FEDERAL COURT OF AUSTRALIA

GMA Garnet Pty Ltd v Barton International Inc [2010] FCAFC 38

THE COURT ORDERS THAT:

1.                  This matter be adjourned to a date to be fixed.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

NORTH AND SIOPIS JJ:

introduction

1                     Before the Court is an appeal from orders made by a judge of the Court on 5 May 2009.  The appeal raises several issues of construction of an agreement for the supply of garnet (the Supply Agreement).

2                     Alluvial garnet (garnet) is a sand-like substance commonly used as, principally, an industrial abrasive.  Australia produces half of the world’s supply of garnet and India is the other major world producer.

3                     Garnet is mined in Australia at Port Gregory near Geraldton in Western Australia.  The mine is owned by the second applicant, Garnet International Resources Pty Ltd (GIRL), and is operated by its subsidiary, the first applicant, GMA Garnet Pty Ltd (GMA). 

4                     The respondent, Barton International Inc (Barton) owned and operated the mine in partnership with GMA.  Up until 2005, it also held 50% of the issued shares in GMA. Barton is incorporated in the USA and registered in Australia as a foreign registered company.  It is a wholly owned subsidiary of Barton Mines Corporation, a company incorporated in the USA which has, either by itself or through related companies, been involved in the business of mining, processing, selling and distributing garnet in the USA since 1878.

5                     Serious differences arose in the partnership relationship from about 2004. In the course of the disputation GIRL notified the Australian Competition and Consumer Commission (ACCC) of an agreement between the parties whereby the appellants agreed not to sell garnet in Queensland, New South Wales, Victoria, Tasmania and South Australia, and the respondent agreed not to sell garnet in Western Australia and the Northern Territory (The Perth Agreement).  As a result of this notification, the ACCC conducted an investigation into whether this agreement was in contravention of the Trade Practices Act 1974 (Cth) andlater commenced proceedings in this Court against Barton and several related companies.  The proceedings were resolved by consent in September 2006 when the Court made declarations of contravention of the Trade Practices Act and imposed substantial pecuniary penalties.

6                     In August 2004, GIRL commenced proceedings in the Court seeking dissolution of the partnership.  Receivers were appointed, and negotiations were commenced with a view to seeking resolution of the dispute.  In view of the acrimony between the parties these negotiations were conducted by solicitors acting as agents.  Mr David Williams acted on behalf of the appellants and related companies, and Mr Steven Cole acted on behalf of the respondent and related companies. 

7                     The negotiations resulted in a settlement of the disputes between the parties.  The essence of the settlement was that GIRL would purchase all the interests of Barton in the mine and its shareholding in GMA.  The consideration for the purchase was a cash payment of $18 million and the execution of a long term supply agreement of garnet from the mine in favour of Barton.  The terms of the settlement were set out in a document called the Principal Agreement which was executed on 21 February 2005.  This document in turn provided for the execution of the Supply Agreement in the form annexed to the Principal Agreement.  The Supply Agreement was executed on 31 March 2005. 

8                     Before examining the events which gave rise to the issues raised on the appeal it is convenient to outline the relevant provisions of the Principal Agreement and the Supply Agreement.

The Principal Agreement and the Supply Agreement

9                     The Principal Agreement made between GIRL and Barton provided not only for the execution of the Supply Agreement but also for agreements concerning the sale of shares and for the transfer of partnership property.  The relationship between the transactions was described as follows: 

2.3               Generally

The parties acknowledge:

(a)                    that it is the composite transaction evidenced by the Settlement Documents that reflects the consideration under the Settlement Documents; and

(b)                    that as part thereof, GMA Garnet [GMA] wishes to promote distribution of Product (as defined in the Supply Agreement) within the United States of America and Canada and, for that purpose, GMA Garnet is allowing Barton a concessional rate for Product as provided for in clause 4.2 of the Supply Agreement.

10                  The Principal Agreement provided that the transactions were conditional on approval or non-objection by the ACCC (cl 3.1(a) and (b)). 

11                  The Supply Agreement was made between GMA and Barton. It identifies GMA as the seller and Barton as the buyer.  GIRL was also a party to the Supply Agreement.  The term of the agreement was until 30 June 2017 unless terminated earlier under the terms of the agreement (cl 1.1). 

12                  Clause 2 dealt with the agreement to supply.  “Product” was defined (cl 1.1) as garnet of specified grades produced from the mine near Geraldton.  GMA agreed to sell to Barton up to 50,000 tonnes of garnet annually (cl 2.1(a)(i)).  The parties could agree for the supply of additional product (cl 2.6) and the Supply Agreement did not prevent GMA supplying others or Barton acquiring from others (cl 2.4).

13                  Clause 2.5 related to branding of the product and is of central concern in this appeal.  It provided: 

All garnet purchased under this Agreement and distributed or sold by the Buyer which is 100% Product must be branded by the Buyer with the GMA Garnet name and logo (which may co-exist with the Buyer’s own branding provided that the prominence of the GMA Garnet name and logo is not less than that which has applied during the 2004 calendar year) and the Seller grants to the Buyer a non exclusive licence to use the GMA Garnet name and logo on Product for this purpose.  The Buyer must not use the GMA Garnet name or logo on, or in connection with, the distribution or sale of any garnet which is not 100% Product or hold out in any way that garnet which is not 100% Product, is Product.

14                  Clause 4 dealt with the price at which the garnet was to be supplied.  Concessional prices were to be charged for the first 50,000 tonnes supplied.  Of that total, the price for the first 35,000 tonnes supplied was stipulated in an appendix to the Supply Agreement and reflected the cost price of the product.  The price of the remaining 15,000 tonnes was to be that cost price plus fifteen percent.  Provision was made for the adjustment of these prices over the life of the agreement.  The circumstances in which the concessional prices applied were stipulated by cl 4.2, which is also a central concern in this appeal and which provided:

The parties acknowledge that the Seller wishes to promote distribution of Product within the United States of America and Canada and, for that purpose, the Seller shall allow to the Buyer a concessional rate for Product as provided in this Agreement.  Accordingly, if the territory into which the Buyer ships and discharges Product under clause 2.1 after taking delivery of the same is the United States of America or Canada, the price for Product to be sold pursuant to orders to be placed by the Buyer pursuant to clause 2.1 shall be: [the concessional prices just described].

15                  Clause 7 dealt with payment.  Clause 7.3 applied where the concessional prices had been charged but the qualifying circumstances had not eventuated.  It provided:

If the seller notifies a Shipment price based on the Buyer’s advice that the Shipment will be shipped and discharged into the United States or Canada and the Buyer subsequently does not ship and discharge that Shipment into either of those territories the Seller may give notice to the Buyer:

(a)               advising that the price for the quantity of Product in that Shipment is revised to such price as determined by the Seller in accordance with the clause 4.1 [the undiscounted price]; and

(b)               attaching a tax invoice for the additional amount payable.

The Buyer must pay the amount of the invoice to the Seller within 30 days after the Seller gives that notice.

16                  Clause 8 dealt with termination of the Supply Agreement, and cl 8.1 dealt with termination by the seller.  Clause 8.1(c) provided:

The Seller shall be entitled to terminate this Agreement by notice in writing to the Buyer if:

…

(c)        persistent breach by the Buyer of its obligations under clause 2.5 following notice in writing of breach being given by the Seller to the Buyer on at least two prior occasions within the immediately preceding two Contract years;

Each Contract year (save for the first) was twelve months ending on 30 June. 

Alleged breaches of the Supply Agreement

17                  Soon after GMA began to supply Barton under the Supply Agreement, GMA became concerned that Barton was not branding the garnet supplied as required by the Supply Agreement.  In November 2006, GMA gave notice of a breach of cl 2.5 of the Supply Agreement for the purpose of cl 8.1(c) of the Supply Agreement, alleging that the GMA logo was not given the prominence which applied in 2004 as required by cl 2.5.  Then, in early 2007, GMA received information that Barton companies were mixing GMA product with Indian garnet.  GMA took the view that blending of GMA garnet with garnet from other sources was not permitted under the Supply Agreement.  Thus, on 23 April 2007, the appellants commenced proceedings to clarify their rights under the Supply Agreement, including the right to terminate the agreement for breach and for damages. 

18                  The pleadings filed by Barton disclosed that it had on-sold bulk garnet supplied under the Supply Agreement to a company called Barton Mines Company LLC (BMC).  This company was incorporated in the USA and, like Barton, was a subsidiary of Barton Mines Corporation.  Further, the pleading disclosed that the bulk garnet sold by Barton to BMC was not branded as GMA product. 

19                  GMA regarded the sale by Barton to BMC as a breach of cl 2.5 of the Supply Agreement.  It served three notices of breach under cl 8.1(c) of the Supply Agreement on Barton dated 20 December 2007, 13 May 2008 and 30 July 2008 in respect of deliveries made respectively in October 2005 and October 2007, on 17 April 2008 and on 9 July 2008.  The third notice claimed the right to terminate the Supply Agreement on the basis of two breaches of cl 2.5 in two consecutive contract years, but the notice did not seek to exercise the right to terminate immediately.   

The applicable legal principles

20                  It was against this background that the primary judge addressed a number of the issues of construction of the Supply Agreement.  He began this task by setting out the legal principals applicable to the construction of the agreements ([89] – [102]).

21                  As the appeal was argued there was no contention that the primary judge had applied the wrong legal principles.  Rather, the appeal concerned the application of accepted legal principles to the construction of the agreements against the setting in which they were made. We agree with the statement of the law set out by the primary judge. In several instances we have reached different conclusions from those reached by the primary judge. That outcome has resulted from placing a greater emphasis on the language of the agreement than the primary judge placed on the language used. In other instances we have taken a different view of the commercial context or the relative importance of some of the surrounding circumstances in which the agreements were made.

22                  The primary judge considered that each of the parties had proposed sophisticated and commercially justifiable sets of reasons for interpreting the Supply Agreement in the way they contended.  Hence, he regarded the case as one where there was no obviously correct literal meaning of the contentious clauses.  In these circumstances the following statement of Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1981) 149 CLR 337; [1982] HCA 24 at [24] (Codelfa) applied:

…when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting.

23                  The primary judge then adverted to an exceptional situation referred to by Mason J when the actual intention of the parties would prevail over the presumed intention.  This occurs when parties specifically reject a particular provision which would otherwise have given effect to their presumed intention.

24                  The primary judge then explained by reference to Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35 at [22] (Pacific Carriers), Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52 at [40] (Toll), International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151; [2008] HCA 3 at [8] and [53] (International Air Transport Association), that “the objective framework of facts within which the contract came into existence” referred to by Mason J is now commonly understood to mean that the proper construction of a contract should reflect what reasonable people in the position of the contracting parties would have understood by the relevant clauses considering not only their text but also the surrounding circumstances and the purpose and object of the entire transaction and its elements.  The primary judge relied on the following passage from the judgment of Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ in Toll at [40] which was adopted in the joint judgment of Gleeson CJ, Gummow, Kirby, Hayne, Heydon, Crennan and Kiefel JJ in International Air Transport Association at [53]:

This Court, in Pacific Carriers Ltd v BNP Paribas [footnote omitted], has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.

25                  The primary judge then said that, in view of the recent dicta in the High Court which made no mention of the need to establish ambiguity in the provision in question, there was no need for ambiguity to be demonstrated before the Court could have regard to surrounding circumstances known to the parties and the purpose and object of the transaction. 

26                  The primary judge then concluded at [96] that “the construction task to be undertaken by the Court requires consideration of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction”. 

27                  He then said that when construing a commercial contract the business objectives of the parties should be taken into account.  He referred to some authorities which determined that provisions in a commercial contract should be given a business commonsense or business like construction.  But, the primary judge said this approach did not involve a free wheeling exercise.  He relied upon the view of the Court of Appeal of New South Wales in Ryledar Pty Ltd t/as Volume Plus v Euphoric Pty Ltd (2007) 69 NSWLR 603; [2007] NSWCA 65 (Ryledar) quoting Palmer J in Euphoric Pty Ltd v Ryledar Pty Ltd [2006] NSWSC 2, who stated at [31] – [33] as follows:

31  However, that does not mean that when the Court begins the task of construction it puts the words of the document aside and endeavours first to ascertain the commonly known factual context and purpose of the transaction, often only by resolving a strenuous contest between the parties. The Court does not, once it has found the commonly known factual context and purpose, then look at the words of the contract and, if they do not readily accommodate the context and purpose so found, force them to do so by a process of interpretation.

32   When the Court is construing a commercial contract, it begins with the words of the document: there it often finds expressed the factual context known to both parties and the common purpose and object of the transaction. But the Court is alive to the possibility that what seems clear by reference only to the words on the printed page may not be so clear when one takes into account as well what was known to both parties but does not appear in the document. When that is taken into account, the words in the contract may legitimately have one or more of a number of possible meanings. It is then the Court's task to identify which of the possible meanings represents the parties' contractual intention.

33  However, when a party to a contract argues that the known context and common purpose of the transaction gives the words of the contract a meaning which, by no stretch of language or syntax they will bear then, in truth, one has a rectification suit, not a construction suit.

28                  The primary judge then observed that a business commonsense construction may not be easy to ascertain.  Minds may differ on that subject: Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181; [2001] HCA 70 at [43]. 

29                  Applying the principles of construction he outlined, the primary judge examined in detail ([102] – [365]) the factual matrix of the transaction and made findings concerning the surrounding circumstances, purpose and object of the transaction and the common understandings of the parties on significant issues.

construction of clause 2.5

30                  There are three issues concerning the meaning of cl 2.5 addressed by the primary judge which require consideration in this appeal. These are:

1.                  Whether the branding obligation in cl 2.5 applies to internal sales between Barton and BMC (the internal sale issue).

2.                  Whether the Supply Agreement required rectification (the rectification issue).

3.                  Whether the branding obligation in cl 2.5 applied only to sales by GMA of packaged garnet or whether it also applied to sales by GMA of loose bulk garnet (the loose bulk garnet issue).

The Internal Sale Issue

Reasoning of the Primary Judge

31                  The primary judge held that the branding obligation imposed by cl 2.5 only applied at the point at which 100% Product was distributed or sold to a third party customer. 

32                  This conclusion, he said, followed from the text of the clause which provided not that “all garnet purchased” under the Supply Agreement must be branded, but “all garnet purchased…and distributed or sold by the Buyer which is 100% Product” must be branded, and also provided that the seller granted to the buyer a non-exclusive right to use the GMA name and logo on product for the purpose.

33                  The primary judge said that this conclusion derived from the text of the clause was supported by the second sentence of cl 2.5 which prohibited the buyer from using the GMA name on, or in connection with, the distribution or sale of any garnet which was not 100% Product, or hold out in any way that garnet which was not 100% Product, was such product.  The primary judge regarded that sentence as concerned with presentation of the product to the market, namely, third party customers. 

34                  The primary judge then said: 

440                   It is also important, in my view, to note the words in parenthesis in the first sentence of cl 2.5:

            (which may co-exist with the Buyer's own branding provided that the       prominence of the GMA Garnet name and logo is not less than that             which has applied during the 2004 calendar year).

441                   Those words, as contended for by the respondent, must be understood in the context that BMC was known to be the distributor of GMA garnet in North America and it was BMC's name and logo that had previously been applied to packaging containing 100% Product, along with GMA Garnet's name and logo.  The reference to prominence is a reference to the relative significance accorded to the two brands which had previously been used together.  The words in parenthesis were plainly designed to allow the continued use of BMC's branding.

35                  The final consideration relied upon by the primary judge was explained as follows:

444                   When one has regard to the broader context in which this commercial agreement was struck, particularly the understanding by the parties that BMC was engaged in the distribution and sale of GMA garnet in North America, and that distribution and sale depended upon its activities, it can be readily understood that while the expression "Buyer" was used in the singular in cl 2.5 – and so on the face of it, applies only to Barton International [Barton]– it was not the intention of the parties that an internal transaction between Barton International and BMC should attract the branding obligation.  The co‑branding provision in cl 2.5 just mentioned serves also to emphasise this.

The Appellants’ Submissions

36                  The appellants contended that cl 2.5 applied to the internal sale of 100% Product from Barton to BMC.  Clause 2.5 placed the branding obligation on the buyer, the term defined in the Supply Agreement to mean Barton.  The appellants argued that the primary judge’s construction took no account of the express nomination of Barton as the entity obliged to comply with the branding obligation.  The interpretation adopted by the primary judge, it was submitted, contradicted the plain meaning of the clause.

37                  The appellants accepted that the purpose of the branding obligation was to ensure that third party purchasers were made aware that they were purchasing 100% Product.  But they argued that their construction of cl 2.5, which required Barton to brand 100% Product on a sale to BMC, would achieve that result as a matter of practical commercial reality.  Once the 100% Product was branded for the purpose of the sale by Barton there was no reason why BMC would remove the branding for the purpose of an on-sale to a third party. 

38                  Further, the appellants rely on the provision in clause 2.5 of a licence to use GMA’s logo granted to Barton. This shows that Barton was to be responsible for branding. Without the granting of a licence to BMC to use the GMA logo only Barton could be responsible for branding. If it were intended that BMC was bound to brand, it would have been granted a licence to use the GMA logo. In the absence of such a licence, the construction preferred by the primary judge confers rights on non-contractual parties. The appellants contend that such an intention would have been made express in the terms of the contract.

The Respondent’s Submissions

39                  The respondent supported the construction of cl 2.5 adopted by the primary judge, namely, that cl 2.5 did not apply to the internal sale by Barton to BMC. 

40                  The respondent argued that the starting point in the determination of the proper construction of the clause was to discern the commercial intention of the clause.  It contended that the intention of cl 2.5 was to ensure that product was presented to the market as GMA product.  Mr Zelestis, who appeared as Senior Counsel with Mr Dharmananda for the respondent, explained it thus:

The idea of distribution or sale in the context of an industrial product and the context of a display of a name and logo, is necessarily an idea about the name and logo being applied at a point in time when the customer sees and receives the product. 

41                  It was wrong, it was argued, to focus on particular words in cl 2.5 as the appellants had done.  Rather, it was necessary to understand the idea conveyed by the words. 

42                  Once the commercial rationale of the clause was understood, then the references in the clause to “the Buyer” should be broadly interpreted in accordance with this idea.  Thus, where clause 2.5 spoke of garnet “distributed or sold by the Buyer”, the expression meant that the garnet was distributed or sold by or through Barton, or distributed or sold as a result of Barton having purchased garnet under the Supply Agreement.  Mr Zelestis explained this aspect as follows: 

What this clause means is that where there is a sale to a customer by or through the buyer having bought the garnet, then the buyer is responsible to ensure compliance with the clause.  So our construction argument delivers the sensible commercial meaning of the clause.

The respondent relied on a finding by the primary judge that the parties to the Supply Agreement mutually understood that BMC had, at the time the agreement was made, been the distributor of garnet from the partnership in North America.  That finding was not challenged on appeal.  It followed, so the respondent argued, that the parties intended that BMC would continue to distribute product in North America.  As a result of the agreement it would do so “through” Barton as the party to the Supply Agreement.

43                  Similarly, where cl 2.5 required the garnet to be branded “by the Buyer” the clause did not require Barton itself to apply the name and logo to the garnet.  Barton could fulfil the branding obligation by causing others to apply the branding.  In fact, when Barton bought packaged garnet, the branding was done by GMA. 

44                  Then, cl 2.5 allowed for co-branding.  Whilst the buyer was required to brand the product with the name and logo of GMA, “the Buyer’s own branding” could also be placed on the package.  The respondent argued that the phrase “the Buyer’s own branding” did not require Barton to affix its brand.  The phrase allowed Barton to choose the brand which it wished to be placed on the garnet.  The primary judge found that the expression “the Buyer’s own branding” allowed the garnet to be branded with the name and logo of BMC because it was BMC’s name and logo which had been applied in the 2004 calendar year, being the relevant year referred to in the balance of the expression. 

45                  The respondent also contended that if, as the appellants argued, cl 2.5 operated only once and at the point of sale from Barton to BMC then the clause would operate in private, that is to say, out of the sight of the ultimate third party consumers.  The clause would operate to require garnet to be branded in transit on a ship or in a warehouse before any sale by BMC to a third party, but it would not require BMC to have the garnet branded for the purpose of the on-sale.  The respondent contended that, construed in this way, cl 2.5 would not achieve the, or any, commercial purpose.

46                  Further, the respondent submitted that if BMC was not required to brand product on the sale to a third party, BMC could remove or mask the brand on product which it purchased from Barton, and the result would be that the third party would not know that the garnet was GMA garnet.  The respondent disputed the appellants’ assertion that there would be no commercial purpose for BMC to remove or mask the brand which Barton had been required to have on the product.  The respondent gave the example of a third party who ordered a supply of bulk 100% Product from BMC.  If, as will be considered later, Barton was obliged to package any bulk garnet which it purchased from GMA in order to brand it, then BMC would have an incentive to unbag the garnet for delivery to a customer who required loose bulk garnet.

47                  Next, the respondent contended that cl 2.5 allowed for the sale by BMC of product blended with garnet from other sources, such as India.  The branding obligation required Barton to brand 100% Product.  Hence, it was said, there was no obligation to brand garnet which was less than 100% Product.  That demonstrated that cl 2.5 was not concerned with controlling the way Barton dealt with product.  Clause 2.5 was rather concerned with the use by Barton of the GMA name and logo.  The clause required the name and logo to be placed on 100% Product and prohibited Barton from using the name and logo except on 100% Product.

Consideration

48                  It was common ground that the language of cl 2.5 must be viewed in the context in which the Supply Agreement was made and must serve the purpose for which the Supply Agreement was made.  It was also common ground that the subject matter of the clause, being the branding of product, concerned the identification of product in the hands of a third party purchaser. 

49                  In our view, the plain meaning of the clause, taken in this context and bearing in mind the commercial purpose of the clause, is that Barton was required to brand product on internal sales.

50                  The Supply Agreement defined the term “Buyer” as it was to be used in the Supply Agreement.  The contractual obligation was imposed expressly on Barton as the entity defined as “the Buyer”. 

51                  No doubt the subject matter of cl 2.5 relates to the presentation of product to the market.  The parties have, however, chosen to achieve their purpose in a particular way, namely, by imposing an obligation to brand on Barton, the purchaser of the garnet from GMA.  The purpose was achievable by the means adopted by the parties.  We accept the appellants’ contention that in many circumstances there would be no incentive for BMC to mask or remove the branding which was required on garnet purchased by Barton from GMA or to unbag the branded garnet supplied to it.  The branded garnet would be sold by BMC in the branded form and the commercial purpose of identifying the garnet to third parties as 100% Product would be achieved. 

52                  Thus, to achieve the commercial purpose of the Supply Agreement, it is unnecessary to read the reference to “all garnet purchased under this Agreement and distributed or sold ­by the Buyer” (underlining added) as meaning such garnet distributed or sold “through” Barton, or as a result of Barton having purchased garnet under the Supply Agreement.  Further, such a reading is not a natural or plain understanding of the language used.  The plain meaning is that the branding obligation falls on Barton irrespective of the entity to which it sells or distributes 100% Product.

53                  In the same way the respondent’s construction of the requirement that the garnet must be “branded by the Buyer” should not be accepted.  The ordinary meaning of this expression required Barton to have the name and logo in place for the on-sale by it. 

54                  The respondent relied on the finding of the primary judge that Barton was entitled to use the BMC name and logo as a co-brand with the GMA name and logo.  The primary judge construed the reference to “the Buyer’s” in the expression “which may co-exist with the Buyer’s own branding” as a reference to co-existence of the GMA name and logo with the BMC name and logo because there was evidence that the BMC name and logo had been used in association with the GMA name and logo in the 2004 calendar year which was referred to in cl 2.5.  This approach misconstrued the entitlement to co-brand.  That entitlement existed in relation to “the Buyer’s own branding”.  Again, as “the Buyer” is defined in the Supply Agreement as Barton, the entitlement was directed to the name and logo of Barton.  The reference to the year 2004, upon which the primary judge relied for his finding, was made to specify the prominence of the GMA logo in any co-branding exercise.  The reference related to the relative sizes of the co-brands.  It did not concern the identity of the owner of the brands.  Consequently, the co-branding entitlement does not assist the respondent on this issue. 

55                  Neither does the respondent’s reliance on the lack of any restriction on blending by Barton assist the respondent’s argument.  We agree with the respondent’s argument that cl 2.5 does not prevent Barton from blending garnet purchased from GMA with other garnet.  Our reasons for this conclusion are explained later in this judgment.  It does not follow from the lack of any restriction on blending that Barton was free to sell 100% Product to BMC without branding.  On the contrary, the lack of any restriction on blending strengthens the argument in favour of cl 2.5 applying to internal sales.  Barton was free of any obligation to brand if it sold blended Product rather than 100% Product to BMC.  Thus, Barton retained the capacity to determine the extent to which it would be subject to the obligation to brand.        

56                  We agree with the appellants’ contention that the grant of a licence to Barton to use the GMA name and logo to brand 100% product demonstrates that the parties intended that Barton would be responsible for branding, that that responsibility was unqualified – it applied to both internal sales and to sales directly to third parties. In the result, we would place a greater emphasis on the language of the clause than did the primary judge, whilst at the same time taking account of the surrounding circumstances known to the parties and the purpose and object of the transaction. The emphasis placed on the meaning of the language used is justified in the circumstances of the case because the Supply Agreement was negotiated not by the parties but by their solicitors and against the background, and as a result of, acrimony which existed between the parties.     

Rectification

The Reasoning of the Primary Judge

57                  The primary judge ordered that the Supply Agreement be rectified by inserting immediately after cl 2.5 the following term:

The Buyer agrees to ensure that Barton Mines Company LLC abides by clause 2.5 as if it was bound thereby.  For that purpose, rights conferred under clause 2.5 may be exercised by Barton Mines Company LLC.

58                  The primary judge said that there must be clear and convincing proof that the parties had a common understanding about the terms of agreement which were recorded erroneously before rectification would be ordered: Ryledar at [22] – [143] and [258] – [315].

59                  As has just been explained, the primary judge held that cl 2.5 did not apply to internal sales made by Barton.  He then found as a fact at [447] that:

…the parties commonly understood and indeed had the continuing intention that BMC would be and should be engaged in the process of distribution and sale of GMA garnet in the marketplace, particularly the North American market in which GIRL had expressed its wish to encourage the marketing of GMA garnet.

60                  He further found at [448] that:

…while the parties took some care to stipulate exactly who the contracting parties should be, in practical terms, when it came to the expected distribution and sale of GMA garnet (particularly in North America), the parties did not discriminate between one entity within the Barton group and another.

61                  On the basis that cl 2.5 did not apply to internal sales but that the parties understood that BMC had been engaged in selling GMA garnet in North America and that the parties did not discriminate between Barton entities in cl 2.5, the primary judge determined that the rectification which had been sought by the respondent was justified.

The Appellants’ Submissions

62                  The appellants argued that the findings of fact made by the primary judge did not justify the rectification which he ordered.  The appellants did not challenge the fact findings but contended that the rectification order was not justified as a matter of law.  They argued that it did not follow from the common understanding that BMC would have a role in the distribution of GMA product that Barton would have any obligation to supervise the activities of a co-subsidiary.  Such a conclusion would require clear and convincing proof of that specific intention.  There was no such proof.  Consequently, it was contended that the rectification order should not have been made and should be set aside.

The Respondent’s Submissions

63                  The primary thrust of the respondent’s submissions was that it was not open to the appellants to challenge the rectification order.  The appellants, it was argued, were bound by the case they had put to the primary judge.  On this point the respondent relied on Metwally v University of Wollongong (No.2) (1985) 60 ALR 68;[1985] HCA 28 at [7].

64                  The respondent said that the appellants’ case at trial included a claim for rectification.  In support of that claim the appellants pleaded that there was a common understanding that Barton would ensure that BMC would comply with the branding obligation in cl 2.5.  The respondent admitted this pleading.  In those circumstances, the respondent submitted, the appellants could not now argue against the rectification order made by the primary judge.

The Appellants’ Submissions in Reply

65                  In reply the appellants made two points.  First they said that it was necessary to take account of all of the interlocking elements of their rectification case before the primary judge, and not select, as the respondent had done, one element of that case.  Their case before the primary judge was that cl 2.5 applied to internal sales.  Thus, Barton was bound to brand 100% Product on a sale to BMC.  If Barton did not do so, then it was commonly understood that Barton would ensure that BMC would comply with cl 2.5.  At the same time Barton would remain bound by its obligation under cl 2.5.  Thus, the appellants opposed the respondent’s rectification case at trial.  On appeal they continued to do so.

66                  Second, and in any event, the appellants argued that their contention on the appeal is an argument of law.  The argument does not depend on leading any further evidence or challenging any of the fact findings made below and thus does not prejudice the respondent.  The situation is as described in Connecticut Fire Insurance Company v Kavanagh [1892] AC 473 at 480 as follows:

When a question of law is raised for the first time in a court of last resort, upon the construction of a document, or upon facts either admitted or proved beyond controversy, it is not only competent but expedient, in the interests of justice, to entertain the plea. 

Consideration

67                  In the case of an internal sale, on the view taken by the primary judge, there would have been no obligation on Barton to brand in the absence of the clause added by the rectification order.  By the added term of the agreement Barton had the responsibility to ensure that the garnet purchased by BMC would be on-sold carrying the necessary branding.  The circumstance that, without rectification, the branding provision could be circumvented by Barton selling to a related entity itself provided some reason for concluding that the parties intended Barton as the contracting party to have some obligation to ensure branding when it sold to a related entity. 

68                  However, when cl 2.5 is seen to apply to an internal sale, as we have determined, the likelihood that the parties intended Barton to have any additional obligation than to brand the product on the internal sale is reduced.  In that context, the two findings of fact on which the primary judge relied do not support the rectification claim.  In particular the finding that the parties mutually understood that BMC would be involved in the distribution and sale of 100% Product particularly in North America does not amount to a common understanding that Barton would ensure that BMC complied with the branding requirements.  If cl 2.5 applied to an internal sale there already existed an obligation on Barton to brand the product.  The parties understanding that BMC would sell and distribute in North America did not mean that any further branding obligation was necessary.

69                  Thus, the findings of fact relied on by the primary judge did not support the terms of the order made.  This conclusion follows from argument, and does not involve any challenge to the findings of fact made by the primary judge.  The argument accepts those findings. It is expedient in the interests of justice for this Court to entertain the argument. We accept the argument. Consequently, the rectification order should be set aside.  

The Loose Bulk Garnet Issue

The Reasoning of the Primary Judge

70                  The sales by Barton to BMC in issue in this proceeding were sales of unbranded loose bulk garnet.  Even though cl 2.5, on the construction we prefer, applied to internal sales, Barton committed no breaches of cl 2.5 unless the clause also applied to sales of loose bulk garnet and required Barton to brand loose bulk garnet when it on-sold that garnet.  The primary judge determined that cl 2.5 did not apply to such sales.  He concluded that the branding obligation applied only to sales of packaged product. 

71                  The foundation of the primary judge’s construction was what he described as “business commonsense”.  He said that the interpretation which required the branding of loose bulk garnet “produces an outcome which is not practical and…contradicts business commonsense”.

72                  The primary judge considered that cl 2.5 did not prevent Barton from blending GMA product with garnet from other sources and that cl 2.5 did not apply to sales of blended garnet.  We agree with the primary judge’s conclusions on these matters and our reasons are set out later at [124] – [131] and [162] – [168] of these reasons for judgment.  The primary judge regarded the ability of Barton to sell blended garnet without any obligation to brand as an important indication of the business commonsense of the construction that cl 2.5 did not apply to the sale by Barton of loose garnet.  It seems that the primary judge reasoned that the fact that Barton was permitted to sell blended product without branding and without restriction demonstrated that cl 2.5 was not intended to ensure that all product sold by Barton had to be branded.  The purpose of cl 2.5 was to regulate the use of the GMA name and logo.  Thus, the clause provided that the name and logo had to appear on some items and was not permitted to be used in relation to other items.  The primary judge seemed to have reasoned that the fact that blended garnet could be sold without branding supported the construction that loose garnet could be sold without branding. 

73                  In support of the business commonsense factor, the primary judge reasoned at [403] that: 

403       …a sale may occur on paper at any point following the point at which      Barton International takes possession of that property.  There may, for        example, be a "paper sale" at some point in transit of a shipment between         Western Australia and the USA.

74                  Then, the primary judge said that if cl 2.5 applied to sales by Barton of loose bulk product, Barton would be obliged by the clause to package product purchased from GMA in loose bulk form.  The primary judge considered that if cl 2.5 intended to impose an obligation on Barton to package product purchased as loose bulk product then the Supply Agreement would have specified that obligation. 

75                  The primary judge next referred to two further textual supports for his view as follows:

408        The words in parenthesis in the first sentence of cl 2.5 concerning the use of the GMA Garnet name and logo with a prominence that was used during the 2004 year, also strongly suggest that the trading [sic branding] obligation only applies to packaged product.  This prominence rule owes itself directly to the pre-existing 2004 practice, well known to the parties prior to the GSA [Garnet Supply Agreement], of branding packaging with the GMA Garnet name and logo at the point of sale to BIA. 

409      The second sentence of cl 2.5, authorising the use of the GMA Garnet name and logo, also tends to emphasise that it is the sale of GMA garnet in packaging to third party customers that is intended to be affected by the branding obligation in cl 2.5.

76                  Then the primary judge referred to some surrounding circumstances as follows:

410          The fact that the applicants also believed at the time of negotiations leading to the GSA, that BMC only distributed or sold GMA garnet to third party customers in packaging, and never loose bulk, also tends to confirm the intention of the parties was to brand packaged GMA garnet only.

411       On the face of it, the parties did not turn their minds to the particular question of branding loose bulk GMA garnet, even though the GSA provided for GMA garnet to be supplied in loose bulk.

77                  Finally, the primary judge observed that it was not possible as a practical matter to brand loose bulk garnet or garnet particles. 

78                  He concluded:

413       The Buyer purchases GMA garnet.  It may receive it in a packaged form or as loose bulk.  There is a branding obligation in respect of the distribution or sale of 100% Product.  There is no obligation to package.  A branding obligation is only apposite, in my view and on the evidence received, where the election is made by the Buyer to package the product.  Clause 2.5 does not speak to the circumstance in which the Buyer distributes or sells GMA garnet in a loose bulk form.

The Appellants’ Submissions

79                  The appellants submitted that the wording of cl 2.5 was clear.  It specified that the branding obligation applied to all garnet purchased under the Supply Agreement which was distributed or sold by Barton and which was 100% Product.  The appellants said that all means all. 

80                  The appellants disputed the primary judge’s conclusion that the parties would have specified in the Supply Agreement that loose bulk garnet could only be on-sold in packaged form if that is what they intended.  This finding was inconsistent with the primary judge’s finding that GMA did not know that the Barton companies sold or distributed product in loose bulk form to ultimate customers.  The primary judge found that GMA believed at the time of the making of the Supply Agreement that the Barton companies sold all garnet to third party customers in packaged form.  This meant, as the primary judge found, that the parties did not turn their minds to the situation.  But, if the parties did not turn their minds to the matter, contrary to the view of the primary judge, it could not be inferred from that failure to advert to the issue, that the parties intended that sales of loose bulk garnet would be free from the branding obligation. 

81                  The appellants then argued that the primary judge erred in the way he used the surrounding circumstance that GMA did not know that Barton companies sold or distributed product in loose bulk form to construe the agreement.  Whilst it was legitimate to use surrounding circumstances to identify the subject matter of an ambiguous contractual obligation, it was not open to use surrounding circumstances to attach a condition or quality to the subject matter of a contractual obligation plainly stated.  The appellants relied on the approach taken by Mason J in Codelfa at [22] as follows:

The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning.  But it is not admissible to contradict the language of the contract when it has a plain meaning.

82                  In this case the contract has a plain meaning.  The primary judge erred, so it was argued, by using the surrounding circumstances to attach a condition to the plain contractual description of the garnet to which the branding attached.  That condition was that the garnet be in a packaged form. 

83                  As to the primary judge’s observation that loose garnet could not be labelled and his view that, as a consequence, there was no obligation on Barton to label garnet sold in bulk, the appellants argued that Barton had an implied obligation to do all that was reasonably necessary to secure performance of the contract.  By making the agreement to brand garnet, Barton impliedly promised that the garnet would be packaged at the time of sale in such a way that it could be branded:  Secured Income Real Estate (Australia) Ltd v St Martin’s Investments Pty Ltd (1979) 144 CLR 596; [1979] HCA 51 (Secured Income).

84                  The appellants then took issue with the conclusion reached by the primary judge that Barton was entitled under the Supply Agreement to engage in unlimited blending, and consequently the appellants also took issue with the primary judge’s reliance on this conclusion to support his construction of cl 2.5.  The appellants submitted that the evidence concerning blending was not evidence of surrounding circumstances but was evidence of antecedent oral negotiations.  Whilst the former was admissible for the purpose of construing the contract, the latter was not.  Hence, the primary judge wrongly relied on the evidence concerning blending. 

85                  Further, the appellants contended that the findings made by the primary judge concerning blending were wider than the evidence justified.  The evidence only permitted a finding that there was a common understanding that there had been, in the past, exceptional instances for niche applications involving the blending of hard rock garnet with alluvial garnet. The evidence did not support the finding that Barton was entitled to engage in unlimited blending.

The Respondent’s Submissions

86                  The respondent supported the construction of cl 2.5 adopted by the primary judge which held that the branding obligation did not apply to the sale or distribution by Barton of loose bulk garnet but only to garnet supplied by GMA in packaged form.

87                  The respondent argued that the purpose of cl 2.5 was to control the use of the GMA name and logo.  It was not intended to restrict the way in which Barton supplied garnet to a customer. 

88                  Support for this argument came, it was argued, from the Supply Agreement provisions which allowed Barton to purchase garnet in either loose bulk or packaged form.  The price of loose bulk garnet was considerably cheaper than packaged garnet.  By giving Barton the option of purchasing in bulk, the Supply Agreement allowed Barton to avoid the packaging costs otherwise charged by GMA. 

89                  The respondent also argued that if an obligation as onerous as a requirement for Barton to sell all 100% Product in packaged form was to be imposed, such an obligation would have been expressly stated.

90                  The respondent said that cl 2.5 allowed Barton to blend the garnet supplied by GMA under the Supply Agreement with other garnet.  Clause 2.5 did not then require the blended garnet to be branded.  The branding obligation only applied to 100% Product.  That the Supply Agreement allowed the sale by Barton of blended garnet demonstrated that cl 2.5 did not aim to maximise the extent to which garnet purchased under the Supply Agreement was on-sold in branded, packaged, 100% Product form.  Rather, its purpose was only to ensure that when packaged 100% GMA Product was sold to customers it was branded with the GMA name and logo. 

91                  The respondent contested the applicants’ submission that the primary judge had impermissibly used the surrounding circumstances to impose a condition on the operation of cl 2.5.  Rather, the primary judge used the surrounding circumstances to define the contractual obligation.

92                  A number of these submissions were clarified and extended by a note handed up by counsel for the respondent in the course of oral submissions.  Whilst generally the respondent said that the proper approach to interpretation was to ascertain the commercial intention of the Supply Agreement from the surrounding circumstances, the note raised a textual argument to justify the same construction. 

93                  The note observed that cl 2.5 used the verb “to brand” and that verb determined the nature of the obligation imposed by the clause.  Significantly, the clause did not use the verb “to package”.

94                  The note then stated that the Supply Agreement required garnet to be branded but, as particles of garnet could not be branded, and only packaging could be branded, the obligation was therefore intended to apply to packaged garnet.

95                  The note criticised the appellants’ reliance on the first word of the clause, namely, “All” in relation to the subject garnet, and argued that the construction of the clause had to take account not only of a single word but of the clause as a whole.  “All” was used in the clause whose verb was “to brand”. 

96                  The note contested the appellants’ reliance on Secured Income.  That reliance, it was said, was erroneous because the scope of any implied obligation depended on an intention and cl 2.5 did not use any verb which conveyed any intention to compel packaging or to prohibit selling in bulk. 

97                  The note then left the textual matter and referred to the considerations and circumstances which the respondent argued demonstrated the intention and purpose of cl 2.5.  Those factors were:

(a)           Garnet is an industrial product which, of its nature, is capable of being handled, transported, stored and sold in bulk.

(b)          As regards concessionally priced garnet, buying in bulk is significantly cheaper than buying in packaging.

(c)           Even the prime customer price will vary according to whether garnet is bought in bulk or in packaging: cl 4.1.

(d)          Clause 2.5 applies regardless of whether garnet is bought at concessional prices or at prime customer prices.

(e)           BMC was known to be the sole Barton group distributor of garnet in North America.

(f)            Prior to the Supply Agreement, packaged GMA garnet had been co-branded GMA and with the BMC branding (as the words in parenthesis recognise) and there had been no requirement that garnet bought in bulk had to be packaged before being on-sold.

(g)           Over a 12 year period, it is inherently likely that the industrial garnet market would evolve, rather than remain static.

(h)           A prohibition on bulk sales by Barton to BMC would impose a cost penalty, but would not ensure that 100% GMA garnet would either be on-sold in packaging or if on-sold in packaging, would still have GMA’s branding on it.  The appellants’ incentive argument is artificial.  Barton could buy in 2 tonne bags, sell to BMC, and BMC could immediately remove the garnet from the bags.  Thus, if cl 2.5 is not externally focused (ie. on presentation of Product to customers), it serves no purpose.

The respondent argued that none of these factors supported an intention or purpose to compel packaging and prohibit bulk loose sales by Barton to BMC.  Rather, it demonstrated that the branding obligation applied when the garnet was sold in packaged 100% Product form.

Consideration

98                  The starting point for the consideration of the meaning of cl 2.5 is the language of the clause.  The subject of the branding obligation is expressed as all garnet purchased under the Supply Agreement.  That subject matter is then confined by two conditions.  First, the garnet must be distributed or sold by Barton, and second, it must be 100% Product.  Beyond those two limitations, the garnet which is subject to branding is not otherwise limited. 

99                  Aspects of the language used in the clause were relied upon by the respondent.  The respondent argued that the obligation was expressed as an obligation to brand.  It was not expressed as an obligation to package.  As loose garnet is a mass of particles, loose garnet cannot be branded.  Thus, it was said, the obligation to brand must be limited to packaged garnet.

100               This approach is to read into the language of the clause a limitation in its application which was not expressed.  The obligation to brand was not expressed as an obligation to brand packaged garnet, but rather it was expressed as an obligation which was to apply to all garnet as described. 

101               Further, it is implicit in the obligation to brand assumed by Barton that Barton was also obliged to do all things necessary to satisfy the obligation.  As Griffith CJ said in Butt v M’Donald (1896) 7 QLJ 68, at 70-71:

It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract.

102               See also: Secured Income at [25]. Thus, the obligation on Barton to brand loose garnet carried with it the necessary implicit obligation to package the loose garnet in order that it could be branded.  It follows that the primary judge erred in holding that if Barton was obliged to package loose garnet before it sold or distributed the garnet that obligation would have been expressly stated.  On the approach we prefer, no such express provision was required. 

103               The respondent also relied on the words in parenthesis relating to co-branding as an indication that the branding obligation applied only to packaged garnet.  However, those words related to packaged garnet only for the purposes of authorising the addition of Barton’s brand to the brand of GMA, and of specifying the relative sizes of the co-brands.  The words in parenthesisdo not assist the respondent’s argument that the branding obligation applied only to packaged garnet.  The authority to co-brand and the requirements as to the prominence of the co-brands apply equally to packaged garnet or to loose bulk garnet which was later packaged. 

104               The respondent then referred to the wider context of the Supply Agreement as a whole beyond the language of cl 2.5 alone.  It relied on the provisions which allowed Barton to order bulk loose garnet from GMA as well as packaged garnet.  The respondent said that by giving Barton the option of buying in bulk the Supply Agreement contemplated that some garnet would leave GMA unbranded.  However, this provision said nothing about the obligation of Barton to brand 100% Product upon any sale or distribution by it. 

105               Then, it may be accepted that the Supply Agreement did not prevent Barton from blending GMA garnet with other garnet and, as a result, Barton had no obligation to brand garnet which it sold or distributed in a blended form.  It does not, however, follow from this circumstance that Barton had no obligation to brand when it sold or distributed loose bulk garnet as 100% Product.  The argument only needs to be stated to disclose its flaw.  The argument starts with the proposition that as Barton may mix the 100% Product with other garnet and sell it unbranded, GMA was not concerned to ensure that all the garnet supplied to Barton was on-sold in branded form.  The argument then says that GMA was similarly unconcerned if loose bulk garnet was sold in unbranded form.  But, whilst blended garnet was by definition not 100% Product, the loose bulk garnet under discussion was 100% Product.  GMA had commercial reasons to ensure that 100% Product was labelled to identify its source.  Those reasons did not apply to blended garnet.  There is no reason to draw a parallel between the way cl 2.5 operates in respect of blended garnet and the way it operates in respect of loose bulk 100% garnet. 

106               In construing the Supply Agreement the Court must consider what reasonable people in the position of the contracting parties would have understood by the relevant clauses considering not only their text but also the surrounding circumstances known to the parties and the purpose and object of the transaction. 

107               The respondent sought to identify the relevant circumstances in the list of factors set out at [97] of these reasons.  Apart from (f) such of the circumstances said to be relevant to the packaging issue do not particularly favour the construction proposed by the respondent.  The proposition in (f) relates to the way GMA garnet was marketed by Barton companies prior to the making of the Supply Agreement.  What is relevant to the construction of the Supply Agreement is the mutual understanding of the parties on the issue.  The primary judge found that: 

136      …the applicants did not know, before the GSA, that BMC or any related entity sold or distributed loose bulk GMA garnet to any of its customers.  Rather, it believed all GMA garnet was sold or distributed to BMC customers in packaging.  (I also find in passing, that BMC did in fact distribute or sell loose bulk garnet to some of its customers in the period before the GSA.)

There was thus no mutual understanding on the question of whether loose bulk garnet had to be branded or not. 

108               The primary judge said that in the construction of a commercial agreement the business objectives of the agreement should be taken into account and the relevant provisions given a business commonsense construction.  He went on to say that the expression “business commonsense” may be problematic because it expresses a conclusion on which minds may differ and in respect of which an imputed consensus may be impossible.  Nonetheless, the primary basis on which he found in favour of the respondent’s construction on the packaging issue was that it accorded with business commonsense.  

109               The primary judge was correct to observe that business commonsense is a consideration which has limitations as a touchstone for the construction of commercial agreements.  Despite his reservations, the primary judge placed some importance on this factor to support the construction of clause 2.5 which he adopted.  To the extent that business commonsense is a useful guide for interpretation, the construction which we favour, namely, that clause 2.5 requires loose garnet to be packaged and branded when sold or distributed as 100% Product by Barton, satisfies the test of business commonsense.  As previously explained, in practical terms, the requirement that Barton brand 100% Product would increase the goodwill of GMA as a supplier of 100% Product.  Unless the garnet supplied by GMA was branded, customers would not know that GMA was the source of the 100% Product.  Clearly therefore the requirement to package and brand loose garnet supplied to Barton had a commercial advantage to GMA.  On the other hand, Barton could utilise the 100% Product without packaging or branding the garnet provided it sold or distributed the garnet in a blended form.  That gave Barton a degree of flexibility in the extent to which it was required to comply with the branding obligation.  In other words, the Supply Agreement gave Barton a significant degree of control over how much of the GMA garnet needed to be branded.  This was the agreement which the parties made.  It does not stand out as commercially unrealistic.  Rather, it suggests a commercial accommodation between the parties involving trade-offs and compromises which characterises such trading relationships.

Conclusions relating to the Construction of cl 2.5

110               For the reasons just explained, properly construed cl 2.5 applied to both internal sales and sales of loose bulk garnet made by GMA to Barton.  The appellants sought a declaration reflecting this construction in the following terms:

…properly construed, the Garnet Supply Agreement executed by the parties on or about 31 March 2005 (the GSA) relevantly provides that:

(a) by clause 2.5, all garnet which is purchased under the GSA (in packaged or loose bulk form) and distributed or sold by the respondent to any person (including related entities), and which is 100% Product, must be branded by the respondent with the first-named appellant’s name and logo;

This declaration should be made.

111               Further, it follows from these reasons that the rectification order made by the primary judge was not justified and should be set aside.

112               Then, the appellants sought a declaration:

…that each notice of breach of the GSA dated 20 December 2007, 13 May 2008 and 30 July 2008 was lawfully issued by the first-named appellant.

113               Each of the deliveries referred to in the notices of breach was a supply of loose bulk garnet made by GMA to Barton.  In each case, Barton on-sold the loose garnet to BMC without branding.  On the proper construction of cl 2.5 these sales made by Barton were made in breach of cl 2.5.  However, the declaration sought goes beyond an application of the construction of cl 2.5 by introducing an element of the overall lawfulness of the issue of the notice.  The scope of the argument before the Court does not justify a declaration of that width.  It is sufficient for these reasons to record that the conduct referred to in each of the notices amounted to a breach of cl 2.5.  Indeed, in oral submissions the only relief sought by the appellants flowing from the loose bulk garnet issue was the making of the declaration referred to in [110] of these reasons.

Construction of clause 4.2

114               Next we address the issues of construction of cl 4.2 of the Supply Agreement raised in the grounds of appeal.

Reasoning of the Primary Judge

115               It will be recalled that cl 4.2 of the Supply Agreement provided:

The parties acknowledge that the Seller wishes to promote distribution of Product within the United State of America and Canada and, for that purpose, the Seller shall allow to the Buyer a concessional rate for Product as provided in this Agreement.  Accordingly, if the territory into which the Buyer ships and discharges Product under clause 2.1 after taking delivery of the same is the United States of America or Canada, the price for Product to be sold pursuant to orders to be placed by the Buyer pursuant to clause 2.1 shall be: [the discounted price] [emphasis added].

An acknowledgment in the same terms appeared in cl 2.3(b) of the Principal Agreement.

116               The appellants argued before the primary judge that these provisions obliged Barton as a matter of contract to cooperate in and support the promotion of all garnet purchased from GMA at the discounted price.  This meant that Barton was obliged to ensure that the discounted product was branded in accordance with clause 2.5 and hence identifiable as GMA garnet. 

117               The primary judge rejected the appellants’ interpretation of cl 4.2.  His starting point was the language of cl 4.2 and cl 2.3(b).  The language of “acknowledge” and of “wishes” was not the ordinary language of legally enforceable rights and obligations.  The primary judge considered that if the parties intended that Barton was to be bound to develop the North American market the language of cl 4.2 would have been different, particularly “where two highly distrustful groups were negotiating such a significant Supply Agreement that was part of the consideration of the overall settlement of their bitter dispute” [542].

118               The primary judge explained that the terms of cl 4.2 did not reveal how the wish of GMA to promote distribution of product in North America was to be realised.  He observed that in order to obtain the concessional price Barton had to ship and discharge the product in North America.  There was a commercial incentive for Barton to sell the product in North America in order to avoid further transport costs.  Then, to the extent that cl 2.5 operated to require the product to be branded with the GMA name and logo, the required discharge in North America would, in practice, operate to promote distribution of the product in North America.  However, the likely commercial operation of the clause did not mean that Barton had assumed a contractual obligation to develop the North American market for the distribution or sale of GMA garnet. 

119               The primary judge gave detailed attention to the course of negotiations between the parties.  He examined the correspondence and discussion which occurred in December 2004 and January and February 2005 and he carefully and thoroughly analysed those aspects of the negotiations which were relevant to the construction of the terms of the Supply Agreement. 

120               In an initial discussion paper Mr Cole, the solicitor for the Barton interests, on 10 December 2004 proposed: 

Barton is an independent agent and not a GIRL/GMA "distributor".  Therefore there are no performance KPI's applicable to Barton's sale of product.

121               In response, Mr Williams, the solicitor for GMA, suggested in a letter dated 10 January 2005 that BMC be appointed exclusive distributor of GMA garnet in the USA.  By 10 February 2005, GMA recognised and accepted that Barton wanted an open supply agreement so that distribution rights would not be tied to performance obligations.  The drafts which followed the written and oral exchanges reflected that common approach.  For instance, a draft prepared by Mr Williams linked the entitlement to the concessional price to “distribution” of product in North America.  Mr Cole altered the word “distributes” in cl 4.2 to read “ships and delivers”.  Mr Williams was instructed by Mr Ketelsen, director of GMA Garnet, to change “delivers” to “discharges” in order to avoid Barton simply sailing a ship into port in North America with the garnet and sailing away again without unloading.  The primary judge also used this incident as an example of the lack of trust between the parties. 

122               Competition considerations also explained the form of cl 4.2.  When the first sentence of cl 4.2 was included in the draft by Mr Williams, Mr Cole asked him to explain the purpose.  Mr Williams said it related to concerns that GIRL had with justifying the discount to which Barton would be entitled under the Supply Agreement.  The parties obtained legal advice about the competition law implications of the transaction.  The primary judge explained the impact of this advice on the negotiations and ultimate form of the Supply Agreement at [109] as follows:

109                      Having regard to the ACCC investigation, competition law issues also loomed large for the parties when the Agreements were struck.  One essential term of the Principal Agreement insisted on by GIRL from the outset of negotiations was that the Agreement had to pass ACCC scrutiny.  The parties were very aware, and took advice during the negotiations of the Principal Agreement and the GSA to ensure there would be no settlement under which:

            (a)        The market for distribution and sale of garnet was "carved up" by the                   parties (for example, by way of a provision which could preclude                   Barton International from selling in Australia), which would                          contravene s 45(2) and s 4D of the Trade Practices Act 1974;

            (b)        GMA Garnet's monopoly position in Australia was used to curtail                         competition in Australia, which might infringe s 46 of the Trade                                 Practices Act 1974; nor

            (c)        Barton International was offered a discount for garnet on terms that                     prevented it from distributing the garnet in a particular place, if the                  purpose or effect of the arrangement was to lessen the competition                 substantially in Australia, which might contravene s 47(2)(c) and                   s 42(f)(ii), s 47(10) of the Trade Practices Act 1974.  For example,                    an agreement which positively required discounted product only to                be sold in North America, which would have the effect of preventing                      Barton International from selling product in Australia in competition              with GIRL/GMA Garnet, might well have offended s 47 of the Trade                         Practices Act 1974, given the selling position in the Australian garnet                  market.

123               The primary judge concluded that the debate between the parties concerning whether the Supply Agreement should be an open supply agreement or a distribution agreement, and the competition issues, supported the view that cl 4.2 did not impose a contractual obligation on Barton to promote distribution of product in North America.  The primary judge said at [548]:

What is very clear on the evidence, as outlined above, is that the parties understood Barton International and BMC were adamant that they would not undertake any form of distributorship for GMA garnet in North America or elsewhere but simply wanted a steady supply of GMA garnet for their own purposes.  At the same time the parties were focussed on ensuring the GSA did not create any competition law problems.  In the end, the only specific obligation that touches on the question of distribution of product - or marketing - are those to be drawn from cl 2.5, which relates simply to branding of relevant Product.   In my view, no legal obligations were imposed on Barton International to develop a market into which discounted garnet was sold in North America, as the applicants contend.  It follows that, in my view, there is also no term of the GSA to the effect that Barton International (or BMC) must not do anything to diminish the reputation of GMA Garnet or its distribution.

124               The primary judge also considered that this conclusion was supported by the findings made concerning the possible blending of GMA garnet supplied under the Supply Agreement.  As the findings made by the primary judge on this issue are challenged on appeal it is necessary to explain the approach taken by him.

The findings concerning blending

125               In a document entitled Principles of Proposed Settlement GIRL/Barton proffered by GIRL on 11 February 2005 a term was proposed which was the forerunner of cl 2.5 as follows:

Barton must label all product purchased from GMA as GMA product and will be granted a non‑exclusive licence to use GMA product branding for that purpose.

126               On 11 February 2005 Mr Williams had a number of separate phone conversations with Mr Aaron Williams, Group General Manager within the GMA group, and Mr Ketelsen, and also with Mr Cole. Mr Williams made a note of the conversations.  One of the notes recorded an issue raised by Mr Cole as follows:

Issue: do not wish to be compelled to label as GMA – may be blending.

127               Mr Williams received instructions from Mr Ketelsen which was noted in the following terms:

If the product is labelled GMA, it must be 100% GMA product.  The product cannot be labelled as GMA product otherwise.

128               On 16 February 2005, Mr Williams sent a further draft to Mr Cole in which cl 2.5 appeared thus:

All garnet distributed or sold by the Buyer which is 100% Product must be branded with the GMA Garnet name and logo and the Seller grants to the Buyer a non exclusive licence to use the GMA Garnet name and logo on Product for this purpose.  The Buyer must not use the GMA Garnet name or logo on, or in connection with, the distribution or sale of any garnet which is not 100% Product.

129               Mr Williams had no recollection of his conversation with Mr Cole on the issue of blending apart from what appeared in his note.  Mr Cole did not make a file note of his conversation but had a recollection of it.  The primary judge set out the following passage from the cross examination of Mr Cole:

[Mr Cole]: My concern was with intentional blending, and I recall having a conversation with David Williams as to Barton practice or industry – what I understood industry practice, dealing with garnet, some of the properties of garnet, some of its niche applications.  I don't recall it specifically at that particular conversation.

[Mr Thomson]: Well I suggest that you actually – if that was your concern – didn't say to him express words to the effect that BII or Barton wish to blend, intentionally, some of that product that you send across, and if that happens, they don't want to label it 100 per cent GMA garnet? --- I wasn't seeking permission on behalf of Barton for that purpose.  I was outlining a practice which became an issue because of a trademarking provision sought to be included in the document.

Certainly.  But what I am suggesting to you is that the words you used, if you did have that concern yourself, didn't convey to them, to Mr Williams, in any way, shape or form, that what Barton was proposing was to blend 100 per cent product intentionally and thereby not be subject to a branding obligation? --- The communication wasn't concerning Barton's intent.  It was concerning Barton's practice and industry practice, as I understood it, having regard to niche applications of the product, and therefore the risk that may arise in very long-term contract that product could become blended, and therefore potential for a breach which would trigger a potential termination of the supply contract.

Well, tell me what practice you outlined to Mr Williams?  --- The practice – I suppose I – lawyers take pride in understanding their client's business.  I did understand, from prior instructions that I had with Robert Brand, and from my dealings with my client over a period of time, and from discussions I’d had with Jim Nash in the past, that some of the different qualities of garnet - alluvial garnet compared with hard rock garnet, some being smoother ridged, some being sharper ridged, different - the size of the particles, and special applications that they have from time to time to meet particular requirements.

You’re telling me about your understanding at the moment? --- Yes, and I communicated that issue to David Williams.

What issue? --- The issue that in this industry, that there is blending of garnet, intentional blending, for niche applications from time to time, and therefore we did not wish to have a provision that obliged it to be branded GMA garnet on every piece of garnet that came through.

Is it not the case that you told him about - on your version, you told him about the industry practice, but he - well, you did not indicate that the use of the GMA garnet was intended for those niche applications and that it would be blended in the course of those niche applications? --- I didn’t have instructions or an understanding as to exactly what Barton was going to do with this particular garnet, no [266].

130               From this evidence the primary judge found as follows:

278                    It seems reasonably plain, in these circumstances, that the parties through this process of negotiations between Mr Cole and Mr David Williams shared a common understanding that there may indeed be some intentional blending of GMA Garnet product by Barton International or entities associated with it, including of GMA garnet acquired under the terms of the proposed GSA.  Mr Cole raised the prospect and Mr Williams ultimately accepted it was so, or assumed it was so for the purposes of drafting cl 2.5.  Clause 2.5 of the GSA was ultimately negotiated and agreed upon in light of that common understanding or acceptance.

282                     Be that as it may, the Court has little hesitation in concluding that cl 2.5 was drafted on the understanding or acceptance by GIRL that, however few and whatever the occasions might be, blending might possibly occur intentionally and that Barton International would not wish to be subject to an obligation that required it to brand all GMA garnet purchased by Barton International under the GSA.

131               The primary judge relied on his findings concerning the blending issue to support his view that the Supply Agreement did not oblige Barton to promote distribution in North America.  He had previously found that the Supply Agreement was drafted on the basis of a common understanding that there may be some intentional blending of garnet supplied by GMA under the Supply Agreement.  He held at [549]:

The substance and effect of the marketing terms of the GSA pleaded and advanced by the applicants are inconsistent with this understanding.

132               The primary judge also rejected the appellants’ contention that Barton owed a duty to cooperate in accordance with the principles explained in Secured Income.  The primary judge held that an implied obligation to cooperate arises by reference to a specific express contractual obligation.  In this case the underlying contractual obligation had not been established. 

The Appellants’ Submissions

133               Paragraph 2(a) and (b) of the Grounds of Appeal identify the basis of the attack on the primary judge’s construction of cl 4.2 as follows:

(a)               The trial judge erred in law by failing to construe the GSA as imposing a duty, inferred or implied as a matter of law, upon the respondent to do all things reasonably necessary to perform its obligations under the GSA in such a manner as to provide an expressly agreed contractual benefit to the first-named appellant.

(b)               The trial judge should have held that the GSA relevantly provides that the respondent shall do all things reasonably necessary to brand 100% Product in accordance with clause 2.5 of the GSA, which the respondent has ordered at the discounted price specified in clause 4.2 of the GSA and has shipped and discharged into the United States of America and Canada, in order for the first-named appellant to achieve its purpose of promoting distribution of Product within that territory.

134               Based on their construction of cl 4.2 in combination with cl 2.5, the appellants argued that the primary judge should have held the respondent liable for damages amounting to either $9,353,123.00 or $4,869,433.00.

135               The appellants calculated that the discount provided by the concessional price amounted to 39 – 50% of the prices offered to prime customers.  The purpose of the discount was stated in the first sentence of cl 4.2 and its importance was emphasised by the duplication of the acknowledgement in cl 2.3(b) of the Principal Agreement. 

136               The question raised by the appeal grounds is whether all Barton was contractually obliged to do to achieve GMA’s purpose to promote distribution of product in North America was to ship and discharge discounted 100% Product in North America, or whether Barton was obliged to brand such 100% Product in accordance with cl 2.5, and was not permitted to blend discounted product with other garnet. 

137               The purpose of cl 4.2, it was argued, was to provide Barton with a discount so that the distribution of 100% Product would be promoted in North America.  This promotion could only occur if the garnet was 100% GMA garnet and was not blended with other garnet.  Otherwise, the distribution of GMA garnet would not be promoted.  Further, in order to promote the distribution of that garnet, it must be identified as such.  Otherwise the purchaser would not be able to order the product again and the distribution would not be promoted.

138               Then, the appellants submitted that a contracting party is obliged to do all things necessary to give the other party the benefit of the contract: Butt v M’Donald at 70–71, approved in Secured Income at [26].  The appellants accepted that this implied obligation could not extend beyond the contractual requirements imposed on the parties.  It could not be used to expand the contractual obligations.  But, contrary to the view of the primary judge, in this case the first sentence of cl 4.2 amounted to an express agreement of a contractual purpose.  That express agreement governs the construction of the contractual obligation.  There is then a duty to do all things necessary to achieve the contractual purpose.  The parties are not free to ignore the contractually agreed purpose.  The case falls within the category described by Mason CJ in Secured Income at [27] as follows:

… the question arises whether the contract imposes a duty to co-operate on the first party or whether it leaves him at liberty to decide for himself whether the acts shall be done, even if the consequence of his decision is to disentitle the other party to a benefit.  In such a case, the correct interpretation of the contract depends, as it seems to me, not so much on the application of the general rule of construction as on the intention of the parties as manifested by the contract itself.

139               The parties in this case expressed their intention by agreeing and stating the purpose for the discount.  To achieve that purpose 100% Product had to be branded.  Properly construed cl 4.2 imposed a duty to do what was necessary to achieve the promotion of distribution of 100% Product, namely, shipping, discharging, and branding GMA garnet in North America.  The appellants accepted that cl 4.2 did not impose any promotional outcomes on the respondent.  However, that did not mean that the first sentence of cl 4.2 had no operation.  It gave GMA the limited assistance in promotion and distribution of 100% Product which arose from the branding of that product. 

140               The appellants then addressed two arguments which they recognised would stand in the way of the implied duty to cooperate to promote distribution of discounted 100% Product in North America. 

141               The first obstacle was that the express duty in cl 4.2 was limited to shipping and discharging the garnet in North America.  In response the appellants contended that shipping and discharging in North America would not achieve the agreed purpose of promoting distribution.  The need to brand the product was a necessary further requirement to effectuate that express purpose.  The purpose should not be limited to accommodate the express obligation to ship and discharge alone because that would undermine the effect of the agreed purpose to promote distribution in North America.

142               Second, the appellants accepted that they could not succeed in their construction of cl 4.2 if Barton was permitted under the terms of the Supply Agreement to blend discounted product.  The appellants acknowledged that there was an implicit permission in cl 2.5 to blend product purchased under the Supply Agreement, but argued that the implied permission did not extend to discounted product.  This was because the permission to blend was implied in cl 2.5 whilst the purpose stated in cl 4.2 was express.  The express purpose could not be defeated by an implied permission.  Thus, the implied permission to blend was limited at least to non-discounted garnet.  If Barton was entitled to blend discounted product GMA would be denied the whole of the benefit for which it had given the discount. 

143               Further, the permission to blend was limited as a result of the common understanding of the parties when the Supply Agreement was concluded.  At that time the Barton companies had blended small amounts of alluvial garnet with hard rock garnet for use in niche applications.  The commonly known background did not suggest that the permission to blend would be extensive.  Further, the limited amount of blending which had been undertaken explained why there was no express statement in the Supply Agreement of the limits to permissible blending.  Similarly, the reason the Supply Agreement did not expressly state that discounted product had to be branded was the common understanding at the time the Supply Agreement was made that BMC sold bagged product.  GMA did not know that BMC sold loose garnet which might not be branded.

144               The appellants took issue with the respondent’s explanation that the expression of purpose in cl 4.2 was designed to assure the ACCC that there was no anti-competitive intention in allowing for a discounted price.  They said that this alleged reason for the statement of purpose amounted to an allegation that the statement was a sham and hence improper, was not put to the appellants’ solicitor, Mr David Williams, but the contrary was put in cross examination of Mr Cole.  In any event, the appellants argued that the statement of purpose would be superfluous because an obligation to ship and discharge in North America would not be likely to contravene the Trade Practices Act. 

The Respondent’s Submissions

145               The respondent argued that the plain meaning of the language of cl 4.2 was that the only preconditions to the entitlement to concessional prices were shipping to and discharge of the garnet in North America. 

146               The stated purpose for GMA offering the concessional prices was the purpose of GMA alone.  Barton acknowledged the purpose of GMA.  The purpose was not a mutual purpose.  It was not the purpose of Barton. 

147               The respondent argued that the primary judge made findings of fact about the purpose of clause 4.2 and made findings about the reasons why the purpose was expressed in the way it was.  Those findings were not challenged on appeal.

148               One purpose found by the primary judge was the purpose of avoiding any competition law problems.  The primary judge found:

·         that Barton International and GMA Garnet commonly understood that there were advantages in the proposed GSA being an open product supply agreement for the reason that it would limit the risk of the GSA being regarded adversely by competition regulators in Australia (and possibly in North America) [132];

149               The respondent said that the parties were concerned that if Barton was bound to distribute product in North America, the ACCC might view the transaction as intended to preclude Barton from selling garnet in the Australian market where GMA held a monopoly position.  The primary judge traced the drafting history of cl 4.2 which demonstrated the intention of Barton that it would not undertake any distribution obligations.  For instance, an early draft included an obligation in cl 4.2 to “distribute” product.  This was replaced with the ultimate text obliging Barton only to ship and discharge the garnet.  The parties were united in rejecting an obligation on Barton to distribute product in North America.  Indeed, the appellants’ own pleading alleged that the parties wanted an open supply agreement to address any competition law concerns. 

150               A further substantial purpose of the concessional price as found by the primary judge was to provide a significant part of the consideration for the sale by the Barton companies of their interests in the mining operation.  The Supply Agreement was not a stand alone supply transaction with the purpose of transacting a sale and purchase of garnet.  Rather it was an integral part of an entire transaction which had the purpose of settling the dispute between partners by providing Barton with consideration for the Barton interests in the mining operation which were transferred to the GMA interests.  The terms of cl 4.2 were drawn to protect this important part of the consideration received by Barton for the Barton interests in the mining operation.  The obligations imposed on Barton were limited in order to minimise the circumstances which would expose Barton to the risk of termination and the consequential loss of a significant part of the agreed consideration.

151               These reasons, rather than the unilateral express purpose of GMA, explained the limited obligations undertaken by Barton and demonstrated that cl 4.2 was not intended to create any obligation on Barton to promote distribution of garnet. 

152               The respondent then argued against any implied duty to cooperate as the basis for an obligation on Barton to promote the distribution of product in North America.  Once it was recognised that there was no contractual obligation on Barton to promote distribution of garnet in North America, there was no place for the appellants’ reliance on an implied duty to cooperate to ensure that the contractual benefit was realised.  In the absence of any contractual obligation to promote distribution of garnet, the implied duty to cooperate recognised in Secured Income did not arise.

153               Finally, the respondent relied on the primary judge’s finding of a common intention that there could be intentional blending of GMA garnet with other garnet.  The Supply Agreement should be construed in conformity with this common understanding.  The capacity of Barton to blend told against a construction which bound Barton to promote the distribution of GMA in North America.  The respondent adopted the assessment of the evidence of the common understanding made by the primary judge, and argued that there was no proper basis for the narrower finding suggested by the appellants that cl 2.5 permitted blending but to a trivial degree in niche applications. 

Consideration

154               We agree with the primary judge that cl 4.2 contains no contractual obligation on Barton to promote the distribution of GMA garnet in North America.

155               The language of the first sentence of the clause speaks in terms of aspiration rather than in terms of legal obligation. Thus, there is a joint acknowledgement directed to a wish to promote garnet in North America.  The wish is that of GMA, that is to say, of one of the parties alone.  The acknowledgment by Barton of GMA’s wish did not in terms, or in substance, identify any obligation on Barton to take steps to give effect to GMA’s aspiration.

156               Whilst the language of the clause leaves no real doubt about the meaning, there are surrounding circumstances and common understandings which support the plain meaning of the text. 

157               A particularly cogent factor supporting this construction is the concern which the primary judge found the parties had about the competition law implications on the terms of the transaction. 

158               There was a particular sensitivity to competition law issues because one of the reasons for the acrimony which had developed between the parties arose from the complaint made by GMA to the ACCC about the Perth Agreement by which the parties had divided up Australia into exclusive trading territories.  The resulting ACCC investigation led to proceedings in the Court against Barton which were resolved by consent when Barton agreed, inter alia, to pay substantial civil penalties. 

159               The Principal Agreement expressly made the non-objection or approval by the ACCC a condition precedent to the operation of the Supply Agreement. 

160               There was evidence before the primary judge of legal advice obtained by both sides as to the competition law issues which might arise following the proposed settlement.  GMA was advised that it would contravene ss 45 or 46 of the Trade Practices Act if it had the purpose of hindering or preventing competition in Australia.  The primary judge summarised the concerns in the passage extracted in [122] of these reasons.

161               The primary judge found that the parties commonly understood that an open supply agreement would limit the risk of the agreement being adversely regarded by the competition regulators. 

162               Furthermore, Barton in the course of negotiations insisted that it would not undertake any obligation to distribute the product.  It wanted the right to obtain supply of garnet from GMA but would not promise to take up any particular amount or meet any performance criteria.  It rejected an early draft of cl 4.2 of the Supply Agreement which required it to “distribute” product, and replaced that wording with a promise to “ship and discharge” product.  These surrounding circumstances and common understandings found by the primary judge were not contested by the appellant.  They underscore the clear meaning of the text of cl 4.2 and speak against Barton undertaking any legal obligation to promote the distribution of GMA garnet. 

163               A further factor strongly supportive of the construction that cl 4.2 did not impose a legal obligation on Barton to promote the distribution of GMA garnet relates to the issue of blending.  The appellants rightly accepted that their construction could not succeed if Barton was permitted to blend product.  The capacity of Barton to blend product and then sell or distribute free of the obligation to brand imposed by cl 2.5 would be inconsistent with an obligation to promote distribution of the discounted product in North America.

164               The appellants contended that the only relevant common understanding at the time the parties entered the Supply Agreement was that in the past there had been exceptional circumstances for niche applications involving hard rock garnet where alluvial garnet had been blended with hard rock garnet.  The appellants said that this common understanding did not necessarily relate to GMA and only concerned blending of small amounts.  It did not justify the far wider conclusion reached by the primary judge that Barton could engage in wholesale blending. 

165               The criticism of the primary judge’s finding does not take account of all the evidence on the subject and the full scope of the reasoning of the primary judge.  Rather, it focuses on selected parts of the passage from the cross examination of Mr Cole extracted at [129].

166               As explained at [119] – [124] of these reasons the primary judge analysed at length ([226] – [289]) the evidence of Mr David Williams, Mr Ketelsen, and Mr Cole on the parties common understanding or concurrence concerning intentional blending and marketing.  An important reason for the primary judge’s conclusion that cl 2.5 did not prevent blending was his interpretation of the course of negotiations and the sequence of drafting of the branding provision which became cl 2.5.  The Principles of the Proposed Settlement GIRL/Barton document of 11 February 2005 prepared by Mr Williams required Barton to label all garnet.  This proposal was followed by several conversations in which Mr Cole rejected such a wide obligation for the reason that Barton may engage in blending of garnet.  The next draft provided by Mr Williams on 16 February 2005 limited the branding obligation in the terms of the final version of cl 2.5.  The primary judge concluded at [278]:

It seems reasonably plain, in these circumstances, that the parties through this process of negotiations between Mr Cole and Mr David Williams shared a common understanding that there may indeed be some intentional blending of GMA Garnet product by Barton International or entities associated with it, including of GMA garnet acquired under the terms of the proposed GSA.  Mr Cole raised the prospect and Mr Williams ultimately accepted it was so, or assumed it was so for the purposes of drafting cl 2.5.  Clause 2.5 of the GSA was ultimately negotiated and agreed upon in light of that common understanding or acceptance.

167               Thus, it was central to the primary judge’s conclusion that the 16 February 2005 draft was accepted following Mr Cole’s statement that there may be intentional blending.  In other words, the primary judge regarded it as significant that no attempt was made by GMA to limit the scope of blending which might occur. 

168               Further, the passage from the cross examination of Mr Cole does not link the past blending practices of Barton to any proposed future conduct.  Mr Cole was not addressing Barton’s possible conduct in the future except to say that there should be no restraint on blending.  In the course of that conversation he made reference to past practice but not to suggest that any future conduct of Barton would necessarily follow the same path.  Rather he sought to explain why any restraint on blending was unacceptable. 

169               Additionally, read as a whole the passage from the cross examination of Mr Cole does not, as the appellants would have it, speak in terms of a trivial amount of blending.  For instance, there is reference to blending for “special applications that they have from time to time to meet particular requirements”.  The emphasis is on the unusual nature of the requirement rather than on the size of the order.  It is quite open to read the passage as referring to substantial orders albeit of blended garnet for special purposes. 

170               To the limited extent that there may be debate about the overall effect of the evidence of Mr Williams, Mr Ketelsen and Mr Cole on the issue of blending, the primary judge enjoyed the advantage of assessing their evidence by seeing them in the witness box and in the context of the entirety of the evidence at trial.  This Court would be slow to interfere with the conclusion reached as a result of that advantage: Fox v Percy (2003) 214 CLR 118; [2003] HCA 22.  The appellants’ argument that the primary judge’s findings that cl 2.5 did not prohibit blending went wider than the evidence justified is not made out. 

171               Finally, there is no scope for the appellants’ submission that Barton was under a duty to cooperate to deliver the benefit of the Supply Agreement to GMA in accordance with the reasoning in Secured Income.  That implied duty only arises in aid of a right provided by the contract.  In this case that foundation is missing. 

Conclusion relating to the Construction of cl 4.2

172               The primary judge was correct to hold that cl 4.2 did not impose any legal obligation on Barton to promote the distribution of GMA product in North America.  Thus, Barton has not acted in breach of cl 4.2 by undertaking blending of the garnet supplied by GMA under the Supply Agreement.  In those circumstances it is not necessary for the Court to address the arguments concerning damages which might have arisen if there had been a breach of cl 4.2.

Relief and costs

173               It follows from these reasons that the appellants have established that the primary judge erred in his construction of cl 2.5.  The appellants are entitled to a declaration reflecting the proper construction of cl 2.5.  Further, a consequence of our view of the construction of cl 2.5 is that the rectification order made by the primary judge should be set aside. 

174               The appellants have failed to establish that the primary judge erred in his construction of cl 4.2.  Thus, the declaration concerning cl 4.2 sought by the appellants should not be made and no damages should be awarded.

Associate:

Dated:         4 May 2010

REASONS FOR JUDGMENT

BUCHANAN J:

The Appeal

175               This appeal principally concerns questions of contractual interpretation.  The factual findings of the trial judge, and his reasons, are detailed and thorough.  Although I have come to a different view about some aspects of the operation of the contractual terms in question no suggestion is available, or was made, that the trial judge did not deal comprehensively with the evidence and arguments of the parties.  As is common, the issues addressed on the appeal are more confined than those with which the trial judge was required to deal.  Any summary of those issues which follows is no substitute for his Honour’s detailed discussion of the overall circumstances.

176               I agree with the outcome of the appeal, and the orders, decided by North and Siopis JJ  However, I wish to emphasise some aspects of the principles to be applied to the question of contractual interpretation which arise for consideration.

Background

177               Garnet is a mineral which is most commonly used as an industrial abrasive.  The first appellant (“GMA”) is the operating and marketing company for the GMA Garnet mine near Geraldton in Western Australia.  The mine, its infrastructure and the garnet it produces are owned by the second appellant, which is the parent company of GMA, Garnet International Resources Pty Ltd (“GIRL”).

178               From early 2002 until 31 March 2005 GIRL and the respondent (“Barton”) were partners, joint owners of the mine and equal shareholders in GMA.  Garnet produced at the mine was produced for their joint benefit.  Commencing in 2003 they had a bitter disagreement.  Litigation ensued and has since been a recurring feature of their strained relationship.  After protracted negotiations between respective legal advisers only (the officers of the two companies being unwilling to meet), agreement was reached to dissolve the partnership.  Part of the settlement concerned the right of Barton to purchase garnet from GMA for 12 years at concessional rates.  A series of instruments and agreements were executed to give effect to the settlement.  They took effect simultaneously.  At settlement GMA became the wholly owned subsidiary of GIRL, Barton was paid $18m, it transferred all its interest in the joint property to GIRL and it became entitled to supply under a garnet supply agreement (“the supply agreement”) to which GMA, Barton and GIRL were each parties.  It is the rights and obligations under the supply agreement which are at the heart of the present proceedings. 

Principles of construction

179               The trial judge was persuaded that it was necessary for him to examine in some detail the course of negotiations between the legal advisers in order to ascertain the commercial framework in which the contracts were made.  An examination of such matters from the point of view only of the parties risks a descent into an assessment of what was, or was likely to be, the subjective intentions of the parties rather than an examination of what the words of the contract would convey to a reasonable person knowing the commercial framework within which the contract was made.  The fact that, as in the present case, contractual rights and obligations are commonly assignable to third parties who were not involved in negotiations makes it imperative that the task of construction remains based on an objective view of the contractual stipulations.  In the present case, there was every reason to think that the parties intended that the settlement, and their ongoing obligations towards each other, would be comprehensively stated in the documents which they executed to accomplish the settlement.  That conclusion is suggested by both the circumstances of the settlement, and the terms of the documents by which it was given effect. 

180               The approach which was taken by the parties in the present case appeared to me to be supported by an assumption that, in recent years, the High Court has softened the previously strict necessity for an objective examination of the terms of the contract and has given its endorsement to the idea that an examination of the “surrounding circumstances” in which a contract was made now justifies acting on conclusions about the subjective intentions or desires of one party or of all parties.  In my view, there is no reason to conclude that that has occurred.  In order to illustrate why that is so it is necessary to make reference to the authorities.

181               In Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 (“Secured Income”) Mason J said (at 606):

The respondent also sought to rely on the oral testimony given by officers of the appellant and the respondent as to what was said and done during the course of negotiations leading up to the making of the contract, with a view to demonstrating that the parties had "commercial" leases in mind. This was said to be evidence of surrounding circumstances to which recourse could be had in interpreting the contract. In truth the evidence is not evidence of surrounding circumstances; it is evidence of the antecedent oral negotiations and expectations of the parties and as such it cannot be used for the purpose of construing the words of a written contract intended by the parties to comprehensively record the terms of the agreement which they have made. As Lord Wilberforce said in Prenn v Simmonds:

“ ... evidence of negotiations, or of the parties' intentions ... ought not to be received, and evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the ‘genesis’ and objectively the ‘aim’ of the transaction.

As to the circumstances, and the object of the parties, there is no controversy in the present case. The agreement itself, on its face, almost supplies enough, without the necessity to supplement it by outside evidence.”

The comment by his Lordship in the last paragraph which I have quoted has equal application to the present case where the provisions of the contract itself so amply demonstrate that the purpose of the parties was to provide against the possibility that the respondent's investment return on the purchase price was less than the figure stipulated.

(Citation omitted, emphasis added)

182               In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 there appears in the judgment of Mason J the passage which has been regarded as the seminal statement of the appropriate principle.  His Honour said (at p 352):

The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.

It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification.

Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.

(Emphasis added)

183               Later cases have given more encouragement to consideration of surrounding circumstances than Mason J’s observations suggest.  Those later cases accept that surrounding circumstances may be taken into account to understand the meaning of contractual terms whether or not ambiguity is present (see the explanation in Masterton Homes Pty Ltd v Palm Assets Pty Ltd (2009) 261 ALR 382 per Allsop P at [1]-[3]).

184               In Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289 the High Court majority joint judgment said (at [10]):

10        In Codelfa, Mason J (with whose judgment Stephen J and Wilson J agreed) referred to authorities which indicated that, even in respect of agreements under seal, it is appropriate to have regard to more than internal linguistic considerations and to consider the circumstances with reference to which the words in question were used and, from those circumstances, to discern the objective which the parties had in view.  In particular, an appreciation of the commercial purpose of a contract:

… presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.

Such statements exemplify the point made by Brennan J in his judgment in Codelfa:

The meaning of a written contract may be illuminated by evidence of facts to which the writing refers, for the symbols of language convey meaning according to the circumstances in which they are used.

(Citations omitted, emphasis added)

185               The majority judgment then made an important observation (at [39]) about the possibility that the House of Lords had, in decisions made since Codelfa, taken a broader view of what might be relevant and admissible “background” to a contract:

39        Two further matters should be noticed.  First, reference was made in argument to several decisions of the House of Lords, delivered since Codelfa but without reference to it.  Particular reference was made to passages in the speeches of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society and of Lord Bingham of Cornhill and Lord Hoffmann in Bank of Credit and Commerce International SA v Ali, in which the principles of contractual construction are discussed.  It is unnecessary to determine whether their Lordships there took a broader view of the admissible "background" than was taken in Codelfa or, if so, whether those views should be preferred to those of this Court.  Until that determination is made by this Court, other Australian courts, if they discern any inconsistency with Codelfa, should continue to follow Codelfa.

186               Later High Court decisions have expressly accepted Lord Hoffman’s statements in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (“West Bromwich Building Society”) at 912 as correctly stating the relevant principles (Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at [11]; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 (“Pacific Carriers”) (at [22])).  However, the necessity for an objective view of the terms of contracts has continued to be stressed by the High Court.

187               In Pacific Carriers the majority joint judgment said (at [22]):

22        … The case provides a good example of the reason why the meaning of commercial documents is determined objectively:  it was only the documents that spoke to Pacific.  The construction of the letters of indemnity is to be determined by what a reasonable person in the position of Pacific would have understood them to mean.  That requires consideration, not only of the text of the documents, but also the surrounding circumstances known to Pacific and BNP, and the purpose and object of the transaction.

(Citations omitted)

188               In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 (“Toll”) the same five justices said (at [40]):

40       This Court, in Pacific Carriers Ltd v BNP Paribas, has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.

(Citations omitted)

189               The observations in Toll at [40] were applied in International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 at [53].

190               Examination of the meaning of a contract involves a search for an objective meaning arising primarily from the language used in the contract.  The cases in which the meaning suggested by the language used in the contract will be subordinated to a presumed intent arising from surrounding circumstances remain the exception.  Any other approach would be destructive of contractual certainty and thus of contractual effectiveness.  Recently, in Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101, Lord Hoffman referred to his earlier remarks in West Bromwich Building Society pointing out (at [14]) that:

14     … in some cases the context and background drove a court to the conclusion that “something must have gone wrong with the language”.  In such a case, the law did not require a court to attribute to the parties an intention which a reasonable person would not have understood them to have had.

but continued (at [15]):

15     It clearly requires a strong case to persuade the court that something must have gone wrong with the language …

191               It does not remain accurate to suggest that evidence of surrounding circumstances is not admissible unless the terms of a contract are ambiguous or susceptible of more than one meaning even though no High Court decision has actually suggested that Mason J’s formulation was, or has become, inadequate.  However, I find it difficult to conceive a situation when Mason J’s formulation would not be adequate to deal with every practical instance where reference to surrounding circumstances was necessary to understand the written terms of a contract (rather than imply terms into one).  Whatever view may be taken about that issue, it remains true in my view that evidence of surrounding circumstances may not be used, as part of an exercise in construction of a contract, to contradict unambiguous contractual stipulations.  Such evidence may have a part to play in an application for rectification of the terms of a contract, but that is an exercise of a different character, appealing to different, equitable, principles.

192               Furthermore, although the terms of the contract must, to the extent necessary, be viewed against the background of surrounding circumstances, and with the purpose and object of the transaction in mind, that does not mean that examination of the rights and obligations stated by the contract commences with the background rather than the terms of the contract (Ryledar Pty Ltd t/as Volume Plus v Euphoric Pty Ltd (2007) 69 NSWLR 603 at [106] – [109]).  It is the words of the bargain, chosen by the parties to express their bargain, which are the lasting (and sometimes only) record of it.  It is therefore the language of the contract to which primary regard must be paid.  That is particularly important when, as here (and commonly), the benefits (and obligations) of the contract might be assigned to third parties who had no part in the negotiations, although they may be presumed to be familiar with the general commercial setting in which the contract operates.

193               Admonitions in the authorities to construe a contract without disregarding the surrounding circumstances do not amount to instructions to fit the terms of the contract into some independent view of such circumstances.  Furthermore, an examination of surrounding circumstances must not be diverted into a surrogate examination of the subjective intention of the parties (Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 at [25]; Toll at [38]).  Equally, the level of commercial reality is a matter for the parties.  Admonitions to avoid commercial unreality should not be read as an encouragement to courts to involve themselves in the quality of a bargain made between contracting parties.  If a party (or both parties) inadvertently make a bad bargain which none intended that is a matter for rectification, not a forced construction.

194               In Toll the High Court emphasised (at [42]) “the significance which the law attaches to the signature (or execution) of a contractual document” (see also Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 at [33] – [35]).  Normally, it is to be presumed that parties have recorded their bargain in the document which they execute (Maybury v Atlantic Union Oil Co Ltd (1953) 89 CLR 507 at 517).  As already indicated, there were good reasons in the present case to proceed upon the footing that the parties intended that their rights and obligations, both immediate and future, would be found in the terms of the documents they had executed. 

The surrounding circumstances

195               Barton is a family owned company based in the United States of America.  Before 2002 it was a shareholder in GMA.  When, in early 2002, GIRL acquired a 50% shareholding in GMA, GIRL and Barton became partners.  During 2003 and 2004 significant differences arose between them.  GIRL approached the Australian Competition and Consumer Commission (“ACCC”).  It suggested there had been contraventions of the Trade Practices Act 1974 (Cth).  ACCC commenced proceedings.  GIRL commenced proceedings in this Court seeking dissolution of the partnership.  Relations between GIRL and Barton broke down completely, to the point where negotiations between them in an attempt to find a basis for an overall settlement were conducted between lawyers.  Officers of the companies did not meet and were not in direct contact, such was the level of distrust and hostility between the two camps.  That was the environment in which the settlement was negotiated and the settlement documents executed. 

196               The overall settlement between GIRL and Barton (and including GMA) was effected by the execution of a number of contemporaneous agreements and instruments.  They included a share sale agreement (whereby Barton sold its shares in GMA to GIRL), a partnership interest sale deed (whereby Barton sold all its interest in the partnership to GIRL), the supply agreement (by which Barton was guaranteed supply of garnet of up to 50,000 tonnes per annum for 12 years at concessional prices) and a number of other documents necessary to sever the existing relationship between Barton and GIRL and transfer Barton’s interests in the arrangements to GIRL.  The individual components of the settlement were brought together by the Principal Agreement.  Important provisions of the Principal Agreement included the following:

INTRODUCTION

A.     Through the chain of documents and events summarized in the Schedule, Barton and GIRL are equal partners in the Partnership and each holds 50% of the issued shares in GMA Garnet.

B.     The Partnership owns the GMA Garnet mine, processing plant, associated plant and equipment and infrastructure and the minerals produced therefrom, situated north of Geraldton, Western Australia.

C.     GMA Garnet provides mining and processing services to the Partnership and is the Partnership’s exclusive distributor of garnet produced from the mine.

D.     Disputes have arisen between the Parties inter alia which resulted in the Proceedings being instituted.

E.      The Receivers were appointed to the Partnership and GMA Garnet in the Proceedings.

F.      Without admission of liability the Parties have agreed to settle all Disputes and claims between them, including those arising from the Proceedings, on the terms set out below.

…

Settlement Documents means this Deed, the Partnership Interest Sale Deed, the GMA Garnet Sale Agreement, the Deed of Covenant, the Supply Agreement and any other deed, agreement or instrument deliverable at Completion in the terms of any of the foregoing instruments.

…

2.         AGREEMENT

2.1              Settlement Documents

Barton and GIRL undertake to one another, subject to the Conditions:

(a)        to execute and deliver to each other and to GMA Garnet on Completion each of the Settlement Documents to which they are a party;

(b)        to duly and punctually observe and perform all obligations on their part respectively contained or implied in each of the Settlement Documents to which they are a party;

(c)        to do all matters and things reasonably within its power or control to cause GMA Garnet at Completion to execute and deliver to the other the Deed of Covenant and the Supply Agreement.

2.2              Interdependence

This Deed is interdependent with the Partnership Interest Sale Deed, the GMA Garnet Share Sale Agreement and the Supply Agreement.

2.3              Generally

The Parties acknowledge:

(a)        that it is the composite transaction evidenced by the Settlement Documents that reflects the consideration under the Settlement Documents; and

(b)        that as part thereof, GMA Garnet wishes to promote distribution of Product (as defined in the Supply Agreement) within the United States of America and Canada and, for that purpose, GMA Garnet is allowing Barton a concessional rate for Product as provided for in clause 4.2 of the Supply Agreement.

…

4          COMPLETION

4.1              Action at Completion

Subject to clause 3, Completion shall take place at the offices of GIRL’s solicitors, Williams & Hughes, Level 1, 25 Richardson Street, West Perth, Western Australia no later than 3pm on the Completion Date.  At Completion:-

(a)        the Parties shall execute and effect the various deliveries and undertakings to each other required at Completion pursuant to the Partnership Interest Sale Deed and the GMA Garnet Share Sale Agreement;

(b)        Barton shall endorse each of the Promissory Notes in favour of GIRL and deliver them to GIRL;

(c)        GIRL shall deliver to Barton a bank cheque for the sum of $18 million;

(d)        each Party shall execute and do all matters and things reasonably within its power or control to procure GMA Garnet to execute the Supply Agreement and the Deed of Covenant;

(e)        Barton must pay GMA Garnet, in accordance with GMA Garnet’s normal trading terms, for all GMA Garnet product taken by Barton and not paid for by Completion; and

(f)        the Parties shall execute and file with the Court and shall do all matters and things within their power or control to procure GMA Garnet to execute and file with the Court, the Consent Orders B.

The obligations of the Parties in respect of Completion shall be interdependent.  All actions at Completion shall be deemed to take place simultaneously and no delivery, execution or payment will be deemed to have been made until all executions, deliveries, filings and payments have been made.

(Emphasis added except for headings)

197               Each of the parties (GIRL, Barton and GMA) released the others from past claims, each agreed to ensure that related entities performed and honoured any release, each agreed not to disparage the others and ensure their related entities did not do so.  In my view the inference is irresistible that each side proceeded upon the basis that nothing was to be left to chance.

198               The findings of the trial judge make it clear that the contract was hammered out in detail against a background of mutual distrust.  I think it may fairly be taken that the parties intended that their agreement was comprehensively stated in the documents they executed.  They were hostile to, and wary of, each other.  This was not a case where the parties were content to state the principal terms of their bargain and proceed otherwise in a mutual spirit of co-operation and give and take.  The opposite was the case.  It was a clear case where the parties may be assumed to have assiduously looked after their own interests and have been on notice that it was strictly necessary that they should do so.

The supply agreement generally

199               The parties to the supply agreement were GMA (defined as the “Seller”), Barton (defined as the “Buyer”) and GIRL.  The supply agreement guaranteed supply of garnet to Barton from the GMA mine of up to 50,000 tonnes each year for a period of just over 12 years.  Provided the terms of cl 4.2 were met (as will be discussed in due course) garnet was to be supplied under the supply agreement at concessional prices representing a substantial discount to market price.

200               Rights and obligations under the supply agreement were assignable to third parties.  It was clear from the Principal Agreement (and the supply agreement) that the supply agreement was to be read in conformity with the Principal Agreement (and therefore as part of an overall settlement) but otherwise the terms of the supply agreement were stated to be comprehensive.  Clause 23 provided:

23.              WHOLE AGREEMENT

Subject to clause 2.3 of the Principal Agreement dated 21 February 2005 between the Buyer and GIRL, this document expresses the whole agreement between the Parties with respect to its subject matter and no extraneous warranty, representation, term or condition not expressly included in this Agreement will apply.  To the extent to which there is any inconsistency between the provisions of this Agreement and any Purchase Order, invoice or other instrument issued ancillary to this Agreement, the terms of this Agreement will prevail.

(Emphasis added)

201               The supply agreement provided a significant commercial benefit to Barton, and imposed corresponding obligations on GMA, which operated adversely after the overall settlement to GIRL as sole owner of the GMA mine and the garnet produced by it.  Clearly, the benefits provided to Barton by the supply agreement were part of the consideration for the overall settlement, in addition to the $18 million cash payment at the time of settlement.

202               The supply agreement identified various alternative means of supply: loose bulk, break bulk (packaged), combination loose bulk/break bulk and container.  Bulk garnet was least expensive.  Commonly used packaging was identified (with corresponding market prices at the commencement date) but it was open to Barton to specify other packaging at additional costs to be borne by it.  Packaged garnet then in common use was GMA branded. 

Clause 2.5 – Branding

203               Clause 2.5 of the supply agreement provided:

2.5        GMA Branding

All garnet purchased under this Agreement and distributed or sold by the Buyer which is 100% Product must be branded by the Buyer with the GMA Garnet name and logo (which may co-exist with the Buyer’s own branding provided that the prominence of the GMA Garnet name and logo is not less than that which has applied during the 2004 calendar year) and the Seller grants to the Buyer a non exclusive licence to use the GMA Garnet name and logo on Product for this purpose.  The Buyer must not use the GMA Garnet name or logo on, or in connection with, the distribution or sale of any garnet which is not 100% Product or hold out in any way that garnet which is not 100% Product, is Product.

204               As has been indicated already the “Buyer” was Barton.

205               The term “Product” was defined in cl 1.1 as follows:

Product means 30/60 Mesh or 80 Mesh as the context requires.

206               In turn, the terms “30/60 Mesh” and “80 Mesh” were defined in cl 1.1 as follows:

30/60 Mesh means 30/60 mesh garnet or 60 mesh garnet produced from the Mine.

80 Mesh means 80 mesh garnet or 100/120 mesh garnet produced from the Mine.

207               Barton argued at first instance, and on the appeal, that the branding obligations in cl 2.5 did not apply to garnet purchased by it in bulk.  It also argued that the obligations did not apply, in any event, to garnet on-sold by it to a related company, Barton Mines Company LLC (“BMC”) which, in due course, sold garnet to external customers.

208               The first contention rested upon the fact that it is impossible to brand garnet directly; rather, it is only possible to brand packaging of some sort.  Bulk garnet was ordered and supplied to Barton unpackaged. Barton argued that the contract did not require it to package garnet (at extra cost) in order to brand it and that, therefore, there was no intended obligation to brand bulk garnet and cl 2.5 should be read down to that extent.  The second contention was based upon the fact that GMA (and GIRL) knew that Barton’s practice was to sell garnet purchased by it to BMC rather than directly to ultimate customers.

209               Although I will examine the issues in greater detail, I may state my views immediately about these contentions as they each appear to me to depend upon an impermissible departure from the principles of construction to which I earlier referred.  Each contention in its own way proposes the subordination of the language of the contract to an external or additional factor to accommodate the commercial significance of that factor to one party.  Furthermore, in my view, each contention contradicts the plain language of the contract.  In that sense, each infringes the injunctions expressed by Mason in Codelfa that evidence of surrounding circumstances is not admissible to contradict the language of a contract when it has a plain meaning.  In my view, no subsequent High Court authority requires a different approach to this question, either generally or in the present case.

210               It followed directly, in my view, from the terms of cl 2.5, that Barton was contractually bound to brand all garnet purchased under the supply agreement (i.e. at concessional prices) which, when distributed or sold by it, was still 100% garnet produced from the GMA mine (which was itself defined and identified by reference to particular leases, a lease application and a prospecting licence).  I see no room for any argument arising from the clear and unambiguous terms of cl 2.5 to the effect that Barton’s obligations were suspended or modified if it distributed or sold the garnet (in an unblended form) at its own election to a related company rather than an “external” customer or ultimate user.  I see no basis in cl 2.5 itself, or elsewhere in the supply agreement, for a contention that garnet purchased in bulk should be excluded from the positive and negative covenants in cl 2.5.  The fact that some intermediate step might have been necessary for Barton to effectively brand some garnet (having chosen to buy it in bulk, rather than packaged and then to distribute or sell it unblended, rather than blended) did not remove or qualify the contractual obligation.  Barton was obliged to take the steps necessary to enable it to perform its bargain (Secured Income at 607; Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126 at [36]; see also Beaton v McDivitt (1987) 13 NSWLR 162 at 185).  There can be no doubt that, if having purchased in bulk, Barton chose to put unblended garnet into bags to sell to a customer it would be obliged to brand it under cl 2.5.  It could not avoid the operation of cl 2.5 by reason only of the fact that it did not wish to package the garnet in order to brand it.

The conclusions of the trial judge about cl 2.5

211               The trial judge concluded that:

(a)        cl 2.5 only imposed a branding obligation on garnet supplied to Barton in a packaged form, not in bulk (“the packaging issue”);

(b)        the supply agreement should be rectified to permit BMC to carry out any necessary branding at the time it sold garnet purchased from Barton to external customers (“the rectification issue”);

(c)        neither Barton or BMC were prevented from blending garnet supplied to Barton under the supply agreement with garnet from other sources, in which case there was no obligation under cl 2.5 to brand it (“the blending issue”).

212               Based on those intermediate conclusions (and the rectification order) the trial judge reached the following further conclusion (at [492]):

492       Having regard to these various constructional findings preferred by the Court, the on-sales by Barton International to BMC of loose bulk garnet, which was not labelled with the GMA Garnet name or logo, did not breach the branding obligation in cl 2.5 of the GSA.

(the “ultimate conclusion”)

The packaging issue

213               In my view the terms of cl 2.5 are clear on this issue.  The obligation to brand applies to all garnet supplied under the supply agreement which, when distributed or sold is “100% Product”.  Assumption of that obligation by Barton required it to package bulk garnet if packaging was necessary to brand it.  As will be seen, I agree with the trial judge that Barton was not required, by the terms of the supply agreement, to refrain from blending (“the blending issue”).  Accordingly, if it chose to distribute garnet as “100% Product” it assumed a corresponding obligation to brand it as such.  The obligation could not be avoided by ordering in bulk (at a lower price).

The rectification issue

214               The trial judge’s conclusion on this issue depended on a prior conclusion that the parties intended that any obligation to brand should only arise at the point of distribution or sale to “a third party customer” so that “internal” distribution or sale to BMC was not intended to be covered by cl 2.5 and should be excluded by rectifying that clause.

215               I am, with respect, not able to accept the premise from which the analysis proceeded.  The fact that BMC was known to be Barton’s distributor in North America and that garnet supplied by the joint venture to Barton had been, on delivery to Barton, branded as BMC, does not mean, in the circumstances of this case, that cl 2.5 should not operate according to its terms or should be amended by an order for rectification.  Barton’s arrangements with BMC were a matter between them.  The arrangement may not have been maintained.  There was no reason for GIRL or GMA to concern themselves with such a matter.  It is clear from the terms of the Principal Agreement that where the parties (GIRL, Barton and GMA) intended that obligations should fall upon a related company, that fact and the nature and extent of the obligation were specified.

216               Barton may have chosen to distribute and/or sell directly.  It may have chosen another intermediary as its agent, whether a related company or not.  It could certainly, in any event, have adapted its distribution and sale arrangements to the contract which it made so that it only distributed or sold “100% Product” to BMC which was already, as earlier, branded with BMC’s name.  The possibilities are numerous but, in my view, the obligation was clear.  Clause 2.5 applied to all garnet purchased by Barton under the supply argument when distributed or sold by it to another legal entity.  There was, in my view, an insufficient foundation for any finding that the elements necessary to rectify the terms of the contract were present.  In particular it was not open to find the other parties had, in error, omitted to include terms actually agreed, which terms were reflected by the rectification order.

The blending issue

217               Clause 2.5 necessarily accepted that garnet supplied under the supply agreement might be blended with garnet from other sources.  In that event, garnet was not to be branded.  Branding of blended product was prohibited.  The trial judge was correct, in my view, to reject the argument that blending of garnet supplied under the supply agreement was a breach of cl 2.5.

The ultimate conclusion

218               In my view, contrary to the conclusion reached by the trial judge, the obligations in clause 2.5 arose at the point of any distribution or sale by Barton, whether to a related company or to an “external” buyer.  That is because Barton was the party bound by the supply agreement and because BMC was a different legal entity.  The supply agreement did not accommodate an exception to the requirements of cl 2.5 based on the fact that distribution or sale to BMC was a sale to a related company.  What Barton and its related companies intended, immediately and for the future, was a matter for them.  No acceptance, much less endorsement, of their intention could be imputed to GIRL or GMA.

219               I would uphold the appeal in relation to the operation of cl 2.5 of the supply agreement so far as it concerns the packaging issue, the rectification issue and the ultimate conclusion of the trial judge, as I have identified them.

Clause 4.2 – Concessional pricing

220               Clause 4.2 of the supply agreement provided:

4.2       North American market

The Parties acknowledge that the Seller wishes to promote distribution of Product within the United States of America and Canada and, for that purpose, the Seller shall allow to the Buyer a concessional rate for Product as provided in this Agreement.  Accordingly, if the territory into which the Buyer ships and discharges Product under clause 2.1 after taking delivery of the same is the United States of America or Canada, the price for Product to be sold pursuant to orders to be placed by the Buyer pursuant to clause 2.1 shall be:

(There are then price formulae which need not be set out.)

221               The concessional rate in cl 4.2 provided a substantial discount to the market price.  It was common ground at the trial that the reference to GMA’s marketing aspirations in North America reduced or eliminated any prospect that the concessional rate might be seen as anti-competitive by Australian regulatory authorities.  A similar aspirational statement also appeared in cl 2.3 of the Principal Agreement which was earlier set out.  There is, in my view, no particular significance which now needs to be attributed to that common view.  Clause 4.2 must be construed in accordance with conventional principles, by reference principally to its own terms, in the context set by the supply agreement and having regard to the fact that the supply agreement was one of a series of interconnected elements of an overall commercial settlement.

222               In my view the opening sentence of cl 4.2 does not disclose any mutual intention to create legal rights and obligations.  It is a statement similar to an introductory recital in a contract.  It sets an acknowledged context to which reference could, if necessary, be made under conventional principles of construction but it has no independent contractual force.  The relevant statement of contractual rights and obligations occurs in the second sentence.  That statement is clear.  The conditions to be met to compel a concessional price were: taking delivery followed by shipping to and discharge in the United States of America or Canada.  Upon discharge in either place the entitlement to a concessional rate was complete. 

223               Under the supply agreement, Barton was obliged, for each shipment, to provide a purchase order which specified quantity, grades, whether bulk or packaged product was ordered, the shipping port, estimated date of arrival and destination of the shipment (cl 6.1).  Failure to comply with the requirements of cl 4.2 activated the provisions of cl 7.3:

7.3              Price uplift

If the Seller notifies a Shipment price based on the Buyer’s advice that the Shipment will be shipped and discharged into the United States or Canada and the Buyer subsequently does not ship and discharge that Shipment into either of those territories the Seller may give notice to the Buyer:

(a)        advising that the price for the quantity of Product in that Shipment is revised to such price as determined by the Seller in accordance with clause 4.1; and

(b)        attaching a tax invoice for the additional amount payable.

The Buyer must pay the amount of the invoice to the Seller within 30 days after the Seller gives that notice.

224               The contractual scheme was self-contained and complete.

225               At first instance, and on the appeal, GMA argued that a contractual requirement arose from cl 4.2 that Barton was required to sell all garnet purchased at concessional prices in the United States of America or Canada without blending and branded as GMA garnet under cl 2.5.  The argument was correctly rejected by the trial judge.

226               None of the additional elements suggested by GMA was a contractual obligation.  Barton was not obliged to sell the garnet in either the United States of America or Canada after discharge in either of those places.  It was not prohibited from blending it with garnet obtained from other sources.  If it was blended then, under cl 2.5 branding was prohibited.

227               I would dismiss this aspect of the appeal.

Relief

228               I agree with the orders which North and Siopis JJ have decided should be made.

229               As there is no basis to conclude that cl 4.2 required all concessionally priced garnet to be branded, the question of what relief may be available for a breach of the branding obligation in cl 2.5 must be considered independently of the operation of cl 4.2.  A declaration should be made to vindicate the appellants’ position concerning the operation of cl 2.5 of the supply agreement.  No reason was advanced by Barton why the Court should not make the declaration sought by the appellants if this aspect of the appeal succeeded.  I agree, therefore, with the declaration proposed by North and Siopis JJ.

230               I also agree with North and Siopis JJ, for the reasons which they give, that it would not be appropriate to make a declaration about the lawfulness of the breach notices issued by GMA.

231               The appellants also sought that damages be paid for breach of cl 2.5 and cl 4.2 of the supply agreement but, in my view, there is no satisfactory basis on which any assessment of loss or damage for breach only of cl 2.5 could be made on the appeal.  Neither, for the reasons which follow, is there a sufficient foundation to require the trial judge to give the matter further attention. 

232               The obligation to brand under cl 2.5 of the supply agreement arose when Barton distributed or sold unblended bulk garnet to BMC.  No loss to either of the appellants occurred at this point because the garnet was not exposed to the market.  To the extent that BMC blended the GMA garnet with garnet from other sources it is as though the blending was carried out by Barton so far as exposure to the market was concerned.  There was no loss of exposure to ultimate customers as a result.  Arguably, to the extent that BMC sold unblended, unbranded GMA garnet to ultimate customers there was a loss of the marketing benefit that branding brought, but a claim put on that basis was not advanced.

233               Barton explicitly contended on the appeal that the appellants had never set out to make good a case of contractual loss from breach only of cl 2.5 of the supply agreement.  That contention drew no rejoinder from the appellants.  In their submissions on the appeal the appellants’ primary claim for damages ($8,698,181) depended on success in relation to both cl 2.5 and cl 4.2 of the supply agreement.  The claim amounted to a claim for a full refund of the discount given on the market price of garnet sold to Barton up to 17 November 2008 under the supply agreement.  There is, in light of the outcome of the appeal, no basis for relief calculated in that way.  The only alternative calculation advanced ($4,869,433) depended on an assumption in favour of the appellants that neither Barton nor BMC were contractually permitted to sell unblended garnet and that there was an entitlement, therefore, to recover at least the value of the discount referable to sales by BMC of blended garnet to third parties.  That assumption has been rejected on the appeal.  

234               In all the circumstances, it should be concluded that no case for damages based only on breach of cl 2.5 of the supply agreement was advanced by the appellants at first instance or on appeal. 

235               In light of the outcome of the appeal, and the result of the appellants’ various contentions, I agree that it is appropriate that the parties bear their own costs of the proceedings at first instance and of the appeal.

Associate:

Dated:         4 May 2010