FEDERAL COURT OF AUSTRALIA

Factory 5 Pty Ltd (In Liq) v State of Victoria (No 2) [2012] FCAFC 150

ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    If the appellant does not file and serve written submissions for some other order as to costs on or before 2 November 2012, then on 3 November 2012, order 3 below shall have effect as from today.

3.    Subject to order 2 above, the appellant pay the respondent’s costs, such costs to be set off against the costs payable by the respondent under order 3 made on 23 May 2011.

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

ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA

REASONS FOR JUDGMENT

RARES AND DODDS-STREETON JJ:

1    Melbourne 2006 Commonwealth Games Corporation (Melbourne 2006 or M 2006) was a statutory corporation established for purposes, consistent with its name, of conducting the 2006 Commonwealth Games in Melbourne. In September 2004, Melbourne 2006 sought terms from proposed tenderers to provide services for the sale of Commonwealth Games related merchandise. Two companies, Stage 5 Pty Ltd (Stage 5) and The Promotions Factory Pty Ltd (Promotions Factory) (the promoters) promoted and, later on 23 December 2004, incorporated the appellant, Factory 5 Pty Ltd.

2    In about September 2004, the promoters entered into negotiations with Melbourne 2006 in relation to the proposed tender. By early November 2004, the promoters were in intense negotiations with Melbourne 2006 with a view to securing their nominee’s appointment as the official concessionaire to sell merchandise, including apparel and souvenirs at Games venues. The promoters had provided Melbourne 2006 with their standard terms and conditions of trade and were seeking to negotiate the parameters under which they might be appointed. By then Melbourne 2006 had indicated to the promoters that Playcorp Limited would be likely to be appointed as licensee to sell Games merchandise to the official concessionaire. The promoters saw themselves as being able to supply that merchandise, with the obvious commercial advantage that they would not have to pay, or make arrangements with, Playcorp for merchandise it had sourced. In early December 2004, Melbourne 2006 decided that it would seek to negotiate the concessionaire agreement with the promoters in preference to any other tenderer. The parties exchanged correspondence with a view to finalising a deal.

3    The primary judge found that Factory 5 and Melbourne 2006 had made a binding contract on 23 December 2004, signed a letter headed “Concessionaire Agreement”, appointing Factory 5 as the official concessionaire for the Games. That letter provided that it was subject to the parties reaching agreement on the terms of a long form contract. The State of Victoria succeeded to the rights and liabilities of Melbourne 2006 by force of the Commonwealth Games Arrangements Act 2001 (VIC). During the hearing of the appeal the State, by leave, filed an amended notice of contention disputing the primary judge’s ultimate decision that the 23 December 2004 letter was a binding contract. The State contended that either the parties had not reached a concluded agreement on 23 December 2004 that was legally binding or that any such “agreement” was void for uncertainty.

4    In the result, the primary judge dismissed the proceedings. He found that Factory 5 ultimately failed to establish that it had an entitlement to recover damages after Melbourne 2006 terminated the negotiations for a long form contract on 24 June 2005. By then the negotiations had reached an impasse. His Honour found that Melbourne 2006 had repudiated the contract with Factory 5 by denying the existence of a contract in its letter dated 24 June 2005. But, the primary judge held that Factory 5 had later abandoned that contract and, accordingly, was not entitled to damages. Factory 5 appealed from that decision. The State contended that its letter of 24 June 2005 should be read as evidencing Melbourne 2006’s acceptance of the repudiatory conduct evinced by Factory 5 prior to that time.

Background

5    Five items of correspondence are central to the issue of whether Factory 5 and Melbourne 2006 made a legally binding agreement on 23 December 2004. These consist of four exchanges in letters and emails between the promoters and Melbourne 2006 between 16 and 23 December 2004 and the letter dated 23 December 2004 signed by Factory 5 and Melbourne 2006 which are described below.

(a)    Melbourne 2006’s letter dated 16 December 2004

6    On Thursday 16 December 2004, Melbourne 2006 wrote to Robert Hilton, creative director of one of the promoters, thanking them for their continued interest in the concessionaire opportunity. The letter outlined Melbourne 2006’s favoured structure and terms for the proposed concessionaire agreement to sell Games licensed merchandise. It sought a meeting within two business days. The letter stated that it was to be intended to form the basis of negotiations and not to constitute an offer. It gave the promoters an exclusive negotiation period, until the close of business on 23 December 2004, to reach an agreement on the proposed terms and structure, but left open Melbourne 2006’s position that, if agreement had not been reached in that time, it could resume discussions with other persons who had applied.

7    The letter proposed terms in summary point form and a structure for a concessionaire agreement. Importantly, it stated that those terms would be further detailed “… in a legally binding Deal Memo and Long Form Agreement”. It stated that the commencement of the agreement would be 31 January 2005 and that it would be completed on 1 April 2006, following the conclusion of the Commonwealth Games.

8    The point form summary of terms dealt with a considerable number of matters, including insurance requirements, guarantees the promoters would have to provide, sales forecasts, royalties, payment schedules, identification of the promoted company’s management team and the following:

    (emphasis added)

(b)    The promoters’ email of 20 December 2004

9    On 20 December 2004, Mr Hilton sent an email replying to Melbourne 2006’s offer of 16 December 2004 with what he described as “comments”. Significantly, this email stated that the promoters’ projected budgets for the project included significant spending on fit-outs and visual merchandising. It asserted that the promoters were not in a position to increase the royalty rate on their lower-end sales value without having to rework those budget figures, but proposed a compromise with a different royalty scale. The email also stated:

“6.    Concessionaire as Manufacturer – We have previously supplied to you a copy of our standard terms & conditions of purchase. We feel the following terms also need to be agreed to by suppliers in order to be commercially supportive of the programme;

Orders Placed During The Commonwealth Games

A mutually agreed amount of unbranded stock is to be held by the Supplier for branding & supply within 24 to 48 hours turnaround of order placement during the Games.

Markdown Contribution

Merchandise remaining at the conclusion of the Games will be marked down for quick sale. The supplier is required to match the markdown on a percentage basis, up to a maximum of 50%. For example:

Retail Price $30     Sale Price $15    50% Retail

Wholesale $9.75    Markdown to be borne by Supplier $4.88    50% of Wholesale”

The markdown contribution by the Supplier is capped at a maximum of 20% of the total spend with the Supplier.

In the event that Suppliers are not able to meet these terms or their price and terms are unworkable or not to market we would like the right to manufacture the product ourselves.” (emphasis added)

(c)    Melbourne 2006’s email of 22 December 2004

10    Melbourne 2006 responded in an email of 22 December 2004. That email referred to a meeting between representatives of the promoters and Melbourne 2006 that had taken place on 20 December 2004 by telephone. It stated that Melbourne 2006’s representatives had discussed matters raised by the promoters with their commercial, finance and legal team. It then set out Melbourne 2006’s responses saying that for expedience it had not detailed the matters that did not pose an issue, including, but not limited, to a proposed guarantee structure and minimum guarantees that would be required. The email then proposed a further compromise on the suggested royalty amounts, taking into account what Melbourne 2006 had originally proposed and the promoters’ counter-proposal, and, among other rates suggested that if the promoters were to be the manufacturer of goods they would be given a 25% retail royalty. The email continued:

“4.    Concessionaire as Manufacturer

To confirm, the purpose of inclusion of trading benchmarks is to ensure the Concessionaire can manufacture should a Licensee be unreasonable or unable to deliver. Notwithstanding the benchmarks, M2006 will grant permission at its absolute discretion to allow Concessionaire to manufacture, and reserves the right to find an alternative Licensee should we decide this is appropriate.

We are in agreement with the [The Promotion Factory’s] trading terms provided by Simon Strapp.

We are in agreement regarding your proposal for mutual negotiations with Licensees to secure an amount of unbranded stock to be held by the supplier for branding & supply within 24 to 48 hours during the Games.

Regarding markdown, this is not a contractual agreement that Melbourne 2006 would enforce on Licensees, rather this is what we would consider to be reasonable and commercial terms that we would encourage the Licensees to support. We have thoroughly and diligently considered your figures but feel that they may not be industry standard and may place excessive pressure on Licensees, especially given that a proportion of your purchasing will be sale or return, and short turnaround delivery. As such we are comfortable to agree that a markdown rebate of 5% of total spend with the supplier is a reasonable request for this purpose.

[The promoters] may find Licensees prepared to offer well in advance of this, however, we do not feel it is commercially appropriate to document anything greater in terms of our agreement with the Concessionaire.

In terms of percentage share on markdown, again, we recommend that negotiation on a case by case basis is commercially available with every Licensee (and some may very well agree), however, in so far as an Agreement between Concessionaire and Melbourne 2006 is concerned we again feel that it would be onerous to document the terms you are requesting as based on our market knowledge and experience your request is not an industry standard.

We are in agreement that you pool rebate money and apply markdowns accordingly.

We trust that you are also confident in our ability to work closely with you as a team to ensure that the Concessions are a success for all concerned, and that we will apply our commercial sense in ensuring that we work with you to maximise supply, sell-thru and sales opportunities at all times.

We confirm that the vast majority of our Licensing Agreements are non-exclusive (Toys, Coins, Stamps are exclusive) and while we appreciate your trepidation, be aware that the Licensees need to ensure that they do great business with the Concessionaire to meet their own commitments and forecasts. A commercially sound, team approach will be a win/win for all and we are confident the Licensees also appreciate this reality.” (emphasis added)

The email concluded, after dealing with other matters, by saying:

“We trust that we have now provided you with positive and workable solutions to the matters you have raised in regard to our correspondence dated 16 December 2004. We await your immediate confirmation to move forward to the next stage of achieving an agreement on the basis negotiated as soon as possible.” (emphasis added)

(d)    The promoters’ email of 23 December 2004

11    Early on 23 December 2004, the promoters responded with an email that stated “Following our discussion, we are in agreement with the points outlined.” After suggesting a minor change not relevant here, the email requested that Melbourne 2006 “… have a heads of agreement drafted today incorporating all the deal points” and said that the promoters proposed to go to Melbourne 2006’s office later that day to “… sign off on this”. The email concluded:

“Great to have agreement in place & move forward.”

(e)     The letter dated 23 December 2004

12    Later on 23 December 2004, Melbourne 2006 wrote a letter to Factory 5, which by then had been incorporated. The letter was as follows:

“Concessionaire Agreement

We refer to previous discussions regarding Factory 5 Pty Ltd (F5) entering into an agreement with [t]he Melbourne 2006 Commonwealth Games Corporation (M2006) to be the Official Concessionaire to sell merchandise and souvenirs at the Games venues.

We confirm that the parties have agreed that F5 is to be appointed as Concessionaire subject to reaching agreement on a legally binding Long Form Concessionaire Agreement to be provided by M2006 and subject to M2006 Board Approval.

The parties have agreed to enter into this agreement on the commercial terms and conditions set out in the following correspondence, which is attached:

1.    Letter from Catherine Mair dated 16 December 2004;

2.    Email from Rob Hilton dated 20 December 2004;

3.    Email from Madelaine Cohen dated 22 December 2004; and

4.    Email from Derek Glover dated 23 December 2004.

Please note that the list of Venues attached to the letter from Catherine Mair dated 16 December 2004 is in draft form and has not been finalised. The final list of venues will be subject to M2006 obtaining the relevant rights under its arrangements with venue controllers. As such, the list of venues at which Concession outlets will be provided may be amended and M2006 will notify F5 of the revised list of venues from time to time.

The parties acknowledge that the Confidentiality Agreements which have been signed continue to apply and neither party will make any public announcement until a Long Form Concessionaire Agreement has been executed.

The M2006 office will be closed until 10 January 2005 and we will endeavour to provide you with a draft Long Form Concessionaire Agreement as soon as possible thereafter.

Please sign in the space provided below to acknowledge agreement with these terms.” (emphasis added)

13    The letter was signed at Melbourne 2006’s office later that day, at about 3.00 p.m. on behalf of Factory 5 by Mr Hilton and Mr Glover who were directors of the promoters, and by then directors of Factory 5, attended at Melbourne 2006’s offices. They had come with a bottle of champagne. The chief executive of Melbourne 2006, Mr Harnden, had signed on its behalf earlier in the day and was not at the meeting. Instead, Mr Jenkins represented Melbourne 2006 there when Mr Hilton and Mr Glover signed the letter on behalf of Factory 5.

The primary judge’s reasoning

14    In is necessary to say a little about the context in which the parties negotiated the terms of the letter of 23 December 2004 and the four items of correspondence it incorporated. The primary judge found that by the time the promoters became interested in having a joint venture vehicle appointed concessionaire, Playcorp had already been appointed by Melbourne 2006 as its licensee for Games apparel. He found that during the course of the negotiations with Melbourne 2006, the promoters raised concerns about Playcorp because of their awareness that the lion’s share of likely sales by the concessionaire would be sales of Games apparel. Although Playcorp had not been appointed as an exclusive licensee, no other apparel manufacturer had been appointed by Melbourne 2006. The promoters were concerned that because Playcorp was the only licensed manufacturer of Games apparel, and in the absence of competition, there was a risk that it could behave unreasonably in its dealings with the concessionaire. The promoters expressed that concern at a meeting held on 15 November 2004 with Melbourne 2006. During the course of that meeting a suggestion was made that the concessionaire should be able to manufacture itself, if a licensed manufacturer was being unreasonable or was unable to deliver the products required. This was the genesis of the terms dealing with the position of the concessionaire as manufacturer that are set out above.

15    The primary judge found that despite the attention given in the negotiations to royalties and margins that would be payable or earned by the concessionaire, pricing of the goods that the concessionaire would sell did not appear to have been regarded by the parties as a matter of importance. This finding would be uncontroversial if all his Honour meant was that the concessionaire was required to offer products at their recommended retail price, and for that reason, the prices it could charge the public were not considered to be important. After all, that requirement reflected what had always been accepted in the negotiations. His Honour went on to say that both Melbourne 2006 and Factory 5 had a common interest in having prices set that maximised the profitability of Factory 5 and thus the royalties to be paid to Melbourne 2006. He said that this matter was not dealt with in the correspondence forming part of the alleged contract on 23 December 2004. His Honour also found that in the subsequent drafting of the long form agreements the issue of pricing seemed to have attracted little or no attention.

16    Importantly however, the primary judge then found that “as between [Factory 5] and [Melbourne 2006], the pricing of merchandise was not contentious and was not accorded any significance as an issue. There is no evidence before me that price is an important matter in contracts of this kind”. Once again, if this finding were directed solely at the recommended retail prices at which the concessionaire would sell the products, it is uncontroversial.

17    However, from their inception in November 2004, the negotiations were very much concerned with the prices at which the promoters or concessionaire would be able to acquire the goods that would be sold to the public and with the margins that the concessionaire would make. At the heart of the concessionaire as manufacturer negotiation, was the fact that Playcorp had the potential to charge prices that would eat into Factory 5’s margins and profitability. The level of royalties, that was apparently resolved by 23 December 2004, was but one aspect of the promoters’ and Factory 5’s concerns. The other critical aspect was the price they would have to pay for the goods they were to sell and whether it would be a price paid to Playcorp or to whomever Factory 5 engaged to produce the goods, should it be able to persuade Melbourne 2006 to allow it to do so.

18    The primary judge found that the letter of 23 December 2004, together with the four items of correspondence that it expressly identified, formed a contract that was legally binding. At the trial the State had argued that on its proper construction, the letter of 23 December did no more than record an agreement to continue negotiations with a view to entering into a binding long form agreement that, at the completion of the negotiations, would be based on the provisions of that letter. His Honour rejected that construction. He found that the reference to “trading benchmarks” in the email of 22 December was objectively understood by the parties to be a reference to the trading benchmarks that consisted of, first, the promoters’ standard terms and conditions that they had provided Melbourne 2006 on 15 November 2004, secondly, the unbranded stock provision referred to in the email of 20 December and, thirdly, the mark down provisions specified in the email of 22 December. The primary judge found that these trading benchmarks did not include price. His Honour appears to have reached that conclusion on the basis of his earlier finding that the pricing of the merchandise to be sold by Factory 5 was not a matter of importance in the negotiations for the 23 December 2004 letter.

19    The primary judge made a critical finding on the proper construction of the concessionaire as manufacturer clause on which he found the parties had agreed in the letter of 23 December. He found that this provided that Melbourne 2006, would grant permission to Factory 5 to manufacture or appoint another licensee where, in the exercise of its discretion, Melbourne 2006 was satisfied that a licensed manufacturer of Games products was either not willing to provide products to Factory 5 on reasonable commercial terms or was unable to deliver. He held that Melbourne 2006’s discretion was to be exercised in relation to the commercial terms dealt with by reference to the three trading benchmarks that he had identified.

20    But, as noted above, in making his findings about the three trading benchmarks, his Honour found that these did not include price. And his Honour also found that prior to the letter of 23 December 2004, Playcorp and the promoters were proposing significantly disparate terms of trade on which the promoters or Factory 5 would acquire Games merchandise. The promoters were seeking 60 days credit on purchases from Playcorp. But Playcorp had said that its normal terms were 30 days and it required a concessionaire to provide a bank guarantee as security for purchases. The primary judge found that Playcorp’s requirement for the provision of a bank guarantee was a matter of great concern to the promoters. The promoters had said that their joint venture would not provide a bank guarantee to any licensee.

21    At a meeting with Melbourne 2006 on 15 November 2004 these trading terms were discussed. The promoters told Ms Cohen, who represented Melbourne 2006, that they were concerned about Playcorp’s prices in the context that it was the only official licensee for apparel.

22    Subsequently, in 2005 while a long form agreement was being negotiated, Factory 5 remained in commercial dispute with both Playcorp and Melbourne 2006 as to the prices of and margins for Games merchandise at which Playcorp was proposing to sell to Factory 5 in its capacity as concessionaire. In March 2005, Playcorp required Factory 5 to provide a bank guarantee for the full amount of the anticipated initial order, expected to cost between $1 million and $2 million. Factory 5’s Mr Glover had never experienced such a demand before and was particularly concerned about it. Mr Strapp, on behalf of Factory 5, told Melbourne 2006’s representatives that Playcorp was insisting on its requirement for the guarantee and that in Factory 5’s view this was not commercial. This led, on 17 March 2005, to Factory 5 requesting Melbourne 2006 to allow it to manufacture Games merchandise because it was unable to negotiate reasonable trading terms with Playcorp. However, Playcorp was concerned about Factory 5’s lack of trading history and wanted security. After maintaining its position for some time, on 8 April 2005, Factory 5 relented and offered to provide Playcorp with a letter of credit for the initial order in lieu of a guarantee, and Playcorp accepted that proposal. Nonetheless, as his Honour found, further difficulties continued to dog the negotiations between Factory 5 and Playcorp in relation to payment terms and credit arrangements for orders that Factory 5 might place during the conduct of the Commonwealth Games themselves.

23    By 12 April 2005, Melbourne 2006 had become sufficiently concerned about the relations between Factory 5 and Playcorp that it developed an options paper contemplating its possible courses of action should the disagreements continue. His Honour found, tellingly:

“Whilst I would infer that the Games-time credit issue would have been resolved if the issue of price had been resolved, by mid April of 2005, it was clear that [Factory 5] was outraged by the pricing being offered by Playcorp.”

He found that by late April 2005, price had become a matter of substantial dispute between Playcorp and Factory 5. By 12 May 2005, Mr Strapp had provided Melbourne 2006’s representatives with information about Factory 5’s margins analysis. From this, Melbourne 2006 understood that Factory 5 was seeking an average margin of 86.3% and received advice from Ms Cohen that that was not only very high but, in respect of apparel, “outrageous”. Based on her experience of other major events, she advised Melbourne 2006 that average margins would generally be in the range of 60%-70% and that Factory 5 previously had sought a margin of 64% in its 2004 response to the request for a proposal.

24    Throughout the rest of May 2005, the impasses between Factory 5, on the one hand, and each of Melbourne 2006 and Playcorp, on the other, continued. By 18 May 2005, Playcorp was offering Factory 5 margins in the range of 65%-77%. Factory 5 repeatedly complained to Melbourne 2006 that Playcorp’s proposed prices were commercially unreasonable and that Factory 5 could not purchase Games merchandise at those prices. Melbourne 2006 responded that it did not accept those assertions. The continuing impasses led to a meeting held on 3 June 2005 between Messrs Strapp and Hilton, for Factory 5, and Messrs Harnden and Jenkins for Melbourne 2006. The primary judge found that during this meeting Messrs Strapp and Hilton accepted that Factory 5 would need to provide some sort of security to Playcorp and it would do so if the issue of Playcorp’s prices could be resolved.

25    Messrs Strapp and Hilton distributed a paper at the meeting that put Factory 5’s position, summarising the history of its relationship with Melbourne 2006 and its then current contentions. The paper asserted that Factory 5 had received independent advice that Playcorp’s pricing and terms were not commercial. It complained that Melbourne 2006 was acting anti-competitively and in breach of the Trade Practices Act 1974 (Cth). The paper requested that Melbourne 2006 appoint Factory 5 or The Promotions Factory as an alternate apparel licensee. Factory 5 asserted that before signing the 23 December 2004 letter it had foreshadowed the likelihood of a situation of this kind arising. It claimed that Melbourne 2006 had reassured it repeatedly that if a licensee were not being commercial in its dealings, then Melbourne 2006 would appoint Factory 5 or an alternate as a licensee. The paper concluded:

“We feel M 2006 have not complied with the Agreement. We need closure on this issue immediately and trust that M 2006 will take the necessary action.”

26    In the meeting Messrs Strapp and Hilton continued to assert that Playcorp was being greedy and totally unreasonable in the prices it was seeking. They gave Messrs Harnden and Jenkins an example of a quote of $5.50 for T-shirts that Factory 5 had received from a supplier as compared to one for $9.00 sought by Playcorp for supply of, what Factory 5 asserted were, the same T-shirts. His Honour found that Mr Harnden said if this disparity was correct, then it would be a matter of concern to him and he would discuss Playcorp’s pricing with it. However, Mr Harnden questioned whether Factory 5 was comparing “apples with apples”, namely whether the two T-shirts were of comparable quality. The primary judge found that there was a genuine misunderstanding by each side as to which of them was to come back to the other on this issue. He found that Mr Harnden understood that Factory 5 would come back to him with more information about his query as to the comparability of the T-shirts, whereas, Messrs Strapp and Hilton thought that Mr Harnden would undertake his own investigation and come back to Factory 5 on his conclusions.

27    On 7 June 2005 Ms Cohen wrote to Melbourne 2006 expressing concern about the consequences of the protracted delay being caused by the debate over reasonable commercial terms. She cautioned that this may lead to Playcorp and or Factory 5 beginning proceedings against Melbourne 2006. On 10 June 2005 Mr Strapp emailed Messrs Harnden, Jenkins and Speer, referring to the meeting of 3 June and asking to be informed as soon as possible, but no later than 14 June, of Melbourne 2006’s decision on Factory 5’s repeated requests for the appointment of another apparel licensee.

28    On 14 June Mr Strapp telephoned Mr Speer and pressed for a response. Mr Speer informed him that Playcorp was prepared to provide to Factory 5 a minimum gross margin of 70% and that in many instances the margin would be greater. Mr Speer also told him that Melbourne 2006 was not prepared to appoint another official apparel licensee.

29    Next on 16 June 2005, Mr Strapp sent an email to Mr Harnden complaining of the latter’s lack of response following the meeting of 3 June. Mr Strapp referred to Mr Speer’s communication of Melbourne 2006’s position two days earlier. He asserted that this was a clear breach of the agreement in the letter of 23 December 2004 and a reversal of the many assurances that had been provided by Melbourne 2006’s representatives in the negotiation of that agreement. Mr Strapp urged Mr Harnden to reread that agreement and Factory 5’s position paper that it had provided on 3 June. He asserted that Melbourne 2006 had both legal and moral obligations to Factory 5 which it expected to be honoured. Mr Strapp threatened legal proceedings if this did not occur.

30    After discussing this email with Messrs Jenkins and Speer, Mr Harnden decided that Melbourne 2006 would not appoint another apparel licensee. On 17 June 2005 Mr Harnden sent a facsimile letter to Factory 5 referring to the recent discussions and Mr Strapp’s 16 June email. This letter denied that Melbourne 2006 was in breach of any agreement with Factory 5. It asserted that Melbourne 2006 was becoming increasingly concerned by the continued delay caused by the debate over reasonable commercial terms and its impact on finalising, first, the long form agreement between it and Factory 5 and, secondly, trading terms between Factory 5 and Playcorp. Mr Harnden confirmed that Melbourne 2006 did not intend to exercise its discretion to appoint Factory 5 or any other alternate apparel licensee. He warned that if Melbourne 2006 concluded that the concessions business was being imperilled by these issues remaining unresolved, it would need to take whatever action was necessary to safeguard the success of that aspect of the Games. The letter finished:

“In conclusion, M2006 has stated its position clearly regarding the commercial terms issue and considers that it is complying with both its legal and moral obligations to F5. We require F5 to revert urgently to confirm F5’s commitment to moving forward on the above basis and to delivering on the concessions program for the Games. Evidence of F5’s commitment is expected within two business days of receiving this letter, in the form of an executed long form agreement and placement of firm orders with Playcorp. M2006 will make itself available to meet this timeframe.” (emphasis added)

31    By this time, the parties had exchanged a number of drafts of the long form agreement but had not been able to surmount their disagreement over the way in which to express the concept of “reasonable commercial terms”.

32    On 21 June 2005 Factory 5’s solicitors, Fetter Gdanski, wrote to Melbourne 2006 in response to its letter of 17 June 2005. The solicitors repeated Factory 5’s assertions concerning Melbourne 2006’s assurances that an alternate apparel licensee would be appointed if Playcorp were not commercial or was being difficult. They asserted that by forcing Factory 5 to deal with Playcorp, Melbourne 2006 was engaging in the practice of exclusive dealing in contravention of s 47 of the Trade Practices Act. The letter repeated Factory 5’s demand that it or another be appointed as alternate apparel licensee. It also asserted that Factory 5 was affected by time constraints and concluded:

“Our client will sign the Long Form Concessionaire Agreement when you adhere to the representations that you have made and to the terms of the Heads of Agreement. Our client does not have to place firm apparel orders within two days pursuant to the Heads of Agreement or the Long Form agreement. On what basis do you make such a demand now?

Our client is keen to continue with M2006 in accordance with terms of the Agreement signed on 23 December 2004. If you are not prepared to appoint our client as an apparel licensee or appoint another independent apparel licensee within 24 hours, our client reserves all its rights, including seeking injunctive relief.” (emphasis added)

33    The primary judge found that Mr Harnden considered the solicitors’ letter with Messrs Jenkins and Speer as well as Ms Cohen. He found that Mr Harnden decided then that Playcorp’s pricing and terms were commercial and reasonable and that Melbourne 2006 should terminate its negotiations with Factory 5. Mr Harnden discussed his view with Mr Speer who had come to a similar conclusion.

34    In the meantime, during the afternoon of 23 June 2005, Mr Jenkins and Mr Strapp spoke on the telephone. Mr Jenkins referred to the letter from Fetter Gdanski and said that the parties were clearly at opposite ends. Mr Strapp replied saying that he expected Melbourne 2006 would need to appoint someone else as concessionaire.

35    On 24 June 2005, Melbourne 2006 wrote a letter, signed by Mr Speer, to Mr Strapp. The letter referred to Melbourne 2006’s letter of 17 June and Fetter Gdanski’s letter of 21 June. It asserted that Melbourne 2006 had sought to negotiate the terms of a legally binding long form agreement since December 2004. It claimed that the delay in finalising that agreement was jeopardising the success of the concessions business. The letter referred to the request in the letter of 17 June that Factory 5 execute such an agreement within two business days, and concluded:

“As this time period has now elapsed and F5 has not executed the Concessionaire Agreement and provided it to M2006, M2006’s position is that it is no longer prepared to continue negotiations with F5. Accordingly, this letter is notice that, with immediate effect, M2006 has terminated negotiations with F5.

M2006 will now take appropriate steps to protect its commercial interests in relation to the concessions business.” (emphasis added)

36    The primary judge found that the letter of 24 June 2005 amounted to a repudiation of the 23 December 2004 agreement by Melbourne 2006. He also found that on 24 June 2005, Melbourne 2006 communicated to its licensees that it was no longer negotiating with Factory 5 and had recommenced discussions with other suitable persons for appointment as the concessionaire.

37    Factory 5 made no response at all to Melbourne 2006 until nearly two months elapsed. Then, on 16 August 2005, Fetter Gdanski sent a letter to Melbourne 2006’s solicitors that replied to the letter of 24 June 2005. Fetter Gdanski expressed bemusement at that letter because Melbourne 2006 had never given Factory 5 a final copy of the long form agreement to be signed. Fetter Gdanski also noted that Melbourne 2006 had made no response to their allegation of its contravention of s 47 of the Trade Practices Act. The letter ended on this note:

“We advise that our client reserves its rights in relation to the Heads of Agreement. It regards your client as being in breach of its obligations and is of the view that it has acted in a misleading and deceptive manner. Our client has further taken its concerns about your client’s apparent breach if [sic] s 47 to the ACCC.”

38    That was the last communication between Melbourne 2006 and Factory 5. On 1 November 2005 Factory 5 was placed in liquidation and just over one year later began the proceedings below.

The primary judge’s principal findings as to matters after 23 December 2004

39    The primary judge held that Melbourne 2006 had not breached the 23 December 2004 agreement by failing to appoint an alternate licensee in place of Playcorp. That finding is not challenged. However, as noted above, his Honour found that, in its letter of 24 June 2005 first, Melbourne 2006 had evinced an intention not to be bound by the 23 December 2004 agreement, secondly, it had denied that a contract existed between the parties and, thirdly, abandoned any such contract. In addition, he held that by moving to appoint another concessionaire on and after 24 June 2005, Melbourne 2006 also evidenced an intention to repudiate the 23 December 2004 agreement.

40    In arriving at those findings, his Honour rejected the argument put by Melbourne 2006 that Factory 5’s own repudiation had brought the 23 December 2004 agreement to an end before 24 June 2005. The primary judge accepted that Melbourne 2006 had some merit in its contention that Factory 5 was in breach of the 23 December 2004 agreement because of its insistence on, first, Playcorp being replaced as licensee and, secondly, an incorrect construction to the concessionaire as manufacturer clause in that agreement. Nonetheless, his Honour found that Melbourne 2006 was not ready, willing and able to perform the 23 December 2004 agreement because the letter of 24 June 2005 denied its existence as a binding legal obligation. Hence, he concluded that the terms of the letter of 24 June 2005 precluded Melbourne 2006 from contending that, by those terms or its later conduct, it had accepted any repudiation by Factory 5. These findings are challenged by Melbourne 2006 in its amended notice of contention.

41    On the other hand, Factory 5’s grounds of appeal challenge his Honour’s findings that Factory 5 was not entitled to recover damages. He had so decided because, first, Factory 5 was not ready and willing to perform the 23 December 2004 agreement, secondly, it had not accepted Melbourne 2006’s repudiation and, thirdly, each party, having communicated to the other an intention not to perform the 23 December 2004 agreement were to be treated as having agreed to abandon it. The primary judge reasoned that by insisting on its incorrect interpretation of that agreement and its demand that a new licensee replace Playcorp, Factory 5 had evinced a definite resolve against performing it in the future.

42    His Honour also found that from and after 19 May 2005, Factory 5’s entrenched insistence that any long form agreement reflect its incorrect interpretation that Playcorp and other licensees had to offer it commercial pricing, denied Melbourne 2006 any discretion to appoint a new licensee. He found that Factory 5 repeatedly expressed its genuine but, entrenched, position on its incorrect interpretation to Melbourne 2006 during their interactions in June 2005. And, he found that Factory 5 had failed to satisfy him that its entrenched position was not “willy nilly” or without regard to the true intent of the 23 December 2004 agreement.

43    His Honour also found that Melbourne 2006 correctly maintained, throughout the relationship, that it had a discretion whether or not to appoint another licensee to manufacture Games’ products. Additionally, the primary judge found that the unexplained failure of Factory 5 to respond to Melbourne 2006’s letter of 24 June 2005 for nearly two months was itself suggestive of a longstanding resolve on its part to walk away from their agreement if Factory 5 could not convince Melbourne 2006 to accept its incorrect interpretation. Therefore, his Honour found that Factory 5 was not an innocent party at the time of Melbourne 2006’s repudiatory conduct on and from 24 June 2005 and, as a result, Factory 5 was not in a position to claim damages for lost profits. Moreover, the primary judge found that Factory 5 had not proved that it had accepted Melbourne 2006’s repudiation.

44    He noted that, at best, Fetter Gdanski’s letter of 16 August 2005 was equivocal in reserving Factory 5’s rights, and that it did not specify on which of two inconsistent rights (i.e. to accept the repudiation or to insist on performance) it relied. His Honour also regarded as relevant that Factory 5 had not acted to seek any remedy thereafter.

Issues

45    The following substantive issues arose on Factory 5’s appeal and the State’s notice of contention:

(1)    was a contract made on 23 December 2004?

(2)    if a contract was made on 23 December 2004:

(a)    was it void for uncertainty?

(b)    was Factory 5 in breach, because of its incorrect interpretation of the concessionaire as manufacturer clause, in the period before 24 June 2005?

(c)    did Melbourne 2006’s letter of 24 June 2005 deny the existence of any contract or amount to a repudiation?

(d)    was the primary judge correct, or was it open to him, to find that the 23 December 2004 agreement had been abandoned by the parties?

(3)    was Factory 5 entitled to damages in light of the primary judge’s finding that Melbourne 2006 had repudiated on 24 June 2005 in circumstances where that act of repudiation ought to have discharged Factory 5 from any obligation to proffer performance thereafter?

46    Initially, in the appeal Melbourne 2006 did not contend that his Honour had erred in finding that the parties had made a contract on 23 December 2004 or that its terms were certain. However, during the course of argument, the Court raised concerns with the parties about these findings. Ultimately, Melbourne 2006 applied for and was granted leave to amend its notice of contention to put these findings in issue: Factory 5 Pty Ltd (In Liq) v State of Victoria [2011] FCAFC 77. The Court had the benefit of full argument on these additional questions.

Issue 1: Was a contract made on 23 December 2004?

47    This issue depends on whether the letter of 23 December 2004 was a contract or not. In Masters v Cameron (1954) 91 CLR 353 at 360, Dixon CJ, McTiernan and Kitto J said:

“Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three classes. It may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. Or, secondly, it may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. Or, thirdly, the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.

In each of the first two cases there is a binding contract: in the first case a contract binding the parties at once to perform the agreed terms whether the contemplated formal document comes into existence or not, and to join (if they have so agreed) in settling and executing the formal document; and in the second case a contract binding the parties to join in bringing the formal contract into existence and then to carry it into execution. Of these two cases the first is the more common.”

48    Factory 5 argued that his Honour was correct to have concluded that a binding agreement as at 23 December 2004 had been made although the parties intended it to be within what has been described as a fourth class additional to the three classes described in Masters 91 CLR at 360-362: see Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 at 628E-G per McLelland J (affirmed GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 per McHugh JA at 634D-635C, Kirby P and Glass JA agreeing). McLelland J identified the fourth class as being one in which the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms.

49    The promoters of Factory 5 were negotiating with Melbourne 2006 in the period between 16 and 23 December 2004. Those negotiations had been initiated by Melbourne 2006’s invitation in its letter of 16 December 2004. That identified an objective of the parties to engage in a negotiation period of one week for agreement by 23 December 2004 on the point form suggested terms and structure of a concessionaire agreement. The letter explained that the terms would be further detailed in “a legally binding Deal Memo and Long Form Agreement” intended to commence on 31 January 2005. The point form summary of terms in this letter was at a high level of generality. The letter stated that it was not an offer. That reinforced the impression that the letter conveyed on its face, namely that Melbourne 2006 was proposing a series of discussion points. Those could be reduced or supplemented over the next week with a view to seeing if the parties should go to the next step, after the Christmas/New Year break, of engaging lawyers to prepare a legally binding agreement by 31 January 2005.

50    The promoters began their email of 20 December in reply by offering what they said were “comments” on the matters raised in the 16 December letter. Some of these “comments” discussed and fleshed out a number of the point form summary items, while others raised questions about what Melbourne 2006 had in mind. Relevantly, the email asked Melbourne 2006 to give the promoters the right to manufacture if suppliers were not able to meet the promoters’ suggested trading terms or the suppliers’ price and terms were unworkable ([9] above). Contrary to the primary judge’s finding, this request showed that the suppliers’ prices were an important issue in the negotiations. The email of 20 December 2004 proceeded on the express basis that the promoters terms “… also need to be agreed to by suppliers”. It did not explore any mechanism for establishing what terms or prices were “workable” if suppliers did not agree to those identified by the promoters as requiring agreement.

51    The question of the price at, and terms on, which merchants buy or sell goods is usually one resolved by bargaining or a market mechanism. The terms and prices sought by promoters in respect of their dealings with suppliers in respect of goods remaining at the end of the Games provided an example of issues that could not be resolved by Melbourne 2006. That is because they involved the competing commercial interests of both the suppliers and the promoters.

52    That problem was recognised in Melbourne 2006’s email in reply of 22 December 2004. It repeatedly referred to the need for the promoters to agree terms with suppliers. And, in this email, Melbourne 2006 refused to document or identify any precise bases on which the promoters and suppliers had to agree their prices and terms. Indeed, Melbourne 2006 expressed the view that the promoters’ suggested share of the markdown for merchandise at the conclusion of the Games was not “an industry standard”. It recommended negotiation on a case by case basis. This was far from a concluded agreement between Melbourne 2006 and the promoters as to the basis on which Melbourne 2006 could assess whether a supplier was or was not proposing reasonable commercial terms.

53    The primary judge found that the email of 22 December 2004 had identified three matters noted in [18] above as “trading benchmarks” that were certain and did not include price. For the reasons above that finding was in error. Price was a critical and outstanding issue that had to be resolved before there could be any agreement on these terms. Moreover, Melbourne 2006’s email not only did not accept the markdown or other pricing provisions in the promoters’ email of 20 December 2004, it also expressly refused to do so, saying that these were matters for negotiation between the promoters and suppliers.

54    It follows that when Melbourne 2006 and Factory 5 signed the letter of 23 December 2004, first, there was no contractual consensus between them on critical terms, including the prices at which Factory 5 would be prepared to treat with suppliers licensed by Melbourne 2006, secondly, what his Honour described as the “concessionaire as manufacturer clause” did not provide any certainty as to the content of the supposed trading benchmarks.

55    Factory 5 recognised in argument on the appeal that the construction of the concessionaire as manufacturer clause it had persuaded the primary judge to adopt, may not have been sound. It argued that it was not necessary for the terms and prices or trading benchmarks to be certain for the concessionaire as manufacturer clause to be a valid contractual provision. Factory 5 contended that a clause, such as this, that reposed a discretion in one of the parties was capable of being sufficiently certain to be an enforceable provision. It argued that a contract could confer a discretion on one party so long as it was exercised in good faith in accordance with what Kitto J, with whom McTiernan and Windeyer JJ agreed, had said in Thorby v Goldberg (1964) 112 CLR 597 at 604-605. There Kitto J said (112 CLR at 605):

“But an agreement is not void for uncertainty because it leaves one party or group of parties a latitude of choice as to the manner in which agreed stipulations shall be carried into effect, nor does it for that reason fall short of being a concluded contract.”

56    However, the email of 22 December 2004 did not just propose that Melbourne 2006 have a discretion to appoint an alternative licensee. It responded to the promoters’ request for a right to manufacture products if the suppliers were not able to meet the promoters’ terms or the suppliers’ prices or terms were unworkable or not to market. Melbourne 2006’s response proposed two separate means of resolving the promoters’ concerns. First, Melbourne 2006 proposed that the “trading benchmarks” would ensure that the concessionaire (i.e. the promoters’ nominated vehicle – Factory 5) could manufacture if a licence were “unreasonable or unable to deliver”. That proposal responded directly to the promoters’ request for a right to manufacture on the different basis nominated in their email of 20 December 2004. Secondly, Melbourne 2006 proposed a further term that would operate in addition to, but independently of, the trading benchmarks. The second term would create an absolute discretion for Melbourne 2006 to allow either the concessionaire to manufacture or an alternative licence to be appointed by Melbourne 2006.

57    In other words, in its email of 22 December 2004, Melbourne 2006 rejected the formulation proposed by the promoters and proposed two different means under which the promoters’ vehicle could either have a right to manufacture or have Melbourne 2006 exercise an absolute discretion to appoint a new license. The primary judge conflated the two separate mechanisms proposed by Melbourne 2006 into what he termed the concessionaire as manufacturer clause. That conflation only gave Melbourne 2006 a discretionary power. It overlooked the separate right that Melbourne 2006 had proposed for the concessionaire to manufacture if particular criteria were met. Those criteria were inherently uncertain. And, his Honour had already held that they did not include price. However, that criterion was of fundamental concern to the parties and remained controversial in their written negotiations.

58    The parties thought they had reached agreement on all the essential questions by the time the letter of 23 December 2004 was signed. However, an objective bystander would have been unable to ascertain or specify what criteria would need to be established for Factory 5 to exercise the right to manufacture “should a licensee be unreasonable or unable to deliver”. Because the second mechanism proposed by Melbourne 2006 gave an absolute discretion to Melbourne 2006, the intention of the parties relating to the first mechanism demonstrated that this discretion would not be relevant to determining whether a licensee was being “unreasonable” within the meaning of the first mechanism, which gave Factory 5 a right to manufacture in those circumstances.

59    The question thus becomes whether the 23 December 2004 letter recorded a legally enforceable agreement or a set of broadly expressed commercial terms that required further negotiation and agreement before a legally enforceable long form concessionaire agreement were signed that bound them. The formal expression of the concessionaire as manufacturer provision was by no means clear cut either on 23 December 2004 or, later, as the parties experienced in preparing the long form agreement.

60    The courts will not lend their aid to the enforcement of an incomplete agreement because it is no more than an agreement of the parties to agree at some time in the future: Booker Industries Pty Ltd v Wilson Parking (QLD) Pty Ltd (1982) 149 CLR 600 at 604 per Gibbs CJ, Murphy and Wilson JJ. In Masters 91 CLR at 361 the Court said, appositely for this appeal:

“Cases of the third class are fundamentally different. They are cases in which the terms of agreement are not intended to have, and therefore do not have, any binding effect of their own: Governor &c. of the Poor of Kingston-upon-Hull v Petch ((1854) 10 Exch 610 [156 ER 583]). The parties may have so provided either because they have dealt only with major matters and contemplate that others will or may be regulated by provisions to be introduced into the formal document, as in Summergreene v Parker ((1950) 80 CLR 304) or simply because they wish to reserve to themselves a right to withdraw at any time until the formal document is signed.”

61    The first mechanism in the email of 22 December 2004, for the promoters’ vehicle to manufacture, was a matter of significance to the parties. It was also a mechanism that had to operate for the benefit and protection of both parties. That follows from the fact that the promoters wanted to protect their own commercial interests and profits in any dealings they, or Factory 5, would have to have with Playcorp. At the same time, Melbourne 2006 wanted protection for its interest in the agreement it had already made with Playcorp to be the apparel licensee. In the context of these divergent interests, the expression “should a Licensee be unreasonable” did not offer a means of ascertaining how and against what criteria the reasonableness of the licensee’s position could be assessed. The expression was not related to the licensee’s perception of its own interests, since the promoters’ concern was the maximisation of their vehicle’s profit at the expense of whoever sold apparel to it. In essence, the promoters wanted to be in competition with Playcorp for the supply of apparel and to displace it from then being able to enjoy the benefit of its licence for that supply from Melbourne 2006 in relation to Factory 5. The essence of competition is constant turbulence and instability between competitors: cf NT Power Generation Pty Ltd v Power and Water Authority (2004) 219 CLR 90 at 140 [138] per McHugh A-CJ, Gummow, Callinan and Heydon JJ.

62    For a commercial contract to be workable, the parties had to have some objective means of ascertaining how, as between Factory 5 and Playcorp, the latter would “be unreasonable” in the pursuit of its interests having regard to both the interests of Factory 5 and Melbourne 2006. The Courts can and do assess whether one party to a contract acted reasonably in situations in which the contract sets such a standard. Leases or agreements for lease frequently provide that lessors cannot unreasonably withhold consent to an assignment of the lease by a lessee. And, in Meehan v Jones (1982) 149 CLR 571 the Court held that clauses that provided that a contract for sale of land was subject to finance, or to suitable finance or to satisfactory finance, were not too uncertain to be enforceable. That result came about even though Gibbs CJ and Murphy J held that the purchaser, who had the benefit of the clause, had only to act honestly in considering whether such finance as he or she was offered was satisfactory (149 CLR 581, 597). Mason J observed, in obiter dicta, that the purchaser had to act honestly and reasonably in his or her consideration (149 CLR at 592), while Wilson J favoured the view of Gibbs CJ and Murphy J without deciding whether Mason J’s addition of the requirement of reasonableness was correct (149 CLR at 597-598).

63    Here, Melbourne 2006 and the promoters had not been able to agree on the parameters for deciding whether or not Playcorp was being unreasonable. An objective bystander, knowing the background of the evolvement of the 23 December 2004 letter would have appreciated that this was an issue that would need to be further discussed and resolved in preparing a binding long form agreement. Both the promoters and Melbourne 2006 were expressing different views about the reasonableness of Playcorp’s prices and the emails of 20 and 22 December 2004 repeatedly referred to the need for the promoters and Playcorp to negotiate further with one another to resolve final positions. All of these factors point to the use of the words “should a Licensee be unreasonable” as a matter that required further clarification in a legally binding agreement, but would suffice as a general, but unenforceable, statement of the parties’ long term goal of reaching agreement.

64    It follows that this critical provision was not agreed as at 23 December 2004 but was to be the subject of further negotiation between the parties. This was consistent with the wording of the 23 December 2004 letter. It expressly made the appointment of Factory 5 subject to three conditions:

(1)    the parties reaching agreement on a legally binding long form agreement;

(2)    that agreement being provided – drafted – by Melbourne 2006; and

(3)    the board of Melbourne 2006 approving the actual terms of the document to govern the parties’ relationship.

65    None of those three conditions was ever satisfied. Before stating those conditions, the letter recorded that “F[actory] 5 is to be appointed as Concessionaire subject to” them. (emphasis added) The words just emphasised indicated that the appointment would only occur in the future after satisfaction of the specified conditions. In addition, the letter noted that the parties would not make any public announcement until a long form agreement had been executed. That was another indicium that the terms of the letter were not intended by the parties, when considered objectively, to create a legally binding relationship in themselves: Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 548A-550D, 551B-D per Gleeson CJ with whom Hope and Mahoney JJA agreed. Here the 23 December 2004 letter amounted to an acceptable framework for the preparation of a long form agreement that required substantive further negotiation and agreement. As Gleeson CJ explained with his customary lucidity in Geebung Investments Pty Ltd v Varga Group Investments Pty Ltd (No 8) (1995) 7 BPR 14,551 at 14,552:

“As the decision in the Australian Broadcasting Corporation case illustrates, the fact that parties to negotiations have agreed upon the major matter under discussion, confidently believing that the remaining matters to be decided will be sorted out later between them or their lawyers, without any difficulty, can sometimes create a misleading appearance of consensus. Such parties may well believe that they have a “deal” or a “bargain”, and speak and act accordingly, whilst at the same time knowing and intending that further and more detailed agreement is necessary. For that reason, conduct such as shaking hands, or using the language of agreement, can be ambiguous. The resolution of the ambiguity may require more detailed factual and legal analysis.”

66    The parties subsequently had difficulties, culminating in an impasse, in formulating a clause for the long form agreement to encapsulate when Factory 5 could exercise its right to manufacture or source its own supply of apparel. That provides a further indication that the 23 December 2004 letter did not amount to a concluded bargain: Australian Broadcasting Corporation 18 NSWLR at 550B-C. As the primary judge found, throughout the negotiation process for the long form agreement the parties were at issue about the appropriate wording for the concessionaire as manufacture clause. Melbourne 2006 had proposed using the expression “reasonable commercial terms”. But, unsurprisingly Factory 5’s lawyers considered that this lacked sufficient clarity. That demonstrated the absence of any earlier contractual consensus for which Factory 5 argued in the proceedings and the appeal. The argument must fail for the reasons, among others, Factory 5 had advanced in resisting the uncertain expression “reasonable commercial terms” during the negotiations in 2005.

Conclusion

67    It follows that the appeal fails and Melbourne 2006 succeeds on its amended notice of contention. Since no contract was made, the questions raised in issues (2) and (3) above at [45] do not arise. Suffice to say, that Melbourne 2006’s letter of 24 June 2005 proceeded on a correct appreciation that the parties had made an agreement to agree on 23 December 2004 and not a binding contract.

68    The State only took the point on which it has succeeded after being invited to amend its notice of contention to do so by the Court during the hearing of the appeal (see Factory 5 [2011] FCAFC 77 at [1]). The parties may wish to address the question of costs to the extent that the order made on 23 May 2011 that the State pay Factory 5’s costs thrown away by reason of the amendment is insufficient. Prima facie, Factory 5’s position should be met by that order and an order that it pay the State’s costs provided that the amounts payable under both costs orders may be set off. Unless Factory 5 files and serves written submissions for some other order within seven days, that order will be made.

Associate:

Dated:    26 October 2012

REASONS FOR JUDGMENT

FOSTER J:

69    I have had the benefit of reading the joint judgment of Rares and Dodds-Streeton JJ in draft. I agree that the appeal should be dismissed. I also agree with their Honours’ proposal in respect of costs. I generally agree with their Honours’ reasons. I wish to add a few observations of my own. For consistency, I shall adopt as necessary the abbreviations and acronyms used by their Honours.

70    M2006 issued its Request for Proposal for the Games-Time Official Retail Concessionaire(s) (Games Venues and Superstores) (the RFP) on or about 9 September 2004. The scope of the appointment of the concessionaire contemplated by the RFP was specified on p 4 of the RFP as follows:

Melbourne 2006 is seeking to appoint an Official Merchandise Concessionaire to design, build and operate Games-time venue concessions and Superstores (“Concessions”).

The purpose of these official retail outlets is to provide the means for the public to purchase official licensed merchandise during Games time at venues and generate revenue for Melbourne 2006.

71    It was intended that most of the concessions would be housed in walk-up temporary structures. Details of the competition timetable and venues were provided as attachments to the RFP. M2006 anticipated that two superstores would be operated by the selected concessionaire. These were to be larger more permanent structures at least one of which would be located in the Melbourne CBD. Certain specific retail concessions were not covered by the RFP. In s 4 of the RFP, the responsibilities of M2006 and the concessionaire were described in some detail.

72    The RFP provided that products sold by the concessionaire were to be offered at the recommended retail price for each product. Sales reporting was required on a daily basis. Under the heading “Inventory” on p 7 of the RFP, the RFP provided:

Products must be purchased exclusively from Official Licensees. The Concessionaire is responsible for purchasing all stock and inventory management, as well as providing off site storage in the event that on-site storage is not sufficient.

…

If the Concessionaire wishes to sell any products other than those of Official Licensees (eg sponsor products) Melbourne 2006 written approval is required.

73    Some merchandise was to be “exclusive to venue”. Nonetheless, such products had to be supplied by Official Licensees.

74    At pp 8–9 of the RFP, the following appeared:

Product Ordering Policy from Official Licensees

All merchandise must be purchased exclusively from Official Licensees. Melbourne 2006 discourages extensive arrangement of “sale or return” trading terms. Please provide information on the intended process for merchandise buying including the intended timing of range planning and placement of firm orders in the lead up to the Games, anticipated timing of deliveries to warehouse and proposed strategies for any further buying during the Games.

In line with the Superstore’s showcasing objectives, a broad range of merchandise from Official Licensees must be offered.

Please outline your proposed policies and trading terms for ordering product from Official Licensees.

Please note that it is expected that a number of the Official Licensees will require the Concessionaire to provide a bank guarantee or letter of credit to secure the Concessionaire’s credit purchases from them. If required by an Official Licensee, the Concessionaire must provide acceptable security to secure its obligations.

Additional Licenses – spectator products, etc

In the event that the Concessionaire identifies products that it believes should be available in Concessions but for which there is no Official Licensee (eg spectator products such as cushions, etc), Concessionaire must bring that to the attention of Melbourne 2006. Melbourne 2006 will be at liberty to appoint an Official Licensee in that category, or to appoint Concessionaire as Official Licensee in that category, in accordance with Melbourne 2006 standard commercial terms for Official Licensees.

Sales Forecast

Please provide preliminary sales forecasts for the Venue Concession Outlets and Superstores, including your rationale given that you will ultimately require further information to confirm your preliminary estimates.

Concessionaire’s Margin

Please specify your proposed margin on recommended retail price.

Royalty Rates

The Concessionaire will be required to pay an acceptable royalty to M2006. Please propose a royalty rate based on retail sales. You may wish to propose a sliding scale based on sales forecasts. No shrinkage allowance will be available.

Minimum Guarantee

The Concessionaire will be required to pay a substantial minimum guarantee to M2006 and must provide an acceptable bank guarantee or letter of credit to secure its minimum guarantee obligations. Please propose a minimum guarantee amount. Please also propose a payment schedule.

75    M2006 was not bound to accept any proposal submitted in response to the RFP and reserved the right to vary, suspend or abandon the RFP. The RFP provided that M2006 would evaluate proposals submitted to it in response to the RFP and then finalise a short list or a preferred company for further discussions. The selection of a “preferred company” was a basis for further discussions which M2006 no doubt anticipated would lead to the making of a binding contract.

76    The ground rules laid down in the RFP included the following:

(a)    The selected concessionaire would be obliged to purchase products for sale at its outlets exclusively from Official Licensees ie licensees approved as Official Licensees by M2006. Should the concessionaire wish to sell products sourced from others, the written approval of M2006 was required.

(b)    Each respondent’s ordering policies and proposed trading terms for ordering products from Official Licensees were to be included in its formal response to the RFP. It was expected that each respondent would agree to provide acceptable security for its obligations to Official Licensees.

(c)    Each respondent was required to submit preliminary sales forecasts.

(d)    Each respondent was obliged to specify its proposed margin on the recommended retail price.

(e)    Each respondent was required to agree to pay an acceptable royalty to M2006.

77    The RFP also required each respondent to provide other information to M2006, including its business plan.

78    In October 2004, Stage 5 Promotions Pty Ltd and The Promotions Factory Pty Ltd (together called “the promoters”) lodged a proposal with M2006 in response to the RFP. The promoters’ response included cashflow and revenue projections and a proposal as to the royalties to be paid to M2006. The promoters informed M2006 that they intended to incorporate a company which would be the vehicle used by them to act as the concessionaire should their proposal be accepted in principle.

79    In Note 2 appended to their Merchandising Budget Summary which formed part of their response to the RFP, the promoters said:

Budgets are based on cost of goods sold not exceeding 32.5%. Should this not be achievable through the licensee we reserve the option to manufacture the product ourselves and pay an additional 15% royalty on the wholesale price. We will endeavour to negotiate fair and reasonable commercial terms with all Suppliers. We will be asking for some stocks to be held for us (unbranded), some percentage of stock on sale or return and mark-down financial structure (similar to major Retail practices) will be negotiated.

80    Other notes forming part of that document addressed other important commercial terms.

81    In effect, the promoters’ response included terms which did not conform to the requirements laid down in the RFP to the effect that all products for sale at the outlets were to be purchased from Official Licensees. The promoters were positioning themselves to try to secure a contract which allowed some leeway on this important point.

82    At [26]–[28] of his Reasons for Judgment, the primary judge said:

26    On 15 November 2004 Hilton, Strapp and Glover attended a meeting with Cohen, Mair and Speer at which TPF/Stage 5 made a presentation in support of its proposal. At that meeting and in communications prior thereto (to which I will return), concern was raised by TPF/Stage 5 as to what might occur if Playcorp, the only official licensee for manufacturing Games apparel that M2006 had appointed, was unreasonable in relation to its pricing or other matters.

27    On 25 November 2004, Cohen and Mair provided a document to Speer which summarised and critiqued the proposal of TPF/Stage5 and another entity competing for the concessionaire contract. TPF/Stage 5 was identified as the preferred applicant and it was suggested that negotiations continue with TPF/Stage 5. On 7 December 2004 Cohen sought, and Strapp provided, information about the proposed joint venture entity that would be established if TPF/Stage 5 were successful.

28    On 6 December 2004, both M2006’s Joint Marketing Committee and Finance Committee approved TPF/Stage 5 as the preferred negotiating partner “based on the structure presented”. These decisions were endorsed by a circular resolution of the Board of M2006 in the course of December 2004.

83    At the meetings which were held on 15 November 2004 and on 25 November 2004, Hilton, Strapp and Glover represented the promoters and Cohen, Mair and Speer attended on behalf of M2006.

84    After M2006 decided (on 6 December 2004) that the promoters and their venture company were to be the preferred negotiating partners, the critical exchanges comprising emails and correspondence described in detail by Rares and Dodds-Streeton JJ at [6]–[12] of their Reasons took place. These exchanges culminated in the meeting held on 23 December 2004. I need not repeat the detail of these exchanges.

85    In addition to the observations made by Rares and Dodds-Streeton JJ in respect of those emails and that correspondence in their joint judgment, I would add the following:

(a)    In its letter dated 16 December 2004 to the promoters, M2006 specified the following royalties payment schedule:

10% on signing

25% June 2005

25% January 2006

40% April 2006

(b)    In the same letter, M2006 stated that 30% of the entire range of products was to be “Exclusive to Venue Merchandise”, that the full range plan and full buying plan were to be submitted to M2006 for its approval by April 2005 and that the full VM plan was to be submitted to M2006 for its approval by August 2005. The Minimum Firm Purchase Order was to be placed by 1 September 2005.

(c)    The letter dated 16 December 2004 concluded with a suggestion that the parties’ representatives meet as soon as possible with a view to “… reaching a mutually rewarding agreement …” with the proposed joint venture company.

(d)    As at 23 December 2004, the parties contemplated entering into a formal contractual document (described by M2006 as “… a legally binding Long Form Concessionaire Agreement to be provided by M2006 …”). In its letter dated 23 December 2004, M2006 stated:

The parties acknowledge that the Confidentiality Agreements which have been signed continue to apply and neither party will make any public announcement until a Long Form Concessionaire Agreement has been executed.

86    As the primary judge found, by the time the promoters began negotiating for appointment as the licensed merchandise concessionaire, M2006 had already appointed Playcorp as its official licensee for the supply of official games apparel. This meant that, in reality, it was Playcorp with which the promoters and ultimately Factory 5 had to come to terms for the supply of that apparel. These were matters of which the promoters were well aware by October 2004.

87    The first draft of the formal Concessionaire Agreement was provided by M2006 to Factory 5 on 3 February 2005. Representatives of the parties met to discuss that draft during the week beginning 7 February 2005. A revised draft was forwarded by M2006 to Factory 5 on 15 February 2005.

88    Clauses 6.2, 6.3(a), (b) and (c), 6.5, 6.6, 6.7 and 6.8 of that revised draft were in the following terms:

6.2    Acquisition of Merchandise

(a)     All Merchandise must be acquired from M2006 Licensees and shall be subject to M2006 prior written approval. The Concessionaire must provide to M2006, on a fortnightly basis, copies of all purchase orders issued by the Concessionaire for Merchandise and a summary report in a form approved by M2006 of the status and deliveries of all Merchandise.

(b)     The Concessionaire agrees to provide to M2006 Licensees a minimum firm purchase order of a total amount not less than $2,000,000 which may be placed across various M2006 Licensees. The latest date for placement of the minimum firm purchase order is 1 September 2005.

(c)     The Concessionaire shall use all reasonable endeavours to procure a supply of Event Specific Merchandise, the design of which is to be subject to the prior written approval of M2006.

(d)    The Concessionaire shall use its best endeavours to ensure that:

(i)    from 15 March 2006 until 19 March 2006 (inclusive), enough Merchandise is at hand at each Outlet, so that the amount of    Merchandise sold on a given day is ten (10) per cent of the    Merchandise which was on hand at the beginning of that particular day; and

(ii)     from 20 March 2006 until 26 March 2006 (inclusive), enough Merchandise is at hand at each Outlet, so that the amount of Merchandise sold on:

(A)    20 March 2006 is twenty (20) per cent;

(B)    21 March 2006 is twenty five (25) per cent;

(C)    22 March 2006 is thirty (30) per cent;

(D)    23 March 2006 is thirty five (35) per cent;

(E)    24 March 2006 is forty (40) per cent;

(F)    25 March 2006 is forty five (45) per cent; and

(G)    26 March 2006 is fifty (50) per cent,

of the Merchandise which was on hand at the beginning of that particular day.

(e)     M2006 will use its reasonable efforts to assist the Concessionaire to acquire licensed products bearing standard and unique graphics and art from M2006 Licensees for inclusion in Event Specific Merchandise.

(f)     The Concessionaire may negotiate with M2006 Licensees, or other suppliers approved by M2006, to agree on an amount of unbranded Merchandise which is to be held by an M2006 Licensee, or supplier as applicable, which can be branded and supplied to the Concessionaire within forty-eight (48) hours of the request in writing by the Concessionaire during the Games Period.

6.3    Licensed Products

(a)     Merchandise offered for sale by the Concessionaire may vary from Venue to Venue and may include Event Specific Merchandise. The precise items of Merchandise to be sold or distributed shall be determined by the Concessionaire and M2006, after development of the Merchandise plan.

(b)     In the event that the Concessionaire wishes to sell items in respect of which M2006 has granted a licence to an M2006 Licensee and that M2006 Licensee does not provide these items on reasonable commercial terms taking into consideration, without limitation, the price, delivery time and trading terms, then the Concessionaire may, with the approval of M2006, supply the items itself. In the event that the Concessionaire does supply the items itself the Concessionaire shall pay a twenty (20) per cent retail royalty to M2006 in relation to these particular items.

(c)    In the event that the Concessionaire wishes to sell items in respect of which M2006 has not granted a licence to any M2006 Licensee or in respect of which an M2006 Licensee is unable to deliver to the Concessionaire, M2006 will consider entering into an agreement with the Concessionaire for the Concessionaire to manufacture such items at its absolute discretion. Notwithstanding this, M2006 reserves the right to enter into an agreement with an alternative M2006 Licensee to manufacture such items where it determines it appropriate to do so.

6.5    Sponsor Related Product Sales

(a)     The Concessionaire acknowledges that M2006 may require the Concessionaire to make certain Sponsor products available for sale and the Concessionaire agrees to do so. The terms and conditions of sale will be negotiated between the particular Sponsor and the Concessionaire and must be approved by M2006.

(b)    Nothing in this Agreement shall prohibit Sponsors from selling products in respect of which a Sponsor has been granted a non-exclusive licence to do so at any Venues.

(c)     If M2006 requests that other specific Merchandise be made available for sale at specific Outlets, the Concessionaire shall provide space for and sell such Merchandise within the Outlet.

6.6    Pricing of Merchandise

Subject to obligations arising under any Laws, the Concessionaire:

(a)    will submit the proposed retail sales price of each item of Merchandise to M2006 on or before 30 September 2005 for its approval:

(b)    acknowledges that the pricing approved by M2006 cannot be increased without the prior written consent of M2006; and

(c)     must ensure that the proposed pricing is competitive with other major events and comparative retail environments and is consistently applied throughout all Outlets.

6.7    Payment for Merchandise

The Concessionaire agrees to comply with M2006 Payment Policy as notified to the Concessionaire and which may be amended from time to time.

6.8    Disposal of Merchandise

(a)     The Concessionaire must include in the Merchandise plan submitted to M2006 pursuant to clause 6.1(b) a business plan in relation to its proposed sale and distribution of Merchandise after 26 March 2006 covering such issues as sales method, sales location, timing and royalties payable to M2006. The Concessionaire must not sell or distribute Merchandise after 26 March 2006 unless and until it has obtained M2006’s written approval of the business plan and may only sell or distribute Merchandise after that date in accordance with the approved business plan, which may involve a Warehouse Sale if the Concessionaire wishes to hold one.

(b)     M2006 acknowledges that the Concessionaire may enter into negotiations with an M2006 Licensee to request a markdown rebate of any amount agreed between the parties in relation to all firm orders of Merchandise which are not sold as at the conclusion of 26 March 2006. Both parties agree that a markdown rebate of five (5) per cent of total spend from the M2006 Licensees is reasonable and the Concessionaire shall not exclude dealings with a particular M2006 Licensee where the M2006 Licensee offers a markdown rebate of five (5) per cent or a greater amount.

89    Clause 45.1 provided that:

45.1     Approvals and consents

Except as otherwise set out in this Agreement, M2006 may give or withhold an approval or consent to be given under this Agreement in its absolute discretion and subject to any conditions determined by it. M2006 is not obliged to give its reasons for giving or withholding consent or for giving any consent.

90    A further revised draft of the formal Concessionaire Agreement was sent by M2006 to Factory 5 on 3 March 2005. This was the last draft sent to Factory 5. It did not differ in any relevant respect from the draft which had been sent on 15 February 2005.

91    By early March 2005, Factory 5 was complaining to M2006 that Playcorp’s insistence upon the provision of a bank guarantee for the full price of goods upon delivery was uncommercial. It must be remembered, however, that the RFP had stated that a bank guarantee or similar acceptable security in favour of official licensees/suppliers would be required in respect of credit purchases made by the concessionaire from those official licensees/suppliers. Factory 5 and the promoters had resisted agreeing to such a term. Ultimately, Playcorp agreed to accept guarantees from Factory 5’s parent corporations thereby resolving this particular issue.

92    By 17 March 2005, Playcorp and Factory 5 were in conflict about the terms of trade for the supply of official licensed games apparel by Playcorp to Factory 5. One of the main sticking points was the price at which the goods were to be sold by Playcorp to Factory 5.

93    At the same time, the lawyers advising Factory 5 in relation to the draft Concessionaire Agreement raised concerns with cl 6.3(b) of that draft. Those concerns were passed on to M2006. However, M2006 rejected the suggestions made by those lawyers concerning the way in which the proposed Long Form Concessionaire Agreement should address trade terms between Factory 5 as concessionaire and official licensees/suppliers. In its email dated 22 April 2005, M2006 said that it did not have sufficient control over licensees to make the commitment sought by Factory 5.

94    Clause 6.3(b) of the draft Concessionaire Agreement sent to Factory 5 on 3 March 2005 provided that Factory 5 may, with the approval of M2006, source merchandise from a supplier other than an official licensee if the licensee does not agree to provide those items “… on reasonable commercial terms …” taking into consideration the price, the delivery time and trading terms. Factory 5’s lawyers had advised Factory 5 that the expression “on reasonable commercial terms” was an inherently uncertain expression and that, were Factory 5 to agree to the proposed cl 6.3(b), it might well end up at the mercy of its suppliers, especially those who were exclusive licensees in respect of particular merchandise. They went on to advise:

Particular issues in this regard could include:-

(i)    Your inability to obtain goods from a Licensee at a competitive price. In this regard, we note that you have suggested that ‘reasonable commercial terms’ would require the Licensee to match or better terms that you are able to obtain through (say) 3 quotations from other suppliers together with a reasonable mark up (say 20% to 25%) by the Licensee; and

(ii)    You may wish to obtain goods from Licensees on terms which allow you to make use of cash flow into the business in order to make full payment for the goods that you purchase. This would be particularly appropriate bearing in mind the need for you to obtain large quantities of Merchandise substantially ahead of the time when you are likely to receive income from the sale of that Merchandise. Thus, for example, you may wish to approach Licensees and seek that you be given the right to purchase goods from them on the basis that you pay 30% of the full purchase price of the goods with the balance payable at a later date.

95    Factory 5 made available to M2006 the advice which it had received from its lawyers. M2006 was unimpressed with what it saw as Factory 5’s attempt to increase its margins on merchandise by replacing Playcorp, which was an official licensee, with apparel suppliers of its own choice and its attempt to secure more favourable terms of trade as between it and Playcorp. This is why it rejected Factory 5’s suggestions directed to these ends when it sent its email of 22 April 2005.

96    In April and May 2005, Factory 5 continued to negotiate trading terms with Playcorp. Factory 5 wanted Playcorp to extend credit to it to the extent of 60% of the purchase price for 60 days. There were also serious ongoing difficulties about the price at which goods would be sold by Playcorp to Factory 5. At the same time, Factory 5 was urging M2006 to allow it to source the relevant apparel from a different supplier, being a supplier of its choosing. By 3 June 2005, Factory 5 had informed M2006 that it considered both the terms of trade and pricing offered by Playcorp to be uncommercial. M2006, on the other hand, considered both the terms of trade and the pricing offered by Playcorp to be commercial and acceptable.

97    On 3 June 2005, representatives of M2006 and Factory 5 met and discussed the impasse that had been reached concerning Factory 5’s relationship with Playcorp and the terms upon which it would trade with Playcorp. The meeting failed to resolve that impasse.

98    On 16 June 2005, Factory 5 sent an email to M2006. In that email, the author asserted that M2006 had both “a moral and legal obligation” to Factory 5. Those obligations were said to arise from the letter dated 23 December 2004, the earlier letter dated 22 December 2004 and other alleged assurances. This was the first time that Factory 5 made a relatively clear assertion that M2006 had any “legal obligation” to it.

99    On 17 June 2005, M2006 sent a letter dated that day to Factory 5. In that letter, M2006 stated that the current terms of trade offered by Playcorp to Factory 5 constituted reasonable commercial terms. It went on to say that it would not exercise its discretion to appoint an additional licensee in the apparel category or to appoint Factory 5 itself or one of its associated companies to manufacture licensed apparel. M2006 did not anchor these decisions in any contractual entitlement under the 23 December 2004 letter. M2006 concluded its letter with demands that Factory 5 execute the current draft of the formal Long Form Concessionaire Agreement and place firm orders with Playcorp. It also denied that it was in breach of any agreement with Factory 5. It asserted that the delays caused by Factory 5’s endeavours to circumvent Playcorp as its apparel supplier were impacting upon finalisation of the “… legally binding …” Long Form Concessionaire Agreement between M2006 and Factory 5 and of other related agreements. M2006 also asserted that Factory 5’s appointment as concessionaire had been “… subject to reaching agreement on a legally-binding long form agreement”.

100    Factory 5’s lawyer then wrote to M2006 by letter dated 21 June 2005. In that letter, the author traversed the history of the matter according to his instructions. He asserted that representatives of M2006 had misrepresented a number of matters to representatives of Factory 5 and also that, by insisting that Factory 5 deal exclusively with Playcorp, M2006 had breached s 47 of the Trade Practices Act 1974 (Cth). The letter concluded as follows:

The Future

Our client has made demands on numerous occasions, that it be appointed as an apparel licensee or that M2006 appoint another apparel licensee immediately. It again makes that demand.

Our client now has time constraints. It has expended large amounts of money in preparation for this contract, has appointed new staff and given up other contracts in readiness for this venture. Our client believes that the delay by M2006 to deal with this issue is having a detrimental effect on its ability to run the concession business to its maximum potential.

Our client will sign the long form Concessionaire agreement when you adhere to the representations that you have made and to the terms of the Heads of Agreement. Our client does not have to place firm apparel orders within 2 days pursuant to the Heads of Agreement or the long form agreement. On what basis do you make such a demand now?

Our client is keen to continue with M2006 in accordance with the terms of the Agreement signed on 23 December 2004. If you are not prepared to appoint our client as an apparel licensee or appoint another independent apparel licensee within 24 hours, our client reserves all its rights including seeking injunctive relief.

Kindly contact Bettina Evert as soon as possible.

101    By letter dated 24 June 2005 from M2006 to Factory 5, M2006 terminated negotiations with Factory 5. Omitting formal parts, that letter was in the following terms:

Factory 5 Pty Ltd

I refer to my letter dated 17 June 2005 and acknowledge receipt of the letter from Fetter Gdanski dated 21 June 2005.

Since December 2004, Melbourne 2006 Commonwealth Games Corporation (M2006) has sought in good faith to negotiate the terms of a legally binding long form Concessionaire Agreement with Factory 5 Pty Ltd (F5). The delay in finalising this agreement has put in jeopardy the success of the concessions business.

In my letter dated 17 June, I requested F5 to execute the long form Concessionaire Agreement within two business days.

As this time period has now elapsed and F5 has not executed the Concessionaire Agreement and provided it to M2006, M2006’s position is that it is no longer prepared to continue negotiations with F5. Accordingly, this letter is notice that, with immediate effect, M2006 has terminated negotiations with F5.

M2006 will now take appropriate steps to protect its commercial interests in relation to the concessions business.

102    The only response to this letter was Factory 5’s letter dated 16 August 2005. Omitting formal parts, that letter was in the following terms:

Re: Melbourne 2006 Commonwealth Games (“M2006”)

We refer to this matter and to your letter of 24 June 2004.

Our client is bemused by your client’s letter given that it has never received a final copy of the Concessionaire Agreement that it is supposed to sign. Consequently, we do not know what it is that our client is supposed to sign. We note further that both you and your client have studiously avoided dealing with the issue relating to s47 of the Trade Practices Act (the ‘Act’).

We are aware of notification 91574 that M2006 has obtained from the ACCC for the purposes of catering, but our searches do not suggest that there has been any other applications in relation to apparel.

We advise that our client reserves its rights in relation to the Heads of Agreement. It regards your client as being in breach of its obligations and is of the view that it has acted in a misleading and deceptive manner. Our client has further taken its concerns about your client’s apparent breach if [sic] s47 to the ACCC.

Consideration

Issue 1—Was a Binding Contract made on 23 December 2004?

103    As Rares and Dodds-Streeton JJ have noted at [3], [18] and [48] of their joint judgment, the primary judge held that the parties made a binding contract on 23 December 2004 when M2006 provided its letter dated that day to representatives of Factory 5 and those persons signed the letter in order to signify Factory 5’s agreement to the terms thereof.

104    I respectfully disagree with that conclusion. My reasons may be shortly stated as follows:

(a)    According to its terms, the letter dated 16 December 2004 sent by Mair to Hilton (being the first item listed in the letter from M2006 to Factory 5 dated 23 December 2004) was not an offer but merely “… a basis for negotiation”. In that letter, Mair described in summary form and in very general terms the circumstances in which M2006 might consider exercising its discretion to allow the concessionaire itself to manufacture merchandise. That description was consistent with the terms of the RFP. The letter did not address the possibility that entities other than the official licensee or the concessionaire would be permitted to manufacture the requisite merchandise nor did it address at all the question of whether M2006 was obliged to consider exercising the discretion referred to in the event that one or more of the circumstances described came to pass or whether there was to be no binding obligation on M2006 to consider exercising the discretion referred to even if the requisite circumstances obtained.

(b)    In their email of 20 December 2004, the promoters did not engage at all with the broad proposal propounded by M2006 in its letter of 16 December 2004 in respect of the possibility that the concessionaire could become the manufacturer. Instead, the promoters fleshed out the ideas which they had first raised in their October 2004 proposal lodged with M2006 in response to the RFP. As Rares and Dodds-Streeton JJ have noted at [9] of their joint judgment, the promoters sought to lay down prescriptive terms and conditions in their agreement with M2006 which were designed to regulate their commercial arrangements with official licensees and to allow their corporate vehicle itself to manufacture merchandise in the event that suppliers were not able to meet the specified terms or in the event that the suppliers’ terms were “unworkable” or “not to market”.

(c)    As at 20 December 2004, there was no consensus between the promoters and M2006 in respect of the terms upon which the concessionaire would be permitted to become the manufacturer or would be permitted to secure an alternative supplier of their choice. This particular matter was of vital importance to both parties. M2006 wished to protect its official licensees/suppliers with whom it had already made firm arrangements. The promoters, on the other hand, were attempting to secure freedom for their venture company itself to supply licensed merchandise or, at the very least, to be free to select the suppliers itself. They saw this as an extremely important factor in maximising their likely profit from the venture.

(d)    It is true that, in the email response which M2006 sent on 22 December 2004, there was some movement by M2006 in relation to the terms upon which it might be prepared to allow the concessionaire itself or other suppliers to manufacture licensed merchandise. However, there was no agreement with respect to the more detailed terms set out in the promoters’ email of 20 December 2004. M2006 proposed that there be negotiations between the promoters and the licensees regarding unbranded stock, markdowns, markdown rebates and percentage shares of markdowns. M2006 indicated that it would work with the licensees and with the concessionaire in order to achieve a reasonable and successful outcome for all parties. M2006 said that it would:

… grant permission at its absolute discretion to allow Concessionaire to manufacture …

and that it reserved the right to appoint an alternative licensee/supplier should it decide that this was appropriate. M2006 did not agree to the demand made by the promoters in their email of 20 December 2004 to the effect that:

In the event that Suppliers are not able to meet these terms [referring to the terms laid out by the promoters in the earlier part of their email] or their price and terms are unworkable or not to market, we would like the right to manufacture the product ourselves.

(e)    In their email of 23 December 2004, the promoters said that they were in agreement with the points outlined. This email was followed by the letter dated 23 December 2004.

(f)    The second paragraph of M2006’s letter dated 23 December 2004 is in the following terms:

We confirm that the parties have agreed that F5 is to be appointed as Concessionaire subject to reaching agreement on a legally binding Long Form Concessionaire Agreement to be provided by M2006 and subject to 2006 Board Approval.

The parties have agreed to enter into this agreement on the commercial terms and conditions [set out in the listed correspondence].

The letter went on to stipulate that no public announcement was to be made until the Long Form Concessionaire Agreement referred to earlier in the letter had been executed. The letter contemplated that immediate attention would be given to the drafting of the formal Long Form Concessionaire Agreement. Signing the letter was said to constitute an acknowledgement of the terms set out therein.

(g)    Although in its letter dated 16 December 2004, M2006 had said that it hoped that the essential terms of its deal with the promoters would be further detailed in “… a legally binding Deal Memo …” and subsequently in a formal Long Form Concessionaire Agreement, that statement should be regarded as a statement of intention the significance of which needs to be assessed in light of the context in which it was made and in light of subsequent events. M2006 plainly hoped to nail down the key commercial terms of the deal by 23 December 2004 and to have it fully and formally documented by 31 January 2005. For reasons which I will explain further below, these hopes were not fulfilled.

(h)    The language deployed by M2006 in its letter dated 23 December 2004 must be interpreted in light of the exchanges which had taken place between 16 December 2004 and 22 December 2004 and in light of the terms of the RFP and of the promoters’ response to the RFP. The position reached in those exchanges in respect of the important issue of the terms upon which Factory 5 would be permitted itself to manufacture official licensed merchandise or the terms upon which an official licensee might be replaced by M2006 was as follows:

(i)    Factory 5 and the existing official licensees/suppliers were to negotiate the detailed commercial terms upon which they would deal with each other;

(ii)    M2006 would assist in facilitating successful outcomes from those negotiations but would not bind itself legally to use its best endeavours to do so; and

(iii)    M2006 retained an absolute discretion as between it and Factory 5 as to whether and, if so, when, in what manner and on what terms it would replace an existing licensee/supplier with Factory 5 or an alternative supplier.

That is to say, the expectation of the parties was that Factory 5 would deal with the existing appointed official licensees in order to agree terms. M2006 would assist it to do so. If such terms were not able to be agreed, M2006 might consider allowing Factory 5 itself to manufacture merchandise or might consider appointing a new supplier. But the decision as to whether it would be prepared to consider doing so and, if so, the terms upon which it might do so remained within its absolute discretion. M2006 undertook no binding obligation whatsoever to take steps to ameliorate in Factory 5’s interests the fundamental basis upon which Factory 5 was to obtain official licensed merchandise, namely, that it was obliged to obtain such merchandise from official licensees, most, if not all, of whom had already been appointed.

(i)    Against this background, the expressions “… is to be appointed (concessionaire) …” and “… subject to reaching agreement …” in the letter of 23 December 2004 should be interpreted as referring to the future. The contemplation of the parties reflected in the words which the parties chose was that the appointment would only take effect when they had signed the Long Form Concessionaire Agreement which was to be prepared within a very short time after 23 December 2004 (allowing for the interposition of the 2004 Christmas holidays). It is that Long Form Concessionaire Agreement which was to be “… legally binding …”. That Long Form Concessionaire Agreement was to stand in contradistinction to the letter dated 23 December 2004. The words deployed at the beginning of the third paragraph of that letter (“The parties have agreed to enter into this agreement on the commercial terms …”) confirm this view. “This” agreement is a reference to the Long Form Concessionaire Agreement rather than to some agreement allegedly set out in the letter itself. The commercial terms to be embodied in the Long Form Concessionaire Agreement are those contained in the emails and correspondence listed in the letter. No public announcement suggesting that Factory 5 had been appointed concessionaire was to be made until the formal Long Form Concessionaire Agreement had been executed. All of these matters suggest that the parties did not intend that they would be immediately bound once the Factory 5 representatives signed the acknowledgement at the foot of the 23 December 2004 letter from M2006. I consider the partaking of champagne by some of those involved late in the day on 23 December 2004 as irrelevant to the determination of the issue at hand.

(j)    In my judgment, the present case falls within the third class of cases described by Dixon CJ, McTiernan and Kitto JJ at 360 in Masters v Cameron (1954) 91 CLR 353. No legally binding agreement between M2006 and Factory 5 was reached on 23 December 2004.

(k)    This conclusion is supported by a consideration of the parties’ conduct between 23 December 2004 and 24 June 2005. That conduct is admissible on the question of whether a legally binding contract was made on 23 December 2004 but is not admissible to prove the terms of any such contract (Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251 at 9255–9256).

(l)    Here, the dealings between the parties in the period between 3 February 2005 and 24 June 2005 which are substantially chronicled at [87]–[102] above do not suggest that the parties had intended to be immediately bound once their representatives had signed the letter of 23 December 2004. They suggest the opposite conclusion. Many matters were considered unresolved. But the key issue which continued to fester and prevent final agreement was the issue concerning the basis upon which Factory 5 or a supplier selected by it might be allowed to replace an official licensee as a supplier of official licensed merchandise. The dealings between the parties in this period establishes beyond argument, in my view, that no agreement in respect of this important matter was ever reached between the parties. Agreement on this matter was fundamental to the concessionaire agreement. Without agreement on this matter, there would never be a contract at all. Factory 5 persisted to the bitter end in its attempts to be given the right to control its sources of supply. M2006 was just as determined to insist upon Factory 5 dealing with its existing official licensees although it was prepared to indicate that it might, at its absolute discretion, consider other arrangements. Neither party accepted the other’s position and the deal fell apart.

(m)    In their letter dated 21 June 2005 to M2006, Factory 5’s lawyers made no clear suggestion that M2006’s refusal to agree to Factory 5’s proposals was a breach of a contract made on 23 December 2004. The only potential cause of action mentioned in that letter was a contravention of s 47 of the Trade Practices Act 1974 (Cth).

(n)    The letter dated 24 June 2005 from M2006 to Factory 5 proceeds upon the basis that there is no legally binding agreement in force as at that date. In the letter, that which is terminated is not the alleged 23 December 2004 contract but “… negotiations …” with Factory 5.

(o)    The letter dated 16 August 2005 from Factory 5 to the lawyers for M2006 does not contain any demand that M2006 perform the alleged 23 December 2004 contract nor does it assert that the correspondence of that date constituted a binding contract as at that date.

Issue 2—Uncertainty

105    This point was not argued before the primary judge. Before the Full Court, having amended its Notice of Contention, the State of Victoria (as successor to M2006) contended that the exchanges between the parties which occurred in the period between 16 December 2004 and 23 December 2004 did not culminate in any agreement which was sufficiently certain to be enforceable.

106    Senior Counsel for Factory 5 submitted that the concessionaire as manufacturer arrangements reached between the parties were certain. He submitted that parties to a contract may agree to repose in one of the contracting parties the power to determine important commercial terms of their arrangements. He relied, in particular, on a passage in the judgment of Walsh J in Godecke v Kirwan (1973) 129 CLR 629 at 641–643 where his Honour said that, subject to certain qualifications, there is no reason in principle for holding that there cannot be any binding contract if some matter is left to be determined by one of the contracting parties.

107    In the present case, it was submitted that the parties had agreed, as between themselves, to allow M2006 to determine the reasonableness of the commercial terms offered by Playcorp to Factory 5 once Factory 5 had submitted the determination of that question to M2006. The proposition was that the true agreement reached was that, upon Factory 5 requesting it to do so, M2006 was bound to consider the terms offered by Playcorp against the documented benchmarks (including the benchmark of “reasonableness”) and was also bound to consider, in light of its assessment of the Playcorp terms, whether it would exercise the contractual discretion reposed in it to dismiss Playcorp from the scene and to allow Factory 5 itself to manufacture or to appoint an alternative supplier. Factory 5 went on to submit that, in the present case, if M2006 had complied with those obligations, Factory 5 or its selected suppliers would inevitably have been appointed as manufacturer in the place of Playcorp because Playcorp’s terms were unreasonable and uncommercial. This last proposition, so it was submitted, only arose for consideration when the Court came to assess damages.

108    The short answer to these submissions is that the parties never agreed to that to which Factory 5 submitted they had agreed. M2006 did not ever bind itself to consider exercising its discretion to replace Playcorp. It certainly did not do so upon the basis suggested by Factory 5.

109    For reasons which I have already explained, I think that no consensus was ever reached between M2006 and Factory 5 on the very important issue concerning the basis upon which Factory 5 might itself manufacture licensed merchandise or might select its own suppliers of that merchandise in the place of official licensees/suppliers and that, for this reason, no binding contract was ever made. I am of the view that the problem is not appropriately analysed by applying the principles dealing with uncertainty of contractual terms but is rather best looked at under the rubric of whether any binding contract was ever made at all.

Conclusion

110    It is for the above reasons that I consider that the appeal should be dismissed. Costs should be dealt with in the manner suggested in the joint judgment.

Associate:

Dated:    26 October 2012