been the common intention of Franklins and Metcash that the only discounts and allowances that Metcash would pass on would be published ones. He ordered that the Supply Agreement be rectified accordingly. He found that Metcash had not established that Franklins was estopped concerning the construction of the Supply Agreement. He found that Franklins were entitled to inspect any document of Metcash that related to any benefit that Metcash was obliged to pass on to Franklins under the Supply Agreement as rectified.
Issues on the Appeal and Cross-Appeal
83 In its appeal, Franklins contends that the primary judge was in error in ordering that the pricing provisions of the Supply Agreement be rectified.
84 In its cross-appeal, Metcash contends that the primary judge was in error in construing the contract to require the passing on of all discounts and allowances of whatsoever kind. Rather, it contends the proper construction requires Metcash to pass on to Franklins only four (or alternatively five) specific types of discount or allowance. Metcash supports that construction by relying on surrounding circumstances known to both parties, the parties’ mutual understanding of how they used the language utilised in the contract, the subsequent conduct of the parties, and the alleged uncommerciality of the construction that the primary judge adopted.
85 Alternatively, Metcash contends that the primary judge rectified the contract in an incorrect fashion, and that the common intention of the parties had been that Metcash would be obliged to pass on to Franklins only the four (or five) nominated types of discount or allowance, not all “published discounts”.
86 As a further alternative, Metcash contends that Franklins is estopped from asserting that it is entitled to the benefit of anything other than the specified four (or five) types of discount or allowance. As a further alternative, Metcash contends that Franklins engaged in conduct concerning the negotiation and entry of the Supply Agreement that breached the Trade Practices Act 1974 (Cth), entitling Metcash to have the Supply Agreement varied under section 87 Trade Practices Act, or alternatively to receive damages.
87 Metcash’s challenge to the form of orders made by the primary judge includes a contention that, by reason of its entitlement to succeed on one or more of the preceding arguments, it was entitled to a judgment in its favour in the action.
88 Franklins contends that it has a contractual entitlement to inspect all documents of Metcash relating to all discounts and allowances received by Metcash concerning goods that Metcash has sold to Franklins. Metcash contends that Franklins has a contractual entitlement to inspect only those of Metcash’s documents that record the particular sales of goods that Metcash has made to Franklins. Alternatively, it contends that if Franklins has a contractual entitlement to obtain inspection of any of Metcash’s documents relating to confidential discounts and allowances, Franklins is bound by an estoppel requiring it to exercise that right of inspection only by an independent person such as an auditor, who would himself or herself be bound by obligations of confidentiality.
89 The final matter of substance is that there are some disputes concerning the adequacy of particular orders that the judge made to give effect to his decisions about the legal relations between the parties.
Summary of Conclusions
90 In brief, the conclusions I have reached on these issues are:
(1) The judge was right in finding that the proper construction of the Supply Agreement required Metcash, in calculating the price at which it sold goods to Franklins, to deduct from the Supplier’s list price all allowances and discounts (including rebates) provided to Metcash by that Supplier. In the course of reaching that conclusion I decide that:
(a) in construing a contract that is wholly in writing, it is not necessary to find there is ambiguity in the contract before using surrounding circumstances as an aid to construction;
(b) subsequent conduct of the parties cannot be used as an aid to construction of a contract that is wholly in writing, if the subsequent conduct is sought to be used to prove any matter that cannot legitimately enter into construction of the contract in accordance with the objective theory of contract;
(c) recitals to an agreement in certain limited circumstances are a legitimate aid to construction of the operative provisions in the agreement.
(2) The manner in which the judge rectified the Supply Agreement was wrong. Instead, the Supply Agreement should be rectified in a manner that allows Metcash to retain certain specified confidential discounts and allowances that were specifically identified as ones that Metcash was to retain in a document called the Laminated List. In the course of reaching that conclusion I consider:
(a) how the requirement for rectification to give effect to the common intention of the parties has the effect that matters that were outside the scope of the parties’ subjective intentions at the time the agreement was entered cannot be affected by the making of a rectification order;
(b) how identification of the intention of the parties should be done as a matter of commercial substance;
(c) the rationale for the “clear and convincing proof” requirement for proof of common intention.
(3) Metcash has not established that Franklins is bound by any estoppel concerning the confidential benefits that Metcash is obliged to pass on to Franklins.[...]