FEDERAL COURT OF AUSTRALIA

Steggles Limited v Yarrabee Chicken Company Pty Ltd [2012] FCAFC 91

THE COURT ORDERS THAT:

1.    The appeal be allowed.

2.    Declaration 1A made by the primary judge on 30 August 2010 and the orders made by the primary judge on 14 July 2011 be set aside.

3.    As to any further relief, the parties are to confer and bring in agreed short minutes of order within 7 days or, in the event that the form of additional consequential orders cannot be agreed, each party is to bring in short minutes of order within a further seven (7) days which set out the additional relief which that party contends should be granted in light of the reasons for judgment of the Full Court delivered on 26 June 2012.

4.    The applicant (respondent on appeal) to pay the costs of that part of the proceeding before the primary judge which concerned the subject matter of the appeal and of the appeal.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT

Introduction

1    In 2004 a group of chicken growers in the Hunter Valley of New South Wales entered into contracts with a large chicken processor, Steggles Ltd (Steggles) for the supply to the growers, and the rearing by them, of chickens to be processed by Steggles at its processing plant at Beresfield in the Hunter Valley.

2    Each of the chicken growers (the Growers) entered into a separate contract with Steggles but the contracts were in the same form. They provided for the Growers to grow the chickens by a method known as tunnel growing under which the chickens are grown in mechanically ventilated sheds on the Growers’ properties.

3    Yarrabee Chicken Company Pty Limited (“Yarrabee”) is one of the Growers. Yarrabee brought a representative proceeding against Steggles under Part IVA of the Federal Court of Australia Act 1976 (Cth) claiming that Steggles had breached its contracts with the Growers and damages for breach of the contracts.

4    The primary judge dealt with the proceeding in two separate hearings. In the first, her Honour dealt with a number of preliminary questions including, in particular, a question of construction of cl 7.4 of the contract.

5    Clause 7.4(a) provided that Steggles would first offer “any extra Shed capacity” arising during the term of the contract to the Growers in preference to third parties, that is to say to other, small “g” , growers located in the Hunter Valley or elsewhere.

6    The question of construction was whether the phrase “extra Shed capacity” described physical sheds, that is to say an increase in the size or number of existing sheds, or alternatively, the capacity to grow additional numbers of chickens using the existing sheds.

7    The primary judge held that the reference to “extra Shed capacity” in cl 7.4(a) of the contract bound Steggles:

… to offer to the growers, first and in preference to any third party, the capacity to grow any bird to be processed at the Beresfield processing plant in one of the Growers’ sheds on their farms.

8    In her second judgment the primary judge found that Steggles had breached cl 7.4(a) because:

the evidence makes plain that Steggles allocated chickens to other growers for processing at the Beresfield plant when the Growers had capacity to grow those chickens.

9    Steggles appeals against both of those findings. The first question which arises on the appeal is therefore the question of construction of cl 7.4(a). The primary judge took into account the language of the clause considered in light of other provisions of the contract, as well as contextual considerations. She was of the view that if, contrary to her finding as to the proper construction of the clause, Steggles’ construction is correct, a term must be implied into the contract to the effect of the preferential right referred to by the primary judge. The implied term was also argued on the appeal, though only faintly.

10    Even if Steggles is unsuccessful on the question of construction, it challenges the primary judge’s findings of breach and damages. Steggles submits that in her second judgment, the primary judge altered and expanded upon the construction of the contract adopted in her first judgment and that this impugns her finding of breach, as well as her approach to the measure of damages.

The Contract

11    The contract was described as a “Broiler Chicken Growing Contract”. It commenced with a Basic Information page which described Steggles’ livestock address in New South Wales by reference to the address of its Beresfield processing plant. The Grower’s name and farm was also shown as were the number of sheds on the farm and the square meterage of each shed. The Basic Information page is the place in the contract where particular details concerning the individual Growers were inserted. The Balance of the contract was in a standard form.

12    Clause 2 of the contract sets out an overview of how the contract was intended to work. It contained a statement of the Grower’s intention to produce “Saleable Birds” on the “Farm” for Steggles and a statement of the Growers’ intention to meet and exceed certain “BPIF Performance Benchmarks”.

13    We will return to those defined terms later but it is important to observe that the “Farm” was defined as the farm listed in the Basic Information or any new farm to which the Grower might relocate.

14    Clause 2 went on to state that in return, Steggles was bound to pay the Grower a fee for the Grower’s service based on “the Best Practice Payment System”, which was defined as an efficiency incentive payment scheme described more fully elsewhere in the contract.

15    Clause 5 dealt with Steggles’ obligation to deliver chicks to the Grower. Clause 5.1 provided that Steggles must supply and deliver Batches of Chicks to the Grower. The term “Batch” was defined to mean a quantity of chicks, but no particular number was specified. Importantly, clause 5 contained no obligation upon Steggles to deliver any minimum number of Batches, or of Chicks, to the Grower.

16    A “Chick” was defined to mean a fowl of a specified genus, not more than 72 hours old.

17    Clause 5 went on to provide for Steggles to give notice to the Grower of a proposed delivery of Chicks. Steggles was required, as far as practicable, to give the Grower reasonable advance notice of a delivery setting out details including the number of Chicks to be delivered. This was dealt with in cl 5.3.

18    Other paragraphs in cl 5 dealt with unloading of Chicks at the Farm, deficiencies and quality of Chicks. Clause 5.7 provided that Steggles remained the owner of the Birds at all times, including during the Growing Period. That term was defined to mean the period commencing on the date of delivery of the Batch to the Farm and expiring on the date of collection of the Birds in that Batch by Steggles.

19    Clause 7 was headed “Advice, Support and Other Obligations of Steggles to Grower”. Clause 7.4 is central to this appeal and we will set it out in full as follows:-

7.4    Extra Shed capacity

(a)    Steggles will first offer any extra Shed capacity that arises during the term of this contract to Growers in preference to third parties.

(b)    Any additional capacity will be allocated at the discretion of Steggles.

20    The term “Shed” was defined to mean any shedding on the Farm used for the Growing of Birds.

21    Clause 7.5 was headed “Equitable treatment of Growers by Steggles”. It provided that, in complying with the contract, Steggles would so far as practicable act promptly, in a reasonable manner that was equitable to all Growers. It also provided that Steggles would treat Growers fairly and on materially similar terms, while recognising that the Best Practice Payment System and other matters may produce variations in payments as between individual Growers.

22    Clauses 8.1 and 8.2 set out the obligation of the Grower to raise the Chicks into chickens in accordance with the minimum standards required by a document called the Broiler Grower Manual.

23    Other paragraphs of cl 8 referred to the obligations of a Grower in relation to “Sheds”. For example, cl 8.4 provides for a Grower to allow access to Steggles to the “Sheds” and the “Silos” as well as to the Farm generally. The reference to “Sheds” and “Silos” were plainly references to physical structures, described by reference to their number and area in the Basic Information.

24    Clause 8.4 also bound the Grower to ensure that the only Poultry on the Farm were birds supplied by Steggles.

25    Clause 8.9 was the only clause in the contract which provided for any guaranteed return to the Grower. The return was calculated as a minimum average return to Growers of $40 per square metre of “Shed floor space”. This was said to be equal to approximately two-thirds of the average return to Growers at the commencement of the contract. The full text of the clause was as follows:

8.9    Minimum Returns

The minimum average return to Growers (averaged across all Growers over a calendar year) will be not less than $40 per square metre of Shed floor space per annum. This equates to approximately two-thirds of the average return to Growers as at the Start Date.

26    Clause 12 dealt with collection of “Birds”, that is to say, the chickens reared by the Grower. Clause 12.1 provided for Steggles to arrange for the Birds to be caught and taken from the Farm when, in Steggles reasonable opinion, the birds were marketable as Broiler Chickens. This left it within the discretion of Steggles to determine the size and weight of the grown Chicks to be collected from the Grower’s farm.

27    Clause 12.3 provided for Steggles to give the Grower at least 24 hours notice of a proposed collection of Birds. Clause 12.5 and following set out the other obligations of the Grower and Steggles in relation to collection of the Birds from the Grower’s Sheds.

28    Clause 14 dealt with the obligations of Steggles to make payment to the Grower. Provisions was made for, inter alia, Steggles to notify the Grower of the BPIF score which was the calculation of the points allocated to the Birds by reference to a formula stated in an appendix to the contract.

29    The formula took into account factors such as the weight and age of the Birds to produce a numerical score. As was stated in cl 19 of the contract, the higher the score, the more efficient a Grower’s performance. This was the basis for the efficiency incentive scheme under which Growers were paid.

30    Clause 20 dealt with the duration of the contract. The effect of cl 20.1 was that the contract had a term of approximately five (5) years.

31    Provision was made for earlier termination of the contract by the parties, including a provision for Steggles to terminate the contract in the event that it closed the Beresfield processing facility: see cl 20.6.

32    Clause 25 stated that the contract may only be amended in writing signed by the parties. The clause provided that where the variation required substantial capital investment on behalf of the Grower, Steggles must provide the Grower with a letter of intent and specify the assurances, if any, that it would provide about renewing the contract on its expiration.

The first judgment

33    The primary judge considered that the terms of the contract were to be construed in light of the statutory, industry and commercial background which she set out at [12]ff.

34    At the time when the contracts were entered into, the growing of chickens for meat consumption in New South Wales was regulated by the Poultry Meat Industry Act 1986 (NSW) (the Poultry Act). That Act was referred to in the Basic Information page of the contract.

35    Following the execution of the contract between Steggles and some of the Growers, the Poultry Act was amended by the commencement of the Poultry Meat Industry Amendment (Prevention of National Competition Policy Penalties) Act 2005 (NSW). The amendments do not affect the question of construction which arises in this case.

36    As the primary judge observed, the Poultry Act distinguished between processors and growers of chickens. It recognised that processors owned the chickens and that they placed them with Growers to rear. It also recognised that chicks are delivered and raised in large batches of 1,000 or more chickens.

37    The contracts between the Growers and Steggles were written agreements which were required under the Poultry Act. At the relevant time, the Poultry Meat Industry Committee was in existence and was required to approve the form of the written agreement.

38    Her Honour stated that certain aspects of the Poultry Meat Industry in New South Wales were common ground. In particular, she said that the Grower provides the facilities necessary to rear the chicks including the sheds in which they are reared, as well as the plant equipment and labour.

39    The growing period for chickens varies depending on the species of bird. It appears that by 2000 Steggles had a preference for a bird of 2.75kg or less which required a relatively shorter growing period of 42 to 47 days. Later, when Steggles was taken over by another company (in 2009), it preferred a larger bird of up to 3.5kg which required a longer growing period.

40    It appears from her Honour’s narration of the background facts that Steggles took an active role in matching the growing capacity of Growers and the processing capacity of the Steggles’ Beresfield plant at which the chickens were to be processed. Her Honour said at [19]:

I infer that the contract was negotiated on the basis that Steggles wanted a sufficient but not excessive number of reliable growers with adequate facilities in the region to rear its chicks.

41    Her Honour also observed that Steggles had a strong preference for growing chickens by the tunnel ventilation method, that is to say in tunnel ventilated sheds. Prior to the execution of the contract in 2004, Steggles had entered into contracts with a larger number of Growers but the new contracts were offered to a group of 38 Growers who were willing to convert their existing sheds to tunnel ventilation, and who had already done so.

42    Not surprisingly, conversion of existing conventional sheds to tunnel ventilated sheds required substantial capital expenditure to be undertaken by the Growers.

43    The primary judge said at [58] that the subject matter of the contract was the rearing of chicks by Growers for the purpose of supplying chickens to Steggles’ processing plant at Beresfield.

44    Her Honour went on to say at [59] that, from a commercial perspective, and under the terms of the contract, neither Steggles nor the Grower had any interest in a shed on a farm other than to the extent that the shed was used to rear Steggles’ chicks.

45    The essence of her Honour’s reasons is found in [60]-[61] as follows:

60    In this context, I am satisfied that the Growers’ case must be accepted.  On Steggles’ construction cl 7.4 makes no sense.  The capacity of the processing plant to process birds reared in the region is the obvious commercial dynamic driving both parties.  The background against which the contract was entered into exposes this dynamic.  To ensure that it could supply its processing plant Steggles needed enough growers in the region using its preferred form of shedding to raise chicks.  To ensure that they could make a living out of raising chicks the Growers needed to ensure that Steggles supplied them with enough chicks and enough batches of chicks to raise.  The contract, however, does not require Steggles to supply any particular number of chicks per batch or number of batches per year.  Instead, it contains a minimum return per floor space of the sheds on the farm, with the number of sheds and floor space being part of the basic information set out in the contract.  The contract also (amongst other things) requires Steggles to comply with cl 7.4.  Clause 7.4, in this contractual scheme, plays an important commercial function.

61    Once these commercial realities are recognised it becomes apparent that if “extra Shed capacity” has nothing to do with supply of chicks (Steggles’ case), the question whether “extra Shed capacity” arises during the term is meaningless – it is a question which cannot arise and could never be answered.  The contract pre-supposes a finite processing and shed capacity in the region.  If Steggles is not bound to allocate chicks to be processed at the Beresfield plant to the Growers in preference to other growers then no occasion could arise for Steggles to require any “extra Shed capacity”.  Nor would there be any benchmark by which Steggles or the Growers could determine whether the requirement for such capacity has arisen.  Clause 7.4, on Steggles’ case, is devoid of any practical content.

46    The primary judge said at [62] that the construction put forward by the Growers accorded with the commercial context known to the parties in four respects. These were (1) the contract operated by reference to a processing plant in a defined region; (2) the capacity of the plant was known to Steggles and the Growers; (3) the Growers were a defined class; and (4) the total floor space of tunnel ventilated sheds available to rear chicks was also defined. Her Honour continued as follows:

In this context, for Steggles to accept an express obligation to offer “any extra Shed capacity” to the Growers first and in preference to third parties necessarily and obviously assumes that Steggles will ensure that the Growers are supplied with chicks to rear for the Beresfield processing plant in preference to third parties.

47    Her Honour went on to say that she was satisfied that the reference in cl 7.4(a) to “extra Shed capacity” means “capacity to grow birds in sheds on the farm”. She then said at [63]:

… Steggles’ obligation is to offer to the Growers, first and in preference to any third party, the capacity to grow any bird to be processed at the Beresfield processing plant in one of the Growers’ sheds on their farms.  This obligation relates to capacity within any existing shed and extends to any additional shed that Steggles might need to rear chicks to be processed at the Beresfield plant. 

The Second Judgment

48    The primary judge returned to the question of construction of cl 7.4(a) in her second judgment, at [49]ff. Her Honour commenced her discussion by saying that in her earlier judgment she accepted the Growers’ argument that cl 7.4(a) required Steggles to offer to the Growers, first and in preference to any other grower, the capacity to grow any chicken to be processed at the Beresfield Plant.

49    Her Honour said at [51]:

Clause 7.4(a) requires consideration of Steggles’ treatment of the Growers compared to its treatment of other growers in respect of chickens in fact processed through the Beresfield plant. More specifically, cl 7.4(a) requires Steggles to offer to the Growers, first and in preference to any other grower, the capacity to grow any chicken to be processed at the Beresfield plant.

50    Her Honour went on to say that this construction is supported by cl 7.4(b). She then said at [51]:

In other words, insofar as any of the Growers has the capacity to raise any chicken to be processed at the Beresfield plant, Steggles must first offer to that Grower (indeed, to every Grower with the capacity) the opportunity to raise that chicken. Insofar as the capacity of all the Growers to raise chickens for processing at the Beresfield plant is exceeded, Steggles may allocate that additional capacity to any other grower as it sees fit under cl 7.4(b).

51    Her Honour amplified her reasoning process in the following paragraphs of her judgment. She said at [53] that Steggles’ obligation to the Growers under cl 7.4(a) depends entirely on what chickens Steggles processes through its Beresfield Plant and:

…all that cl 7.4(a) requires is that the Growers be given the first opportunity in preference to any other grower to grow every chicken processed through the Beresfield plant to the extent of the Growers’ capacity.

52    The primary judge said at [55] that it followed from the construction of cl 7.4(a) that the Growers’ claim of breach and loss must be accepted because the evidence made it plain that Steggles allocated chickens to other growers for processing at Beresfield when the Growers had the capacity to grow those chickens.

53    Her Honour did not consider that it was necessary for the Growers, in establishing breach, to show that on a day on which Steggles allocated chickens to another grower, one of the Growers had the capacity to take them.

54    Rather, her Honour accepted the Growers’ approach that allocations and capacity should be considered on an annual basis. She accepted that the Growers had the capacity to rear 6.3 batches of chickens per year in 2009 and 2010. It followed that the Growers had the capacity to rear some 3.6 million of the chickens that Steggles allocated to other growers in 2009, and nearly 4.4 million of the chickens allocated to other growers in 2010.

55    Her Honour found that the average live weight of the chickens allocated to other growers was up to 2.75 kg and that the Growers had the capacity to grow those chickens in the numbers referred to. The quantum of the Growers’ damages followed from those calculations.

Issue 1 – the proper construction of cl 7.4(a)

56    The proper approach to construction of cl 7.4(a) of the contract is to construe it by reference to the principle of objectivity stated by the High Court in Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22] and Toll (FGCT) Pty Ltd Alphapharm Pty Ltd (2004) 219 CLR 165 at [40].

57    That approach requires the Court to ascertain the intention of the parties by reference to what a reasonable person would understand the language of the contract to mean. It:

… 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. See Toll at [40]; and also see Pacific Carriers at [22].

58    It is well accepted that a commercial contract such as the present is to be construed fairly and broadly but the Court has no power to remake a contract for the purpose of avoiding a result which may be considered unjust Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 (ABC v APRA) at 109.

59    That said, in approaching the construction of the contract, if a detailed, semantic and syntactical analysis of words in a commercial contract will lead to a conclusion that flouts business common sense, it must be made to yield to business common sense: Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at [43] citing Antaios Companios Naviera SA v Salem-Rederiesna AB [1985] AC 191 at 201; see also ABC v APRA at 109.

60    Nevertheless, orthodoxy requires that evidence of prior negotiations is ordinarily to be excised from the process of construction: Royal Botanical Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45 at [39]; Western Export Services Inc v Jireh International Pty Limited (2011) 282 ALR 604 at [2] – [4] (application for special leave to appeal per Gummow, Heydon and Bell JJ, query whether this constitutes a binding precedent, see O’Brien, D, Special Leave to Appeal (2nd Ed, Supreme Court of Queensland Library, 2007) at pp 46-50); see also Australian Medic-Care Company Ltd v Hamilton Pharmaceutical Pty Ltd (2009) 261 ALR 501 at [118].

61    Here, what has to be determined in the light of these principles is the meaning of the composite phrase “extra Shed capacity”. The phrase must be considered as a whole in its full contractual context, but some guidance is to be obtained from the individual words used. Thus, for example, the word “extra” is of some significance. One of the questions which therefore arises is, “extra” to what. Another is, whose “capacity” is addressed. Is it that of the Growers or Steggles? But what is immediately apparent is that the clause speaks of “Shed capacity”. It makes no reference to the supply of chicks.

62    We acknowledge that there are some difficulties in construction which arise in large part from the use of the word “capacity”. This was recognised in the submissions of Senior Counsel for the Growers who commenced by submitting that the capacity in question is that of the Growers, although ultimately he accepted that it is the capacity of Steggles with which the clause is concerned.

63    In our view, the capacity with which cl 7.4(a) is concerned is the capacity of Steggles to process chickens at its Beresfield plant. Thus, the subject matter of the right of first refusal is the capacity of Steggles to process additional chickens to be grown by the Growers by increasing the size or number of their existing sheds. This is the extra shed capacity that is to be offered to the Growers. It is to be determined by reference to any increase in the processing capacity of the Beresfield plant measured by reference to the capacity of the plant at the date when the contract was executed.

64    This construction fits most naturally with the language of cl 7.4(a), as well as the other provisions of the contract and its purpose and object.

65    The object of the contract was stated by the primary judge in [58] of her first judgment as the rearing of chicks by Growers for the purpose of supplying chickens to Steggles’ Beresfield processing plant.

66    Her Honour also said at [62] that the context known to the parties included the fact that the contract operated by reference to a processing plant in the Hunter Valley Region where the Growers were located, the plant had a capacity known to the Growers and to Steggles and the total floor space of tunnel ventilated sheds available to rear chicks for Steggles was defined.

67    These matters emphasise that the “Sheds” (as referred to in cl 7.4(a)) are the physical structures erected on the Growers’ farms in which the chicks are reared and the capacity with which the contract is concerned is the capacity of each party. That is to say it is concerned with the capacity of Steggles’ processing plant to process the chickens and the capacity of the Growers to rear the chickens in their sheds.

68    This makes it clear in our view that when cl 7.4(a) speaks of extra shed capacity to be offered to the Growers it is concerned with the extra physical shed capacity available to the Growers as a result of the increased processing capacity of Steggles at its Beresfield plant.

69    To suggest that extra shed capacity to be offered by Steggles to the Growers is referable to a preferential right of the Growers to be allocated chickens for processing at the plant is not consistent with the language or the purpose of the contract. Nor is it supported by the contextual considerations referred to by the primary judge.

70    The extra capacity is to be measured by reference to conditions occurring since the date of the contract. This is clear from the language of cl 7.4(a) which refers to extra capacity that arises during the term of the contract. We do not see how it could be measured by conditions occurring on a day-to-day basis as would be required to accommodate the Growers’ argument. On that view, what would be required would be for the supply of chickens to be monitored throughout the term with regard being paid to the growing capacity of individual Growers. We do not see how this can be consistent with the object of the contract or its language.

71    What is plain from the language of the contract is that “Shed” is defined as the physical object consisting of the shedding on the Grower’s farm used for the growing of chickens. Moreover, the contract sets out on the Basic Information page the precise number of sheds and the precise area described by way of the square meterage of each shed. This, and the other matters to which we have referred, strongly support the view that the subject matter of the right of first refusal in cl 7.4(a) was the opportunity for the Growers to increase the number or size of existing sheds so as to accommodate Steggles’ increased processing capacity.

72    This construction is also supported by other clauses in the contract, in particular cl 5.1 and cl 8.9. Clause 5.1 imposes no minimum supply obligation on Steggles. Thus, Steggles retained maximum flexibility in its ability to supply chicks to the Growers, thereby retaining control of the supply of chicks to them.

73    The fact that Steggles was free at all times to determine the number of chicks or the density of the batches to be delivered to the Growers was very much at the heart of the contract. It shows that the contract was weighted heavily in favour of the commercial interests of Steggles.

74    This is reinforced by cl 8.9 because the protection granted to the Growers to compensate for the no minimum supply clause was the guaranteed minimum return of $40 per square metre of shed floor space. That was only a limited safety net because it was said to equate to approximately two-thirds of the average return to Growers at the start date. Nevertheless, for reasons more fully explained later, we consider that cl 8.9 supports the construction we have given to cl 7.4(a) because, if the Growers were to take up extra shed capacity that arises during the term of the contract, they would receive an extra $40 per square metre for the additional shed floor space. If the Growers’ construction were correct it would mean that the Growers would be entitled to preferential allocation of chicks but no increased minimum return if they were to build extra sheds to accommodate those chickens.

75    Some further protection to the Growers may have been granted by cl 7.5 which required Steggles to treat the Grower reasonably and in a manner that was equitable to all Growers. However, we do not consider that this affects the construction which we consider to be the correct approach to cl 7.4(a).

76    The no minimum supply provision in cl 5.1 is of particular importance in coming to this view. This is because it seems to us that it would be inconsistent with cl 5.1 to suggest that cl 7.4(a) gives rise to a preferential entitlement in the supply of chicks from Steggles. Such a right, even in the form of a right of first refusal, cannot be consistent with Steggles’ clear right enshrined in cl 5.1 to supply such number of chicks or batches as it determined.

77    The weighting of the contract in favour of the commercial interests of Steggles may also be seen in cl 8.4(b) which obliged the Grower to ensure that the only poultry on the farm consisted of chickens supplied by Steggles.

78    Thus, the Growers were tied to Steggles for supply but with no obligation to provide them with a minimum number of chicks and only a limited guaranteed return. It may well be that the Growers agreed to accept these burdens in return for the prospect of greater revenues flowing to them from the efficiency incentives scheme in cl 19.

79    In any event, it is clear to us that the language of the contract renders the Growers subject to these burdens and that cl 7.4(a) did not contain a right of first refusal to the supply of chicks from Steggles.

80    It is true, as the primary judge said in her first judgment at [60] that the capacity of the processing plant to process birds is the dynamic that drove both the Growers and Steggles. It is also true, as her Honour said, that to ensure that the Growers could make a living, they needed to ensure that Steggles supplied them with enough batches of chicks to raise. However, the answer to that proposition is that the terms of the contract did not give the Growers that assurance.

81    Indeed, the commercial dynamic, to which her Honour referred, of the capacity of the processing plant, points in favour of the construction which we consider to be correct. This is because, as her Honour said at [19], Steggles took an active role in matching the growing capacity of Growers and the processing capacity of the Beresfield plant. This was a circumstance known to the parties at the time of the contract and can be taken into account in construction.

82    It shows that cl 7.4(a) is concerned with an increase in the processing capacity at the Beresfield plant over and above the capacity that existed at the inception of the contract. If that were to occur, the growing capacity of the Growers and the processing capacity at the plant would be rematched. This would be done under cl 7.4(a) by Steggles first offering the Growers the opportunity to increase the size or number of their sheds, that is, the extra shed capacity arising from the increased processing capacity at the Beresfield plant.

The difficulties in the primary judge’s approach

83    We do not consider it is necessary to address every argument considered and disposed of by the primary judge. It is sufficient in our view to say that the flaws in the Growers’ approach to the construction of cl 7.4(a) are revealed in the difficulties which her Honour discussed, in particular, in her second judgment.

84    In her second judgment the primary judge addressed further arguments on construction that were put to her during the second hearing. Although she said she was not persuaded to depart from the construction adopted in her first judgment, it seems to us that she did so.

85    In her first judgment, her Honour held that cl 7.4(a) required Steggles to offer to the Growers, first and in preference to any third party, the capacity to grow any bird to be processed at the Beresfield plant. However, in her second judgment at [51] and [53], the primary judge added a rider to that obligation, namely that Steggles was bound to give that opportunity to every Grower who had the capacity to raise any chicken to be processed at the Beresfield plant.

86    Importantly, her Honour recognised at [54] of her second judgment that, so construed, the obligations of Steggles under cl 7.4(a) imposed “some constraints” on Steggles in its management of systems for the allocation, collection and processing of chickens.

87    In short, what would have been required by that construction of cl 7.4(a) was for Steggles to make extensive enquiries of Growers as to their ongoing capacity to rear chickens to be processed at the Beresfield plant.

88    In our view, there is nothing in the contract to suggest that Steggles was subject to such constraints. Indeed, as we said earlier, the contract was weighted heavily in favour of the commercial interests of Steggles. It is unlikely that Steggles would have accepted the sort of constraints which flowed from the primary judge’s construction of cl 7.4(a) in the absence of clear language to that effect. Certainly there is nothing in cl 7.4(a) which supports the imposition of such constraints.

89    Nor in our view does the interpretation adopted by the primary judge allow for any work to be given to the word “extra”. Rather, her Honour seems to us to have ignored the effect of that word in the composite phrase “extra Shed capacity”, preferring instead in her analysis at [52]ff of her second judgment to treat cl 7.4(a) as a clause which is about the relative treatment of Growers and other growers.

90    Even if it is about such comparable or relative treatment, the essence of the clause is that it recognises the possibility that after the date of the contract, Steggles may require extra physical shed capacity. Steggles’ obligation was to first offer the opportunity to construct the extra shed capacity to Growers in preference to other growers, not to give them preferential supply of chickens.

Clause 7.4(b)

91    In her first judgment the primary judge did not deal with the construction of cl 7.4(b) but she did so in her second judgment.

92    The effect of what her Honour said in her second judgment at [53] was that cl 7.4(b) operated so that if none of the Growers had the capacity to grow the chickens that were offered to them, Steggles could allocate the “additional capacity” to other growers, at the discretion of Steggles.

93    We do not agree with that construction of cl 7.4(b). The effect of the clause in our view was to confer on Steggles a discretion to determine as between the Growers, which of them would be given the opportunity to build new or larger sheds. The exercise of this discretion was subject to the proviso in cl 7.5 that Steggles was bound to act equitably between the Growers in offering them the first opportunity to enlarge their shed space.

Clause 8.9

94    We think that the better view of cl 8.9 is that the minimum guaranteed return to Growers is based upon the shed floor space that was in existence at the time of the contract but it extends to any additional shed floor space taken up under the right of first refusal of extra shed capacity under cl 7.4(a). This is because the clause refers to the sum of $40 per square metre of shed floor space and the square meterage of each shed is set out in precise terms on the Basic Information page but “Shed” is defined in terms which are wide enough to encompass new sheds, or sheds of increased size, constructed in order to take up the extra shed capacity offered to Growers under cl 7.4(a).

95    It is true that the last sentence of cl 8.9 states that the $40 per square metre minimum return equals approximately two-thirds of the average return to Growers at the commencement of the contract. This might suggest that the guaranteed minimum is limited to shed floor space at the commencement date. However, in our opinion the last sentence of cl 8.9 is merely an explanation of the way in which the calculation of $40 per square metre has been made, or alternatively the effect of the calculation.

96    In our view, when approached in this way, the construction of cl 8.9 fits harmoniously with cl 7.4(a) so as to give the Growers the protection of a guaranteed minimum return if they increase the number or size of their sheds to take up the extra shed capacity offered to them under cl 7.4(a). That approach to cl 8.9 gives it a common-sense, business-like construction which fits naturally with the language of cl 8.9 and 7.4(a).

97    In any event, whether or not the guarantee under cl 8.9 extended to the extra shed floor space constructed upon the acceptance of an offer made by Steggles under cl 7.4(a), we do not see that it supports the Growers’ contention that cl 7.4(a) is concerned with the supply of chickens by Steggles to the Growers.

Implied Term

98    In her first judgment at [64] the primary judge held that if she was wrong in her construction of the contract, a term must nevertheless be implied into the contract to give effect to the term she described. That is to say, a term was to be implied that Steggles was bound to offer the Grower first, and in preference to any third party, the capacity to rear any bird to be processed at the Beresfield plant.

99    It is evident from her Honour’s reasons at [64] that she considered the implication of that term satisfied the five conditions required by the test stated in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 52 ALJR 20 at 26, adopted by the High Court in Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 347.

100    The essential reason her Honour came to that view seems to be that:

If cl 7.4 does not mean what the Growers submitted and Steggles thereby is free to place birds for processing at the plant at it own discretion, then the entire commercial rationale of the contract … is undermined.

101    We are unable to agree with that conclusion. Nor in our view does the term implied by the primary judge satisfy the conditions stated in Codelfa.

102    In our opinion, the term is not necessary to give business efficacy to the contract and the contract is perfectly effective without it. The effect of the contract was that Steggles agreed to supply chicks to the Growers who undertook to grow them for a fee based upon an efficiency incentive payment regime stipulated in the contract. Steggles was under no obligation to supply a minimum number of chicks or a minimum number of batches and thereby retained for itself maximum flexibility in the supply process. The only protection which Steggles granted to the Growers in return for that benefit was the payment of a minimum guaranteed dollar sum.

103    There was nothing commercially ineffective about a contract in those terms. Indeed, it was “efficacious” without the implication of a further term and it was not necessary in the sense that it was required “to avoid an unworkable situation.” See Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 66.

104    Nor is such a term so obvious that it goes without saying, or capable of clear expression as is revealed by the difficult process undertaken by the primary judge of seeking to interpret the contract in the manner set out in her Honour’s detailed judgments.

105    Finally, it seems to us that the implied term is inconsistent with the express term stated in cl 5.1. The effect of that clause is, as we have said, to secure for Steggles absolute control over the number of chickens it supplies to the Growers. In our view, to impose an impediment on Steggles’ power of control in the manner which would exist under the implied term would be inconsistent with the effect of cl 5.1.

106    It is no answer to say that the implied term requires only an offer by Steggles and that if the Growers do not accept the offer Steggles is free to go elsewhere. That seems to us to ignore the impediments upon Steggles’ control referred to above. Indeed, the primary judge recognised the constraints on Steggles’ management of its systems of allocation, collection and processing which flow from such a term.

Breach and Damages

107    It follows from our conclusion as to the proper construction of cl 7.4(a) that the Growers have not established breach of contract or loss.

108    Even if we are wrong in rejecting the primary judge’s construction of the clause, or upon the implication of a term to the same effect, in our opinion her Honour’s finding of breach and damages cannot stand. This is because, what would be required to establish breach was evidence that, when Steggles allocated chicks to third parties, a particular Grower or Growers had the capacity to grow those chickens.

109    Her Honour’s findings do not address that question. It is true that she found at [55] of her second judgment that the evidence made it plain that Steggles allocated chickens to other growers when Growers had the capacity to grow those chickens. However, her Honour was of the view that it was not necessary for the Growers to prove that when Steggles allocated chickens to another grower, one or more of the Growers could have taken them.

110    We do not agree with her Honour’s conclusion because it seems to us to depart from the term which on her view formed part of the contractual arrangements between the parties.

111    As her Honour said at [51] and [53] of her second judgment, insofar as the Growers had the capacity to raise any chicken to be processed at the Beresfield plant, Steggles was bound to first offer that opportunity to the Grower, indeed to every Grower with the capacity to raise that chicken.

112    We do not see that the question of breach of such a term can be answered by considering allocations to Growers and their capacity upon an annualised basis.

Conclusion

113    It follows that the appeal must be allowed. The orders we would make are:

1.    The appeal be allowed.

2.    Declaration 1A made by the primary judge on 30 August 2010 and the orders made by the primary judge on 14 July 2011 be set aside.

3.    As to any further relief, the parties are to confer and bring in agreed short minutes of order within 7 days or, in the event that the form of additional consequential orders cannot be agreed, each party is to bring in short minutes of order within a further seven (7) days which set out the additional relief which that party contends should be granted in light of the reasons for judgment of the Full Court delivered on 26 June 2012.

4.    Order the applicant (respondent on appeal) to pay the costs of that part of the proceeding before the primary judge which concerned the subject matter of the appeal and of the appeal.

Associate:

Dated:    26 June 2012