FEDERAL COURT OF AUSTRALIA
Zwanenberg Australia Pty Ltd v Moira Mac’s Poultry and Fine Foods Pty Ltd [2014] FCA 1072
| IN THE FEDERAL COURT OF AUSTRALIA | |
| ZWANENBERG AUSTRALIA PTY LTD (ACN 130 900 015) Applicant | |
| AND: | MOIRA MAC’S POULTRY AND FINE FOODS PTY LTD (ACN 006 929 102) Respondent |
| DATE OF ORDER: | |
| WHERE MADE: |
THE COURT ORDERS THAT:
1. The proceeding be listed at 10:15 am on 30 October 2014 for the purpose of receiving the parties’ submissions as to –
(a) the orders to be made conformably with the reasons of the court published this day; and
(b) the directions to be given for the further conduct of the proceeding.
2. Costs be reserved.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
| VICTORIA DISTRICT REGISTRY | |
| GENERAL DIVISION | VID 706 of 2013 |
| BETWEEN: | ZWANENBERG AUSTRALIA PTY LTD (ACN 130 900 015) Applicant |
| AND: | MOIRA MAC’S POULTRY AND FINE FOODS PTY LTD (ACN 006 929 102) Respondent |
| JUDGE: | JESSUP J |
| DATE: | 6 OCTOBER 2014 |
| PLACE: | MELBOURNE |
REASONS FOR JUDGMENT
1 This proceeding concerns a contract, made on 3 December 2012 between the applicant, Zwanenberg Australia Pty Ltd and the respondent, Moira Mac’s Poultry and Fine Foods Pty Ltd, for the production by the latter of snack foods for sale to the former over a period of seven years. On the applicant’s case, the commercial relationship sustained by the contract had irretrievably broken down by about the beginning of July 2013 (ie about seven months into the term of the contract), largely as a result of the respondent insisting on being paid sums well in excess of those to which it was entitled under the contract. The applicant alleges that the respondent thereby repudiated the contract. The applicant also sues under s 18 of the Australian Consumer Law (“the ACL”), Sch 2 to the Competition and Consumer Act 2010 (Cth), alleging that it was caused to enter into the contract by a misleading representation made by the respondent. The respondent takes the position that the contract remains valid and effective, and should be enforced. It defends the monetary claims which it has made on the applicant and, by cross-claim, seeks remedies against the applicant to which it claims to be entitled under the contract.
2 This is only the barest of outlines of what is a rather complex case, and one in which mutually interdependent allegations and claims are made by the parties against each other. The relationship which the contract sought to establish was an unusual one, and the contract itself presents a number of constructional difficulties.
The negotiation and execution of the Letter Agreement
3 The applicant is a wholly-owned subsidiary of Zwanenberg Food Group BV (“ZFG”), a Dutch company which specialises in the production and sale of processed meat products and chilled meat products. Included in ZFG’s range of chilled food products are “processed snack products”, which can be offered for sale at supermarkets, for instance. In about October 2010, ZFG decided to explore the potential for the production and sale of snack food products in Australia, and the general manager of the applicant, Hendrik Willem (“Dick”) Koops, was instructed by the executive chairman of ZFG, Aldo van der Laan, and the chief executive officer of ZFG, Ronald Lotgerink (both of whom were then in Australia for other reasons), to investigate the relevant market. This he did over the next six months or so, and it appears that, on the production side, his focus was on finding a suitable chicken processing facility in Victoria.
4 Mr Koops’ inquiries brought him to the respondent, a manufacturer of cooked and fresh poultry products from its premises in Bendigo. On 6 June 2011, Mr Koops travelled to Bendigo and met with Dean Russell, the sole shareholder and director of the respondent. They undertook a tour of the respondent’s manufacturing plant, exchanged Powerpoint presentations relevant to their respective businesses, and discussed generally the proposal for the respondent to produce snack food products for the applicant, for sale into the Australian market. Both parties were attracted to that proposal. They met again (at Mr Koops’ office in Surrey Hills) on 23 June 2011. On 24 June, Mr Koops sent an email to Mr Lotgerink attaching some brief notes of what had been discussed at the meeting, and noting that “the impression on both sides was once again highly positive”. By return email, Mr Lotgerink said that he agreed with Mr Koops’ proposal (ie to do business with the respondent), adding “please go ahead”.
5 On 12 July 2011, Mr Russell sent Mr Koops an email which contained the following text:
Key Issues:
1. Can the principals establish trust and empathy?
2. Are the products appealing to the Australian consumer?
3. Is there enough profit in snack foods to provide margin for two enterprises working the one project?
4. Are key customers in Australian retail and food-service prepared to commit to snack foods?
5. Is there a market beyond Australia?
6. Will a collaboration be more productive than each business working independently?
My thoughts:
1. A meeting in Australia with Aldo or Rodney and myself asap.
2. Prepare 6 test kitchen samples of both Entertaining (3) and Snacking (3) style products for consumer testing.
3. Develop cost models on 6 proposed lines, include margins for both Moira Mac’s and Zwanenberg / Plumrose.
4. Present 6 products to Coles, WW, Aldi, Bidvest, PFD and a mix of independent distributors.
5. Consult with Austrade on opportunities in Vietnam, S. Korea, China, India, Hong King, Singapore and Japan.
6. Suck it and see, one step at a time.
Mentioned in this email, “Aldo” was Mr van der Laan, and “Rodney” was probably a reference to Mr Lotgerink. “Plumrose” was a brand name under which the applicant already sold some (non-snack) food products in Australia.
6 On 27 July 2011, Mr Koops sent Mr Russell an email to which were attached four diagrams showing factory layout options for the production of snack foods at the respondent’s plant at Bendigo. Much of the specialised machinery to be used in the production of snack foods was to be supplied by ZFG which had experience of the kind of industrial operations that were contemplated. The diagrams had been prepared by Twan Peters, a production manager employed by ZFG who had been responsible for the operations of one of its processing factories in The Netherlands. In the email, Mr Koops indicated which of the four was Mr Peters’ preference. However, Mr Koops noted that, in every option, it was necessary to make use of some space in the corridor, including, under the preferred option, for packaging of final product. This was, it seems, an early indication of issues that might arise due to space limitations at the respondent’s factory.
7 On 13 and 14 September 2011, Messrs Koops and Peters met with Mr Russell and Shannon Simpson, the respondent’s factory manager, at Bendigo. The four men inspected the factory, and observed the respondent’s existing operations. Amongst the things that Mr Russell told Mr Koops was that the respondent’s production line was designed to produce 40,000 kg per week, based on 1½ shifts per day of eight hours each. They had discussions with the respondent’s landlord, Leon Scott, on the subject of alterations to the factory that might be needed to accommodate a snacks production line. They also looked at an adjacent area under the control of a concern identified as “Pasta Master” (but, it seems, part of Mr Scott’s freehold) which was not being used at that time and which, therefore, might have been available for the snacks line if it could not be installed within the respondent’s existing tenanted area. Mr Peters prepared a report for the applicant on these two days of meetings and inspections, and, while the detail of it is now of no particular importance, it was, to say the least, encouraging as to the prospects of the respondent being able to undertake the kind of production operation which the applicant had in mind.
8 On the business, as distinct from the operational, side, Mr Russell had, on 12 September 2011, prepared a schema on a computer program called “Mindjet” which he showed to the representatives of the applicant when they were at Bendigo over the following two days. It set out what was one idea as to how the parties’ relationship might be structured, and (at a high level) how it might operate. The proposal was for there to be a joint venture company in which the applicant and the respondent would have equal shareholdings, and that the respondent would second staff to that company at cost. The following was proposed on this schema:
Structure: 1 ZA and MM enter into a 50/50 Joint Venture, by issuing 2 shares in a new company (1 each). 2 Partnership Agreement needs to be drawn up and signed off. 3 Capital Plant and Equipment supplied by ZA to partnership at cost, with repayments, by JV, starting after 12 months. 4 MM takes on head lease of rental space. 5 JV subleases on 12 monthly basis.
9 On 26 October 2011, Mr Lotgerink sent Mr Koops an email in which he noted that he had had “feedback” from Mr Peters (presumably including the report to which I have referred) and from the applicant’s technical expert in factories of this kind, Willem Versantvoort. Mr Lotgerink’s email continued:
Our position is now as follows:
1. Moira Mac’s is potentially a strong candidate.
2. The line appears to be readily installable, they have the basic know-how required.
3. We’re prepared to commit to a transfer of knowhow and start-up support.
4. However we’re not in favour of a shared factory
a. In a single factory there can only be one boss
b. Constant discussion on investment, rent costs, maintenance, etc.
5. The way forward has to lie in a preparedness on MOIRA’S part to invest in renovation and the line.
6. We will then provide him with a sales guarantee, on the basis of which he can (partly) run the operation.
7. We will also set down what has been agreed in a co-packers agreement.
So the core question is, is MOIRA prepared to invest in expansion and the line on the basis of a sales guarantee and a co-pack agreement.
Can you discuss this with MOIRA?
This email contained a clear indication, to Mr Koops, that ZFG was not interested in a joint venture as such, but preferred some arrangement under which it would purchase the produce of the proposed undertaking from the respondent, coupled with a “sales guarantee”. As will be apparent from what follows next, however, the prospect of such a guarantee was not part of the applicant’s discussions with the respondent.
10 By November 2011, Mr Koops and Mr Russell were exchanging financial models for the proposed snack production operation. The court knows that Mr Koops sent a model to Mr Russell on 8 November, but the copy of the spreadsheet on which the details of it were set out tendered (by the respondent) in the case had, by the time of its reproduction for that purpose, been altered by Mr Russell in his response to Mr Koops of 22 November 2011. A focus of Mr Russell’s concerns was the level of sales which the respondent would be likely to achieve, particularly in the early days of what would be a new offering on to the Australian retail market. In that response, Mr Russell said that he had put in some “very conservative figures” for sales in the first two years, namely of 250 t and 500 t respectively. In years 3, 4 and 5, Mr Russell had used the figures previously suggested by Mr Koops, which were based on sales of 1000 t/year. In his response of 22 November, Mr Russell referred to the risk of a slow take-up of the new snacks product by retailers, saying “clearly it would have a major impact on cash-flow”. He continued:
Perhaps to mitigate this risk, we need some pre-commitment from the retailers. O & G would need to investigate at the strategic management level.
Moira Mac’s won’t be able to fund equipment and cash flow losses – we would need some certainty to take to the bank.
I need to get the financial viability clear before I can get the Memorandum.
There is no evidence of whether, and if so how, Mr Koops responded to Mr Russell’s concerns. “O & G” was a reference to a company affiliated with the applicant called “Orange & Green” which conducted a number of services for the applicant including “administration, supply chain [and] quality assurance”.
11 Whether or not prompted by Mr Russell’s concerns, the fact is that, by about November 2011, the applicant had secured in-principle understandings with two of the larger retailers, Coles and Woolworths, that they would, in Mr Koops’ words, “stock and trial the snack products”.
12 On 19 December 2011, Mr Koops sent Mr Russell a first draft of a memorandum of understanding to articulate the parties’ intentions in the period prior to them entering into formal contractual relations. After identifying the parties, the memorandum proceeded in the following terms:
Purpose
The parties agree to work together on the planning, development, operation and management of a snacks operation to be built in the facilities of Moira Mac’s.
This memorandum merely constitutes a statement of the mutual intentions.
Moira Mac’s and Zwanenberg Food Group acknowledge the following are intentions vital to a successful partnership:
a) Both parties intend a long-term business relationship
b) Both parties need to work together in good faith
c) Confidentiality
Key Principles
a) Moira Mac’s will invest in machinery and any specific building upgrade requirements
b) Zwanenberg offers Moira Mac’s a guaranteed minimum value of contract
c) Zwanenberg and Moira Mac’s share knowledge and experience
d) Zwanenberg and Moira Mac’s work exclusively together in this production facility
e) Both parties work on basis of “open cost calculations”, with regards to
– Recipe costs
– Direct labour costs
– Overhead
– Interest, depreciation/write offs and profits
Objectives
The project opens a window of opportunity for Moira Mac’s to start up production in a wide range of products. These must not compete with Zwanenberg’s range.
Zwanenberg offers Moira Mac’s security by offering guaranteed compensation for volume or investment.
With respect to item e) under “Key principles” in this passage, Mr Koops gave the following evidence in chief:
Mr Russell said in the early stages that he questioned or was wondering if there’s a profit in it for both parties and we agreed in the early stages to share information and make all our calculations open to each other, have no secrets, and that only had the purpose to make calculations more accurate and transparent to each other, but that requires a level of trust as well, which was important for both parties as well.
In a return email sent to Mr Koops on 20 December 2011, Mr Russell placed the following comment alongside the passage which would preclude the respondent from competing with the applicant’s “range”: “Define range”.
13 Under Mr Koops’ draft memorandum, the anticipated contract would have a term of five years. The memorandum dealt with the subject of intellectual property, and continued:
Financials
Estimated investment in Machinery $1,500,000
Estimated investment in building $500,000
Write off period 5 years
Moira Mac’s invests in machinery and building upgrade requirements.
Should the project fail or was to be terminated prematurely, Zwanenberg will buy the machinery back from Moira Mac’s at the residual fiscal value at that point in time.
The investment in the building is at Moira Mac’s risk.
Proposal
Variable fee per kilo TBC
Minimum value of contract $400,000 per annum
Non Competition
During the contract period Moira Mac’s will not use any of the snacks production equipment or Thermopack/MAP equipment for contractors other than Zwanenberg Australia.
Moira Mac’s will not manufacture products in the snacks facility, whether branded or private label, for any retailer in the same categories as Zwanenberg is active in.
Zwanenberg will not enter the foodservice industry with snacks products. Moira Mac’s will have exclusive access to the industry.
If volume grows over the expected volume production of 20 Mt per week (and free production capacity becomes more scarce), Moira Mac’s will prioritize Zwanenberg production up to 25Mt per week (10 week average) at agreed rates.
Moira Mac’s is allowed to produce non conflicting products on the production line. Moira Mac’s will be charged a contribution rate that will be deducted from the Zwanenberg fee.
Again, in his reply of 20 December 2011, Mr Russell inserted a number of comments into the text set out above, including the following alongside the passage “40 Mt per week”: “Assume 20 ton per 40 hour shift with notional capacity of 40 ton per week”.
14 Over the period 15-19 January 2012, Mr Russell visited the ZFG operations at Corby in the United Kingdom and at Aalsmeer, Borculo and Almelo in The Netherlands, where he observed snack food production of the kind that was anticipated for Bendigo, should the proposed arrangement go ahead. Accompanied by Mr Koops, Mr Russell met, and had discussions with, Mr van der Laan, Mr Lotgerink, and Sjoerd van der Laan, Mr Aldo van der Laan’s son, being Mr Koops’ direct report in the management of ZFG. In the course of those discussions, Mr Lotgerink said that he wanted to develop a business based (and here I refer to the evidence of Mr Koops) on “additional costs”, that is costs which were “additional to the existing business” of the respondent. Mr Koops referred to this approach as “incremental costing”. Mr Russell agreed with that approach. In his evidence in chief in this case, Mr Russell said that, at the conclusion of this trip, he was “very interested in pursuing the arrangement with ZFG”.
15 During the next few months of 2012 the applicant was, it seems, occupied in what Mr Russell described as “extensive due diligence” on the respondent. The applicant was provided with the respondent’s profit and loss statements, and with its balance sheet as at 31 December 2011. According to Mr Russell, the applicant “was interested in analysing [the respondent’s] financial position and costs of producing its own products”. I would add that this level of interest in such matters arose because of two principles embodied in the parties’ then understanding: first, that of “open cost calculations”, which meant, in effect, that the respondent would be completely open with the applicant about its current level of costs, and secondly, that of “incremental costing”, as referred to in the previous paragraph. The applicant would know how much it would cost the respondent to produce one additional unit of output, a circumstance which, of itself, would give the relationship between the parties a feature which would normally not be found in conventional buyer/seller price negotiations.
16 In early May 2012, the applicant had its Melbourne solicitors prepare a first draft of what would have been the written contract which governed the parties’ relationship for the production of snack foods by the respondent at Bendigo. Although, ultimately, nothing came of that draft, the facts that it was sent to Mr Russell and, I infer, that it was on his solicitor’s desk when he (the solicitor) prepared the first draft of the agreement which the parties executed later in 2012 are important, even if only very high-level, aspects of the background.
17 The applicant’s draft proposed that, for the manufacture of products in accordance with the contract, the respondent would be paid a “fee” made up of the sum of three “components”: a “standard manufacturing cost price”, an amount to cover interest and repayments payable by the respondent for the acquisition and establishment of the capital infrastructure which would be used to make snack products for the applicant, and a profit margin of 3%. As to the first of these components, the draft contract provided as follows:
Zwanenberg will pay the Manufacturer the manufacturing cost price for Products manufactured pursuant to a Purchase Order.
Principles:
– Initial manufacturing cost price based on preproduction costing
– Corrections to manufacturing cost price based on postproduction costs
Manufacturing cost price consists of:
– Materials (raw materials and packaging) – at cost
– direct labour – at cost
– Overhead (indirect costs for snacks production, excluding depreciation and interest):
• Total sum overhead to be maximized
• Based on preproduction estimates overhead is maximized at $700,000 per annum over a volume of 1,000 Mt produced product
• Correction based on postproduction costs
It was also provided as follows:
For the avoidance of doubt, other than the Fee no monies are payable by Zwanenberg to the Manufacturer in respect of the manufacture or delivery of the Products.
Although nothing further was seen of a provision in terms like those just set out, it is useful to note its existence in this early draft provided on behalf of the applicant, as it demonstrates the starting position, as it were, from which the applicant commenced negotiations with the respondent.
18 When Mr Russell received this draft from the applicant, he did not favour it. In his view, the draft did not reflect the memorandum of understanding prepared in the previous December. It was “written very much in legal language and [Mr Russell] wanted the deal to be expressed more in language that [he] was comfortable with.” Under cross-examination, Mr Russell was challenged on the genuineness of this explanation for his reservations about the draft, but nothing turns on the matter. The fact is that, because of those reservations, the draft was taken no further.
19 Instead, on 17 May 2012, Mr Russell forwarded his own draft to Mr Koops. This was written on the respondent’s letterhead, and was in the form of a letter addressed to the applicant. Between the parties, it came to be referred to as the “letter agreement”, and I shall follow that convention. After the greeting, the letter was headed “Australian manufacturing arrangements for Zwanenberg snack products”. The letter was over the hand of Mr Russell, but not at that stage signed by him: indeed, it was transmitted to Mr Koops electronically, and referred to in the covering email as a “draft”. The letter concluded by inviting the addressee, the applicant, to sign in the space provided at the foot of the last page if it agreed with the terms and conditions set out in it. In point of content, the letter agreement owed much to the applicant’s draft contract referred to in the previous paragraph, but a number of provisions had been introduced to protect the respondent’s interests. In his covering email, Mr Russell said, rather optimistically as matters turned out, that there were “some small revisions needed for this draft, but should finalise in the morning”.
20 The first section of Mr Russell’s draft was headed “Background”, and served as a kind of preamble to the letter agreement. Clause 1.4 was as follows:
Under this arrangement:
(a) Moira Mac’s agrees to invest in new machinery and building upgrades required to manufacture the products;
(b) Zwanenberg will purchase the manufactured products based on an “open cost calculation” plus agreed profit margin;
(c) Zwanenberg agrees to order minimum quantities of the manufactured products;
(d) each party agrees to make available their respective know-how on a non-exclusive basis solely for the purpose of the manufacture of the products under this letter agreement and not for any other purpose;
(e) Moira Mac’s agrees to exclusively manufacture products for Zwanenberg,
on the terms and conditions of this letter agreement.
Alongside para (c) of this subclause, Mr Russell himself had inserted the electronic comment: “pay a minimum fee based on the cost of principal and interest financed for machinery and factory set-up”.
21 Section 3 of Mr Russell’s draft was headed “The deal”. Clauses 3.1 and 3.2 provided as follows:
3.1 (Term) This letter agreement shall commence on the date of this letter agreement and continue for a period of seven (7) years unless terminated earlier in accordance with this letter agreement (Term). This letter agreement may be extended by mutual agreement of the parties.
3.2 (Investment in Machinery) Moira Mac’s agrees to invest in the machinery (Machinery) and building upgrade requirements relating to the Machinery (Building Upgrades) as set out in Annexure A. Moira Mac’s shall finance the purchase of the Machinery and Building Upgrades with its financiers.
The remaining provisions of section 3 dealt with knowledge sharing, confidentiality and non-competition. Section 4, headed “Manufacturing”, ultimately lay at the centre of the letter agreement, but the only further thing which needs to be said about it here is that it contemplated that there would be an Annexure A to the letter agreement, dealing with product specification. That annexure was not then included.
22 The provision, ultimately agreed, which was based on section 5 of Mr Russell’s draft is, however, most controversial. The whole of the section as it appeared in that draft provided as follows:
Financial matters
5.1 (Fees) From the Commission Date, Moira Mac’s shall invoice a fee for each delivery of Products based on a variable fee per kilo (Fees). Zwanenberg agrees to pay the Fees to Moira Mac’s. The Fees shall consist of three components:
(a) manufacturing costs (including materials, packaging, labour and overhead) as set out in Annexure B to this letter agreement (Manufacturing Costs). Manufacturing Costs shall be calculated at the commencement of each calendar quarter;
(b) capital costs (comprising principal and interest on the loan for Machinery (including any commission costs) and building upgrade requirements) (Capital Costs). For the avoidance of doubt, the Capital Costs include any payments on the loan prior to the Commission Date required for pre-commissioning activities. Any government grants for the manufacturing using the Machinery shall be used to reduce the Capital Costs. Capital Costs shall be forecast at the commencement of this letter agreement until 30 June 2013 (and, thereafter, each financial year ending 30 June) based on the forecast finance costs divided by the forecast production volume for that period. At the end of each period, the Capital Costs shall be adjusted against the actual finance costs paid by Moira Mac’s in that period and Moira Mac’s shall be entitled to invoice an adjustment equal to this adjustment amount; and
(c) an agreed profit margin of five percent (5%) applied to all of the above;
5.2 (Payment terms) All payments are due within 30 days of the end of the month in which the products are manufactured an delivered;
5.3 (Minimum Fees) At the end of each calendar month, Moira Mac’s shall be entitled to invoice an adjustment to Zwanenberg equal to the amount of the actual Capital Costs for that calendar month (regardless of the quantity of Products ordered and invoiced in that month) less the total cumulative Capital Costs component of the Fees invoiced to Zwanenberg for Products during that calendar month.
5.4 (Security) Zwanenberg’s parent company must provide, within 7 days of request by Moira Mac’s, an irrevocable letter of credit from a reputable bank in favour of Moira Mac’s financiers as security for the financing required for the machinery (Letter of Credit). The investment in the Building Upgrades is at Moira Mac’s risk.
5.5 (Charge) Zwanenberg shall be entitled to a charge over the specific Machinery provided that the charge shall be released when the Letter of Credit is released by Moira Mac’s financiers.
5.6 (Purchase of Machinery) If Zwanenberg terminates this letter agreement under clauses 8.1 or 8.2, Zwanenberg may purchase the Machinery from Moira Mac’s at the residual fiscal value at that point in time.
5.7 (Insurance) Moira Mac’s shall maintain adequate insurance to cover general (product) liability they may incur in regards to the agreement.
In his draft, Mr Russell had placed an electronic comment alongside para (c) of cl 5.1, as follows: “2% will be set aside to reinvest in capital improvements during the term, allocated annually with both parties’ agreement. Any surplus capital would be split equally at the end of the term or carried over into a new term.” Nothing further came of that suggestion, the profit margin having been agreed, at a fairly early stage, at 3%. The controversial aspect of section 5 was cl 5.3, which became a frequent subject of the correspondence subsequently passing between the parties. It should also be noted, at this stage for the sake of the narrative only, that cl 5.1(a) contemplated that there would be an Annexure B to the letter agreement, dealing with the matter of manufacturing costs.
23 On 21 May 2012, Mr Russell sent a further email to Mr Koops, attaching what he described as “some formats that could be attached” to the proposed agreement. One of the attachments was a schedule of the “annual estimated cost”, as the heading to the schedule stated, for each item of expense that would be involved in the production of snack products for the respondent. Each item of cost had been converted into a “per kg” figure, based on the assumption that annual production would be 1,000,000 kg, ie 1,000 t. The total came to $10.97 per kg, including the 3% profit margin. The respondent’s evidence-in-chief was that this schedule was a “template [which] estimated a cost of $10.96 per kg to produce a processed meat product”. Under cross-examination, Mr Russell said that the schedule was merely “a copy of our general ledger ... as it was at that time”, that he was not “attempting to estimate cost”, that the schedule was “the logical total for those items”, and that he was “merely reflecting a template as it appeared within the Moira Mac’s business”.
24 Mr Russell’s schedule was not well received by ZFG in The Netherlands. In an email sent to him on 22 May 2012, Mr Koops said that the schedule had “caused quite a bit of commotion”, adding that “your cost model is very different to what we have worked with thus far”. One of the matters to which Mr Koops drew specific attention was “factory overhead”, which he said was “much higher”. He said that total overhead was $1.7m, “where we advised earlier that overhead should be maintained at 880K”. Mr Koops concluded his email by proposing that he and Mr Russell should have a telephone or video meeting the following day.
25 They did have a meeting on 23 May, but it was face-to-face, at a cafÉ somewhere in Tooronga. At that meeting, Mr Koops informed Mr Russell of the poor reception which his (Mr Russell’s) email sent the previous day had received in The Netherlands. According to Mr Koops’ evidence, Mr Russell’s response was in the following terms:
You were not supposed to send that through to The Netherlands. That was just for you to understand what I think … the costs incurred in that snacks operation would be. So it was more a – an example of a costs model rather than the cost that I think would be incurred.
Mr Koops then reminded Mr Russell that he (Mr Koops) worked for the applicant, and that it should be expected that he would send any document he received on to The Netherlands. Mr Koops attempted to explain to Mr Russell what he meant by “incremental costs”, namely, “the additional out-of-pocket costs to [the respondent’s] business by setting up that snacks factory” but, still according to Mr Koops’ evidence, Mr Russell did not “give [him] the opportunity to finish [his] explanation”. Mr Russell said that Mr Koops did not have to lecture him on accounting, to which Mr Koops responded that, if Mr Russell got his numbers right, he would not have to lecture him. Mr Koops described this as a very unpleasant meeting. Taken to the meeting in cross-examination, Mr Russell was unable to recall it with anything like the detail given by Mr Koops. He said that he did not recall the use of the word “incremental”, but I accept Mr Koops’ evidence that the word was used; and I accept his evidence generally about the meeting, in preference to the very limited, uncertain, evidence given by Mr Russell.
26 On 25 May 2012, there was a video conference involving Mr Russell for the respondent and Mr van der Laan, Mr Lotgerink, Mr Baan, Mr Koops and Mr Sjoerd van der Laan for the applicant. Although Mr Sjoerd van der Laan’s presence at the conference was not clearly recalled by Mr Koops, an email from the latter to Mr Russell on 26 May 2012 makes it clear that he was there. At this conference, Mr Russell first outlined his reasons for not wanting to use the manufacturing agreement that had been prepared by the applicant’s Melbourne solicitors. The representatives of the applicant said that they were happy to work with Mr Russell’s letter agreement.
27 It was at this video conference that Mr Russell and Mr Baan first met. Mr Lotgerink said that he proposed to have Mr Baan involved in developing the cost model for the proposed snacks operation on behalf of the applicant, because he had a lot of experience in that field. Mr Baan, who had recently seen Mr Russell’s schedule of estimated costs of 21 May 2012, and been told by Mr Koops (subsequent to the unpleasant meeting at Tooronga) that the figures in that schedule had “no substantive value”, told Mr Russell that he would “rather use [his] own cost pricing model to calculate a proper cost price”. Mr Russell had no objection to that. Mr Koops recalls Mr Baan asking Mr Russell: “Are you willing to open your books so we can have a good look and develop a cost model that we are all happy with?”
28 The importance of getting the cost model right, of course, lay in the circumstance that the proposed arrangement was, on one view of it, to be a hybrid of a conventional arms-length contract and a joint venture. The respondent was to produce goods for sale to the applicant, but the agreed price for those goods was to be such as would cover the costs involved in their manufacture. The “costs” in question – under a firm requirement of the applicant which was accepted by the respondent – were to be the additional costs incurred by the respondent in running the snack foods operation alongside its existing business. In order to determine what those costs were, the applicant considered it to be necessary for the respondent to accept an “open books” approach to the parties’ negotiations on the subject, and that was accepted by the respondent. From this point forward, the calculation of the unit price of the goods to be produced by the respondent was effectively driven by Mr Baan. The experience of the few days leading up to this video conference on 25 May 2012 had left neither him nor his colleagues in The Netherlands with any great confidence in Mr Russell’s capacity to handle, unassisted, the concepts or the detail involved in calculations of the kind that would be required.
29 Those attending the video conference on 25 May 2012 also discussed various amendments to the draft letter agreement which Mr Russell had sent to Mr Koops on 17 May 2012. In Mr Koops’ email to Mr Russell of 26 May 2012 to which I have referred, the former asked the latter for confirmation that he would send an updated version of the letter agreement, with all the additions which had been discussed with Mr Sjoerd van der Laan and Mr Lotgerink at that conference. That was necessary, he said, because a signed manufacturing agreement was a condition of the guarantee which the applicant’s bank proposed to provide in relation to the debt the respondent would incur for the purchase of the machinery to be used in the snacks production line at Bendigo.
30 On 28 May 2012, Mr Russell sent Mr Koops an electronic copy of his then draft of the letter agreement. The draft contained some changes compared with the 17 May version, and Mr Russell also had inserted more marginal comments which, he said in his covering email to Mr Koops, related to the “Friday discussion” (ie, I infer, the video conference). Mr Russell said that he would send the draft to his solicitor “for a re-write”, he asked Mr Koops to “comment asap”, and he added: “Please don’t forward until we discuss.” The draft of 28 May 2012 contained what were, in effect, no more than blank placeholders for the foreshadowed Annexures A and B.
31 Mr Koops responded to Mr Russell’s draft letter agreement on the same day. He made a number of comments on the draft, one of which was headed “Costprices” and read:
Both parties will make a list of cost components that make up the cost price.
Comparison will show the differences which both parties will discuss.
Mr Russell’s response by return included the comment that “my next cost model will have to be compared against yours before it is ready to [be] put on the table for negotiation”.
32 That next cost model was in fact sent by Mr Russell to Mr Koops at 6 pm that very day, 28 May 2012. It was a development of the so-called template sent by Mr Russell on 21 May 2012. The original figure of $10.97 per kg had come down to $10.82. Some additional cost items were included, as were Mr Russell’s explanations, in some cases, of items on the list. Of particular present significance was the inclusion of a new column setting out the respondent’s “annual fixed” costs. These were stated as annual, not unit, figures. The items concerned were superannuation and wages for direct staff, electricity, gas, audit fees, cleaning/rubbish removal, rent, accountancy, bank charges, computer supplies, consultant fees, insurance, laundry, licence fees, minor equipment under $100, pest control, printing and stationery, council rates, water rates, machinery consumables, samples, staff amenities, staff training, telephone, internet, mobiles, and travel. The total of these annual fixed costs was $644,150. Mr Russell’s endorsement alongside that total was “MM LIKELY COSTS REGARDLESS OF VOLUME”. A note made by Mr Russell at the head of the table read: “Fixed costs per kg are vulnerable to sharp increase with low volumes”.
33 Mr Koops sent Mr Russell’s cost model to Mr Baan in The Netherlands. Mr Baan re-arranged, but did not alter, Mr Russell’s figures to make them comparable with the costs incurred by ZFG in the production of a Dutch snack product, chicken satay. He calculated that the overhead cost shown in Mr Russell’s figures was $1.76 per kg, based on an annual production of 1,000 kg, whereas the corresponding Dutch figure was $1.50. Mr Baan sent his cost comparison to Mr Koops, but there is no suggestion that it was sent on to Mr Russell.
34 Mr Baan found, however, that true comparability as between Australian and Dutch costs was difficult to achieve. In his witness statement, Mr Baan said:
For this reason, I knew that the next stage of analysis of the feasibility of the Moira Mac’s proposal would require me to analyse Moira Mac’s financial information, such as its payroll records, rent costs, and accounts. I understood from Mr Koops that Mr Russell had told him that he had over 30 years experience in the industry and had been the CEO and financial controller of Moira Mac’s. I therefore expected that he would have a detailed knowledge of his business and of the costs incurred in conducting it. I relied heavily on this knowledge and what he told Zwanenberg, because no one from the Zwanenberg side knew the conditions in Australia. For this reason, the cost model that I intended to create to determine if the proposed arrangement would be profitable would involve a combination of Zwanenberg and Moira Mac’s input.
Mr Baan was taken to this passage in cross-examination, but not in any way that involved a substantial challenge to what he said.
35 The parties’ objective had been to execute the letter agreement in May 2012 and, with that in mind, Mr van der Laan and Mr Lotgerink came to Australia in late May, with a view to participating in a formal signing at the respondent’s premises at Bendigo. They did come to Australia on 29 May 2012, but the parties’ agreement had not matured to the extent that would be necessary for the execution of a written document at that stage. In the result, these men, accompanied by Mr Koops, used the occasion to discuss unresolved issues with Mr Russell, and to inspect the Bendigo factory. As to the latter aspect, it was in May 2012 that it became apparent to Mr Russell that the Pasta Master area would be available to rent if he wanted it, and thenceforth the applicant and the respondent formulated their plans on the assumption that that area would be used for the proposed snacks operation. It seems to have been resolved during Mr van der Laan’s visit that the Pasta Master area would be used.
36 In the days following the visit of Mr van der Laan and Mr Lotgerink, Mr Peters and Mr Versantvoort visited Bendigo to deal with engineering and technical arrangements for the installation and later operation of the required equipment and machinery in the former Pasta Master area. It was, it seems, during the visit of Mr Peters and Mr Versantvoort that the subject of the remuneration to which the respondent would be entitled for the labour costs involved in meat preparation was first raised, and discussed as between them and Mr Koops and Mr Russell. The “meat preparation” phase of the operation would take place after the meat had been received from the respondent’s supplier, but before the commencement of the snacks process as such. I shall return to this subject in due course.
37 On 7 June 2012, Mr Koops wrote to Mr Russell informing him that Mr Lotgerink had asked Mr Baan “to make a full, detailed analysis of the cost model”. The analysis would proceed conformably with the following “starting principles”:
• Open cost information
• Open cost calculation, based on incremental costs
• Look for opportunities for cost savings for Moira Mac’s based on benchmarking with Zwanenberg
Mr Koops proposed a “cost type analysis”, suggesting a classification of costs by direct costs (recipe and labour), indirect factory costs (overheads of different kinds), lease and rent, depreciation and indirect financing costs (interest). He asked Mr Russell to provide his costs, based on his financial statements for 2011 and 2012, by reference to that classification. He asked: “Can you give me your estimate on incremental costs to run the snacks production?” He added that Mr Lotgerink would like this information “asap”. In a number of tranches, Mr Russell provided at least some of the information requested over the period 11-12 June 2012.
38 On 15 June 2012, Mr Baan sent an email to Mr Koops, identifying the financial information that Mr Russell had not supplied to that stage, stating that the respondent’s average overhead rate was $2.60 per kg (which Mr Koops, in an email to Mr Lotgerink on 18 June 2012, considered to be “reasonably in line with [the applicant’s] figure of EUR2.15/kg for snacks”) and attaching his “calculation model”. That model indicated that the incremental overhead cost to the respondent for having to produce an additional 1000 t of products would be $709 (ie $0.71 per kg). Over the ensuing fortnight or so, Mr Baan continued to refine his calculations as more information became available from Mr Russell. Save to provide information as requested, and to clarify things from time to time, Mr Russell was not part of this process.
39 On 4 July 2012, Mr Russell sent Mr Koops a revised version of the draft of the letter agreement. The draft of 17 May had been amended in a number of respects, including by the insertion of the passage “plus the fixed component of the Manufacturing Costs (Annexure B)” after the words “actual Capital Costs” in cl 5.3. Annexures A and B, as such, remained blank. On 5 July 2012, Mr Koops replied to Mr Russell, noting, in relation to the amendment to cl 5.3:
Speaks of “plus the fixed component of the Manufacturing Costs (Annexure B)”
Albert has finished his pre production cost calculations which he’ll share with us soon. We need to make sure this fixed component is described carefully in this overview as well.
40 As to what happened next, Mr Russell gave the following evidence-in-chief:
Following Koops’ email I spoke to him about the subject of fixed costs. I said to Koops that I had made it clear to he and Aldo during their visit to Australia in May that Moira Mac’s could only proceed with the joint venture of [sic] Zwanenberg would guarantee our monthly costs for operating the snacks business. I said that clause 5.3 would need to be amended. I said to Koops that Moira Mac’s would only proceed if it was entitled to recoup its fixed costs (bank principal and interest, fixed component of its manufacturing costs, such as rent and insurance regardless of the amount of product that [Zwanenberg] ordered. Where volumes of product were of sufficient quantity to cover Moira Mac’s costs, there would be no issue. However, if the volume of orders was small, Moira Mac’s would not recover its fixed costs and would end up subsidising [Zwanenberg’s] sales to its customers. I said to Koops that clause 5.3 had to be amended to address that situation.
The “Aldo” referred to was Mr van der Laan. I take it that the missing closing parenthesis in about the middle of this passage was intended to come after the word “ordered”.
41 By email of 10 July 2012, Mr Koops accepted the amendment to cl 5.3 of the letter agreement proposed by Mr Russell on 4 July. He added that he had discussed the matter with Mr Baan, and that his (Baan’s) estimate for the total costs, per annum, was, approximately, $384,000 by way of interest and repayment fee, $50,000 for rent and $50,000 for insurance, which Mr Koops proposed might be rounded off at $500,000 pa. He said that, if that was in line with Mr Russell’s thoughts, they could “add these estimated costs to Annexure B”. By return email the same day, Mr Russell told Mr Koops that he had “a much broader view of what comprises ‘fixed components’”, and that he would send Mr Koops “a list of what [he thought] should be included”.
42 Also on 10 July 2012, Mr Koops sent an email to Mr Russell and Mr Peters, to which was attached a cost price model prepared by Mr Baan, on which he had been working for a number of weeks. For each of several product/size categories, the model stated the price, per kilogram, that the applicant would pay the respondent for producing the items in question; and it gave a breakdown of the components in that price. Taking the 600 g pack of meatballs as an example, the model showed the following:
| MEATBALLS | Bulk Pack 600 gr | |
| Meat | ||
| Prod Loss | ||
| Spices | ||
| Oil | ||
| Packaging | ||
| Labour | 0.51 | |
| Overhead | 0.81 | |
| Interest and repayment fee | 0.25 | |
| Copackers margin | 0.05 | |
| 1.62 |
As will be apparent, there were some missing figures in this model, but of particular present interest is the overheads figure of $0.81 per kg. This figure for overheads was part of the model for all product/size combinations.
43 In his email to which Mr Baan’s cost price figures were attached, Mr Koops said:
In the attachement [sic] you’ll find the costprice elements for labour, overhead, interest and repayment and copackers fee.
Can you both help me finalize this cost model? What we’ll end up with is a pre-production cost model that we will use in the costmodelling, invoicing etc. Final costs will be based on post production costs, but it would be nice if the pre production costs come close to the real thing.
Twan,
Can I please ask for your input on:
• Meat components and ratio per recipe: ie. 50% breast, 30% Thigh, 20% MDM
• Yield per product.
• Costs of spices (using Dutch costs as starting point, assuming costs are similar here in OZ and not the most important cost component)
• Cost of Oil per product
• Costs for packaging (I struggle matching Arjan’s costs for packaging with Albert’s recipes)
Dean,
• Can you give us the actual costs for the meat components?
Together, we should be able to finish the cost calculations and finalize this part of the Manufacturing Agreement.
We’re almost there, I can smell it!
Mr Russell’s response to Mr Koops was to ask him to send a breakdown of the overhead cost, adding, “it seems very low”.
44 It may be observed that, on the afternoon of 10 July 2012, Mr Russell had communicated his concerns about the adequacy of the overhead cost recovery for which Mr Baan was allowing in his then calculation of the respondent’s entitlement under the intended contract in two separate, but related, emails. The first, sent at 4.29 pm, was that referred to in para 41 above, and related to Mr Baan’s estimate of the total fixed manufacturing costs over the course of a year. The second, sent at 4.48 pm, related to the per kilogram figure of $0.81 for overheads, to which I have referred in para 43 above. How the respondent’s overhead costs would be covered under a contract which provided for its income flow to be based on volume was clearly a concern for Mr Russell at the time; and it was a concern which he made known to Mr Koops.
45 At 8.49 am on 11 July 2012, Mr Koops attempted to send Mr Russell an email which had two attachments. For some reason, the email refused to be sent, and it was not until 2.49 pm that day that Mr Koops’ sixth attempt to send this email proved successful. The attachments were two spreadsheets which set out Mr Baan’s workings with respect to the respondent’s unit and other costs in the year to 30 June 2011 and in the nine months to 31 March 2012 (although the latter spreadsheet seemed to have used 2010/2011 figures in a number of places). In each spreadsheet, the first worksheet was a summary which showed, amongst other things, the respondent’s total indirect production costs, or overheads, in the year concerned.
46 Taking the 2010/2011 spreadsheet as indicative of the nature of Mr Baan’s calculations, there were three high-level categories of overheads: staff, depreciation and “other”. The third category was the subject of a separate detailed spreadsheet from which the first sheet was populated with data. The total of all three categories was $2,975. In that year, the respondent’s total production, by mass, was 1,229 t. A calculated cell in the spreadsheet indicated that this represented a total overhead cost of $2,420 per 1,000 t. Three further columns were headed “Additional”, and set out the additional overhead costs which the respondent would incur for the production of an additional 1,000 t, 1,500 t and 2,000 t respectively. In the case of an additional 1,000 t, the additional overhead cost would be $709. The spreadsheet made it clear that, while the respondent’s overall average overhead cost associated with producing 1,000 t of food products was $2,420, the additional costs to which it would be exposed if it increased its production by 1,000 t would be only $709. The corresponding figure calculated from the respondent’s data in respect of the succeeding part-year was $674. The 2010/11 spreadsheet was the same, with the same per additional 1,000 t overhead figure, as had been sent by Mr Baan to Mr Koops on 15 June 2012 (see para 38 above).
47 So far as the evidence shows, it was not until Mr Koops’ email of 11 July 2012 that Mr Russell was exposed to Mr Baan’s workings, but he undoubtedly was then. Counsel for the respondent, presumably on instructions, put it to Mr Koops under cross-examination that the figure $709 in the attachment to Mr Baan’s email of 15 June 2012 was the “provenance” of the figure of $0.71/kg ultimately used as a basis for the unit overhead costs in Annexure B, and there is no reason to suppose that Mr Russell himself did not similarly understand the figure of $709 which he received in the attachment to Mr Koops’ email of 11 July 2012. It is here that one may most clearly discern the principle of incremental costing: its object was to identify the cost of producing an additional – or “incremental” – unit of output.
48 The text to Mr Koops’ email of 11 July 2012 was as follows:
See attached files.
Please note that the overhead in the 2011/2012 file is even lower then [sic] used in the cost price calculation.
Reason is that in the cost price calculation the overhead is based on 2010/2011, in the attached file the overhead is based on July 2011 – March 2012 (with higher volume).
Over 2010/2011 you[r] overhead was $2.48 per kilo. Your total Overhead over July 2011 – March 2012 was $2.01 per kilo, this is lower because your volume rose from 1200 Mt (2010/2011) to 1600 Mt (2011/2012) on annual basis.
I have asked Albert to update the Cost price file, to match the latest overhead calculations.
Please have a look, because it’s important we are all agree[d] on the outcome.
49 With respect to the fixed annual operating costs, Mr Koops responded to Mr Russell on 12 July 2012. He said:
I discussed the fixed operating costs with Albert.
Albert advises to run with your approach and use your estimate for these costs. We agree on principles, any differences between pre production cals and post production actual will be evened out.
Based on our discussion, this was my translation of your estimate.
| Rent | 75K |
| Insurance | 50K |
| Core permanent labour | 70K |
| Core permanent QA | 60K |
| Utilities | 20K |
| Overall management fee/admin | ?? |
| Safety gear / Laundry / Materials/ | ?? |
| Schoonmaak/ sundries |
If you can fill in the ?? we can work with that number and add that to Annexure B.
The “Albert” referred to was Mr Baan.
50 Also on 12 July 2012, Mr Koops sent Mr Russell what he described as the latest version of the cost model on which Mr Baan was then working. It had the same format as the model mentioned in para 42 above. Taking the 600 g meatball product as an example, the model showed the following:
| MEATBALLS | Bulk Pack 600 gr | |
| Meat | ||
| Prod Loss | ||
| Spices | ||
| Oil | ||
| Packaging | ||
| Labour | 0.51 | |
| Overhead | 0.71 | |
| Interest and repayment fee | 0.38 | |
| Copackers margin | 0.05 | |
| 1.65 |
It will be seen that the unit overhead component had been adjusted from $0.81 to $0.71. That constituted, in effect, a reversion to the figure used by Mr Baan on 15 June 2012: see para 38 above.
51 On 16 July 2012, Mr Russell responded to Mr Koops’ email of 12 July. The text of the email itself was “cost models attached for discussion”. There were two attachments, one, which I shall call the first attachment, dealt with the unit price for snack foods produced by the respondent, but this time (for, I think, the first time) the calculations were based on an assumed production of 500 t per annum. The overhead figure was $1.62. It seems uncontroversial that this was a computer-generated figure resulting from the halving of the denominator in a previous calculation by Mr Baan that had the overhead figure at $0.81 per kg (that is to say, Mr Russell had not incorporated the adjustment to $0.71 the subject of Mr Koops’ email of 12 July 2012).
52 The other attachment to Mr Russell’s email of 16 July 2012, which I shall call the second attachment, was the precursor of what has become the most controversial document in this case. It read as follows:
| Minimum costs to run snacks operation | ||
| Rent | $ | 75,000.00 |
| Rates/Water | $ | 8,500.00 |
| Management | $ | 50,000.00 |
| Supervisor | $ | 70,000.00 |
| QA Officer | $ | 60,000.00 |
| Insurance | $ | 50,000.00 |
| Utilities | $ | 30,000.00 |
| Maintenance | $ | 10,000.00 |
| Cleaning | $ | 10,000.00 |
| Accountancy | $ | 10,000.00 |
| Bank fees | $ | 3,000.00 |
| Safety/Laundry/Materials | $ | 20,000.00 |
| Laboratory | $ | 10,000.00 |
| Audit fees | $ | 6,000.00 |
| Pest Control | $ | 5,000.00 |
| Office Costs | $ | 6,000.00 |
| Sundry | $ | 20,000.00 |
| Subtotal | $ | 443,500.00 |
| Finance Costs | $ | 384,000.00 |
| Total | $ | 827,500.00 |
It is the non-finance sub-total of $443,500, and the items which made it up, which became most controversial in the case. In part those items were based on the estimates of Mr Baan forwarded to Mr Russell in Mr Koops’ email of 12 July 2012 (see para 49 above). The figures for rent, insurance and “QA” were unchanged. The figure for utilities had been increased from $20,000 to $30,000. In part Mr Russell had modified the description of an item: where Mr Baan had provided for $70,000 in relation to “core permanent labour”, Mr Russell had used the same figure, but described the item as “supervisor”. In part Mr Russell had filled in the spaces occupied only by question marks in Mr Baan’s list. And, it seems, in part Mr Russell had added new items, probably not referable to anything that Mr Baan had in mind.
53 The second attachment to Mr Russell’s email of 16 July 2012 may also be compared with the template attached to his email of 28 May 2012: see para 32 above. The subject of both was the fixed, unavoidable, costs which the respondent would incur regardless of the volume of production which it was achieving.
54 For the sake of the narrative, I mention next a development at about this time which did not relate to the parties’ negotiations on costs. As mentioned above, Mr Russell’s draft of 17 May 2012 contained a provision which would oblige the respondent to invest in the necessary machinery for the operation of a snack foods production line at its factory at Bendigo. This investment was to be financed with the respondent’s “financiers”. On 10 July 2012, the respondent received an invoice from ZFG for what was, in effect, a deposit on specialised machinery to be supplied for this purpose. The invoice was in the sum of €550,000 and, in an email on the same day to the respondent’s bank, Mr Russell said that he expected to be invoiced for an additional €775,000, and that he had budgeted for an additional $500,000 for factory set-up costs.
55 When Mr Baan saw the second attachment to Mr Russell’s email of 16 July 2012, he was not impressed with it. By email to Mr Koops on the same day, he said that he could see “99k in costs here that would not be incurred at zero production”. He had in mind the items for utilities, accountancy, bank fees, safety/laundry/materials, laboratory, office costs and sundry.
56 As mentioned previously, one issue upon which the parties were working was the allowance to be made for the costs that would be incurred by the respondent in the preparation of the meat that was to be used in the production of snack foods. By about the stage of the narrative which I have reached here, Mr Baan had decided that $0.25/kg would be the figure for this item to be proposed to the respondent. He so informed Mr Koops by email of 19 July 2012, attaching an amended form of his model which showed, for all snack products, an overhead figure of $0.96/kg, which resulted from the addition of this $0.25 to the $0.71 previously communicated. These matters were the subject of a video conference in July 2012 involving Mr Koops, Mr Russell and Mr Baan, following which, on 27 July 2012, Mr Koops sent to Mr Russell the cost model which they had discussed, which included the following figures in respect of the 600 g meatball product:
| Meat | R511T HLT (NL recipe | 2.51 | |||
| % | p/kg | ||||
| Flakes 70-30 | 49.79% | $3.20 | $ | 1.59 | |
| Cheeks without rind | 11.01% | $2.45 | $ | 0.27 | |
| Trim 95-5 | 16.51% | $3.90 | $ | 0.64 | |
| Prod Loss | 0.23 | ||||
| Spices | 0.73 | ||||
| Oil | 0.00 | ||||
| Packaging | 0.52 | ||||
| Labour | 0.69 | ||||
| Overhead | 0.96 | ||||
| Interest and repayment fee | 0.34 | ||||
| Copackers margin | 0.18 | ||||
| Rendement/Yield Production |
| 6.15 | |||
57 On 24 July 2012, Mr Russell informed Mr Koops that his bank had asked for “an estimate of the fixed component of the manufacturing costs referred to in the Agreement”. By return email, Mr Koops referred to Mr Baan’s queries as to the appropriateness of some $99,000 of the estimated fixed costs previously suggested by Mr Russell. Mr Koops proposed that they “pick a number halfway”, which he thought could be $390,000, to give to the bank, and that they could have “a more detailed discussion” with Mr Baan on the subject later.
58 On 2 August 2012, Mr Russell sent Mr Koops what was then the latest draft of the letter agreement, which incorporated amendments upon which the parties had agreed in their discussions to that point. Clause 5.1(a) was now expressed as follows:
5.1 (Fees) From the Commission Date, Moira Mac’s shall invoice a fee for each delivery of Products based on a variable fee per kilo (Fees). Zwanenberg agrees to pay the Fees to Moira Mac’s. The Fees shall consist of three components:
(a) manufacturing costs (including materials, packaging, labour and overhead) as set out in Part A of Annexure B to this letter agreement (Manufacturing Costs). Part A of Annexure B sets out the model for calculating Manufacturing Costs as at July 2012. The actual Manufacturing Costs shall be calculated at the commencement of each calendar quarter based on this model with adjustments to be made for any increases or decreases in actual Manufacturing Costs….
It will be seen that this provision now contemplated that there would be a “Part A” of Annexure B to the letter agreement.
59 Clause 5.3 was now expressed as follows:
(Minimum Fees) At the end of each calendar month, Moira Mac’s shall be entitled to invoice an adjustment to Zwanenberg equal to the amount of the actual Capital Costs, plus the actual fixed component of the Manufacturing Costs (calculated in accordance with the model in Part B of Annexure B) for that calendar month (regardless of the quantity of Products ordered and invoiced in that month) less the total cumulative fixed component of the Manufacturing Costs and Capital Costs component of the Fees invoiced to Zwanenberg for Products during that calendar month.
Here it was contemplated that there would be a “Part B” of Annexure B to the letter agreement.
60 Annexures A and B were now, for the first time, populated with content. There is no need to say anything about Annexure A. Annexure B, by contrast, lies at the centre of the controversy in the present case.
61 Parts A and B of Annexure B were now, for the first time, populated with content. Part A was headed “Costprice Calculations MM”, and subheaded “1000 MT/yr”. It contained the unit cost price model upon which the parties had agreed, and was substantially the work of Mr Baan. The 600 g meatball example sent to Mr Russell on 27 July 2012 was part of this model and, to the extent presently relevant, was typical.
62 Part B of Annexure B was as follows:
Minimum indicative costs to run snacks operation.
Fixed component of Manufacturing Costs
| Rent | $ | 75,000.00 |
| Rates/Water | $ | 8,500.00 |
| Management | $ | 50,000.00 |
| Supervisor | $ | 70,000.00 |
| QA Officer | $ | 60,000.00 |
| Insurance | $ | 50,000.00 |
| Utilities | $ | 30,000.00 |
| Maintenance | $ | 10,000.00 |
| Cleaning | $ | 10,000.00 |
| Accountancy | $ | 10,000.00 |
| Bank fees | $ | 3,000.00 |
| $ | 20,000.00 | |
| Laboratory | $ | 10,000.00 |
| Audit fees | $ | 6,000.00 |
| Pest Control | $ | 5,000.00 |
| Office Costs | $ | 6,000.00 |
| Sundry | $ | 20,000.00 |
| Sub total (fixed component of Manufacturing Costs) | $ | 443,500.00 |
| Capital Costs | $ | 384,000.00 |
| Total | $ | 827,500.00 |
| These items (based on actual) will make up the actual fixed component of Manufacturing Costs and the actual Capital Costs for the purposes of calculating the Minimum Fees, referred to in the Agreement. |
63 On the same day, Mr Koops responded. To the extent presently relevant, he said that the wording of cl 5.3 confused him, and that he was not sure that he understood it correctly. He said that the clause should state that the respondent was entitled to invoice the applicant “equal to the amount of the actual capital costs plus the manufacturing costs with a minimum as calculated in the model in Part B of Annexure B for that calendar month”. Mr Koops said that this was “a very important part of the agreement”, and asked Mr Russell to have another look at it, or “maybe rephrase”. Mr Russell responded immediately with the comment: “I will rephrase”.
64 So far as the documentary record shows, the next thing to happen was an email from Mr Russell to Mr Koops on 6 August 2012. Attached to it was what Mr Russell described as “a first draft of an invoicing model”. This was divided up into three examples. Example 1 was headed “zero production”. The first column in this example contained the items listed in Part B of Annexure B to the then latest version of the letter agreement sent by Mr Russell on 2 August 2012. The second column was headed “estimated annual”, and contained the dollar figures exactly as they appeared in Part B of Annexure B. The third column was headed “actual monthly 0”, and contained figures which were one-twelfth of the figures in the second column. The fourth column was headed “actual monthly 1000”, and it showed how the cost figures set out in the third column would change if the annual production were 1,000 t as contemplated in the model upon which Mr Baan had been working. Some of the figures in it were the same as those in the third column, recognising the fact that the costs concerned would not change with increases in volume over zero – rent, management and insurance, for example. Other figures had risen – utilities, maintenance and laboratory, for example. The fifth column was headed “actual monthly 20000”, and it made corresponding adjustments to the relevant cost figures if annual production were to be 20,000 t – a wildly optimistic possibility at the time.
65 Of importance in this first example were the total monthly figures for non-financial overhead costs, and recognised as such by Mr Koops when he received the email: at zero production, the figure was one-twelfth of the corresponding figure in Part B of Annexure B as sent by Mr Russell on 2 August 2012, $36,958.33. At 1,000 t and 20,000 t annual production levels, the figures were $40,623.94 and $55,124.67 respectively.
66 The second and third examples appeared to be of situations in which 800 kg and 8,000 kg of bulk packs were sold, respectively. However, they were not explained in the evidence, and the meaning intended to be conveyed by their contents is not self-evident.
67 On 9 August 2012, Mr Koops met with Mr Russell. They discussed the terms of the amended letter agreement which had been sent by Mr Russell on 2 August 2012. Late in the day on 9 August, Mr Koops sent Mr Russell an email which summarised the points on which they had agreed. With respect to cl 5.3, the email recorded that they had agreed on the following:
The rules with regards fixed component of the Manufacturing Costs resolves possible negative coverage on overhead if forecasted volumes are not met. If production is higher than the 83 mT per month (1000 annual) the overhead contribution would lead to excess coverage on overhead, which results in a credit payment to [be] deducted from the total cumulative fixed component of the Manufacturing Costs and Capital Costs.
Also, all costs are subject to the quarterly review / post production corrections of the Manufacturing costs.
For the avoidance of doubt I suggest to describe both scenarios and review as mentioned in 5.3.a calculate actual Manufacturing Costs at the commencement of each calendar quarter.
Mr Koops noted that “this wording covers/replaces the Excel examples of the fixed manufacturing costs at lower volumes than the forecasted volume of 1000 mT per annum”. The “Excel examples” were, I presume, the attachments to Mr Russell’s email of 6 August 2012.
68 Mr Russell sent Mr Koops’ email to his solicitor (who had been the drafter of the letter agreement), with a request to modify the agreement accordingly. On 13 August 2012, the solicitor responded to Mr Russell with the following comment about cl 5.3: “I was not sure what these comments precisely related to, other than to say the model in Part A of Annexure B might need to be reviewed based on actual volumes. Please see my revised drafting.” That drafting produced a new cl 5.3 in the following terms:
(Minimum Fees) At the end of each calendar month, Moira Mac’s shall be entitled to invoice an adjustment to Zwanenberg equal to the amount of the actual Capital Costs, plus the actual fixed component of the Manufacturing Costs (calculated in accordance with the model in Part B of Annexure B) for that calendar month (regardless of the quantity of Products ordered and invoiced in that month) less the total cumulative fixed component of the Manufacturing Costs and Capital Costs component of the Fees invoiced to Zwanenberg for Products during that calendar month. The model in Part B of Annexure B is based on 1,000 tons of Products being produced per annum. The model will be reviewed at the commencement of each calendar quarter and if volumes are less or greater than that assumed volume, the parties agree to review the model and adjust it accordingly.
On 13 August 2012, Mr Russell sent a version of the draft of the letter agreement, containing the changes made by his solicitor, to Mr Koops.
69 Despite what may now be discerned as the significance of the wording of cl 5.3 of the letter agreement, from the evidence before the court it was not until 31 August 2012 that Mr Koops responded to Mr Russell’s latest draft. He had some further suggestions, which Mr Russell sent to his solicitor on 13 September 2012. On 25 September 2012, the solicitor sent his redraft of cl 5.3 to Mr Russell “as discussed”. It was in the following terms:
(Minimum Fees) At the end of each calendar month, Moira Mac’s shall be entitled to invoice an adjustment to Zwanenberg equal to the amount of the actual Capital Costs, plus the actual fixed component of the Manufacturing Costs (calculated in accordance with the model in Part B of Annexure B) for that calendar month (regardless of the quantity of Products ordered and invoiced in that month) less the total cumulative fixed component of the Manufacturing Costs and Capital Costs component of the Fees invoiced to Zwanenberg for Products during that calendar month. For the avoidance of doubt, it is intended by the parties that the Minimum Fees cover Moira Mac’s overheads comprising the Capital Costs and the fixed component of Manufacturing Costs (Covered Overheads) each calendar month only where those Covered Overheads are not otherwise covered in the Fees paid that calendar month. It is not intended that Moira Mac’s receives more than what is needed to cover those Covered Overheads. Accordingly, after each quarter, if the amounts received by Moira Mac’s as Minimum Fees in that calendar quarter are more than Moira Mac’s actual Covered Overheads during that quarter, a credit will be brought forward in the following quarter for that excess amount and any brought forward credit at the end of the financial year will be paid by Moira Mac’s to Zwanenberg. The model in Part B of Annexure B is based on 1,000 tons of Products being produced per annum. The model will be reviewed at the commencement of each calendar quarter and if volumes are less or greater than that assumed volume, the parties agree to review the model and adjust it accordingly.
70 The letter agreement was dated 25 September 2012, probably because that was when the then final version was sent electronically to Mr Russell by his solicitor, with the instruction to print it and sign it. Mr Russell sent it immediately to Mr Koops, stating that he was “happy to sign tomorrow”. As it happens, he signed the letter on the day he received it, 25 September 2012. It was not until 2 October 2012 that Mr Koops sent the letter agreement to his principals in The Netherlands.
71 Mr Baan travelled to Bendigo in early November 2012. In an email to Mr Russell on 31 October 2012, Mr Baan referred to the following “planned activities” for the visit:
– check calculated cost price during test-production next week, measurement on material-usage and labour-usage
– evaluate the registration of your flow of goods, we need this for efficiency-reports on material
– evaluate the registration of used hours per production department, we need this efficiency-reports on hours
– evaluate a format I made for a report on efficiency results and needed materials and hours (based on production planning)
– we have to agree upon the way we calculate the fixed costs according to the contract, make a setup for your general ledger
– evaluate the registration and the monitoring of the stock (raw materials an [sic] packaging), long lead-times, guarantee continuity of production
During his visit to Bendigo, Mr Baan worked with someone whom he perceived to be a kind of “financial controller” then employed by the respondent, Daniel Holland. At some point, Mr Baan provided Mr Holland with an electronic version of a revised cost/price model which followed the format of Part A of Annexure B for the letter agreement, but which departed from it in two respects at least: the individual products were not always the same, and it was based on an assumed total annual production of 500 t (not 1000 t, as was the case under Part A itself). As to the latter aspect, it seems that the only respect in which the revised model reflected the change was that the allowance for “interest and repayment fee” had been increased from $0.34 to $0.68 per kg. The allowance for “overhead” remained at $0.96 per kg.
72 Mr Baan gave evidence that, at the end of his visit to Bendigo, he met with Mr Russell and Mr Holland, when they “went through all the calculations and the reports and … agreed that they were ok.” At no stage did either Mr Russell or Mr Holland tell Mr Baan that there were any difficulties with his estimate of $709,000 as the respondent’s fixed cost of producing 1000 t of product per annum, or with the “overhead” figure of $0.96 in Part A of Annexure B, or with the $443,500 figure in Part B of Annexure B. Under cross-examination, Mr Baan was not challenged on this evidence, and Mr Russell said nothing of any value about it in his evidence. Mr Holland was not called.
73 By late November 2012, the machinery for the production of snack foods at Bendigo had been installed and was being commissioned. The evidence is unclear as to exactly what had been achieved by when in this respect, but I note that Mr van der Laan was present at the factory for activities which included a tasting on 27 November 2012.
74 The letter agreement was executed on behalf of the applicant on 3 December 2012. The form of the agreement which was executed was that which had been signed by Mr Russell on 25 September 2012. The figures in Part A of Annexure B did not reflect those given to Mr Holland by Mr Baan in November. The November figures were, however, those upon which the parties operated, to the extent that they did operate, under the letter agreement in 2013.
The terms of the Letter Agreement
75 Although I shall have to refer to particular terms of the letter agreement in detail in various sections of my reasons which follow, for reference I now set out so much of the agreement as has become relevant in this proceeding, and some other provisions for the sake of context.
1. Background
The background to the intended arrangements is as follows:
1.1 Zwanenberg carries on the business of promoting, advertising and selling the Plumrose range of food products in Australia. Zwanenberg is the owner of the certain know-how relating to machinery, processing, operation, product development and quality control relating to certain food products which it manufactures overseas. Zwanenberg does not manufacture these food products in Australia.
1.2 Moira Mac’s carries on business in Australia of manufacturing food products. Moira Mac’s is the owner of the certain know-how relating to machinery, processing, operation, product development and quality control relating to manufacturing food products for Australian local requirements.
1.3 Zwanenberg and Moira Mac’s wish to enter into a long-term business arrangement where Moira Mac’s manufactures certain food products for supply to Zwanenberg.
1.4 Under this arrangement:
(a) Moira Mac’s agrees to invest in new machinery and building upgrades required to manufacture the products;
(b) Zwanenberg will purchase the manufactured products based on an “open cost calculation” plus agreed profit margin;
(c) Zwanenberg agrees to pay a minimum fee based on the cost of principal and interest financed for machinery and factory set-up;
(d) each party agrees to make available their respective know-how on a nonexclusive basis solely for the purpose of the manufacture of the products under this letter agreement and not for any other purpose;
(e) Moira Mac’s agrees to exclusively manufacture products for Zwanenberg, on the terms and conditions of this letter agreement.
….
2.1 (Definitions) In this letter agreement:
(a) Capital Costs means principal and interest on the loan for Machinery (described as “interest and repayment fee” in Part A of Annexure B to this letter agreement) together with any commissioning costs and building upgrade requirements. Part A of Annexure B sets out the model for calculating the interest and repayment fee component of Capital Costs as at July 2012. The actual Capital Costs shall be calculated at the commencement of each calendar quarter based on this model with adjustments to be made for any increases or decreases in actual Capital Costs.
….
(h) Manufacturing Costs means the materials, packaging, labour and overhead costs as set out in, and described as “meat”, “product loss”, “spices”, “oil”, “packaging”, “labour costs” and “overhead” in, Part A of Annexure B to this letter agreement. Part A of Annexure B sets out the model for calculating Manufacturing Costs as at July 2012. The actual Manufacturing Costs shall be calculated at the commencement of each calendar quarter based on this model with adjustments to be made for any increases or decreases in actual Manufacturing Costs.
….
(j) Profit Margin means three percent (3%). The Profit Margin is described as Copackers Margin in Part A of Annexure B of this letter agreement. Part A of Annexure B sets out the model for calculating Profit Margin.
….
3.1 (Term) This letter agreement shall commence on the date of this letter agreement and continue for a period of seven (7) years unless terminated earlier in accordance with this letter agreement (Term). This letter agreement may be extended by mutual agreement of the parties.
3.2 (Investment In Machinery) Moira Mac’s agrees to invest in the machinery (Machinery) and building upgrade requirements relating to the Machinery (Building Upgrades) as set out in Annexure A. Moira Mac’s shall finance the purchase of the Machinery and Building Upgrades with its financiers.
3.3 (Knowledge sharing)
(a) Zwanenberg will make available to Moira Mac’s its know-how relating to machinery, processing, operation, product development and quality control relating to the Products which it manufactures overseas (Zwanenberg IP) on a non-exclusive basis solely for the purpose of the manufacture of the products under this letter agreement and not for any other purpose. Zwanenberg shall retain all intellectual property in its Zwanenberg IP.
(b) Moira Mac’s will make available to Zwanenberg its know-how relating to machinery, processing, operation, product development and quality control relating to manufacturing food products for Australian local requirements (Moira Mac’s IP). Moira Mac’s shall retain all intellectual property in its Moira Mac’s IP.
(c) Moira Mac’s shall make available to Zwanenberg any improvements developed by Moira Mac’s to either Zwanenberg IP or Moira Mac’s IP. Moira Mac’s shall retain all intellectual property in such improvements.
….
4.1 (Manufacturing of Products) Moira Mac’s shall manufacture the Products for Zwanenberg using the Machinery from the Commission Date.
4.2 (Factory Design) Moira Mac’s agrees to consult with Zwanenberg on all aspects of factory design relating to use of the Machinery. Zwanenberg will provide guidance using its engineering and construction know-how.
4.3 (Forecasts and orders) Zwanenberg must, at all times, provide to Moira Mac’s forecasts/orders on the following basis:
(a) Rolling forecasts to be prepared based on discussions with retailers;
(b) Adjustment to forecasts based on information received from retailers;
(c) Moira Mac’s will, wherever possible, produce to actual orders on a Just in Time basis; and
(d) The parties will work together to assist Moira Mac’s meet any delivery performance or other KPIs set by retailers.
….
5.1 (Fees) From the Commission Date, Moira Mac’s shall invoice a fee for each delivery of Products based on a variable fee per kilo (Fees). Zwanenberg agrees to pay the Fees to Moira Mac’s. The Fees shall consist of three components:
(a) manufacturing costs (including materials, packaging, labour and overhead) as set out in Part A of Annexure B to this letter agreement (Manufacturing Costs). Part A of Annexure B sets out the model for calculating Manufacturing Costs as at July 2012. The actual Manufacturing Costs shall be calculated at the commencement of each calendar quarter based on this model with adjustments to be made for any increases or decreases in actual Manufacturing Costs;
(b) capital costs (comprising principal and interest on the loan for Machinery (including any commissioning costs) and building upgrade requirements) (Capital Costs). Additional Capital Costs may be added during the term of the letter agreement for the purpose of continuous improvement in the production process and exploiting new product opportunities. These must be agreed by both parties. For the avoidance of doubt, the Capital Costs include any payments on the loan prior to the Commission Date required for precommissioning activities. Any government grants for the manufacturing using the Machinery shall be used to reduce the Capital Costs. Capital Costs shall be forecast at the commencement of this letter agreement until 30 June 2013 (and, thereafter, each financial year ending 30 June) based on the forecast finance costs divided by the forecast production volume for that period. At the end of each period the Capital Costs shall be adjusted against the actual finance costs paid by Moira Mac’s in that period and Moira Mac’s shall be entitled to invoice an adjustment equal to this adjustment amount; and
(c) the Profit Margin applied to all of the above.
5.2 (Payment terms) All payments in respect of Products are due within the same payment terms agreed with the major retailers for the Products (that is, Coles and Woolworths). These payments are usually 30 days of the end of the month in which the Products are manufactured and delivered. Any variation to these usual payment terms must only be made with the written agreement of both parties. All other payments (including Minimum Fees) shall me made within 30 days of date of invoice.
5.3 (Minimum Fees) At the end of each calendar month, Moira Mac’s shall be entitled to invoice an adjustment to Zwanenberg equal to the amount of the actual Capital Costs, plus the actual fixed component of the Manufacturing Costs (calculated in accordance with the model in Part B of Annexure B) for that calendar month (regardless of the quantity of Products ordered and invoiced in that month) less the total cumulative fixed component of the Manufacturing Costs and Capital Costs component of the Fees invoiced to Zwanenberg for Products during that calendar month. For the avoidance of doubt, it is intended by the parties that the Minimum Fees cover Moira Mac’s overheads comprising the Capital Costs and the fixed component of Manufacturing Costs (Covered Overheads) each calendar month only where those Covered Overheads are not otherwise covered in the Fees paid that calendar month. It is not intended that Moira Mac’s receives more than what is needed to cover those Covered Overheads. Accordingly, after each quarter, if the amounts received by Moira Mac’s as Minimum Fees in that calendar quarter are more than Moira Mac’s actual Covered Overheads during that quarter, a credit will be brought forward in the following quarter for that excess amount and any brought forward credit at the end of the financial year will be paid by Moira Mac’s to Zwanenberg. The model in Part B of Annexure B is based on 1,000 tons of Products being produced per annum. The model will be reviewed at the commencement of each calendar quarter and if volumes are less or greater than that assumed volume, the parties agree to review the model and adjust it accordingly.
5.4 (Security) Zwanenberg’s parent company must provide, within 7 days of request by Moira Mac’s, an irrevocable letter of credit from a reputable bank in favour of Moira Mac’s financiers as security for the financing required for the Machinery (Letter of Credit). The investment in the Building Upgrades is at Moira Mac’s risk.
5.5 (Charge) Zwanenberg shall be entitled to a charge over the specific Machinery provided that the charge shall be released when the Letter of Credit is released by Moira Mac’s financiers.
5.6 (Purchase of Machinery) If Zwanenberg terminates this letter agreement under clauses 9.1 or 9.2, Zwanenberg may purchase the Machinery from Moira Mac’s at the residual fiscal value at that point in time.
….
9.1 (Termination for material breach) Either party may terminate this letter agreement if the other party materially breaches the letter agreement and does not remedy such breach within 14 days of notice of the breach from the firstmentioned party.
9.2 (Termination for insolvency) Either party may terminate this letter agreement if the other party is or becomes Insolvent.
9.3 (Termination for change in control or assignment) Zwanenberg may terminate this letter agreement if:
(a) there is a change in Control of Moira Mac’s such that an entity, which does not, either solely or jointly, Control Moira Mac’s as at the date of this letter agreement, attains Control of Moira Mac’s; or
(b) there is an assignment of this agreement by Moira Mac’s to an assignee,
without the prior consent of Zwanenberg, such consent not to be unreasonably withheld or delayed.
9.4 (Consequences of termination) Upon termination of this letter agreement, Zwanenberg shall be entitled to all then manufactured Product subject to payment of all Fees in full for the Products.
76 There were two annexures to the letter agreement. The first, Annexure A, was concerned with product specifications, and is not presently material. The second, Annexure B, was concerned with the payments to which the respondent was entitled, and was in two parts.
77 Part A of Annexure B was headed “Costprice Calculation MM”, was subheaded “1000 MT/yr”, and set out the price which the respondent was entitled to charge for each kilogram of product delivered to the applicant. The prices differed as between products, but the format was consistent. By way of example, in respect of the 600 g meatball pack, the pricing reflected the model which had been sent by Mr Koops to Mr Russell on 27 July 2012: see para 56 above. In respect of all products, the overhead component was $0.96/kg.
78 Part B of Annexure B was in the same terms, and contained the same figures, as in the draft sent by Mr Russell to Mr Koops on 2 August 2012: see para 62 above.
The operation of the Letter Agreement
79 On 3 December 2012, the respondent remitted to the applicant its first minimum fee invoice under cl 5.3 of the letter agreement. The invoice related to the month of November. An attachment to the invoice contained a list of items generally in accordance with the format of Part B of Annexure B to the letter agreement, but with some significant departures from that annexure. All of the Annexure B items were on the list, but in respect of some there were no amounts claimed, presumably because there had been, in the month of November, no costs incurred by the respondent for the items concerned (rent and sundry, for example). In two instances – “Supervisor” and “QA Officer” – what had been claimed was one twelfth of the corresponding amount set out in Part B. In three instances – “Insurance”, “Maintenance” and “Bank Fees” – what had been claimed was less than one twelfth, and in one instance – “Accountancy” – it was more. Additionally, the respondent had added four new items to the list, and made a claim in respect of each of them: “Factory supplies”, $10,804.93; “Freight in”, $205; “Consultancy”, $375; and “Staff Training”, $600. The total claimed was $31,178.31 (before GST).
80 The respondent’s next invoice was dated 31 December 2012, and related to that month. Again, a list generally in the format of Part B of Annexure B to the letter agreement was attached. There were more claims made here than under the invoice for November: for example, $6,248, was claimed with respect to rent, and $4,167 was claimed with respect to “management”. There were two new items added to the list: “rubbish removal” ($5,522.36) and “security” ($1,815.45). The total claimed was $54,648.16 (before GST).
81 The sums invoiced by the respondent to the applicant with respect to the fixed cost items in Part B of Annexure B in respect of the months of January and February 2013 were $60,970.49 and $49.266.66 respectively. This trend was of concern to the applicant. Janet Pearce, an employee of Orange & Green, sent an email to Mr Russell on 26 March 2013 which contained the following passage:
On review of the February invoice we have received, we are concerned that we have received very little supporting documentation for these charges after you assured me in our phone conversation some weeks ago that we would be receiving this with our next invoice. In addition, these charges are still high and above forecasted costs.
We must now ask for full disclosure and substantiation of these charges from the first invoice issued to current so we can review these charges, as reiterating my previous discussion with you, it is not sufficient from an audit and substantiation perspective for us to process an invoice of this amount on the basis of nothing more than an Excel spreadsheet.
It is not apparent what response Ms Pearce, or Mr Koops, received to that communication. Notwithstanding the concerns expressed in this email, Mr Koops authorised the respective payments.
82 It was also in late March 2013 that the applicant placed its first order for snack food products upon the respondent. According to the evidence of Mr Koops, the applicant’s supply of snack foods to Coles commenced in early April 2013.
83 On 9 April 2013, there was a development which proved to be of some significance to the parties’ relationship and to the operation of the letter agreement: the respondent engaged Marc Smith, a business management graduate and certified practising accountant, as its financial controller. Henceforth, it was he who had responsibility for preparing the invoices that would be sent to the applicant, commencing with the minimum fee invoice for March 2013, which was sent to the applicant on 24 April 2013. The amount claimed was $87,923.00.
84 Mr Smith’s evidence about the preparation of the March minimum fee invoice was as follows:
The process that I followed for preparing the March 2013 Minimum Fee Invoice was as follows:
152.1 first, I journalled over to the Mac’s Snacks general ledger the expenses for supervisor, quality assurance officer, management and insurance. I simply took 1/12th of the amounts stated in B/B for these;
152.2 next, I printed out the Mac’s Snacks general ledger as at 31 March 2013. I went through each of the expense categories shown on it and checked for coding errors. I then listed all of the expenses that were originally in the general ledger in a document which I called “Profit & Loss Statement March 2013”;
152.3 next, I checked the general ledger against the actual invoices for every item in the Profit & Loss Statement;
152.4 next, I spoke with the supervisor who was in charge of all the employees who were working on commissioning and trialling the Line and obtained from her the apportionment of the employees’ time between the Core Business and the Mac’s Snacks Business. I then prepared an apportionment sheet called “Payroll March 2013”;
152.5 next, I printed out the general ledger for finance costs and bank charges and checked them against the Mac’s Snacks bank statement;
152.6 next, I prepared and printed out a tax invoice to ZA for the total amount of what was owing, adding GST;
152.7 last, I sent the package of documents to Dick by email. I also attached individual invoices for most of the expenses. The total length of the email I sent Dick was 32 pages.
85 When Mr Koops received this invoice, he contacted Mr Russell and asked him to justify the invoice, and to provide him with supporting invoices which showed that the respondent had in fact incurred the costs to which its claims related. In response, Dean Gordon, the respondent’s external accountant, sent some invoices to Mr Koops.
86 By 1 May 2013, Mr Koops had given the invoices provided by Mr Gordon some attention. On that day, he addressed a lengthy email to him and to Mr Russell. In that email, Mr Koops referred to the estimate of fixed costs contained in the annexure to the letter agreement, $443,500, and noted that the applicant had been invoiced “281k for overhead in 6 months”. He queried a number of items in the respondent’s invoices at the level of detail. He concluded:
In general we have many concerns about the charges that are being passed onto Zwanenberg Australia. Costs are continually over estimated figures which indicates to us that Moira Mac’s are spending funds with what appears to be little control (for Zwanenberg) or responsibility over the amounts spent, safe in the knowledge that costs can be passed back to us on the monthly invoice. We therefore propose that going forward we implement some controls over the amounts that are spent, whereby any proposed spending over the estimated monthly amount must only be undertaken in consultation with me. This way Moira Mac’s will have boundaries within which they must operate and be accountable for the estimates that they have agreed to at the outset of this project. We can then have reasonable expectations of what will be included in the monthly invoice.
Now that saleable production is underway, we also want to confirm that Zwanenberg will receive a credit each month against the monthly charges, equalling the number of kilograms produced multiplied by the predetermined overhead amount per kilogram. Should the level of production be such that overheads are more-than absorbed based on this overhead rate, then a credit will be due to Zwanenberg Australia.
87 Mr Koops went to Bendigo the following day, 2 May 2013, and met with Mr Russell, Mr Smith (who had not by then seen Mr Koops’ email sent the previous day) and others. I should say that Mr Koops’ email of 1 May 2013 was not the only issue which then required discussion and, as I shall indicate presently, it would be a mistake to assume that there were not other difficulties facing the parties in their project to produce snack products at Bendigo. The meeting on 2 May commenced without Mr Russell and, according to Mr Koops, was initially concerned with these other things. When Mr Russell did join the meeting, he was, again according to Mr Koops, “very angry” about the email. Mr Koops’ evidence-in-chief about the course of the meeting thenceforth was as follows:
Well, he was – firstly, he pointed out that he – he said to me a couple of things. He said, “You must feel really tough. You want to show everybody how tough you are, sending an email like that.” He said, “I think you sent that email to show the Netherlands how tough you can be, and it’s such – and hoping that that will improve your career chances within the company.” He said, “I don’t think you are expressing my ideas properly to the Netherlands, and I think that’s – that’s the reason why things are not working out between both parties at the moment.” He said, “I think you’re incapable of doing your job, and I don’t want to work with you anymore.” Halfway that – well, how do you call it, is it a speech, or – anyway, halfway, I said, “Look, does everybody have to be – hear this? Do you think that’s necessary?” And he said, “No, you’re right”, and he dismissed Mr Wilson and Ms Silke, and they left the room. And – yes, then he went on, and once he got to the point that he said, “You’re incapable of doing your job properly and I don’t want to work with you any more”, I said to him, “I think the best solution then is for you to call Mr van der Laan about how we proceed from here, because that’s the end, isn’t it?” And he said, “Yes. I will do that. I will give him a call.” And then he went on and said, “Listen, I don’t have to listen to this. If you keep harassing me and bullying me, if you don’t want to work with me anyway.” So I said, “I – I better leave”. So I stood up and shook everybody’s hand, and I left.
Under cross-examination, Mr Koops was not challenged on that evidence.
88 Mr Russell’s recollection of the meeting was less detailed than that of Mr Koops. I would also have to say that Mr Russell appeared to be concerned to minimise the significance of Mr Koops’ email, and the respondent’s minimum fee invoices, and to emphasise other issues which the respondent claimed to have with the snack foods project. Mr Russell said:
I came in mid-meeting and made some statements to Koops … along the basis that there were some substantial issues that needed clarifying. … I said, “Dick, things aren’t going well. You’re placing too many difficult requirements on my staff, in terms of planning forecasting. That’s not working well. You’re not paying your bills. Your machinery is not working.” I said, “I’m not very happy.” I was quite angry and irate, and I told him he needed to man up, get back to Holland – get some plans to get this sorted. … [Koops] stood up and said, “I don’t need to take this.” He reached his hand out and he said, “I would like to say it has been a pleasure, but it hasn’t,” and walked out.
I am disposed to think that what Mr Russell described as his advice to Mr Koops to “man up” and to “get back to Holland” was more accurately expressed in the evidence of the latter, set out above.
89 Mr Smith’s evidence-in-chief included a more detailed explanation of the course of the discussion at the meeting on 2 May 2013 before Mr Russell came in to the room. It involved a number of operational issues which do not need to be rehearsed here. But they appear to have made their contribution to Mr Russell’s obvious state of irritation with Mr Koops. As to what occurred after Mr Russell did join the meeting, Mr Smith said:
Dean seemed quite angry with something that had occurred. Dean spoke to Dick and said that Zwanenberg were blaming all the problems on Moira Mac’s and that this shouldn’t be the case. Dean said that at this point, “The production planning issues are causing us to spend more money. The lead times aren’t right,” which is the stuff that we just covered in the meeting but Dean wasn’t in there at that time, “that the cost of the product was too high in Coles”. We worked out that the meatballs were 50 cents a piece and he said that that was not sustainable. The next one he spoke about – then he spoke about the late payment that Zwanenberg had – was continually paying late. It was at this point where Dick, I could see, was getting quite upset around this conversation. The side of his neck started to go red and it was at this point where Dick said, “I don’t need to take this. I don’t need to take this,” and got up and walked out. And that was the conclusion of that meeting.
Again, under cross-examination Mr Smith was not challenged on this evidence.
90 Late in the afternoon of 2 May 2013, Mr Koops sent his principals in The Netherlands a lengthy email which contained, in effect, a litany of the respondent’s shortcomings as he saw them. This was admitted without objection, and it was not suggested to Mr Koops that the sentiments expressed in it were self-serving. With respect to the area of present controversy, the email stated:
Finances
MM’s invoicing is a shambles. They charge out all their costs on a 1-to-1 basis. That’s not what we agreed. I’ve explained to both Dean and his accountant Dean Gordon what was agreed between us and I’ve stressed the need to adhere to these agreed procedures otherwise it will all be a mess. I’m sitting down with Dean on Friday morning to discuss the issue.
I have a running list of questions in regards to costs and how these should be dealt with (which costs should and should not be charged out) I’ve put these on the table and am seeking an appointment with Dean/Dean to go through them. We also have a standing arrangement to review the cost price every quarter. MM doesn’t maintain any records (as we discussed during Albert’s visit) that would assist us to conduct this review.
91 At 11.36 pm on the same day, Mr Russell sent a very short email to Mr Koops, with a copy only to his (Russell’s) solicitor. The subject line of the email was “breach of contract”. The text of the email (formal parts excluded) was as follows:
I advise that Moira Mac’s is unable to guarantee continued production for Zwanenberg, unless contractual payments are brought up to date by close of business Friday May 3rd.
The applicant paid the respondent’s March invoice on 3 May 2013, but Mr Koops said, in an email to Mr Russell of that day, that the applicant was “not sure all the costs on the invoices are correct [and] ... would like the opportunity to review the costs in detail”.
92 In the days which followed, Mr Smith spoke to Mr Koops by telephone, informing him (in Mr Smith’s words) that he was “working on the cost models”. Then on 10 May 2013, Mr Russell sent an email to Mr Koops which dealt with a number of (mostly operational) issues which the respondent was encountering, but containing also the following item:
Budgeted costs for all snacks products were underestimated.
PROPOSAL – New costs models, based on actual costs, be revised by Marc Smith, Moira Mac’s Financial Controller, completed by May 13th.
When it was put to Mr Russell under cross-examination that the figure that constituted an underestimate was the total costs of $443,500 in Part B of Annexure B, his response was unconvincing at best. He said that he “saw” the sum of $443,500 as the respondent’s “minimum guarantee”, not as an estimate “in terms of something that might be used for invoicing”.
93 On 13 May 2013, Mr Smith sent Mr Koops what he described as “a revised costing model for each of the products”. The costings set out in Part A of Annexure B to the letter agreement had been adjusted. In each case, the per kilogram figure for “overheads” had been adjusted from $0.96 to $1.42. The “monthly overhead costs” were set out in an itemised list as follows:
| Monthly overhead costs | ||
| Rental Costs | $12,502.00 | |
| Factory Supplies | $2,697.45 | |
| Freight | $2,909.28 | |
| Insurance – Factory | $2,666.00 | |
| Laboratory Services | $300.00 | |
| Electricity | $10,600.00 | |
| Maintenance | $3,000.00 | |
| Accountancy | $2,000.00 | |
| Bank Charges | $359.22 | |
| Office Supplies | $400.00 | |
| Consultant Fees | $0.00 | |
| Pest Control | $50.00 | |
| Rubbish Removal | $1,800.00 | |
| Laundry Costs | $480.00 | |
| Security | $0.00 | |
| Water Rates | $2,000.00 | |
| Supervisor Expense | $5,833.00 | |
| QA Expense | $5,000.00 | |
| Management Expense | $4,167.00 | |
| Total Overheads | $56,763.95 | |
| Labour Hire | $45,143.91 | |
| Finance Costs | $34,897.00 | |
| Number of kg’s produced for the month | 40000 | |
| Overhead Recovery | $1.42 | |
| Labour Recovery | $1.13 | |
| Interest Recovery | $0.87 |
94 Mr Koops was concerned at the increases in the costs specified in Annexure B (both parts) which this revised costing model implied. On 14 May 2013, he wrote to Mr Russell, with two purposes: first, to respond to his email of 10 May 2013, and secondly to propose a meeting at Bendigo involving Mr Baan to review the issues which had arisen around the respondent’s cost/price calculations and its fixed overhead costs, as recently re-calculated by Mr Smith. Mr Koops proposed that Mr Baan would “look in more detail at the financial process flow and the workings of the agreement from the financial side of things”. His email to Mr Russell continued:
We need to address the following points:
• Review monthly invoices from October until March
• Review costs other than costs clearly specified in the manufacturing agreement, ie. test productions
• Review Cost price calculations
• Review Overhead fee
• Method of how costs are charged as per contract / reporting deviances from standards
Mr Russell was content for representatives of the applicant, including Mr Baan, to visit Bendigo.
95 Mr Koops, Mr Baan and Mathias Heinsohn, a production manager in the employ of ZFG then based with the respondent, met with Mr Smith over the period 21-23 May 2013. On the first day of the meeting (21 May), Mr Baan showed Mr Smith the version of the cost/price model which he had given to Mr Holland the previous November. That model, it will be recalled, was based on a total production of 500 t pa. On that and the succeeding days, Mr Baan and Mr Smith considered the elements of that model, and the costings indicated in Mr Smith’s model of 13 May 2013, in detail. At times, Mr Koops and Mr Heinsohn participated in these discussions, while at other times they met separately to discuss operational, as distinct from financial, aspects.
96 It is not necessary, and it would not be productive, for me here to set out the substance of the evidence with respect to the course of this meeting, which occupied three days. As a generalisation, however, I would say that Mr Baan and Mr Smith were substantially concerned with the point at which the former’s cost price model intersected with the costs which the respondent was in fact incurring, and which it expected to incur, in the early days of the operation of the snacks operation. For his part, Mr Smith was concerned to explain to Mr Baan what those costs were, and to justify the allocation of them to the snacks operation which was implicit in his email of 13 May 2013. For his part, Mr Baan – who had been, after all, the architect of the model itself, and was the person most familiar with the theoretical underpinnings of the model – was concerned to bring Mr Smith to a complete understanding of the model and how, and the extent to which, the respondent’s costs would be reflected in it.
97 At their meeting over the period 21-23 May 2013, Mr Baan and Mr Smith did not give specific attention to the money figures set out in Part B of Annexure B of the letter agreement. They did, however, give detailed attention to a number of the more significant items listed in Mr Smith’s email of 13 May 2013 as “monthly overhead costs”. According to Mr Baan, the only items which were considered in any detail – and the only items which he could recall discussing – were rent, maintenance and utilities (electricity). With the assistance of notes which he took at the time, Mr Smith recalled having discussed also consultant’s fees, accountancy fees, factory supplies, rubbish removal, supervision and QA expenses, freight and management expense. Mr Baan was firm in his denial that this last item was not discussed over this period, but I prefer Mr Smith’s evidence on this point. Mr Smith recalled that Mr Baan made it clear to him that, under the incremental costing model that was being used, it was not permissible for the respondent to apply the dollar equivalent of the proportionate amount of time that members of its management team, including Mr Russell, were occupied upon matters relating to the snacks operation. Mr Baan proposed that there should be, say, a 10% allowance of the cost of management reflecting, in the evidence of Mr Smith recalling Mr Baan’s words, “an efficient line”.
98 At 6.26 pm on 22 May 2013, Mr Koops sent Mr Baan and Mr Smith a revised cost price model according to the format in Part A of Annexure B to the letter agreement. It contained adjustments to the model shown to Mr Smith by Mr Baan at the outset of their discussions on 21 May 2013. Over the products referred to in the model, those adjustments were always upwards, and lay within the range $0.06/kg to $0.78/kg, with an unweighted average of $0.50. In every instance, the overheads figure of $0.96/kg remained unchanged. Mr Koops’ model did not deal with the fixed cost estimates in Part B of Annexure B to the letter agreement.
99 Mr Smith did not consider that Mr Koops’ model of 22 May 2013 reflected the actual costs which he had been discussing with Mr Baan over the previous two days. In his evidence, Mr Smith said that he decided to “re-work” that model, but he had not done so by the time that Mr Baan had to return to Melbourne on the afternoon of 23 May 2013. He did so on the understanding that such issues as there were about the model, and about the per-kilogram allowances for which it provided, had been resolved.
100 Mr Smith forwarded to Mr Koops what his email described as the “snacks costing model complete” on the morning of 24 May 2013. It followed the format of Mr Koops’ model of 22 May. Mr Smith had made further adjustments to the figures in that model which, putting aside overheads for the moment, lay within the range ($0.27)/kg to $1.10/kg, with an unweighted average of $0.30. That is to say, aside from overheads, acceptance by the applicant of Mr Smith’s model of 24 May 2013 would have given rise to an average price $0.80/kg higher than had been shown in the model given by Mr Baan to Mr Holland in November 2012.
101 In his model of 24 May 2013 Mr Smith had, however, also adjusted the per kilogram overheads figure contained in Part A of Annexure B and in the models of November 2012 and of 22 May 2013. To understand that adjustment, it is necessary first to note that, in his email of 24 May 2013, Mr Smith included the following schedule of fixed annual costs:
Fixed Component of Manufacturing Costs
| Rent | 154,848 | |
| Water Rates | 25,600 | |
| Management | 232,843 | |
| Maintenance Costs | 270,373 | |
| Supervisor | 70,000 | |
| QA Officer | 60,000 | |
| Insurance | 75,000 | To be confirmed around capitalisation |
| Utilities | 184,800 | |
| Cleaning | 171,859 | |
| Accountancy | 10,000 | |
| Bank Fees | 3,000 | |
| Safety/Laundry/Materials | 20,000 | |
| Laboratory | 10,000 | |
| Audit Fees | 6,000 | |
| Pest Control | 5,000 | |
| Office Costs | 6,000 | |
| Sundry | 20,000 | |
| Total Overheads | 1,325,322 |
The figure of $1,325,322 was to be compared with the figure of $443,500 in Part B of Annexure B to the letter agreement.
102 Returning to Mr Smith’s cost model as such, the overheads figure included in respect of each product was $2.65/kg. It is easy to see how this figure was arrived at: having made a new estimate of the respondent’s fixed annual costs of operating the snacks line, Mr Smith divided this by 500 to reflect the assumption that annual production would be in the order of 500 t, and then by 1,000 to express the sum per kilogram. That is to say, $1,325,322/500/1000 = $2.65. This represented an increase of $1.69 over the figure of $0.96 stated in Part A of Annexure B, and of $1.23 over the figure of $1.42 provided by Mr Smith himself in his email of 13 May 2013.
103 At the time when Mr Smith’s email of 24 May 2013 was received in Mr Koops’ office, Mr Baan was present there but was about to leave for his return flight to The Netherlands. In his evidence, Mr Baan said that he had had “nothing to do with putting this new estimate together”, that he had not had “the faintest idea that this figure was coming” and that, over the course of their meetings in Bendigo, Mr Smith had never given him “any indication that he would suggest such an increase in fixed costs”.
104 As he had promised to do in his email, Mr Smith shortly rang Mr Baan to discuss the model which he had emailed to him. During this call, both parties were on speaker-phone. At the respondent’s end, Mr Smith and Mr Russell were present. At the applicant’s end, Mr Baan and Mr Koops were present. In the evidence of these men, there is some disagreement as to the exact terms in which Mr Baan expressed his reaction to Mr Smith’s figures of $2.65/kg and of $1,325,322 pa, but there is little dissent from the proposition that it was a strong one on any view. Mr Baan said that he told Mr Smith that figures of this order would “kill the business” and that he would now have to leave Melbourne with a “stomach ache”. Mr Smith did not confirm the use the latter metaphor, but he did accept that the impression he gained from the applicant’s end of the phone call was one of frank astonishment. Mr Koops recalled that both he and Mr Baan “were in shock when [they] saw” the new figure.
105 Mr Koops sent Mr Smith’s costing figures to Mr van der Laan in The Netherlands, together with a message which contained the following:
We were unpleasantly surprised this morning when we received the suggested overhead calculations this morning. Unlike their previous calculations where they came with 700K in overheads, they now came with a much higher number, $1.3M. At a budgeted volume of 500 Mt that would mean a overhead rate of $2.65/kilo, compare that with the current fee of $0.96.
We told them we can’t run the business with an overhead rate at that level, and that the way costs are calculated do not comply with the initial principle to only charge us with incremental costs. By the way, this new rate is twice as high as the costs they raised in their proposal only 2 weeks ago.
We have told them we want to discuss with you first, but that with these fees we know you can never run a viable business.
106 Mr Baan spoke to Mr van der Laan about these developments on his return to The Netherlands. That led to the sending of an email by Mr van der Laan to Mr Russell on 29 May 2013 in the following terms:
I briefly spoke to Albert today. He informed me of your latest calculation of the overhead costs. It is clear that these costs are a major concern to us and to the success of the whole project. I understand that Albert is waiting for some further information before we can draw a conclusion.
I intend to fly to Australia this weekend.
Are you available for meetings next Monday or Tuesday?
I would appreciate a prompt reply so I can make the necessary arrangements.
Mr van der Laan did travel to Australia, and participated in meetings with representatives of both parties in the first week of June.
107 Before turning to those meetings, I should mention a dispute which emerged in the last week of May 2013 over some production invoices which the respondent had raised. Those invoices, Nos 56-84, were ostensibly referable to cl 5.1 of the letter agreement. They bore various dates, the earliest of which was 1 April 2013, but they were all sent by Mr Smith to Mr Koops on 27 May 2013. They reflected the former’s model of 24 May 2013. Upon receipt of these invoices, Mr Koops rang Mr Smith and queried the prices upon which they had been based. Mr Smith referred to the recent discussions which the parties had had about the model, and said that his invoices were based on what was then agreed. Mr Koops said that the applicant had not agreed to any adjustment to the model, and that the prices charged by the respondent should reflect the model which he had sent on 22 May 2013 (see para 98 above). The prices in that model were, according to Mr Koops’ evidence, those which had been agreed in November 2012. Pending the resolution of this dispute, Mr Koops authorised the payment of $195,000 on account of the replacement invoices which he expected the respondent to raise. That payment was made on that day, 27 May 2013.
108 The dispute was the subject of emails between representatives of the parties, the conclusion to which was an email sent by Mr Smith to Mr Koops on the afternoon of 31 May 2013, as follows: “Yes just confirmed with Ben, it was a misunderstanding and I will now fix this and re-issue.” The invoices were re-issued on the basis of the prices which had been specified in Mr Koops’ model of 22 May 2013.
109 Returning to the meetings in the first week of June 2013, they were held over three days, but failed to achieve any resolution of the issues which were presented by Mr Smith’s model of 24 May 2013. They commenced in acrimony and they ended in acrimony.
110 The first meeting was held at the respondent’s premises on the afternoon of 3 June 2013. It was attended by Mr van der Laan and Mr Koops on behalf of the applicant and Mr Russell and Mr Smith on behalf of the respondent. Mr Koops recalls that Mr van der Laan expressed his deep concern about the way things stood, saying that “we have a very big problem because it’s not a viable business, and we need to find a solution”. Mr van der Laan said that there was no way that the applicant could run a business with $1.3m in overheads. Mr Koops said that the atmosphere of the meeting was “very tense”. He described it as a “very nasty” meeting. Mr Smith, whose recollection of the course of the meeting was assisted by reference to notes which he took at the time, said that Mr van der Laan seemed very angry. He (van der Laan) said that the costs were too high, that “it’s not manageable”. Mr Smith said (at the meeting) that the costs were “reflective” of the conversations which he had had with Mr Baan. Mr van der Laan responded that Mr Baan was shocked with the costs model which Mr Smith had sent on 24 May 2013. Mr Smith rejoined that he and Mr Baan had worked through the costs when they met on 21-23 May, at the end of which Mr Baan was “very happy with the work that we had actually done”. There followed some argument about a recent balance sheet which Mr Smith had, at Mr Baan’s request, forwarded to him in The Netherlands subsequent to the email of 24 May 2013, and another, somewhat more personal, argument between Mr van der Laan and Mr Russell as to the latter’s failure to take advantage of a recent trip to Scotland for a family funeral to visit the former.
111 Eventually Mr Smith guided the meeting in the direction of a more constructive conversation, and the parties thereafter dealt with the cost issues which confronted them. At the end of the afternoon, they agreed to meet again the following day, late in the afternoon, at Mr van der Laan’s hotel in Melbourne.
112 Mr Smith took the opportunity of the late resumption on 4 June 2013 to send a number of emails to representatives of the applicant. One of them was a detailed, constructive, email to Mr van der Laan at 10.44 am that day. Mr Smith opened by suggesting that it was “imperative that we maintain the Primrose brand”, and continued:
It is agreed our current level of overheads are too high.
The original costing ($443,000) lacked some of the knowledge that we now have.
It is important from a sustainability perspective that we actively look at ways to reduce the overhead costs.
He then set out the list of fixed manufacturing costs that had been attached to his email of 24 May 2014, and provided particulars, and proposals as to how some of those costs might be reduced, in respect of the following items: rent, management, maintenance, insurance, utilities and cleaning. He stressed the importance of keeping the costings “close to the true cost of production so that we have less surprises”. Having canvassed some ways of increasing sales volumes, and thus securing cost recovery on a per kilogram basis (ie under the model in Part A of Annexure B to the letter agreement), Mr Smith ended by noting that it was “important that we seriously look at these options as a way to move forward”, and that he was “committed to work closely in getting an outcome that is satisfactory for both businesses”.
113 A second email from Mr Smith on 4 June 2013 was that which he sent at 10.49 am to Mr Baan (who was not in Australia at the time). Mr Smith sought “a point of clarification”. He said: “In the contract we have a costing of $0.96 to cover overheads, based on 1,000MT, which equates to overhead costs of $960,000.” The observation which I would make about this seemingly innocuous correspondence is that it demonstrated Mr Smith’s limited understanding of the basis of the unit overhead figure in Part A of Annexure B to the letter agreement, notwithstanding his obvious conscientious attention to the subject since he had commenced employment with the respondent on 9 April that year. The figure of $0.96 included $0.25 for meat preparation: the true overhead component of it was $0.71.
114 A third email, this time sent by Mr Smith at 2.01 pm on 4 June 2013, was addressed to Mr Koops. In the email, Mr Smith stated that the respondent was allowing a credit in the sum of $29,079.85 in respect of wages, overhead and interest for usage of the snacks line in March 2013 in the production of goods which were for the respondent’s own business. As an attachment to a fourth email, Mr Smith sent the credit note itself at 2.07 pm the same day. The sum of $29,079.85 was net of GST.
115 Returning to the events of 4 June 2013 as such, the resumed meeting between the parties commenced at 5 pm that day. Again, proceedings commenced on an adversarial note. Mr van der Laan expressed his concern that the respondent’s bank had taken a security over the machinery which had been bought from ZFG, notwithstanding that ZFG’s bank had issued letters of credit for the comfort of the respondent’s bank. There was some contention about the balance sheet that the respondent had provided to the applicant. Then Mr van der Laan said that the applicant had taken legal advice about the letter agreement, and had come to the view that everything was in the respondent’s favour, that the respondent could charge whatever it liked, and that the agreement involved no risk for the respondent. He said that he was not happy with the agreement, and that his people had been “fools” to get him into it. The representatives of the respondent justified their own position, Mr Smith recalling that Mr Russell said that the respondent went into the venture in good faith, and that he pictured that, in three years’ time, Mr van der Laan and himself, with their respective wives, would be (as Mr Smith put it in his evidence) “sitting on a beach somewhere while their businesses were growing around them”. Mr van der Laan reiterated that the contract was a bad one which would not work and that his people had been fools to go into it, but he added that he signed off on it, and it was his decision to have done so.
116 Sensing that tensions were rising, Mr Smith suggested, according to Mr Koops’ recollection, that the two of them should, in effect, take over the conduct of the meeting and focus on resolving the matters of detail that separated the parties at that stage, thereby, in effect, removing Mr van der Laan and Mr Russell from each other’s firing line along the emotional axis. This stratagem appeared to work well. By the time the parties agreed to adjourn, there was a consensus that the meeting had been a successful one. Mr van der Laan considered that Mr Smith’s contribution had been a very constructive one. He told Mr Smith that he and Mr Koops had been “able to come up with some solutions instead of the way that the meeting was going”. Mr Russell thanked Mr van der Laan for his efforts, and his attempts to make the venture work. There was more to be done, but, as a general observation, I would note that the snacks project was again on the rails. The parties agreed to meet again the following morning at Mr Koops’ office at Surrey Hills.
117 Before going to Mr Koops’ office, Mr Russell took the advice of the respondent’s solicitors in Melbourne. This made him and Mr Smith at least an hour late for the meeting (I say “at least” because, on the applicant’s evidence, it was in fact closer to two hours, the difference arising from some apparent confusion as to the time at which it had been agreed that the meeting would commence). Mr van der Laan considered that this tardiness was, if I may paraphrase his words, unpromising for the conduct of a constructive meeting.
118 According to Mr Koops’ recollection, the meeting commenced with some inconsequential chat about jet lag, but then Mr Russell “wanted to kick off by expressing his disappointments”. He said, for example, that the machines supplied by ZFG were not functioning well, in addition to which, as Mr Koops recalls, “there were all kinds of issues”. Mr Russell’s tone was “so aggressive”. Mr van der Laan said, “Look, where is this going? I thought we were here to solve this, and I don’t feel that you are trying to solve it at the moment, so what do you want?”, to which Mr Russell replied, “I want you to show me respect by letting us do what we need to do, and not look over my shoulder.” He said, “I’m very jealous of what you have accomplished through your career. You have been much more successful than I, but that doesn’t mean that you can tell me what to do. It’s my business, it’s not your business, and I run my business the way I want it to be run.” And then Mr van der Laan said, “Listen, I have given you a bank guarantee for $1.5 million, and I think I’m entitled to know what is going on in that factory.” Mr Russell said, “Look, I’m very confident about my position – very confident. And if you don’t show me the respect that I deserve, I will take you to court and I will take you for millions. You didn’t show me even the respect to go into my factory on Monday to speak with the people that work for you”. Mr van der Laan replied that he was not there on Monday to look at the factory, as they had bigger issues to deal with. At some point after that, Mr Russell (according to Mr Koops’ evidence) “stood up and walked out of the room”.
119 According to Mr Smith’s recollection, Mr Russell started the meeting by saying that he wasn’t scared of Mr van der Laan’s threats of legal action (the latter having, over the previous two days, made threats to take action over the machinery installed at Bendigo), that he felt that the respondent was in a good position, and that he was happy to fight. He said that this had been his dream, that it was an opportunity for him to expand his sales, that it had been something on which he had worked for a long time and that he did not want to let it go. Mr van der Laan said that he did not think that the parties were meeting to discuss taking legal action, adding, “I thought we were here to solve these issues and move forward.” Then Mr Smith himself turned to Mr Koops and said that there were a couple of things that they needed to get sorted out, the first of which related to the allowance for the direct labour cost for which the existing model provided. Referring to a particular model, Mr Smith said that Mr Koops had “the labour component for this product set lower than Twan’s model” (Twan being Mr Peters), and that he had “set the labour model lower than what it should actually be based on what you’re achieving in the Netherlands.” As Mr Smith put it in his evidence, at that point Mr Koops got “quite upset”, and asked Mr Smith whether he was calling him a liar. Mr Koops said that they were not even making the product referred to by Mr Smith, and wanted to know why they were talking about it. Then Mr Russell said, “Look, I thought these guys were able to work this out, but obviously based on Dick’s reaction it’s not going to work”. Mr Koops said that he wanted there to be “business as usual”, meaning that the applicant would continue ordering products from the respondent. However, Mr Russell acted conformably with his view most recently expressed: he got up and walked out of the room. The meeting lasted only about ten minutes.
120 Nothing turns on whether Mr Koops’ or Mr Smith’s recollection of the course of the meeting on 5 June 2013 is the more reliable: on any view, the meeting marked the unproductive conclusion of the attempts which these men had made over the previous days to reach a consensus on the extent to which the respondent’s claimed actual costs in the production of snack foods would be met by the applicant.
121 On 6 June 2013, Mr Smith sent Mr Koops the respondent’s invoice No 88, which was a minimum fee invoice ostensibly issued pursuant to cl 5.3 of the letter agreement in respect of the months of April and May 2013. It contained the following items:
Description Amount
April Overheads (including some February and March Costs) $122,061.41
May Overheads $76,786.81
Finance Costs April $33,386.70
Finance Costs May $35,571.08
Wage Cost April $62,072.87
Wage Cost May $50,564.74
less Contributions from Sales
Labour Costs -$8,193.66
Finance Costs -$8,190.34
Overhead Costs -$28,267.80
less Cleaning Issue Credit -$2,856.15
These were GST-inclusive figures. The invoice was supported by schedules of overhead costs (based on categories that appeared to reflect the respondent’s accounting system more so than Part B of Annexure B to the letter agreement) said to have been incurred in those months, and, in the case of April, including also two minor adjustments carried over from February and March. In total, the invoice claimed the sum of $337,935.66. In his evidence, Mr Smith said that he prepared the invoice “in exactly the same way” as he had prepared the invoice for March 2013 (as to which see para 84 above).
122 Aside from the minor cleaning issue credit referred to, the items in this invoice fall into three categories. The first is overheads, both positive (claimed under cl 5.3) and negative (credits arising from the inclusion of an overhead component in the unit price which the respondent received for its sales under Part A of Annexure B – in which respect I note that it was not made clear in the evidence whether the relevant sum, $28,267.80, was calculated on the basis of $0.71/kg or $0.96/kg). The second is finance costs, both positive (claimed under cl 5.3) and negative (credits arising from the inclusion of the “interest and repayment fee” in the unit price which the respondent received for its sales under Part A of Annexure B). The third is wages, both positive (described in the invoice as “wages cost”) and negative (described in the invoice as “labour cost”, and presumably referable to the “labour” item in the product pricing model in Part A of Annexure B).
123 On 8 June 2013, Mr van der Laan sent an email to Mr Russell. In it, he expressed his “disappointment about the outcome and tone of discussions” which the parties had had that week in Melbourne. He said that, as things stood, the applicant would communicate with the respondent only through lawyers. However, “before we start this procedure”, there were two matters which he wished to “clarify”. There is no need to consider the substance of those two matters, but, in the course of dealing with them in his email, Mr van der Laan observed that, if the respondent was “experiencing problems” with the snacks production machinery installed at Bendigo, he could “only assume that this is still due to the relative [sic] inexperienced staff.” Mr van der Laan concluded by saying that he was disappointed that Mr Russell “did not even have the courtesy to shake hands” when he left Mr Koops’ office on 5 June 2013.
124 If Mr van der Laan thought that this email would bring Mr Russell to a greater level of understanding of the applicant’s position on the matters in dispute, he would have been disappointed to receive the following email from him on 10 June 2013:
I was disappointed, but now I am simply determined…determined to correct the numerous misinterpretations and errors of fact made during your recent visit to Australia.
On day 1 and 2, your behaviour varied between belligerent and irrational. By day 3 you had become forgetful and confused. I am concerned you may have had a reaction to medication used to mitigate the effects of jet lag. Regardless of this, your conduct was unforgivable.
You may have forgotten, but during discussions with myself and Marc Smith you made a variety of threats and accusations, including:
1. You would arrange to dismantle the snacks line in Australia and return it to Europe.
2. You had been induced into a contract with Moira Mac’s.
3. Your staff were fools to have entered into a contract to produce snacks in Australia.
Are these the techniques you used to build your reputation in Europe? I doubt they will be effective in Australia.
I have assembled the best legal team in the country, who will methodically dismantle your inaccurate and defamatory statements.
As agreed, this matter is best kept with the lawyers.
125 10 June 2013 was also the effective date for the commencement of the applicant’s supply of snack foods to Woolworths.
126 On 12 June 2013, Mr Koops informed Mr Smith by email that he had compared all the production invoices (ie those re-issued on 27 May 2013) with the “productions” which the applicant had in its system, and set out the comparison in an attached spreadsheet. That spreadsheet was extremely detailed, and no criticism of it was ventured by the respondent in the present proceeding. The face value of the invoices, in total, was $227,368.98. Using the applicant’s records of product received, and the applicant’s pricing model, however, Mr Koops calculated that the respondent was entitled to $234,942.21, a difference in favour of the respondent of $7,573.23. Mr Koops asked Mr Smith whether he agreed with the spreadsheet, and suggested that the difference in the parties’ calculations might be resolved by the respondent creating a further invoice, rather than making any changes to the existing invoices. So far as the evidence shows, Mr Smith did not respond to that suggestion.
127 At this point in the narrative, I should mention one area of controversy which later became relevant under the respondent’s cross-claim. At various times over the period 29 March – 28 May 2013, ZFG had invoiced the respondent, in Euros, in respect of certain packaging materials required in the production of snack foods and delivered to Bendigo. The total claimed under these invoices was €55,300.58. These materials had not been ordered by the respondent, and it seems clear that what was delivered was well in excess of its then reasonably anticipated requirements. The applicant justified ZFG having delivered the materials on the basis of having used its global purchasing power to secure them at advantageous prices, but, necessarily, involving substantial transactions. On 14 June 2013, Mr Koops drew Mr Smith’s attention to the invoices, and sought his advice “on the payment date”. Mr Smith replied:
As per our discussion on the phone, when Albert came over we discussed the issue around these purchases where Moira Mac’s don’t have control and the requirement to send these goods in Bulk. We agreed to the concept that Zwanenberg Australia would fund the stock and we have separated this stock in our warehouse as per these discussions. It was agreed that we would place purchase orders for the stock, which I believe is occurring.
So far as the evidence shows, there was no resistance from Mr Koops to this proposal.
128 The other matter which became the source of controversy in this period was the respondent’s invoice No 88 (which, it will be recalled, had been sent on 6 June 2013). On 17 June 2013, Mr Koops asked Mr Smith to send copies of the suppliers’ invoices which vouched the overheads claimed in that invoice. Then on 18 June 2013, Mr Koops queried what he perceived to be “a substantial difference between the charged labour costs and labour contribution in April and May”. He added that the “charged labour rate is very high in April”. On 20 June, Mr Koops sent Mr Smith an email in which he had two areas of inquiry: first, whether he agreed with the summary of the differences between the respondent’s and the applicant’s figures under the production invoices (the subject of Mr Koops’ email of 12 June); and secondly, whether Mr Smith would respond to his requests for further information in relation to invoice No 88.
129 Mr Smith responded to Mr Koops’ correspondence of 17, 18 and 20 June 2013 on 21 June 2013. He sent what he said were all the supplier invoices which related to invoice No 88, together with a copy of the respondent’s general ledger for the two months to 31 May 2013, “to help reconcile the amounts”. As printed and reproduced in the court book, the invoices comprised 99 pages.
130 Mr Smith’s response to the email of 18 June was in the following terms:
I have received your spreadsheet and I can assure you that the amounts of labour that were used in this area were double checked to ensure that I only charged the correct amounts for the actual labour used in the production of snacks product.
In relation to comparing to the model, we have a number of issues that need to be taken into account.
• Full Time Staff, these staff are required to be paid even during low production periods.
• Setup / Close Down machine lines, as we had numerous small runs that increased the labour requirement as we were setting up machines for smaller production runs, I am sure that Matthias would be able to explain this as he would have witnessed the number of small runs during these periods. This added significant cost to the labour component. The issue will cease when we have the factory running at full capacity.
• Cleaning issues around the machine needed to be dealt with, of which we have reduced the bill to offset amounts of an employee who was not working to the correct standard.
In regards to your calculations you worked out the labour rate at $51.97, however you failed to include the staff who worked only for Mac Snacks and were not shared between Moira Mac’s and Snacks. Their hours would need to be included to get a true labour rate.
Also Mark Ingham is a full time maintenance person who works in the Snacks area ensuring that the machinery is operating correctly.
131 With respect to Mr Koops’ email of 20 June, Mr Smith’s response on 21 June was as follows:
I have sent you through all the answers to your queries.
Can you please ensure that we can get payment on the outstanding invoices next week to ensure that we can continue to supply product. We currently have a number of suppliers who are threatening to put us on stop credit and we need to pay them urgently to ensure that there is no delays in supplying the products to Woolworths, Coles or Aldi.
We are looking for a payment of approximately $340,000.
Your urgent attention is greatly appreciated.
Mr Smith’s reference to “approximately $340,000” would have made it clear to Mr Koops that the respondent was claiming payment on invoice No 88 the following week (ie that commencing Monday, 24 June 2013).
132 According to Mr Smith’s evidence-in-chief, in “the second half of June” (which, from the context, I would interpret as substantially a reference to the week commencing on 24 June), he tried to call Mr Koops many times, but was not able to contact him. The area of Mr Smith’s concern, I infer, was payment of invoice No 88: he made a point of noting in that evidence that he had responded to Mr Koops’ emails in the week commencing 17 June, which emails, according to Mr Smith, sought information about that invoice. Being unable to contact Mr Koops, ultimately Mr Smith “became frustrated” and, at 5.32 pm on 28 June 2013, emailed Mr Baan with a request that he contact him by telephone “to discuss the payment of invoices that are due for payment today”. He said that he had been unsuccessful “numerous times this week” in contacting Mr Koops “both via email and a number of phone calls”. He said that he wanted to “confirm the payment of the outstanding invoice to avoid any issues with Creditors, or any issues with the loan payments which are due at the start of the month”. Although it is not clear to what invoices Mr Smith was referring as being due for payment on 28 June 2013 (as I shall mention later in these reasons, none were), in context I would infer that what Mr Smith described as “the outstanding invoice” would have been reasonably understood by the applicant as a reference to invoice No 88.
133 As it happened, on the same day, 28 June 2013, the applicant had paid the respondent the sum of $124,598. The remittance advice forwarded to the respondent on that day explained the payment as follows:
| Undisputed amount of invoices 00000056 – 00000084 | 222,536 | |
| Undisputed amount of invoice 00000088 | 99,996 | |
| Credit invoice March 00000085 | – | 31,988 |
| GST | 29,054 | |
| Advance payment 07/05 | – | 195,000 |
| Undisputed amount owing (incl. GST) | 124,598 |
Although this remittance advice did not state the time at which the applicant’s payment was made, I would infer that it was before the close of business, and therefore before the sending of Mr Smith’s email to Mr Baan at 5.32 pm that day. But it likewise seems clear that, when he sent that email, Mr Smith was not aware of the payment.
134 Although one would scarcely think so from the weight of the parties’ submissions in the case, this remittance advice is an important document. But it is problematic in ways to which I shall refer. To the extent that they may be, the figures are to be explained as follows:
$222,536: The total face value of invoices 56-84 was $227,386.96. That was a GST-inclusive figure. Although the evidence does not deal explicitly with why the sum of $4,832.96 came to be disputed, I infer that it was the “small amount” which related to products that had been “incorrectly invoiced” referred to in the applicant’s solicitor’s letter of 3 July 2013 (see para 143 below).
$99,996: Tendered by the applicant were two documents which purported to be remittance advices dated 1 July 2013. One of them recorded the face value of invoice No 88 in the sum of $337,935.66 (see para 121 above). It also recorded a credit claim on that invoice in the sum of ($227,940.49). This claim was dated 17 July 2013, which throws doubt on the correctness of the date of the document itself. Be that as it may, the difference between these two sums, $109,995.17, is the GST-inclusive equivalent of $99,995.60, or $99,996 rounded up. Thus I would infer that, on 28 June 2013, the applicant had decided that it would pay $99,996 (GST exclusive) only on invoice No 88. In a letter from its solicitors on 3 July 2013 (referred to below), the applicant explained how this payment had been calculated, but the actual calculations were not set out. In his witness statement, Mr Smith supplied the deficiency. He said:
I have worked out how ZA reached $99,996. The calculation is as follows:
398.1 the Overheads in BIB total $36,958.33 per month (i.e. $443,500 + 12), before GST. For two months, the amount is $73,916.66;
398.2 the Capital Costs from BIB per month is $32,000 (i.e. $384,000 + 12), and two months of that is $64,000;
398.3 the total of the two is $137,916.67;
398.4 from that amount, the contribution price based on the sales to ZA had to be deducted;
398.5 ZA took the number of kgs that had been sold in Fee Invoices 56 - 84 and multiplied the relevant number by $0.96 for overheads and $0.68 for Capital Costs, taking those figures straight from the ZA Model;
398.6 when the contribution price was deducted from $137,916.67, the result was $99,996.
($31,988): I have dealt with this credit note at para 114 above. This was a GST-inclusive figure.
$29,054: This is claimed to be GST, and would be the GST payable on the balance of the three sums referred to above. However, as mentioned, the sums of $222,536 and ($31,988) were GST inclusive. GST should have been calculated on $99,996 only, a sum of $9,999.60. On 4 July 2013, the applicant’s solicitors wrote to the respondent’s solicitors informing them of this error and asserting that “the excess sum of $19,055.00 [was] a credit” in favour of the applicant.
$195,000: I have dealt with this sum at para 107 above. This was a GST-inclusive figure. In the second of the documents dated 1 July 2013 to which I have referred above, it was set against invoices Nos 56-72 and in part against invoice No 73. That appears to have been done after the event.
135 At 12.38 pm on 1 July 2013, Mr Russell emailed Vince Millicevic, the applicant’s sales manager for snacks, primarily about a tasting that was to be arranged. He added, however, the following:
I should advise you, however, that Zwanenberg will go on stopped supply as of 5.00pm today if outstanding invoices remain unpaid.
Dick Koops should contact Marc Smith immediately to make arrangements for payment.
136 Mr Russell’s email prompted the sending of a letter, the same day, from the applicant’s solicitors to the respondent’s solicitors. The letter contained a strong protest about Mr Russell’s email. The writer referred to a dispute between the parties as to the respondent’s entitlement under several invoices, including No 88, and to the payment made on 28 June 2013. The writer continued:
In the meantime, I am very concerned about your client’s attitude to the Agreement.
Moira Mac is well aware that a dispute has arisen in relation to Moira Mac’s invoicing for charges which it asserts are payable under the Agreement. It is also well aware that the parties are presently attempting to resolve their dispute on those matters.
Notwithstanding the present impasse, Moira Mac has unilaterally asserted a right to cease its principal obligation under the Agreement on less than five hours notice. It has not attempted to identify the source of its right to do so (and nor could it, since plainly such a right does not exist). If you are of another view please let me know and advise me of the source of any such entitlement to terminate its fundamental obligation under this Agreement on less than 5 hours notice.
The writer concluded with a demand that the respondent, by 4 pm on 3 July 2013, withdraw its threat to cease supply under the letter agreement, and continue to perform and observe its obligations under that agreement. The applicant’s rights were “expressly reserved”.
137 For reasons which will become clear, it is of some present interest whether the applicant’s solicitors’ letter had come to the attention of Mr Russell during business hours on 1 July 2013. There is no evidence of when it was sent on that day. But, in Mr Russell’s own evidence-in-chief, he referred to the letter, and stated that, on the same day, the respondent’s solicitors “sent a response” to the applicant’s solicitors. I do not accept that a response was in fact sent on that day, as the document to which Mr Russell referred was self-evidently a draft, and corresponded with a document in substantially the same terms (also in evidence) which was in fact sent by the respondent’s solicitors on 3 July 2013. The significance of the draft, however, is that it was on the respondent’s solicitors’ letterhead, it was dated 1 July 2013 and it contained a detailed response to the applicant’s solicitors’ letter which could only have been prepared on instructions. The inference I draw is that, before close of business on 1 July 2013, the applicant’s solicitors’ letter of that date had come to the attention of Mr Russell and had been the subject of detailed instructions by him to his own solicitors.
138 That conclusion is of interest because, at 6.02 pm on the same day, Mr Russell wrote to Mr Koops, reiterating that the respondent would not guarantee supply if the applicant “continues to disregard contractual payment terms”. Although expressed in slightly more nuanced terms, this was in effect a reiteration by Mr Russell of the threat which he had made at 12.38 pm that day. For reasons explained above, I infer that this later threat was made by Mr Russell in full knowledge of the substance of the applicant’s solicitors’ letter.
139 Less clear-cut is the answer to the question whether, when Mr Russell made the threats referred to above, he was aware of the applicant’s remittance of $124,598 made on 28 June 2013. Regrettably, he gave no evidence in chief on this subject, and it was not explored in cross-examination. However, something may be inferred from the terms of the draft letter prepared by the respondent’s solicitors on 1 July 2013 to which I have referred. It contained the statement that the applicant’s remittance of $124,598 had not been received. 28 June 2013 was a Friday, and 1 July was the following Monday. In the circumstances, I would infer that, when Mr Russell made the second of his threats on 1 July 2013, he was aware of the applicant’s assertion that it had made the remittance referred to, but had not satisfied himself that the funds had been received by the respondent.
140 On 2 July 2013, Mr Smith sent an email to Mr van der Laan, with a copy to Mr Baan, to which was attached a detailed memorandum which addressed what Mr Smith described as “costing model issues”. He said that he had called and emailed Mr Koops a number of times over the previous 10 days, but had not received a response. He did receive a response from Mr van der Laan. It was in the following terms:
As you know we Zwanenberg and Moira Mac [sic] are now communicating through their respective lawyers. This is the result of our last meeting where Dean made it very clear that he does not have any confidence in me or in Zwanenberg. He confirmed his opinion in mails I have received since this meeting.
We would have preferred to find a commercial solution but this seems to be impossible for the moment.
Therefor [sic] all Zwanenberg staff and directors have been instructed to communicate with directors and employees of Moira Mac [sic] through our lawyers office.
141 On 3 July 2013, the respondent’s solicitors replied to the applicant’s solicitors’ letter of 1 July 2013. They asserted their client’s entitlement to be paid the full amounts invoiced, and said that the applicant’s remittance of $124,598 had been received as part payment. They complained that the applicant had not specified what was, and what was not, in dispute, nor given particulars of the matters in dispute. They continued:
Our client fully intends to comply with its obligations under the Agreement, but cannot do so without its invoices being paid in a timely manner or at all. The part-payment of $124,598.00 does not meet the minimum repayments in respect of the facilities relating to the Manufacturing Line and is in all the circumstance [sic] entirely unacceptable. Non-payment of our client’s invoices is a breach of the Agreement by your client and our client reserves all its rights.
142 On the same day, 3 July 2013, the applicant’s solicitors sent a lengthy letter to the respondent’s solicitors (the copy of which as tendered bears the latter’s received date stamp of 4 July 2013), the stated purpose of which was to obtain clarification as to the basis upon which the respondent had calculated the sums which it had recently invoiced to the applicant. In relation to invoice No 88, there were three general areas of dispute: the sheer size of the fixed manufacturing costs claimed, compared with the indicative figures in Part B of Annexure B to the letter agreement; the inclusion of claims in respect of items not listed in Part B; and the inclusion of wage costs. In relation to production invoices Nos 56-84, it was said that they did not correspond with the respondent’s production report, and that the total should be $222,536, not $227,942 as claimed. The writer sought a “substantive response to this letter” by 11 July 2013, pending which the applicant reserved “all of its rights and remedies”.
143 In the same letter, the applicant’s solicitors provided an explanation of how the sum of $195,000 paid by the applicant on 27 May 2013 (albeit said in the letter to have been paid on 7 May) had been calculated (see para 134 above) and referred also to the payment of $124,598 on 28 June 2013. They said that these payments had been calculated by reference to (1) the amounts claimed in the production invoices Nos 56-84, less a small amount for products that had been “incorrectly invoiced”, (2) two twelfths of the indicative amount of the fixed component of manufacturing costs as set out in Part B of Annexure B to the letter agreement, less the covered overhead component in the manufacturing costs, (3) two twelfths of the indicative amount of the capital costs as set out in Part B of Annexure B, less the capital costs component in the manufacturing costs, and (4) credit invoice No 85 (the credit referred to in para 114 above).
144 On 5 July 2013, Mr Smith sent an email to Mr van der Laan to which was attached a letter providing the respondent’s response to the letter referred to in the previous paragraph. He said that the respondent did not “see merit” in its invoices “being the subject of a forensic analysis, much less involve solicitors in the process”. Subject to that objection, Mr Smith explained the basis of the manufacturing costs claimed in invoice No 88, and did so in considerable detail. His general approach to the subject may be seen in the following paragraph from this document:
All expenses are separately costed and we have gone to great efforts to ensure that only expenses that relate to the operation of this factory are charged, this includes separate meters for all utilities, individual billing and statements from our suppliers and a detailed wage report that separates the wages used on this process. When Moira Mac’s has used these facilities in the past a credit has been raised, the amounts that have been credited have not been based on the model in the agreement, it has been based on the model depicting actual costs, which is a true reflection of the manufacturing costs.
With respect to production invoices Nos 56-84, Mr Smith said that the quantities there invoiced “match back to the batch sheets and production amounts”.
145 In the course of his letter to Mr van der Laan of 5 July 2013, Mr Smith said:
During the discussions with Albert Baan, Dick Koops and Marc Smith in April, it was agreed that the indicative amount of the manufacturing costs as set out in Part B to Annexure B for the sum of $443,500 was significantly under estimated and a review was conducted based on information around actual costs. This review was as per section 5.3 of the agreement, where the cost model is to be reviewed on a quarterly basis.
This review should have altered the invoice price for the goods that have been manufactured and this was agreed in principle that this would occur. A review of the prices charged on the production invoices will still need to occur.
So far as I can see from the evidence, there were no discussions involving Mr Smith and Mr Baan in April 2013. On the assumption that Mr Smith here intended a reference to the meetings over the period 21-23 May 2013, I have set out, at para 94 above, how those meetings came to occur. So far disclosed in the evidence, there was no contemporaneous acknowledgement by the parties that they were then engaged in the process for which the final sentence of cl 5.3 of the letter agreement provided.
146 The present proceeding was commenced on 12 July 2013.
147 Notwithstanding that circumstance, as mentioned above, the applicant was, by then, supplying both Coles and Woolworths with snack foods manufactured by the respondent at Bendigo. It continued to place orders upon the respondent, and those orders were filled. In the months that followed, the parties were in heated dispute about the respondent’s entitlement in respect both of sales invoices under cl 5.1, and of minimum fee invoices under cl 5.3, of the letter agreement. The respondent’s production invoices claimed no more than the unit prices that had been specified by Mr Koops on 22 May 2013, consistently with the re-issued invoices Nos 56-84 raised in late May 2013. They were paid, and no dispute subsists in relation to this aspect of the parties’ relationship.
148 The respondent’s minimum fee invoices for the months of June, July, August and September 2013 (Nos 105, 138, 190 and 217 respectively) were prepared according to the same principles as Mr Smith had followed in preparing invoice No 88. They were paid in part only by the applicant, taking, as I understand it, the same approach as explained in its solicitors’ letter of 3 July 2013 (see para 143 above). Of the total face value of these invoices, $430,846.29, the sum of $229,426.00 was paid.
149 On 2 October 2013, the present proceeding was the subject of mediation. On 4 October 2013, a joint memorandum by senior counsel engaged in the case was forwarded to my associate. It was subsequently placed into evidence by consent. It was there stated that considerable progress had been made at the mediation, and that terms of settlement were being “addressed”. It was anticipated that terms would shortly be signed, and that consent orders would be made disposing of the proceeding. Regrettably, the optimism implied by this memorandum was misplaced.
150 At a time which could only have been in the days immediately following the mediation, Mr van der Laan instructed Mr Koops (in the former’s words) “to wind up all of [the applicant’s] business with [the respondent] … to end all contracts with Australian customers and, once that was done, to cease placing orders with [the respondent]”. By that stage, the applicant’s only customer in Australia was Woolworths.
151 About a week after the mediation, Mr Koops spoke to representatives of Woolworths and informed them of developments which later were expressed in writing in an email which he sent to those representatives of 10 October 2013:
We discussed yesterday that with great regret Zwanenberg Australia has decided to discontinue the production of the Plumrose Deli range, the fresh snacks that are currently ranged in Woolworths.
We are still convinced there is market potential for these products and we endeavour to make a comeback in 12 to 18 months.
I would like to thank you for your support and I appreciate your understanding.
Can you please let me know at your earliest convenience when you will place your last order so we can make arrangements for winding down our production.
Later on the same day, Woolworths informed the applicant that no further orders would be placed from the following day.
152 On 14 October 2013, one of the Woolworths representatives wrote to Mr Koops. He referred to the applicant’s decision “to temporarily exit the Australian market”. He said that the applicant had “brought true NPD to the Australian Smallgoods category” and that their customers “loved the range and healthier white meat options”. He continued:
When you’re ready to return to Australia please ensure Woolworth’s is your first port of call because I know our customers would like to see your range again in our supermarkets.
Mr Koops’ reply the following day included the following:
Thank you very much for your mail, I appreciate it very much.
I will keep you informed of the developments of our plans to come back into the Australian market.
Also thank you for your support over the last 6 months with the new range.
153 On 25 November 2013, the respondent’s solicitors wrote to the applicant’s solicitors on the subjects of a proposed timetable for the proceeding and of their client’s claims for security for costs. In those contexts, the writer noted that “lengthy settlement discussions” had failed and that the applicant was “no longer placing orders pursuant to the agreement”.
154 On 6 December 2013, the applicant’s solicitors wrote to the respondent’s solicitors, noting that, “as a result of the failed negotiations between the parties”, the applicant had ended its contract to supply Woolworths with products manufactured by the respondent, and that the applicant would not be ordering any further products under the letter agreement. They (the applicant’s solicitors) referred to cl 5.3 of that agreement, and said that the interpretation and application of that provision were in dispute. They continued:
The regrettable position obtains that, on the view taken by Moira Mac’s, the letter agreement must oblige Zwanenberg to incur losses for the duration of the term. As you understand, our client contests that this was ever the basis on which it entered into the letter agreement. Those issues must now be resolved by the Court.
At all events, it is necessary to address the present position and how the parties might reasonably contain the losses which are certain to flow whatever the outcome.
To this end, and without prejudice to any other arguments Zwanenberg has in respect of the matter, I write to inform you that Zwanenberg’s view is that it is not obliged to pay any amounts in respect of the actual fixed component of the Manufacturing Costs where Moira Mac’s has not taken all reasonable … steps to mitigate those amounts being incurred, including by:
(a) selling of putting to other productive use the Equipment;
(b) terminating the Lease;
(c) arranging for water and other utilities to be disconnected;
(d) terminating any relevant insurance policy; and
(e) ceasing to employ any contract labour.
The applicant’s solicitors referred to a number of cost items listed in Part B of Annexure B to the letter agreement which, if such costs were being incurred at all, could no longer be referrable to the agreement.
155 On 11 December 2013, the respondent’s solicitors replied in terms which amounted to an unmistakeable, and categorical, rejection of the propositions contained in, and implicit from, the applicant’s solicitor’s letter of 6 December 2013. They (the respondent’s solicitors) made it clear that their client’s position was that, until the applicant moved to terminate the letter agreement, the contract constituted by that agreement remained on foot, and that this entitled the respondent to invoice its actual costs conformably with cl 5.3. They said:
For the record, your letter is a further unequivocal affirmation of the current agreement between your client and Moira Mac’s in circumstances where your client has asserted (wrongly) that it is entitled to bring the Agreement to an end in the face of an alleged repudiation of the Agreement by our client.
And:
So that there is no misunderstanding, we reiterate that while the Agreement remains on foot your client is obliged to perform it, including clause 5.3. Should ZA have genuinely believed that our client had repudiated the Agreement, it would have formally terminated the Agreement months ago, no later than the date of its decision to issue the current proceedings. If ZA wishes to relieve itself of the burden of Clause 5.3, and of honouring its commercial obligations more generally, no doubt you will advise it as to how it may do so. Such a decision will, for ZA, not be without significant risk and substantial penalty.
The letter concluded by stating that the respondent would inform the applicant, “by way of its next invoice” of the amounts that the respondent continued to incur in the way of fixed manufacturing costs “notwithstanding [the applicant’s] decision not to place any further orders upon it”.
156 On 18 December 2013, the applicant’s solicitors wrote again to the respondent’s solicitors, referring to the last two sentences in cl 5.3 of the Letter Agreement, and continuing:
Volumes for the October-December 2013 quarter have been minimal and well below one quarter of 1,000 tons. Volumes for all future quarters will be nil. In these circumstances, the obligation to review and adjust the model accordingly arises at the beginning of the next quarter, being 1 January 2014.
They asked for confirmation that a representative of the respondent would be available early in 2014 “to attend to this process” with a representative of the applicant.
157 On 31 January 2014, Mr Baan sent an email to Mr Smith, referring to a telephone conversation which they had had that week. The email contained a proposal for “the ongoing fixed costs” that the applicant was prepared to pay by reference to the list of items in Part B of Annexure B to the letter agreement, and Mr Baan gave percentages of the sums referable to those items which the applicant was prepared to pay. He also requested documentation which would vouch some of the respondent’s ongoing costs.
158 That email was followed by a further email from Mr Baan to Mr Smith on 10 February 2014. Mr Baan referred to the parties’ ongoing obligation under cl 5.3 of the Letter Agreement to review and to adjust the model in Part B of Annexure B. Anticipating that there would be such a review, Mr Baan asked Mr Smith to provide documents and cost details in a number of areas “which both our solicitors and us have requested of you numerous times”. Mr Baan concluded: “We trust that you will comply with your obligations under the Agreement and attend to the review process as soon as possible.”
The Parties’ Cases
159 In its Further Amended Statement of Claim, the applicant refers to Mr Russell’s fixed manufacturing costs estimate of 16 July 2012, to Mr Smith’s model of 24 May 2013 and to the parties’ meetings in early June 2013, and alleges that it faces the immediate prospect that, for the remainder of the seven-year term of the letter agreement, the respondent will assert an entitlement to recover fixed costs calculated in respect of each of the items and upon each of the revised charges as listed in Mr Smith’s model, and not only in respect of the items and charges in Part B of Annexure B to the letter agreement. The respondent denies these allegations, says that Mr Smith’s model had no contractual force, and alleges that it has invoiced, and will continue to invoice, the applicant conformably with its entitlements under the letter agreement. It does, however, admit that the applicant has denied that it is contractually bound to pay its (the respondent’s) minimum fee invoices, and has not paid them.
160 The applicant refers to the definition of “manufacturing costs” in the letter agreement, and to cll 5.1 and 5.3 thereof, and contends that, on the proper construction of the agreement, any minimum fee invoice under cl 5.3 must be calculated in accordance with the model in Part B of Annexure B, must include only those items that are listed in that part, and, otherwise, must be calculated only in accordance with any variation to the agreement that has been executed under cl 10.2 thereof. To this contention, the respondent admits that any monthly fixed costs invoice under cl 5.3 must be for its own “actual costs incurred in respect of those items of fixed costs as are listed in Part B of Annexure B”, and, otherwise, must be calculated only in accordance with any variation to the agreement that has been executed under cl 10.2 thereof. These allegations and responses have a benign look to them, but they conceal a substantial axis of dispute between the parties. At least they show that there is no dispute but that the respondent’s minimum fee invoices had to be confined to the items listed in Part B of Annexure B. They, and another pleading in the Defence, also show that the respondent’s position is that any item in respect of which it raised a minimum fee invoice under cl 5.3 that was not specifically mentioned in Part B was to be justified under the item described as “sundry”. As the case developed, however, further issues arose with respect to cl 5.3, principally whether the respondent was entitled to recover wages costs under the provision and as to the basis of calculation which the respondent was obliged to use when preparing its invoices.
161 The applicant next refers to the failed mediation of 2 October 2013, to its cessation of placing orders with the respondent and to its solicitors’ letter of 18 December 2013. It alleges that, in circumstances where the volume of production was going to be nil, it was not obliged to pay the amount of the respondent’s actual fixed manufacturing costs under cl 5.3 of the letter agreement unless the respondent had taken all reasonable steps “to mitigate those amounts being incurred”; and it gives some instances of what the respondent was obliged to do by way of mitigation. The respondent’s defence to this aspect of the applicant’s case is, as a matter of pleading, both comprehensive and complex, but ultimately the position to which the respondent tied itself was that, while it would act reasonably in making its calculations under cl 5.3, it had no obligation to take the mitigatory steps alleged by the applicant.
162 The next series of allegations made by the applicant refers to invoice No 88. It refers to the overheads and wages cost figures in that invoice, and alleges an arithmetical relationship between the former and the overheads figures in Part B of Annexure B. It alleges that labour costs had already been invoiced by the respondent in its unit price invoices under cl 5.1(a) of the letter agreement, and that the inclusion of wages costs in invoice No 88 gave rise to a claim in respect of items for which the respondent had already invoiced it. The respondent joins issue directly on these allegations, and supports its entitlement to have raised this invoice under cl 5.3 of the letter agreement. One allegation which the respondent does make in this regard, and which might be noted at this stage, is that the “disputes and differences” between the parties to which the applicant refers in its pleading were created by it “for the collateral commercial purpose of extricating itself from an agreement which it no longer perceives to be to its advantage”.
163 The applicant alleges that the respondent has materially breached the letter agreement within the meaning of cl 9.1 thereof by having sent invoice No 88 with the objectionable features to which I have referred, by having threatened to cease supply by Mr Russell’s emails of 2 May and 1 July 2013, and by having refused the applicant’s requests that it withdraw the threat to cease supply. The applicant says that it is entitled to give the respondent a notice of the kind for which cl 9.1 provides, or to terminate the agreement under that provision. Save to admit the sending of the emails referred to, the respondent denies these allegations, and takes the position that the invoice, and the threats designed to enforce payment of it, were no more than a reflection of its contractual entitlement.
164 In an alternative series of allegations, the applicant says that the respondent’s conduct referred to in the context of its (the applicant’s) material breach allegations “evinced an intention not to be bound by the agreement or to perform and fulfil it only in a manner substantially inconsistent with its obligation and has thereby repudiated the agreement”. These allegations are denied by the respondent.
165 The respondent adds that the applicant has not given a cl 9.1 notice, and has not terminated the letter agreement under that clause or otherwise. It has, rather, affirmed the agreement and is no longer entitled to give any such notice or to terminate the agreement.
166 The applicant then moves to its case under s 18 of the ACL. It alleges that the estimate of fixed manufacturing costs made by the respondent and ultimately included, substantially unchanged, in Part B of Annexure B of the letter agreement was a representation as to a future matter for which the respondent did not have reasonable grounds. The applicant alleges that it relied on that representation to enter into the letter agreement, to procure the sale and delivery of machinery to the respondent, to procure ZFG to provide letters of credit to the respondent’s bank and to expand its presence in the Australian market for snack food products.
167 The respondent denies every element of the applicant’s misleading conduct allegations. It adds that the sums in Part B of Annexure B to the letter agreement were “the minimum indicative costs to run (the) snacks operation”, and that the actual costs incurred in respect of the items mentioned in Part B would make up the actual fixed component of manufacturing costs and the actual capital costs for the purpose of calculating the minimum fees referred to in the agreement. The respondent says that Part B of Annexure B “contained no representation as to what [its] fixed costs would be but only a minimum indicative costing arrived at in or about July 2012 in respect of those future fixed costs which could be expected to be incurred upon its performance of the agreement”.
168 The relief claimed by the applicant includes declarations that it has no obligation to pay the respondent’s minimum fee invoices in respect of any item which is not listed in Part B of Annexure B to the letter agreement, that it is obliged to pay only such invoices where the sums concerned have been calculated in accordance with “the model” in Part B, that the respondent is not entitled to raise invoices under cl 5.3 by reference to Mr Smith’s model of 24 May 2013, that the respondent has “materially breached” the letter agreement, that the applicant may give the respondent 14 days’ notice pursuant to cl 9.1 of the letter agreement, (alternatively to that declaration) that the applicant may terminate the letter agreement by reason of the respondent’s material breach or by reason of its “repudiatory conduct”, (alternatively again) pursuant to ss 237(1) and 243(a) of the ACL, that the agreement is void as and from a date that the court deems appropriate, and that the respondent is obliged, upon termination of the letter agreement, to sell to the applicant the machinery used in the snacks process at its residual value. The applicant seeks a mandatory injunction compelling the respondent to review the model in Part B of Annexure B and to make the adjustment contemplated by cl 5.3. It seeks the taking of accounts and the making of inquiries to determine the sums that are payable to the respondent under its production invoices Nos 56-84, under its minimum fee invoices Nos 88 and 105, under any further invoices that the respondent may raise, and under cl 5.3 in respect of the quarter ended on 31 March 2014; and to determine the residual value of the machinery. Subject to certain preconditions, it seeks an order for the delivery up of the machinery, either contractually or, in the alternative, pursuant to ss 237(1) and 243(d) of the ACL. Finally, the applicant seeks damages, interest and costs.
169 In its Amended Statement of Cross-Claim, the respondent commences by referring to cll 2.1(h), 4.3, 5.1, 5.2, 5.3 and 5.8 of the letter agreement. It proceeds to allege the existence of two implied terms (although described as a matter of pleading as a single term), namely, first, an implied term of co-operation to enable the parties to have the benefit of the agreement, and, secondly, a term to the effect that the applicant “would have discussions with retailers and place orders with [the respondent] for the duration of the agreement”. The applicant admits the existence of the first of these implied terms, and denies the existence of the second.
170 The respondent alleges that it delivered the product referred to in its production invoices for September 2013 to the applicant, that it invoiced the applicant the sum of $94,128.86 in respect of those deliveries and that the applicant has paid the sum of $16,770.12 only on those invoices. The respondent alleges the existence of a debt in the sum of the balance, $77,358.74; alternatively, it claims damages for breach of cl 5.2 of the letter agreement. The applicant admits the delivery of the product and the raising of the invoices referred to. Its only defence to this aspect of the Cross-claim is that it is entitled to set off against this debt sums said to be owing by the respondent in respect of packaging materials.
171 The respondent next refers to the meetings of 21-23 May and 3-5 June 2013, and alleges that they were for the purposes, amongst other things, of calculating actual manufacturing costs under cll 2.1(h) and 5.1(a) of the letter agreement and of adjusting the model in Part B of Annexure B to reflect production volumes well below 1000 t/year. It is alleged that, during those meetings, the applicant would not make the said calculation and has since refused to do so, and that the applicant required the said adjustment to be based on a production volume of 500 t/year when it was in fact placing orders at about 148 t/year only. In each of these respects, it is alleged that the applicant breached the letter agreement. The respondent refers to the spreadsheet of unit prices provided to Mr Smith by Mr Koops on 22 May 2013, and to Mr Koops’ indication on 31 May 2013 that the applicant would pay only these prices, instead of the higher prices which the respondent had calculated. It alleges that the applicant repeated this indication on 4 September 2013. In the circumstances, the respondent continued to invoice the applicant at the applicant’s prices. It is said that the applicant’s breaches constituted by its failure to make the calculation for which cll 2.1(h) and 5.1(a) required and the adjustment for which cl 5.3 required caused it (the respondent) to suffer loss and damage constituted by the extent to which its revenue received from sales of product at the applicant’s required prices fell short of the revenue that would have been yielded had the calculation and the adjustment been made. The applicant denies that the calculation referred to in cll 2.1(h) and 5.1(a) of the letter agreement was “an obligation capable of performance by the applicant”, and it denies all of the other substantive allegations in this part of the respondent’s case, including the allegation that the purposes of the meetings of 21-23 May and 3-5 June 2013 included the purposes of making such a calculation or the adjustment referred to in cl 5.3.
172 In the alternative to the allegations referred to in the previous paragraph, the respondent alleges that it was entitled to be paid the face value of its minimum fee invoices from invoice No 88 raised in respect of April and May 2013 to invoice No 238 raised in respect of January 2014. When the amounts actually paid by the applicant on those invoices were taken into account, there was said to be the sum of $612,449.80 still outstanding. This claim is put primarily in debt, and alternatively in damages for breach of cl 5.2 of the letter agreement. The applicant joins issue directly on the respondent’s entitlement to be paid the amounts claimed under cl 5.3 of the letter agreement, and adds that, if the respondent does have such an entitlement, the amount of its own liability constitutes loss and damage in its principal case.
173 Finally, the respondent alleges that the applicant’s cessation of business with Australian retailers in October 2013 amounted to a breach of the implied terms referred to in para 169 above. It says that the damages which it suffered as a result of this breach are to be measured by the loss of the 3% margin which it would have received on sales to the applicant had business continued as previously.
174 The relief claimed by the respondent is the sum of $77,358.74 as a debt under its production invoices, damages for the applicant’s failure to make the calculation required by cll 2.1(h) and 5.1(a) of the letter agreement and the adjustment required by cl 5.3, alternatively the sum of $612,449.80 as a debt under its minimum fee invoices, and damages for breach of cl 5.2 of the letter agreement, and of the implied terms to which I have referred.
175 By reference to these pleadings and the submissions made upon them, the matters arising for consideration may be grouped as follows:
The concept of incremental costing and its place in the cost price model under the letter agreement;
The nature of the obligation to calculate manufacturing costs on a quarterly basis under cl 5.1(a) of the letter agreement, and whether the applicant was in breach of that obligation;
The respondent’s entitlements under its unpaid production invoices;
The construction of cl 5.3 of the letter agreement;
The nature of the obligation to review the model in Part B of Annexure B, arising under cl 5.3 of the letter agreement, on a quarterly basis, and whether the applicant was in breach of that obligation;
The respondent’s entitlement under its minimum fee invoices;
The applicant’s material breach case under cl 9.1 of the letter agreement;
The applicant’s repudiation case;
The respondent’s implied terms cases; and
The applicant’s case under s 18 of the ACL.
Incremental Costing
176 The definition of “manufacturing costs” in cl 2.1(h) and the use of that term in cl 5.1(a) were central to the intended normal operation of the letter agreement. Under cl 5.1, the respondent was required to invoice the applicant in respect of “each delivery of Products”. The invoice was to be “based on a variable fee per kilo”. This is what the agreement referred to (using the plural) as “Fees”, and the applicant agreed to pay them. The balance of cl 5.1 set out the components of which the fees would consist, namely, manufacturing costs, capital costs and profit margin.
177 With respect to the first of these components, manufacturing costs were to be “as set out in Part A of Annexure B”. That is to say, when inserting this component of cost into its calculation of the fee for a particular product, the respondent was required to use the costs set out in Part A. However, the reader was then told that Part A set out the model for calculating costs as at July 2012, and the clause went on to provide that the actual manufacturing costs shall be calculated at the commencement of each quarter, based on “this model”. Thus it is apparent from the provision that Part A of Annexure B contained both the costs which constituted the relevant component of the respondent’s fee and the model which had to be used to calculate actual costs at the commencement of each quarter.
178 Some aspects of that model have not proved problematic in the issues which led to the present proceeding, but they demonstrate the approach which was contemplated by cl 5.1(a) in the quarterly calculations which were required. Increases in the cost of materials, packaging or labour would be reflected in adjustments made to the figures in Part A conformably with the model there set out. It is the overheads which have proved problematic. But, again, the approach which cl 5.1(a) required was that the quarterly calculation of overheads be faithful to the model: that was the governing framework within which increases or decreases in actual costs were to be reflected in any adjustment of the figure of $0.96 which represented overheads in the model.
179 A stranger to the letter agreement, and to the protracted series of negotiations which preceded its execution, would wonder how the sparse terms of Part A of Annexure B could constitute a “model” by which overhead costs might be calculated. But this was a working commercial agreement made with substantial input from the flesh and blood businessmen who would have to operate under it. This was no boilerplate agreement. Those businessmen knew, for example, that the figure of $0.96 included $0.25 to cover the respondent’s costs of meat preparation. It is difficult to perceive how that might be regarded as an “overhead” in the normal sense of the word, but the parties so treated it. Thus, if the actual cost of meat preparation increased, it would be conformable with the model in Part A for that increase to be reflected by way of an adjustment to the figure of $0.96.
180 So too in the case of overheads strictly so-called. The parties knew that their contribution to the figure of $0.96 was $0.71. But the parties also knew the way in which the $0.71 had been calculated. Mr Baan had been responsible for that, but he worked with the respondent’s financial data for the periods in respect of which it was available. Importantly, Mr Koops exposed Mr Baan’s workings to Mr Russell in his (Koops’) email of 11 July 2012, and drew attention to the importance of the subject. What Mr Baan’s workings demonstrated, at least to a conscientious and well-informed reader as the applicant was entitled to assume that Mr Russell was, was that the $0.71 had been calculated using the incremental costing principle.
181 That principle lay at the centre of the cost price model which was sustained by the letter agreement. The business model which the parties adopted for the production of snack foods at Bendigo recognized some of the features involved in the start-up of a new enterprise: most obviously, in the provision which the letter agreement made for the payment by the applicant of certain capital costs. But the incremental costing principle assumed the pre-existence of productive operations in relation to which each unit of output was “incremental”. It was the overhead cost involved in producing that incremental, or additional, unit of output that was set at $0.71 in the letter agreement as executed. This was an essential feature of the “model” for which Part A of Annexure B provided. Thus it would not be consistent with the model referred to in cl 5.1(a) for the respondent’s overheads to be allocated proportionally as between its existing business and the snack foods business according to some formula, such as quantity of production or the amount of time which a particular executive, for example, spent on work for each business
182 At the trial of the proceeding, it was the respondent’s primary case that, as a matter of contract, incremental costing played no part in the pricing model for which the letter agreement provided. It was pointed out that the letter agreement itself made no explicit reference to incremental costing, and that there was only one occasion, in all of the parties’ negotiations, where incremental costing had been mentioned, at least in writing, namely, Mr Koops’ email to Mr Russell of 7 June 2012. But the email reflected a basic, uncontroversial, principle upon which the parties had been ad idem from the outset. The principle had been accepted by Mr Russell as early as January 2012 when he visited the ZFG operations in the United Kingdom and The Netherlands. When Mr Russell met with Mr Koops in Tooronga on 23 May 2012, and when the latter embarked upon an explanation of the principle of incremental costing, the former would not be lectured on the subject. That was followed by Mr Koops’ email of 7 June 2012, the significance of which the respondent accepted. Then by Mr Koops’ email of 11 July 2012, Mr Russell was exposed to Mr Baan’s workings with respect to the elements of the unit prices for the products that were to be covered by the letter agreement. Those workings demonstrated unequivocally that an incremental costing approach was being taken.
183 Furthermore, the calculation for which cl 5.1(a) provided was intended to make adjustments necessary to reflect “increases or decreases in actual Manufacturing Costs”. That is to say, it was to be a quantitative exercise. No departure from the model reflected in Part A itself was permitted. The model, as I have stressed above, was that devised by Mr Baan in the period leading to 11 July 2012, and which yielded a figure of $0.71/kg for overheads other than the cost of meat preparation.
184 I would hold, therefore, that, when cl 5.1(a) of the letter agreement required the quarterly calculation to be based on the model in Part A of Annexure B, it required the taking of an incremental costing approach as I have explained it above, and it required the calculation to reflect only such increases and decreases in actual manufacturing costs as were consistent with the model referred to.
QUARTERLY CALCULATION OBLIGATION
185 In its Cross-claim, the respondent alleges that the applicant was under an obligation, pursuant to cl 5.1(a), to calculate the “actual manufacturing costs” at the commencement of each quarter, and that, during the meetings of 21-24 May 2013 and 3-5 June 2013, the applicant defaulted in the discharge of this obligation in relation to the quarter commencing on 1 April 2013. It was submitted on behalf of the applicant that cl 5.1(a) did not impose upon it alone the obligation to make the calculation referred to. I accept that submission. Clause 5.1(a) used the passive voice. In my view, it is implicit from the way the provision was expressed that the parties were under a joint obligation to use their best endeavours, in good faith, to calculate the respondent’s actual manufacturing cost as at the commencement of each quarter, and to do so consistently with the model in Part A of Annexure B. Clearly this had to be done in consultation. In a practical sense, the respondent, as the party with primary, direct, access to the costs in fact being incurred at any time, was obliged to bring those costs to the table for the purposes of calculating a unit cost which fell within the model. The applicant, as the party responsible for, and with the manifestly superior understanding of, the architecture of the model itself, was obliged to recognise the costs which the respondent was incurring and to cause them to be reflected in the recalculations in which the parties were engaged.
186 Although it is not entirely clear that the parties’ meetings of 21-24 May and 3-5 June 2013 were such as was contemplated by cl 5.1(a) in relation to the quarter commencing on 1 April 2013, the respondent’s case proposed that they were and the applicant did not offer any serious resistance to that proposition. In the first round of meetings, much work was done by the representatives of both parties and, so far as the court can see from the evidence, satisfactory progress was made. As things stood at the end of 23 May 2013, I could not find that the applicant had defaulted on any obligation which it bore under cl 5.1(a). Indeed, so far as the evidence shows, as at that stage there appeared to be no respect in which the parties were going to be unable to make the calculation for which cl 5.1(a) provided.
187 Then Mr Smith produced his figure of $2.65/kg on 24 May 2013. It was submitted on behalf of the applicant that this figure, like the whole of Mr Smith’s model, had not been calculated according to the incremental costing principle. While I would accept that submission at the level of fact (and Mr Smith made it quite clear in his evidence that his model was not so calculated), it would, in my view, be a distraction to introduce notions of incremental costing into the respondent’s estimate of its annual fixed manufacturing costs, a subject to which I shall turn in due course below. But, as explained above, such notions were central to the cost price model in Part A of Annexure B to the letter agreement.
188 The real difficulty with the figure of $2.65/kg is that it was no more than an arithmetical derivative of Mr Smith’s estimate of annual fixed manufacturing costs, $1,325,322. But the overheads figure of $0.71/kg in the model in Part A of Annexure B was never a derivative of Mr Russell’s annual minimum manufacturing costs estimate of $443,500 pa. The two figures were conceptually and arithmetically separate, and had been developed separately. Thus it was not conformable with the model in Part A of Annexure B to insert a per kg overheads figure which was no more than a 1/500,000 part of what was a new estimate for the purposes of Part B of the annexure.
189 In the result, it was not the applicant which, over the period 21-24 May 2013, refused to calculate costs faithfully to the terms of cl 5.1(a): it was the respondent. It is no part of the applicant’s case to allege a breach of this provision, but the analysis which I have provided above leads to the rejection of the respondent’s cross-claim to the extent that it alleges a breach of the letter agreement in this period by the applicant.
190 No different conclusion is called for with respect to the period 3-5 June 2013. Again, although it appears that some progress was being made by the end of 4 June, eventually the meetings came to nothing. Any attempt to analyse these meetings within the framework of cl 5.1(a) of the letter agreement is made the more problematic because of the proprietorial interventions of Messrs van der Laan and Russell – interventions which they were entitled to make, of course, but which seemed to have had little to do with the low-level task which this provision required. What matters in the litigation is that the meetings ended as they commenced: no progress was made. I could not find that this happened only because of the position maintained by the applicant. Indeed, if anything, on the final day of the meetings it was the applicant’s representatives who were prepared to continue searching for a solution and, ultimately, Mr Russell was not.
191 For the above reasons, the respondent’s allegation of breach of cl 5.1(a) of the letter agreement must be rejected.
UNPAID PRODUCTION INVOICES
192 The next aspect which arises under cl 5.1 is the respondent’s debt claim in the sum of $77,358.74 in respect of invoices issued under this provision which remain unpaid. As I have indicated above, the applicant’s only defence to this claim is to allege an entitlement to set off certain sums said to be owing by the respondent in respect of packaging materials. The materials were referred to at para 127 above. There is no dispute that it was the respondent’s responsibility under the letter agreement to obtain, at its own cost, packaging materials to be used in the snacks production operation. There also appears to be no serious dispute that, because of the specialised nature of the materials concerned, the respondent would, in practice, be likely to obtain them from ZFG (or, depending on ZFG’s own arrangements, possibly from the applicant).
193 The two areas of contention are these. First, the respondent asserts, and it appears to be clear, that ZFG caused to be delivered to its factory at Bendigo a consignment of these packaging materials far in excess of anything which the respondent required in the short or even the medium term. ZFG took that course because it was able to use its global purchasing power to obtain the materials at an advantageous cost if it obtained them in very large volumes. The respondent says that it did not order materials in those large volumes, and that a requirement to pay ZFG for them so far in advance of using them in production would place an intolerable strain upon its cash flow situation. When the respondent made a protest to this effect to the applicant, Mr Koops made a practical suggestion designed to address the respondent’s cash flow concerns and, at least according to his evidence given in re-examination, this solved the problem. Notwithstanding that pragmatic expedient, as between ZFG and the respondent there remains a dispute about the former’s entitlement to be paid for goods delivered in the course of trade. Since ZFG was and is not a party to this proceeding, I propose to say nothing further about any such dispute.
194 Secondly, the applicant claims that the respondent was dealing with itself, not with ZFG, with respect to the ordering and supply of the packaging materials. Factually, this was said to be based on the circumstance that the necessary arrangements were informally made as between the respondent and Mr Koops. Legally, it was said that Mr Koops, an employee of the applicant, could only have made a contract on behalf of the applicant and that it was, therefore, such a contract which defined the parties’ obligations with respect to the packaging. There was, according to the applicant’s submissions, either a contract for the supply of packaging materials from itself to the respondent – the applicant having notionally first obtained the materials from ZFG – or a contract of agency, under which the applicant was the respondent’s agent for the purposes of securing the materials from ZFG. Either way, the end result was that, once the packaging was delivered, a debt arose in favour of the applicant (not ZFG) which the applicant was entitled to set off against the debt due to the respondent under its production invoices.
195 I do not accept the first way in which this legal analysis is advanced on behalf of the applicant. A difficulty, frankly acknowledged by the applicant, is that the factual basis of the analysis is almost entirely inferential and, in some respects, notional. There is no evidence of the making of any such contract as the applicant alleges. It may be that the discussions, such as they were, involved Mr Koops rather than any employee of ZFG, but there is no evidence of them. Such evidence as there is does not point unambiguously to the existence of a contract for the supply of packaging as between the applicant and the respondent. The applicant called no evidence that it had acquired the packaging from ZFG, and the fact that it was ZFG which raised the relevant invoices on the respondent suggests that it had not. The arrangements which existed as between ZFG and the applicant were for the applicant to prove, and I am not disposed to join what are little more than quite distant factual dots simply because the result would provide a basis for this aspect of the applicant’s legal case.
196 The second way in which the applicant advances its legal analysis is not so readily dismissed. Although the direct evidence is lacking, in an ongoing commercial relationship in which one party is the local subsidiary of a large international company, the absence of such evidence does, more likely than not, bespeak a consensus as between the parties, particularly on seemingly straightforward matters of logistics. As I have said, it seems to have been uncontroversial that the packaging would, in lay terms, come from ZFG. Under the letter agreement, packaging was the respondent’s responsibility, and an informal agreement, as between the respondent and Mr Koops, for the applicant to make the necessary arrangements with ZFG might readily be inferred. Had the packaging materials been delivered in quantities no greater than was reasonably required for the respondent’s immediate purposes, there would be little difficulty in locating a legal basis for the respondent’s obligation to pay for them.
197 But, even if the applicant’s agency analysis be accepted, the principals to the assumed contract for the supply of the packaging materials would be ZFG and the respondent. The debt in respect of goods supplied pursuant to such a contract would be in favour of ZFG, not the respondent’s own ordering agent. However the contract under which the packaging was supplied to the respondent be characterised, it was on any view a contract for the sale of goods. Under that contract, property passed from ZFG to the respondent. Consistently, the relevant invoices were raised by ZFG, not the applicant.
198 I must, therefore, reject the applicant’s case that there was any debt owing by the respondent to itself in respect of the packaging materials for which payment was not made. It was not suggested on behalf of the applicant that a right to a set-off would arise in the absence of such a debt. It follows that the debt owing to the respondent under its production invoices is not impeached by set-off, and remains owing in the sum of $77,358.74. In the circumstances, it is not necessary for me to deal with the respondent’s alternative case that it is entitled to damages for a breach of cl 5.2 of the letter agreement constituted by the applicant’s failure to pay these production invoices issued under cl 5.1.
THE CONSTRUCTION OF CL 5.3 of the Letter Agreement
199 Clause 5.3 of the letter agreement lay at the centre of the dispute which led to the unravelling of the business relationship between the applicant and the respondent. As will be apparent from my recitation of the facts above, over the period of the parties’ negotiations for the agreement, cl 5.3 grew like topsy, the result of seemingly constructive inputs from different people at different times. The result was something of a contractual Hydra, a number of the unlovely heads of which now require consideration, and reconciliation if possible, in the task of construction which confronts the court.
200 The questions which arise are the following:
whether the respondent’s entitlement to invoice the applicant each month was limited to the items listed in Part B of Annexure B;
whether, in those invoices, the respondent was limited to, or to something approximating, the money amounts set out in Part B of Annexure B;
whether the money amounts listed in Part B of Annexure B were relevant only at zero production;
whether the calculation of the sum which the respondent was entitled to invoice each month was required to be done on an “incremental”, or similar, basis;
how the amount which the respondent was required to recognize as a credit in favour of the applicant was to be calculated;
in a situation in which the applicant was placing no orders at all, whether the respondent was obliged to “mitigate” the costs which it would otherwise be entitled to recover under this provision; and
what was the nature of the parties’ obligations in the quarterly review required by the provision, and of the applicant’s obligations in particular.
201 The first question was not the subject of any dispute in the proceeding: the respondent accepted that its entitlement to invoice the applicant each month was limited to the items listed in Part B of Annexure B. The only comment that needs to be added is that, in the quarterly review for which cl 5.3 provided, there was scope to adjust the model and thus, in my view, to alter the content of the items on the list. Absent a consensual alteration in that context, however, the respondent was limited to the list as it stood.
202 The next question concerns the relationship between the respondent’s entitlement to invoice the applicant under cl 5.3 and the money amounts set out in Part B of Annexure B. At issue is the meaning of the phrase “the actual fixed component of the Manufacturing Costs (calculated in accordance with the model in Part B of Annexure B)”. There was a note subjoined to the list of items in Part B that provided that those items “(based on actual) will make up the actual fixed component of Manufacturing Costs … for the purposes of calculating the Minimum Fees, referred to in the Agreement.” As a matter of internal construction, the most natural sense of these provisions is that “the actual fixed component of the Manufacturing Costs” was so much of the respondent’s actual manufacturing costs as fell within the items listed in Part B. The expression “calculated in accordance with” meant derived from the sum of those actual costs.
203 Translating the terms of the provision as so construed into the context of the practical operation of the letter agreement has been, however, a source of much contention as between the parties. The problem concerns the place of the money amounts set out in the list in Part B of Annexure B in the calculation referred to in cl 5.3. On the respondent’s case, those amounts were not limiting in any sense. They were, as the heading stated, “indicative” only, the calculation itself having to be “based on actual”. Regardless of the size of those actual costs, they had to be used, their relationship with the amounts set out in Part B being contractually irrelevant at this point. The applicant accepted that the respondent was not strictly limited to the amounts set out in Part B, but it submitted that its entitlement was limited to amounts which were of the general order of those set out in Part B, treating the latter as a schedule of binding contractual approximations, as it were. It was in this sense that the amounts were “indicative”, which qualified the otherwise open-ended reference to “actual” costs.
204 Neither of the constructions advanced by the parties is wholly satisfactory. The respondent’s construction involves the counterintuitive proposition that the amounts listed in Part B were effectively meaningless when it came to the only point in the contract where the part had work to do. The applicant’s construction would involve uncertainty in practice: how far away from the amounts listed would the respondent’s actual costs have to be before it could be said that they were no longer within the general range contemplated by the construction?
205 In this state of things, the court is inevitably driven to a consideration of the parties’ negotiations for the letter agreement, in the hope that they might throw some light on the commercial purpose which the contentious provisions were intended to serve. Here, there can be little doubt but that the parties put considerable store by the figures set out in the table in Part B.
206 At the time when Mr Baan was working on the cost price model, in early July 2012, Mr Russell raised the issue of the “fixed component of [the respondent’s] manufacturing costs, such as rent and insurance” not being adequately covered by the model in situations of low production volumes. He said that cl 5.3, which then applied to capital costs only, would have to be amended to address that situation. Through Mr Koops, Mr Baan responded with an estimate of $50,000 for each of rent and insurance. Mr Russell then informed Mr Koops that he had “a much broader view of what comprises ‘fixed components’”, and that he would send Mr Koops “a list of what [he thought] should be included”. What followed was a conversation between Mr Russell and Mr Koops, in the course of which Mr Russell gave Mr Koops certain annual figures. Mr Koops discussed these with Mr Baan, who advised that the applicant would “run with” Mr Russell’s approach. In an email to Mr Russell on 12 July 2012, Mr Koops acknowledged that the parties agreed “on principles”, adding that “any differences between pre production cals and post production actual will be evened out.” Mr Koops also provided his “translation” of the estimate which, again I infer, had been given by Mr Russell in those discussions. That estimate was $275,000 pa, in addition to which Mr Russell was to fill in some remaining gaps.
207 Mr Russell’s list of fixed manufacturing costs, sent to Mr Koops on 16 July 2012, did more than fill in the gaps. It was the precursor of Part B of Annexure B and, with respect both to the items covered and to the amounts attributed to those items, thereafter remained unchanged. But the heading did not state that the costs were “indicative”, and there was nothing about the costs to be used in the cl 5.3 invoices being “actual” ones. It is as clear as may be that Mr Russell was proffering this list as constituting the limit of his company’s potential claims for the coverage of fixed manufacturing costs in low-volume situations, and thus the outer limit of the applicant’s exposure to claims of that kind.
208 What next happened, although incidental to the parties’ negotiations, throws important light on Mr Russell’s thinking at the time: it was the arrangement by the respondent of the accommodation necessary from its own bank to finance the purchase of the machinery to be used in the snacks operation. The bank was interested in receiving an estimate of the “fixed component of the manufacturing costs referred to in the Agreement”. It will be recalled that Mr Koops suggested that the parties in effect split the difference between Mr Russell’s figure of $443,500 and Mr Baan’s suggestion that there were $99,000 of costs that should not be on the list.
209 The bank’s interest and the parties’ proposals about it are of some present relevance because they imply that quantum was a significant issue. I would infer that the respondent had informed its bank that the agreement being negotiated would contain a provision entitling it to reimbursement of its fixed manufacturing costs, and that the bank inquired about the extent of, or any relevant limit on, that entitlement. Had it been Mr Russell’s view that the respondent would be entitled to reimbursement of all of its costs in certain categories, whatever their amount, the bank would not have had cause to inquire as to quantum.
210 It was in this state of things that, on 2 August 2012, the respondent produced the next draft of the letter agreement, and it contained terms which provided the basis for the respondent’s submission about “actual” costs. That adjective was introduced before the phrase “fixed component of the Manufacturing Costs” in cl 5.3, and the qualifier “based on actual” was used in the note subjoined to the first appearance of Part B of Annexure B. Additionally, the qualifier “indicative” was introduced before the words “minimum costs” in the heading to Part B of Annexure B. There is nothing in the evidence to explain why Mr Russell thought it necessary to make these changes. They were not, so far as I can see, the result of a pre-existing consensus. They were to the respondent’s advantage and, in hindsight, one would have to say very significantly so.
211 Mr Koops was confused by these changes. In his email to Mr Russell of 2 August 2012, he made a distinction between capital costs, to which the adjective “actual” was to be applied, and fixed manufacturing costs, which would be subject to “a minimum as calculated in the model in Part B of Annexure B for that calendar month”. Mr Russell agreed to “rephrase” the provision, but no such exercise was ever undertaken. Rather, the parties resorted to a different drafting expedient to allay Mr Koops’ concerns.
212 They had not done so, however, by 6 August 2012, when Mr Russell sent an “invoicing model” to Mr Koops. In a month of zero production, he contemplated that the respondent would recover one-twelfth of $443,500. This was consistent with what I perceive then to have been the tenor of the negotiations between the parties.
213 Mr Koops met Mr Russell on 9 August 2012, and they discussed the latter’s draft agreement of 2 August. Only Mr Koops gave evidence about what was discussed at this meeting, but that evidence added nothing of substance to his email of 9 August. It appears that the applicant’s then concern was not with the potential for the new form of cl 5.3 and of Part B of Annexure B to expose it to having to recoup the respondent’s fixed manufacturing costs whatever be their order, but with the necessity to provide clearly for the situation in which the respondent had invoiced an amount, in a particular month, conformably with the model in Part B of Annexure B, yet in which, over the whole of the corresponding quarter, it had already recovered by way of overheads in the cost price model more than one quarter of the sums set out in Part B.
214 This concern on the part of Mr Koops led to the respondent’s solicitor introducing the final two sentences into cl 5.3. The solicitor, however, did not understand Mr Koops’ email, “other than to say the model in Part A of Annexure B might need to be reviewed based on actual volumes”. The result of him not coming squarely to terms with the nature of Mr Koops’ concern was, I would have to say, the drafting of a passage which made its own contribution to the constructional problems which have brought the parties to court. The penultimate sentence of the redrafted cl 5.3 was most confusing. The model in Part B of Annexure B was not based on 1,000 t of production annually: to the contrary, it was concerned with a situation in which the respondent produced less – on the figures being discussed, much less – than that quantity. The point of the figures mentioned in Mr Koops’ email was to identify the monthly production volume beyond which the cost price model (ie that in Part A of Annexure B) would “lead to excess coverage on overhead”, that is, coverage in excess of one-twelfth of the corresponding amounts set out in Part B of Annexure B. That was the origin of the need to make an adjustment at the commencement of each quarter – so that the pluses might be set off against the minuses. (As a matter of arithmetic, of course, the point at which overhead recovery at $0.71/kg would be equal to $443,500 was about 625 t pa, not 1,000 t pa, but Mr Koops was correct, on any view, to propose that, at production volumes greater than 1,000 t, the respondent’s estimated fixed manufacturing costs would be amply covered under the cost price model.)
215 Another problematic aspect of the respondent’s solicitor’s contribution of 13 August 2012 was that he appears to have thought that the model in Part A of Annexure B might need to be reviewed based on actual volumes whereas the amendment which he drafted was placed into cl 5.3 and provided for a review of the model in Part B of the annexure. Neither party dealt with this oddity in submissions made in the proceeding. With respect to those involved, it is little wonder that the court has been confronted with constructional issues in relation to cl 5.3.
216 It seems clear that the applicant was not satisfied that the respondent’s redraft of cl 5.3 sufficiently addressed the concerns to which Mr Koops had referred in his email of 9 August 2012. After a period of about three weeks, a further, somewhat wordy, insertion was proposed for the provision: the three sentences commencing, ironically as events have transpired, “for the avoidance of doubt”. Those sentences did deal with Mr Koops’ concern, and the respondent too accepted them. But the final two sentences, the result of the respondent’s amendment of 13 August 2012, remained in place.
217 What does the foregoing narrative of the parties negotiations tell us about the commercial purpose of cl 5.3 in the area of fixed manufacturing costs? First, it confirms that the fundamental purpose was to provide the respondent with a degree of protection against a situation in which its overhead recovery under production invoices did not cover its additional fixed costs arising from the snacks operation (fixed in the sense that they would be incurred regardless of volume of production). Counsel for the respondent stressed that the respondent was being asked to go into a business venture in which it did not have control over marketing and sales to retailers, and was being given no minimum guarantee of volume. That was, in my view, a point well-made, and was the fundamental purpose of cl 5.3. But the perception of such a purpose goes only so far in resolving the present issue, which is concerned with the extent and nature of the protection provided.
218 Secondly, it must also be recognized that cl 5.3 was not a free-standing source of cost reimbursement. The main source of overhead recovery contemplated by the parties in a scenario of healthy business operations was cl 5.1(a), but, each month, the respondent would receive no less than the reimbursement for which cl 5.3 provided. Thus, in a minimum fee invoice, the respondent was required to give credit for so much of the sums which it had invoiced under cl 5.1(a) as represented overhead recovery. It was in this sense that the costs were described as “minimum” ones.
219 Thirdly, it was also a purpose of the clause to avoid a situation in which the respondent obtained, in effect, a windfall. Absent the provision for evening out the pluses and minuses, the respondent might have received a payment under cl 5.3 in one month without having to account for the extent to which its overhead recovery under cl 5.1(a) exceeded the cl 5.3 minima in other months. The provision referred to operated by way of a credit which was carried forward from month to month to the end of the quarter in question, and, if the applicant remained in credit within the quarter, that credit amount was carried into the succeeding quarter.
220 Fourthly, it is important to recognize what was a basal feature of the relationship sustained by the letter agreement. This was not a cost plus contract. It would have been very simple for the applicant to have engaged the respondent to make snack food products for it and paid whatever it cost the respondent to do so, plus a margin. Rather, a detailed cost price model was devised which recognized that the respondent, no less than the applicant, was in a business which involved risks as well as rewards. It left the respondent with both the responsibility and the incentive to manage its own costs with a view to profit. As stressed by counsel for the applicant, it is easy to see how the business model to which the parties agreed might be compromised if cl 5.3 were given the effect of entitling the respondent to recover from the applicant whatever costs it happened to incur, even within the categories listed in Part B.
221 Fifthly, while it was undoubtedly a purpose of cl 5.3 to cover the respondent for certain costs, it was equally obvious that the applicant relied on the model in Part B of Annexure B to set at least an indicative upper limit to its own exposure. There is no other rational explanation for the applicant’s keen interest in the content of, including the amounts set out in, Part B during the period of the negotiations for the letter agreement. Insofar as cl 5.3 required the calculation to be made in accordance with the model in Part B of Annexure B, therefore, it was a purpose of the provision to provide such an upper limit.
222 Returning to the terms of the letter agreement themselves, there are, it seems to me, three possible meanings to be given to the references to “actual” in cl 5.3 and in the note subjoined to the table in Part B of Annexure B. The first, for which the respondent contends, is that it is a reference to the whole of the costs which it incurred in the month in question in the various categories. The second, for which the applicant contends, is that it is a reference to costs in fact incurred, but limited to those which are of the general order of the amounts listed in the table in Part B. Of these two possibilities, the first is most obviously conveyed by the terms of the provisions. It does, however, produce a result which strikes one as asynchronous with the intent of the parties’ negotiations. The second would produce a contract of great uncertainty and, while it might be perceived to be more in harmony with the parties’ intent than the first, it must be acknowledged that there was nothing in those negotiations which would give any mileage to the suggestion that the parties ever recognized that they were making a contract with such a meaning. For the applicant in particular to have knowingly signed a contract that left its monetary obligations in such a state of uncertainty would be quite inconsistent with its otherwise meticulous approach to such matters.
223 The third meaning is that the amounts listed in Part B of Annexure B stood as the limit of the respondent’s entitlements in relevant areas, but that, subject to those limits, the respondent was entitled under cl 5.3 to claim reimbursement only of costs actually incurred. That is to say, the effect of the word “actual” was to make it clear that the respondent was not automatically entitled, each month, to claim the amounts so listed, regardless of whether it had in fact been subject to the underlying costs. This might have been the understanding of the parties for the inclusion of this word in the draft of 2 August 2012, but neither submitted that it was. For me to take this possibility further, therefore (when it is not clearly conveyed by the terms of the provision) would be to act on surmise.
224 For all of the reservations which I have expressed about its consistency with the parties’ business purpose, I have come to the conclusion that the construction for which the respondent contends must be accepted. The words to which the parties agreed are relevantly intractable: “actual” meant what it said. The respondent was entitled to invoice the applicant, each month, for its costs actually incurred in the relevant categories.
225 The next point concerns a submission made on behalf of the respondent about Part B of Annexure B: that the money amounts listed there were not applicable at all, even indicatively, to a situation in which there was some production of snack foods under the letter agreement, albeit at low levels. It was submitted that those amounts were referable only to a situation in which there was “zero production”. So far as I can make out, this point would be relevant as an alternative contention against the possibility that I might find that the amounts listed in Part B were contractually limiting. In such a case, the amounts would be inapplicable save in a situation of zero production.
226 The respondent’s submission had a plausible grounding in the evidence, in that, on occasion, representatives of the applicant had made it apparent that they understood that the respondent’s list of fixed costs would have application to a situation in which there was zero production. Under cross-examination, Mr Koops accepted that the setting-out of “likely costs regardless of volume” in Mr Russell’s email of 28 May 2012 (see para 32 above) “could mean zero production”. But the proposition that Mr Russell’s list of costs was confined to a situation of zero production, and was meaningless in a situation of positive, albeit minimal, production does not withstand examination.
227 In the first place, the proposition is inconsistent with the heading to Part B of Annexure B itself, which referred to the minimum indicative costs to run the snacks operation. Secondly, the proposition is inconsistent with every expression of concern made by Mr Russell in his representations for the inclusion of Part B during the negotiation of the letter agreement: variously, he referred to the costs to which his company would be exposed at “low” volumes of production, and to costs which would be incurred “regardless” of the volume of production. Thirdly, and fundamentally, the entire context of the negotiations for the inclusion of fixed manufacturing costs in cl 5.3, and with respect to the content of Part B itself, was one in which the actual operation of the snacks line was assumed. That the parties were going to the lengths that they did to get the model right only for the purpose of having the snacks line lie idle cannot be regarded as a realistic interpretation of the relevant events.
228 The next constructional issue which arises under cl 5.3 is whether the costs there referred to were to be calculated on an incremental basis, as the applicant contended, or on a proportional basis, as the respondent, at least in its primary case, contended. The provision required that the calculation be done “in accordance with the model in Part B of Annexure B”. This formula was an echo of that used in cl 5.1(a), but the model used in Part B was very different from that used in Part A.
229 The model in Part A was a cost price model, in the sense that it represented a calculation of price by reference to the different elements of cost that were required to be incurred in the production of an incremental unit of the product concerned. The model in Part B was not concerned with the cost of producing a unit of output. Rather, it was concerned with identifying the respects in which and, to an approximation, the extent to which, the establishment and operation of the snacks facility at Bendigo would cause the respondent to incur costs regardless of the level of production. It would, in my view, make no sense to introduce incremental costing concepts into the model in Part B.
230 Neither would the flow of negotiations for the letter agreement sustain the proposition that cl 5.3 was subject to the principle of incremental costing. The development of the cost price model proceeded quite separately from the development of the model which ultimately found expression in Part B of Annexure B. By 28 May 2012, when Mr Russell first foreshadowed the need for some kind of protection for the respondent against “likely costs regardless of volume”, the applicant had already made clear its commitment to incremental costing as the basis for the cost price model. It was the result likely to be produced by such a model that led to Mr Russell’s concern, and to the estimate forwarded by him on 16 July 2012 which, as I say, had nothing to do with pricing. Those estimates, and the model which later was based on them, were in the nature of a safety-net for the respondent, and stood quite apart – conceptually and arithmetically – from anything that Mr Baan would have recognised as incremental costing.
231 That conclusion, however, leaves unresolved the applicant’s contention that the respondent was confined under cl 5.3 to costs which related only to the snack foods operation, and was not entitled to invoice the applicant for costs which related, to any extent, to its existing business. Indeed, as I perceive it, it was in this sense that the submissions made on behalf of the applicant invoked the concept of “incremental” costs. As I have attempted to explain above, that was not an accurate use of the term. But the applicant’s contention remains to be considered.
232 At a superficial level, the problem with which the contention was concerned appears not to be a problem at all: there was never any suggestion by the respondent that cl 5.3 could be used as a vehicle to recover costs which had been incurred in its pre-existing business. Mr Russell’s early concerns, which led to the development of what became Part B of Annexure B, were solely with the additional fixed costs to which the snack foods operation would expose the respondent at low volumes. Mr Smith’s explanations to Mr Baan and Mr Koops in 2013 had the purpose of persuading them that certain costs had in fact been incurred in that operation. At neither of these times – nor, indeed, at any stage in the conduct of its case in court – did the respondent suggest that the applicant could be invoiced for costs which did not relate to it.
233 The real problem is one of the apportionment of costs which pertained both to the snack foods operation and to the respondent’s existing business. A good example, and one which counsel for both parties accepted was representative of the problem, was the “management” item in Part B of Annexure B. In his evidence in the respondent’s defence to the applicant’s case under s 18 of the ACL, Mr Russell said that the amount of $50,000 set out in Part B represented 10% of the total cost of employing the respondent’s management team. Mr Smith’s revision of 24 May 2014 allocated more than 10% of management time to the snack foods operation but, either way, the principle of allocation of an otherwise undifferentiated cost incurred by the respondent was applied, and was defended by the respondent as the correct approach in its case in court.
234 On the applicant’s case, no part of the cost of the respondent’s management team was to be invoiced under cl 5.3 because it had not been necessary to add to that team solely for the purpose of the snack foods operation. All members of the team were existing employees of the respondent, and the fact that they had additional responsibilities did not have the consequence that the respondent was entitled to require the applicant, in effect, to share the costs of employing them. It was in this sense that the applicant contended that the respondent did not incur any “incremental” cost by the establishment of that operation.
235 Whatever its attraction generally, the applicant’s approach must be rejected in the management example with which I am here dealing. It is quite clear that the $50,000 item for management in Part B of Annexure B had been derived by way of the allocation of a proportion of the respondent’s existing management costs to the snack foods operation. There was never any suggestion that an additional manager (as distinct from a supervisor) was to be employed in that operation. The size of the figure of $50,000 makes it quite improbable that the employment of an additional manager was contemplated. As it happens, Mr Russell gave the evidence to which I have referred, and he was not challenged on it. Although after the event apropos the negotiation of the letter agreement, I note also that Mr Baan himself, in his meetings with Mr Smith in May 2013, proposed the making of a 10% allowance of the cost of management (see para 97 above). It is as clear as may be that “the model in Part B” (to use the words of cl 5.3) provided for the allocation of some part of the respondent’s general management costs to the account of the snack foods operation.
236 I have dealt with management costs in order to expose the dimensions of the problem, but it should not be assumed that the calculation of the respondent’s actual cost entitlement under every one of the categories in Part B of Annexure B should proceed conformably with that example. As a matter of construction, cl 5.3 entitled the respondent to invoice the applicant for costs calculated in accordance with the model in Part B. Beyond that, the question is: in the case of each of the cost categories, what was the basis of calculation which that model required? Here, I would have to say, the parties’ submissions (although otherwise very comprehensive) were the source of very little assistance. The respondent was content to submit that cl 5.3 entitled it to recover its “actual” costs in the various categories, but did not come to grips with what the model provided in the case of costs which were not, of their nature, confined to the snack foods operation. The applicant’s case was that the money figures in Part B were, as I have described them, binding contractual approximations, but an alternative case – concerned with the content of the model in Part B in the event that its primary case was not accepted – was not presented.
237 As will appear from what follows below, it is not necessary now to decide questions as to the content that model beyond what I have already said. And it would be inappropriate for me to attempt to do so in the absence of focused submissions on behalf of the parties. There is only one aspect of the practical resolution of the claims made by the applicant which would require a decision at that level, namely, the claim for the respondent’s entitlements under cl 5.3 to be sent to a special referee. I shall say something further about that in due course.
238 I turn next to so much of cl 5.3 as required the respondent to give credit for the fixed manufacturing costs which had already been recovered under product invoices raised in respect of the month concerned. Here, what was required was the identification, within the fees invoiced to the applicant over the previous month, of the cumulative total of the Manufacturing Costs component thereof. The inquiry was directed not to costs incurred by the respondent, but to fees invoiced by it. This took the reader to cl 5.1(a) of the letter agreement, which effectively mimicked the definition of “Manufacturing Costs” in cl 2.1(h) set out above, and from there to Part A of Annexure B. Of the fees in fact invoiced by respondent conformably with Part A, those that covered the respondent’s costs in relation to materials, labour, packaging and overhead fell within the expression “the Manufacturing Costs component of the Fees invoiced ….”
239 But what was “the total cumulative fixed component” of the costs covered by those fees? The word “cumulative” presents no difficulty: what was required was the aggregation of the fees in question as rendered under all the cl 5.1 invoices over the month in question. But what was the “fixed component”? This was not a reference to Part B of Schedule B as such, since it represented a sum which had to be deducted from a figure calculated in accordance with the model in that Part. Neither was it a sum identified expressly in cl 5.1(a). But an understanding of the components of the unit price of the products for which invoices were to be raised under cl 5.1(a) provides the answer: it could only have been a reference to, or to part of, the “overhead” item in each of the product price models in Part A of Annexure B. I say “part of” because, as explained above, not the whole of the $0.96/kg allowed by way of overhead could be described as a “fixed” component of those fees: $0.25 of this sum was attributable to the cost of meat preparation, a cost that would be variable with production.
240 Thus I would hold that “the total cumulative fixed component of the Manufacturing Costs … component of the fees invoiced … during that calendar month” was $0.71 for every kilogram of product covered by the respondent’s invoices in the month concerned.
241 The next matter to consider is the applicant’s submission that, in a situation in which it was placing no orders at all, the respondent was under a duty to “mitigate” the costs to which it was then presumptively exposed. As a matter of pleading, the applicant put it that, on the proper construction of the letter agreement, it was not obliged to pay anything in respect of the “actual fixed component of Manufacturing Costs” where the respondent had not taken “all reasonable steps to mitigate those amounts being incurred”. Examples of such steps were given: selling the machinery used for the production of snack foods, or putting that machinery to other productive use; terminating the lease of the premises used for the snack foods factory; disconnecting water and other utilities; terminating any relevant insurance policy; and ceasing to employ any contract labour.
242 This construction argument of the applicant’s was not developed in either of its written outlines of law. In its final oral submissions, two alternative ways of looking at the matter were briefly canvassed. The first was to propose that the possibility of the failure of the letter agreement had been accepted by the parties, and that the last sentence of cl 5.3 was “engaged” where production had reverted to zero by reason of the complete cessation of the applicant’s orders. The second was to contemplate a circumstance in which the applicant had wrongfully terminated the agreement and the respondent was the plaintiff in an action for breach of contract: its entitlement to damages would then be subject to the conventional duty to mitigate.
243 The possibility of the letter agreement failing was contemplated by the parties, but only to the extent provided in section 9 thereof, that is to say, where the agreement had been terminated by one or other of the parties. These provisions provide no sustenance for the argument that, without the agreement having been terminated, the respondent was under a contractual obligation to mitigate the costs which it incurred within the itemised categories in Part B of Annexure B. On the other hand, the final sentence of cl 5.3 did require the parties to review the model for which Part B provided at the commencement of each quarter, and to adjust the model to account for volumes being (in the case under consideration) less than those assumed under the agreement. But, far from implying that, at zero ordering and production levels, the respondent was required to reduce its costs in the ways proposed by the applicant, this provision supplied its own solution to such an unhappy eventuality: the parties were required to confer, and to adjust the model accordingly. Outside any such process, no obligation in the way of “mitigation” is fairly to be implied.
244 The second way at which the mitigation “landing” (to use the metaphor of counsel for the applicant) might be reached – a supposition that the applicant had terminated the letter agreement in breach thereof and the respondent was suing for damages – does not withstand examination. Conceptually, it is irrelevant to the construction of the agreement. Otherwise, there is no issue of mitigation in the proceeding: in its Defence to the respondent’s Cross-claim, the applicant did not plead that the respondent’s failure to mitigate constituted an answer to its case in damages.
245 Finally in this department of the case, the nature of the parties’ obligations in the quarterly review required by cl 5.3 is a question which arises on one aspect of the Cross-claim, and involves an issue of construction which should be considered here. As I have noted above, the observation that the model in Part B of Annexure B was based upon production volumes of 1,000 t pa was confusing at best, but effect must be given to the stated obligation to review the model if volumes were less than or greater than those specified. As a matter of procedure, that obligation was a mutual one: the parties were required to work together, in good faith, to review the model in the light of the achievement of higher or lower volumes than had been assumed. There is nothing in cl 5.3, or in the model itself, to imply any particular limitation upon the scope of the review, save the implied one that the purpose of the review was to accommodate the unexpected alteration of production volumes. Most obviously, an adjustment of the amounts listed in Part B of Annexure B would seem to have been contemplated, but the prospect that the parties might have found it convenient to alter the basis of the calculation of those amounts, or the item categories themselves, cannot be excluded, and would be permissible.
OBLIGATION TO REVIEW
246 That brings me naturally to the first of the claims which the respondent makes in its Cross-claim under cl 5.3 of the letter agreement. In tandem with its similar claim under cl 5.1(a), the respondent alleges that the applicant was in breach of an obligation under cl 5.3 to review the model in Part B of Annexure B at the commencement of the quarter April/June 2013 against the fact that volumes were less than 1,000 t pa. Here I should commence by clearing away a minor distraction: since November 2012, the model by reference to which the parties were working assumed an annual production of 500 t. As I have noted above, the letter agreement was not varied to reflect that reality, but the terms of cl 5.3 itself were able to accommodate it. It may be taken that, as at the commencement of the January/March 2013 quarter, the model had been reviewed to take account of the fact that volumes were now assumed to be 500 t pa. It is true, as the respondent pointed out, that no change to the terms of Part B of Annexure B had been agreed, but Mr Baan was in Bendigo for substantial talks on the subject of the letter agreement, and, since the cl 5.1(a) model was unambiguously adjusted to fit that assumption, it would, in my view, be unrealistic not to accept that the parties were content for the existing terms of Part B to continue to cover the situation with respect to the cl 5.3 model.
247 The focus of the respondent’s complaint in this part of the Cross-claim was upon the applicant’s failure to review the Part B model in the meetings held over the periods 21-23 May and 3-5 June 2013. In relation to the first of those periods, there is nothing in the evidence from which I could find the applicant to have been in breach of the obligation to review. I rather suspect that little attention was then given to the content of Part B of Annexure B, it having been left to Mr Smith to prepare what the respondent required in this regard. When he did so, on 24 May 2013, the meetings were over, and Mr Baan was about to depart for The Netherlands.
248 The respondent’s case is not that the applicant did not, then and there, accept Mr Smith’s proposal, but that it did not use that proposal as the basis for the review which cl 5.3 required. On the facts, that case must be rejected. It is hard to see what more the applicant might have done in response to Mr Smith’s model of 24 May 2013. Within about 10 days, Mr van der Laan was in Bendigo for high-level discussions with Mr Russell, in the meetings held in the second of the periods referred to. There was also much low-level work done involving Mr Smith and Mr Koops. I repeat what I said about these meetings at para 190 above. The failure of them, in relation to Part B of Annexure B no less than in the case of the cost price model, cannot be laid at the feet of the applicant.
249 For the above reasons, I would reject the respondent’s case that the applicant was in breach of its review obligations under cl 5.3 of the letter agreement.
MINIMUM FEE INVOICES
250 The respondent’s alternative claim under cl 5.3 (and, to the extent that damages for breach are claimed, cl 5.2 also) of the letter agreement is that it was entitled to be paid the face value of its minimum fee invoices issued with respect to the months April 2013 to January 2014. As I have indicated, the first such invoice was No 88 issued with respect to the months of April and May 2013. It is convenient to use it as a vehicle for a consideration of the respondent’s entitlements in presently controversial respects, but I should commence by noting that it was not the first minimum fee invoice which the respondent issued.
251 The first such invoice related to November 2012, and was paid by the applicant without demur. So was the invoice for the following month. The invoices for January and February 2013 prompted the concerns expressed by Ms Pearce in her email to Mr Russell on 26 March 2013, but they were paid. The invoice for March 2013 – the first prepared by Mr Smith – was of even greater concern to the applicant, and was paid (on 3 May 2013) only under Mr Russell’s threat to discontinue supply if it were not paid. By then, it must have been apparent to the applicant that the respondent had a view of its entitlements under cl 5.3 of the letter agreement which was fundamentally divergent from its own. What followed were the meetings of 21-23 May 2013, Mr Smith’s costing model of 24 May 2013, and the meetings of 3-5 June 2013. The day after the last of those meetings, the respondent sent invoice No 88.
252 Subsequently, the respondent issued a minimum fee invoice in respect of each month down to, and including, January 2014 (there being two such invoices issued on 31 October 2013). The applicant did not pay the whole of the sums claimed in those invoices. It paid part of the sums claimed in invoices issued down to 30 September 2013, and made no payments thereafter. The total shortfall, over the 10 months referred to, was, according to the respondent, $612,449.80.
253 The three main cost areas the subject of invoice No 88 are all challenged by the applicant. Those areas are fixed manufacturing costs, capital costs and labour costs. I shall deal with them in that order.
254 With respect to fixed manufacturing costs, it is convenient to commence with a consideration of a submission made by the applicant that it was not sufficient for the respondent to have raised invoices for costs said to have been incurred under Part B of Annexure B: it was a necessary part of its case to prove that those costs had in fact been incurred. In its Statement of Cross Claim, the respondent alleged that the minimum fee invoices had been given to the applicant, and that, by reason thereof and the terms of cl 5.2 of the letter agreement, the applicant was obliged to pay the sums specified in the invoices. That allegation cannot be accepted. The applicant’s obligation under cl 5.2 depended upon the sum in question coming within the terms of cl 5.3, and that clause, in turn, entitled the respondent to raise an invoice only in respect of costs which had actually been incurred. The mere raising of an invoice was not sufficient to make good the respondent’s case in relevant respects.
255 The respondent did not, however, rest upon the invoices which it had sent to the applicant. It accepted the obligation to establish by evidence that it had in fact incurred the costs upon which its minimum fee invoices were based. I have referred to Mr Smith’s evidence as to how invoice No 88 was prepared (see para 121 above), and the supplier invoices which vouched the incurring of the relevant costs were tendered. Normally, that would be sufficient. In the present case, however, the applicant objected to the admission of Mr Smith’s evidence for that purpose, upon the ground that his was an accounting exercise only, and was hearsay to the extent that it was relied on to establish that the costs in question had in fact been incurred. I overruled the objection to the admission of the invoices themselves, on the ground that they were business records: Evidence Act 1995 (Cth), s 69. I now take the additional step of holding that, as a matter of raw obligation to outside suppliers, the respondent did in fact incur the costs to which the supplier invoices referred. I reject so much of the applicant’s Defence to the Cross-claim as puts in issue the incurring of the costs upon which the respondent’s minimum fee invoices were based.
256 The applicant’s next complaint is to say that, in point of quantum, invoice No 88 claimed an amount in respect of fixed manufacturing costs which was vastly in excess of two-twelfths (remembering that the invoice was for the months of April and May) of the total for which Part B of Annexure B, and thus cl 5.3, provided. That complaint was based upon the applicant’s earlier submission that the respondent was limited to the amounts set out in Part B, at least to an approximation. As a matter of construction, I have rejected that submission. As explained above, knowing just what the respondent was entitled to claim under cl 5.3 requires a more thorough investigation of the model in Part B than has been undertaken by either of the parties in the case. It is sufficient here to hold, as I do, that the absence of some approximate relationship between the total claimed in this invoice and two-twelfths of the sum of the fixed manufacturing costs set out in Part B is not fatal to validity of the invoice.
257 The applicant’s next complaint about this invoice in relation to fixed manufacturing costs is that it was not confined to the items listed in Part B of Annexure B to the letter agreement. As will be seen, the invoice itself did not descend to the level of detail necessary to permit a comparison of the underlying costs with the categories in Part B. However, it is established on the pleadings that the sum claimed included costs described (in the respondent’s accounts) as factory supplies, freight, consultancy fees, rubbish removal, security, equipment hire, general expenses, and property, plant and equipment hire. The respondent accepts that it has no entitlement save with respect to cost categories which appeared on the list in Part B of Annexure B, but it says that the items referred to either fell within relevant categories on the list or were covered by the description “sundry”.
258 With respect to factory supplies, Mr Smith gave the following evidence as to the kind of costs that were included under that item in invoice No 88:
Factory supplies are the materials used by the employees involved in the production of the Mac’s Snacks. So, factory supplies include things like disposable hair nets, disposable beard covers, disposable plastic aprons, disposable plastic gloves and gumboots. Factory supplies also includes the gas that is used in the packing process to vacuum seal the Mac’s Snacks products before they are packaged into the carton.
259 The respondent submitted that costs of these kinds fell within the “safety/laundry/materials” category in Part B of Annexure B. As a generalisation, I could not accept that submission. I would read the word “materials” noscitur a sociis with “safety/laundry” and I would accept, therefore, that it does cover hairnets, gloves, gumboots and the like. However, if Mr Smith included “materials used in the production of the Mac’s Snacks” as his discrimen for this item, it was, in my view, too wide. In the absence of some more satisfactory clarification than Mr Smith provided, I would not accept that gas used in the packing process, for example, is covered. It may well be described as “factory supplies”, but that is not the term used in the letter agreement.
260 With respect to freight, Mr Smith explained what was involved, and what he referred to was indeed freight and was associated with the snack foods business of the respondent. But, in their submissions in the case, counsel for the respondent made no attempt to bring freight costs within a specific category in Part B of Annexure B.
261 With respect to consultancy fees, Mr Smith explained that, in invoice No 88, this was the sum of $2,847.50 made up of several invoices from a project management company for “designing and working on the Line issues between February and April 2013”. That may be so, but, again, counsel for the respondent made no attempt to bring freight costs within a specific category in Part B of Annexure B.
262 With respect to rubbish removal, Mr Smith said that there were two entries in the respondent’s general ledger which were “sometimes called ‘Rubbish Removal’”, namely, one for cleaning materials provided by a concern called “Ecolab”, and the other for rubbish removal as such provided by a concern called “Cleanaway”, the latter involving the removal, on an almost daily basis, of cardboard packaging used for supplies and of “rubbish like used hairnets, used gloves and other used factory waste”. The respondent submitted that this came under the “cleaning” item in Part B of Annexure B, and that it was admitted by Mr Baan in the following exchanges during cross-examination:
And rubbish removal, in case his Honour doesn’t appreciate, is really part of cleaning, because you can’t, for hygienic reasons, leave the hair nets and the gloves and the things you put on your shoes, on the ground?---I’m aware of that.
Yes, because the workers tend to throw them away, don’t they?---No, no. They don’t.
263 Even if it were possible for a witness to make an admission on the question whether a particular circumstance falls within the terms of a contract, I would not regard this evidence as sufficient for that purpose. I would accept that, when ancillary to a cleaning operation as such, rubbish removal may be regarded as part of cleaning, but I do not accept that the removal of discarded items which have, for the sake of good order, been thrown into a bin in the normal course of operations, can be so regarded. To take away discarded cardboard packaging, for example, is not “cleaning”. On the other hand, the cost of cleaning materials as such, when used exclusively in the snack foods operation at Bendigo, should be regarded as “cleaning” and, Mr Smith not having been tested on his evidence with respect to the Ecolab materials, that cost should be accepted as falling within Part B of Annexure B.
264 With respect to security, Mr Smith said that the costs referred to had been incurred to protect from theft a consignment of sticks, trays and films (referred to elsewhere in these reasons as packaging materials) which were delivered to Bendigo, unordered by the respondent, by ZFG. While it may be that the respondent has a claim against someone for the reimbursement of those costs, it would not arise under Part B of Annexure B. Save possibly under the “sundry” category to which I shall come, counsel for the respondent did not submit otherwise.
265 With respect to equipment hire, Mr Smith explained that this related to the hire of “Chep” pallets used in the snack foods business. That appears to be uncontroversial in point of fact, but the question is whether the cost of the hire came within Part B of Annexure B. It was submitted on behalf of the respondent that it did, as “safety/laundry/materials”. I would have no hesitation in rejecting that submission.
266 With respect to “general expenses”, neither Mr Smith in his evidence nor counsel for the respondent in their submissions made any reference to the item. I hold, in the circumstances, that it did not fall within Part B of Annexure B.
267 With respect to property, plant and equipment hire, Mr Smith said that invoice No 88 included a sum of $598.00 in respect of the hire of a “foaming unit”, namely, “a piece of equipment which puts cleaning chemicals over the stainless steel equipment in the line”. Again, counsel for the respondent did not attempt to bring this within any specific item in Part B of Annexure B.
268 That leaves “sundry”. Counsel for the respondent made the omnibus submission that anything for which the court could not find a specific home in Part B of Annexure B should be held to be covered under this item. They asked me to apply what was said to be the dictionary meaning of the word, namely, “items not mentioned individually”. In doing so, they appeared to have read the word, as used in Part B of Annexure B, in an adjectival sense, the noun “items” being implied. That seems to be an uncontroversial approach, and I shall adopt it.
269 Of the several uses of the word referred to in the Oxford English Dictionary, the meaning “consisting of miscellaneous items” is apposite to the present context. Surprisingly, the most recent usage of the adjective in this sense there referred to dates from 1913: “Yield, including sundry revenue, £4,855”. But an associated cross reference to the noun “sundries” is provided, and there the relevant meaning is “small articles of a miscellaneous kind; esp. small items lumped together in an account as not needing individual mention”. By way of example, this time from 1912: “6,885 bales, made up as follows:—New South Wales, 387 bales; Queensland, 328; British East African, ten; and sundries, five bales”. The respondent referred me to the second edition of the Australian Oxford Dictionary, where the meaning of “sundry”, used as a plural noun, is given as “items or oddments not mentioned individually”.
270 What emerges from these sources – and the differences between them are of no present moment – is that the word “sundry” is almost inevitably used as a reference to a given, but unspecified, miscellany of things or items. Of its nature, it is never identifying. Thus it would make sense to refer to the basket of a shopper, as he or she emerges from the supermarket, as containing, say, sausages, spinach, milk, bread and other sundry items. The speaker would be using “sundry” to convey the idea that it did not matter what the items were. But it would make no sense for a householder to send another member of his or her family to the supermarket to buy ten sundry items: the latter would not know what to buy. When the denotation of the word is so understood, its connotation in the context of Part B of Annexure B may be seen to be problematic indeed.
271 As a matter of internal construction, however, “sundry” in that context cannot be a reference to any and all other fixed manufacturing costs which have not been specifically mentioned. In respect of overheads, the words in cl 5.3 “calculated in accordance with the model in Part B of Annexure B” were limiting. There could be no assumption that all fixed manufacturing costs would be covered. To regard “sundry” as an “all other” category would be to defeat the manifest intent of cl 5.3.
272 Save for their submissions on etymology and construction, and for the very broad submission that anything which was in fact a cost item for the respondent but which did not correspond with a specific item in Part B of Annexure B should be held to be covered under “sundry”, counsel for the respondent did not descend to the level of detail necessary to make the discriminations which my understanding of the meaning of the word would require. They did not identify what it was about particular cost items which made them sundry items, whereas others were not. Of the items which I have, in my reasons above, held not to be covered by Part B, none is so conspicuously of a “sundry” nature to force its way into that item in the absence of the kind of focussed submission which such an outcome required. In the circumstances, and for the reasons I have expressed, I reject this aspect of the respondent’s case.
273 It follows that, for the great majority of the disputed items, I uphold the position for which the applicant contended. To that extent, the respondent’s invoice No 88 did not reflect its contractual entitlements under cl 5.3 of the letter agreement.
274 The applicant’s next criticism of invoice No 88 is that the respondent was here claiming costs which had not been calculated conformably with the model in Part B of Annexure B of the letter agreement, in the sense that they had not been calculated according to the incremental costing principle. For reasons which I have given above in the context of the construction of cl 5.3, I could not accept that criticism.
275 The question remains, however, whether invoice No 88 was based on a calculation which had been made in accordance with the model in Part B of Annexure B. Here I should commence by noting the approach which Mr Smith took when he prepared the invoice.
276 In relation to “supervisor, quality assurance officer, management and insurance”, Mr Smith simply took two-twelfths of the relevant amounts listed in Part of B of Annexure B to the letter agreement. It is not easy to see how this lined up with the submission which the respondent makes that it was entitled to invoice the applicant for its “actual” costs, but the applicant appears not to make any complaint about this approach.
277 The next group of costs are those which I have held did not fall within the categories in Part B of Annexure B and which, for that reason, would fall outside cl 5.3. They are factory supplies (except hairnets, gloves, gumboots and the like), freight, consultancy fees, rubbish removal, security, equipment hire, general expenses, foaming unit hire, and “sundry”. The respondent’s claim for reimbursement of these costs under cl 5.3 should be rejected.
278 That leaves so much of the fixed manufacturing costs claimed in invoice No 88 as are not covered by the two preceding paragraphs. Here one thing seems tolerably clear: as explained by Mr Smith in the passage set out at para 84 above, once he had dealt arithmetically with “supervisor, quality assurance officer, management and insurance”, he did not in fact give consideration to the requirements of the “model” in Part B, whatever that was. He seems to have performed an exercise which led to the inclusion of all of the respondent’s non-capital costs which, as a matter of accounting, were attributable to the snack foods operation. Whatever else may be said about that approach, it had the effect of blurring the distinction, central to the architecture of the letter agreement, between manufacturing costs which were recoverable under cl 5.3 and manufacturing costs which, although in excess of what the respondent was able to recover under cl 5.1, were to its own account.
279 It is here that the court is required to come to grips with the content of the expression “calculated in accordance with the model in Part B of Annexure B”. As mentioned earlier, this issue was not the subject of sufficient attention in the submissions which I received. I could, and if unavoidable I would, proceed to resolve the issue without the assistance of counsel, but there would be, in the circumstances, an appreciable risk that I would identify the model in terms which represented the position of neither party, and which did not lie fairly along the axis of the forensic contest in which they engaged. It would not be just to proceed in that way without giving the parties the opportunity to address me further, unsatisfactory though such an expedient clearly would be.
280 The applicant proposed that the calculation of the respondent’s true manufacturing cost entitlement under cl 5.3 of the letter agreement should be referred to a special referee under s 54A of the Federal Court of Australia Act 1976 (Cth) (“the Federal Court Act”). The respondent did not resist that approach if the applicant’s case was otherwise successful. Notwithstanding the respondent’s position, for reasons which I have already given, I consider that the nature of its contractual entitlement is not yet sufficiently clarified to justify asking a referee to perform the necessary calculation. I propose to proceed as indicated in the previous paragraph.
281 Turning to so much of the respondent’s minimum fee invoices as were concerned with capital costs, the applicant accepts that the adjustment referred to in cl 5.3 of the letter agreement must be made, but it advances two objections to the claims in fact made by the respondent. First, it says that the respondent has included in its minimum fee invoices claims for reimbursement of capital costs which were not contemplated by cl 5.3, and secondly, it says that the respondent has not brought into account a government grant of $200,000 which it received in respect of the snack foods operation at Bendigo. In this area the applicant’s case, and my reasons likewise, are concerned not only with invoice No 88 but with the stream of minimum fee invoices down to that for January 2014.
282 As to the applicant’s first objection, the respondent’s entitlement under cl 5.3 was tied to the definition of “capital costs” in the letter agreement. The word “Machinery” was a term of art in the letter agreement. Although it was not defined in the interpretation clause, cl 3.2 provided as follows:
(Investment in Machinery) Moira Mac’s agrees to invest in the machinery (Machinery) and building upgrade requirements relating to the Machinery (Building Upgrades) as set out in Annexure A. Moira Mac’s shall finance the purchase of the Machinery and Building Upgrades with its financiers.
283 Although the parties did not advert to the matter in their submissions, the reference to “Annexure A” in this clause was an obvious mistake (although it might locate the responsibility for the mistake in the wrong area to describe it as a typographical error). Annexure A was concerned with product specification, and was referred to in cl 4.7 of the letter agreement. There is, however, a table at the end of the letter agreement headed “SCHEDULE 1 – MACHINERY”, and I consider it to be obvious that it was to this schedule that the parties intended to refer in cl 3.2.
284 The applicant objects to the inclusion in the minimum fee invoices of a loan obtained by the respondent with the National Australia Bank in the sum of $200,000, secured by chattel mortgage. The loan was used, as Mr Smith said in his evidence-in-chief, “to buy equipment which was needed for the Mac’s Snacks business from the previous occupier” of the Pasta Master area. It was not suggested by the respondent that this equipment fell within the table in the schedule to the letter agreement. Neither was it suggested that the costs concerned had been agreed by the applicant within the scheme of cl 5.1(b). Rather, it was submitted that the costs were for “building upgrades” within the meaning of cl 3.2. However, neither Mr Smith nor Mr Russell gave evidence that this investment had that character. And counsel for the respondent did not draw my attention to any other evidence to that effect. Indeed, as mentioned, Mr Smith’s evidence was that the investment related to equipment. The submission that it was for building upgrades must, therefore, be rejected. It follows that the loan should not have been included in the respondent’s calculation of its minimum costs entitlement under cl 5.3 of the letter agreement.
285 The applicant also objects to the inclusion in the minimum fee invoices of another loan obtained by the respondent with the National Australia Bank, this time in the sum of $152,845, secured by chattel mortgage. The loan was used, as Mr Smith said in his evidence-in-chief, “to pay Potters Coolroom for a large amount of panelling (which was required for fire proofing) and for building rooms in the Mac’s Snacks Area”. Under re-examination, Mr Smith said that the investment was for “additional fireproof walls that were required around the different parts of the factory”. In my view, this evidence was sufficient to bring the investment within the connotation of the expression “building upgrade requirements” in the definition of “capital costs” in, and within cl 5.1(b) of, the letter agreement. It was not necessary for the respondent to obtain the separate agreement of the applicant to this loan. The respondent was, in the circumstances, entitled to include it in its calculation of minimum costs under cl 5.3.
286 The second of the applicant’s objections to the respondent’s calculation of its capital cost entitlement under cl 5.3 relates to a government grant for which the respondent applied, and which it obtained, in connection with the snacks operation. Here I should commence by making it clear that it was no part of the respondent’s case to resist the applicant’s contention that any government grant within the terms of cl 5.1(b) of the letter agreement received by the applicant was to be brought into account as a credit item in favour of the applicant in the adjustment process for which cl 5.3 provided.
287 The grant in question was part of the Victorian Government’s flood recovery program. The respondent applied for it in April 2013, and received $80,000 and $120,000 on 23 September and 3 December 2013 respectively. The whole sum of $200,000 was applied in the reduction of the respondent’s overdraft with the National Australia Bank. Mr Smith’s evidence was that the respondent “made capital payments or had outstanding debts for capital items – that is, payments made or debts for machinery, improvements to the Mac’s Snacks Area, payments for contractors who worked to get the Line or Mac’s Snacks Area fit for operation – of $2,352,868.72”. Of that, the sum of $2,062,491.10 was financed by a loan from the bank, and the balance was financed on the respondent’s overdraft.
288 It seems that it was not until well after the commencement of the present proceeding that the applicant became aware of the existence of this grant. It then raised the question whether the grant should have been available as a credit against its obligations under cl 5.3 of the letter agreement.
289 In an email to Mr Baan of 13 March 2014, Mr Smith justified the respondent’s position in the following terms:
14. We received a grant totaling [sic] $200,000 in two payments.
15. We financed over $200,000 of capital expenditure on our overdraft. We never claimed finance costs from you for this expenditure. I attach the spreadsheet for this. … As you will see, apart from not charging you finance costs, we wore about $7,000 which remained after we repaid the overdraft with the government grant.
16. Let me know that you accept this explanation. If not, we will prepare the appropriate invoice to claim all of our finance and capital costs.
The essence of this justification was that, because there were other items of “capital expenditure” which exceeded $200,000, the cost of which had not been passed on to the applicant under cl 5.3, the respondent was entitled to use the grant to reduce its overdraft. The result of this course unilaterally adopted by the respondent was, of course, that it avoided the occasion to assess these other items of expenditure against the definition of “capital costs” in the letter agreement – the definition by reference to which the applicant’s contractual obligations under cl 5.3 were measured.
290 In its case in court, the respondent submitted that the grant had been “used to reduce the capital costs”. In point of fact, that submission cannot be accepted. It is inconsistent with Mr Smith’s explanation given to Mr Baan on 13 March 2014. It is also inconsistent with the respondent’s own invoices. The capital cost component of the respondent’s minimum fee invoice for September 2013 was $38,549.48 (ex-GST), and there was no suggestion that it was the result of subtracting the $80,000 received on 23 September from some other figure. Likewise, the capital cost component of the minimum fee invoice for December 2013 was $38,871.08 (ex-GST), and there was no suggestion that it was the result of subtracting the $120,000 received on 3 December from some other figure.
291 For these reasons, I uphold so much of the applicant’s defence to the cross-claim as is based on the respondent’s failure to apply the grant to the capital costs which were to the applicant’s account under the letter agreement, and thus by way of reduction of the applicant’s obligations under cl 5.3.
292 I turn finally to labour (sometimes called “wages”) costs. These were the subject of separate line items (both positive and negative) in the respondent’s minimum fee invoices. The applicant submits that they should not have been there at all. Its point is that, in the definition of “manufacturing costs” in the letter agreement, “labour costs” were separate from “overhead”, and had their own line item in each of the product tables in Part A of Annexure B. Such costs were, therefore, included in the price which the applicant paid the respondent for each kilogram of product. Only the overhead and capital components of the unit prices were the subject of adjustment under cl 5.3, and only they were available in the offsetting exercise which that provision required. Having been paid for labour costs by the kilogram, and not being obliged to offset such payments under cl 5.3, the respondent was here seeking to have them paid again as part of the minimum monthly fee which it sought under invoice No 88 and the other like invoices.
293 The applicant accepted that, to the extent that labour costs fell within an item in Part B of Annexure B, they were allowable. For example, “management”, “supervisor” and “QA officer” would presumably involve, wholly or partly, labour costs. It was not suggested that such costs were excluded from legitimate minimum cost claims under cl 5.3. At this level the parties were ad idem: it was submitted on behalf of the respondent that the labour involved in the various cost items listed in Part B was properly claimed under cl 5.3 (subject, of course, to the offsetting of contributions already made under production invoices at the level of $0.71/kg).
294 Was invoice No 88 faithful to this understanding of the letter agreement? It would appear not. Mr Smith gave the following evidence:
I prepared the Minimum Fee Invoices including the full amount of wages which MM was incurring in making the Product. I did this because that is how it had been since the first Minimum Fee Invoice and ZA had always paid it. That is why there is a “Wages” entry on these invoices. If it were not done this way, MM would be out of pocket for its actual labour costs.
295 Mr Smith then explained that he allowed a credit for labour costs that had in fact been charged in the product invoices issued with respect to the month concerned. To the extent that the applicant’s case involves the allegation that, by invoice No 88, the respondent was requiring it to pay a second time in respect of items for which it (the respondent) had already been paid, that case must, therefore, be rejected. However, the applicant’s associated contention that the respondent had no right to invoice the applicant under cl 5.3 for all labour costs incurred in the production of snack foods which had not already been recovered under cl 5.1 is a good one. Clause 5.3 was concerned with fixed manufacturing costs, not with variable costs that had not been recouped under cl 5.1. It is clear from Mr Smith’s evidence to which I have referred above that, under invoice No 88, the respondent was claiming more than its contractual entitlement in this regard.
296 It follows that invoice No 88 did not reflect the respondent’s entitlement under the letter agreement. For reasons which I have explained, the determination of what that entitlement was must be the subject of further submissions and, possibly, of a reference under s 54A of the Federal Court Act.
The applicant’s material breach case
297 In this part of its case, the applicant seeks a declaration that the respondent has materially breached the letter agreement within the meaning of cl 9.1 thereof. Principally, the applicant’s point is that the inclusion in invoice No 88 of demands for payment to which the respondent had no entitlement under cl 5.3, either as such or in combination with threats to discontinue supply, amounted to a breach of the agreement of such seriousness that it should be regarded as material. In respects to which I have already referred, the invoice did involve demands for payments to which the respondent was not contractually entitled.
298 The question remains, however, whether, to the extent that invoice No 88 overreached the respondent’s contractual entitlement under cl 5.3 of the letter agreement, the sending of the invoice constituted a breach of the letter agreement, and if so, whether such a breach was a material one within the framework of cl 9.1. In my view, it was not a breach. No provision of the agreement provided in terms that the respondent must not claim any amount to which it was not entitled. It was submitted on behalf of the applicant that invoice No 88 was “invalid”, but it would, in my view, be a more fitting description of the situation which I have held to arise to say that the applicant was entitled to ignore the invoice while still holding the respondent to its contractual obligations. I cannot see how the sending of an erroneous invoice, of itself, would amount to a breach of the letter agreement.
299 But this aspect of the applicant’s case does not stop there. It relies also on Mr Russell’s threat of 1 July 2013 to stop supply at 5 pm that day if outstanding invoices, most obviously No 88, had not by then been paid. To have stopped supply for that reason would have amounted to default on the central obligation which the respondent had under the letter agreement. I shall say something more about this matter in the following section of my reasons. It is presently sufficient to note that, in the light of the findings which I have made, the stopping of supply could never have been justified by the applicant’s failure to pay the full amount claimed under invoice No 88. Had Mr Russell delivered on his threat, there would have been not only a breach but, in my view, a material breach of the letter agreement within the meaning of cl 9.1 thereof.
300 But Mr Russell did not deliver on his threat. After the applicant’s solicitors became involved, so did the respondent’s solicitors, the remittance of $124,598 apparently came to the attention of Mr Russell, and there was no stopping of supply. Although there had been a threat of a breach of contract, there was no breach in fact. There was, therefore, no material breach within the meaning of cl 9.1 of the letter agreement.
301 The same conclusion should be reached in relation to the other of Mr Russell’s threats upon which the applicant relied as a material breach, namely, his late-night email of 2 May 2013, to which I have referred in para 91 above. Unlike his later email of 1 July 2013, that did not involve a direct threat to stop supply, but I take it that the applicant would contend that any difference between the two was semantic only, and that they conveyed the same meaning. Proceeding on that basis, I would nonetheless hold that the email of 2 May went no further than to foreshadow the cessation of production: the respondent did not in fact cease producing, or supplying to the applicant, the latter’s snack food requirements.
302 The applicant relies also on the respondent having, in the period since the raising of invoice No 88, maintained the position on which that invoice was based, and having done so by sending regular monthly minimum fee invoices in which claims were made for sums to which, in the submission of the applicant, it was not entitled. However, if the sending of invoice No 88 did not constitute a breach of the letter agreement, the sending of subsequent invoices of the same nature would not do so either. As a matter of analysis, I cannot see how sending many invoices containing the same vice as a single invoice would amount to a breach where sending the single invoice did not.
The applicant’s repudiation case
303 At the centre of the applicant’s case on repudiation is the conduct of Mr Russell in threatening to withhold supply unless the respondent’s invoice No 88 was promptly paid. This was said to be a case in which a party to a contract, even if not in breach, evinced an intention to fulfil the contract “only in a manner substantially inconsistent with the party’s obligations” (Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115, 135 [44]).
304 In Velik v Steingold [2013] NSWCA 303, Sackville AJA, with the concurrence of McColl and Gleeson JJA, summarised some key principles in this area of the law. His Honour said ([2013] NSWCA at [86]):
A convenient statement of “some of the key principles” is to be found in the judgment of Ashley JA (with whom Kellam JJA, and Osborn AJA agreed) in R & A Cab Co Pty Ltd v Kotzman [2008] VSCA 68, at [44]–[49]. What follows is in part drawn on that statement:
• whether a party to a contract has acted in such a way as to evince an intention not to carry out the contract is a question of fact: Laurinda [Pty Ltd] v Capalara [Park Shopping Centre Pty Ltd (1989) 166 CLR 623, 633-4] at 659;
• repudiation of a contract is a serious matter and is not to be lightly found or inferred: Shevill v The Builders Licensing Board (1982) 149 CLR 620, at 633, per Wilson J;
• the question of repudiation requires a consideration of all of the circumstances, including the conduct of the party claiming to have accepted the repudiation: Koompahtoo Council v Sanpine, at [60]; Cab Co Pty Ltd v Kotzman, at [48] and cases cited there;
• repudiation is not determined by inquiring into the subjective state of mind of the party in default, but by reference to conduct (verbal or otherwise) which conveys to the other party the defaulting party’s intention not to perform the contract or to perform it only in a manner inconsistent with that party’s obligations and in no other way: Laurinda v Capalaba at 647, per Brennan J;
• where one party to a contract persists in maintaining that it will only perform an obligation of essential importance in accordance with an untenable construction of that obligation, that conduct amounts to a repudiation of the contract: Satellite Estate Pty Ltd v Jaquet (1968) 71 SR (NSW) 126, 149 per Asprey JA (with whom Wallace P agreed);
• in some circumstances, an honest misapprehension as to the proper construction of the contract will not justify a claim of repudiation, especially if the defaulting party indicates that he or she may be open to correction: Ross T Smyth & Co Ltd v TD Bailey, Son & Co [1940] 3 All ER 60, at 72 per Lord Wright; Cab Co Pty Ltd v Kotzman, at [49]; and
• whether the party propounding an erroneous construction of the contract has put forward that construction in good faith is relevant to the question of whether he or she evinces an intention not to be bound by the contract: Satellite Estate Pty Ltd v Jaquet, at 149; Trawl Industries of Australia Pty Ltd v Effem Foods Pty Ltd (1992) 27 NSWLR 326, at 354 per Samuels JA.
305 Considering all of the circumstances as required by the third of the principles set out above, one commences with the execution of the letter agreement by the applicant on 3 December 2012. At about the same time, the respondent raised its first minimum fee invoice, which appeared not to excite any consternation on the part of the applicant. By the time that the applicant had received the respondent’s minimum fee invoices for December, January and February, however, the total claimed as minimum fees under cl 5.3 in respect of the first four months had reached about $196,000. This was above the estimate contained in Part B of Annexure B to the extent of about one third. It gave rise to Ms Pearce’s email of 26 March 2013. The concerns which she expressed would have made it apparent to the respondent that the applicant was not satisfied that the invoices referred to reflected the respondent’s contractual entitlements under cl 5.3.
306 The upward drift of the respondent’s minimum fee claims did not abate when Mr Smith sent the first invoice in the preparation of which he was involved, that which related to March 2013: it lifted the five-month total to about $284,000, more than one-half more than what might then have been anticipated as a rateable reflection of Part B of Annexure B. This led to Mr Koops’ email of 1 May 2013, to his unfriendly meeting with Mr Russell on 2 May 2013 and to the latter’s email threatening that continued production could not be guaranteed unless contractual payments were “brought up to date” late on the evening of the same day. The fact that Mr Russell expressed this threat by reference to “contractual payments” bespeaks a view on his part that the respondent was contractually entitled to the sums which it had claimed in its minimum fee invoices to that stage. Mr Russell’s threat had the desired effect, as the respondent’s minimum fee invoice for March was paid on 3 May, albeit together with a reservation by Mr Koops that he wanted the opportunity to review the costs concerned in detail.
307 Whether or not that threat might be regarded as evincing an intention on the respondent’s part to perform its obligations only in a way that was inconsistent with the terms of the letter agreement must now be regarded as a moot question, since, on any view, the applicant elected to affirm the contract, and to sort out any overpayments that compliance with the threat involved at a later stage, once the relevant costs had been reviewed. Mr Koops’ email of 3 May 2013 is consistent with no other conclusion.
308 By the time that Mr Russell made the next threat on which the applicant relies, the parties had engaged in what I could only find was a most conscientious attempt to resolve the cost issues that lay between them in the meetings which involved Mr Baan and Mr Smith over the period 21-23 May 2013. In retrospect, it may be seen as unfortunate that these men terminated their meetings before they had prepared, in detail, a revised schedule of the fixed manufacturing costs to which the respondent would be entitled under cl 5.3. It was, of course, Mr Smith’s schedule of 24 May 2013 that led to the visit of Mr van der Laan in early June 2013, and, ultimately, to the acrimonious termination of any further attempt to reach consensus and to the handing over of responsibility for further communications to the parties’ solicitors. It was in this environment that invoice No 88 was issued by the respondent on 6 June 2013.
309 In the three weeks which followed, Messrs Koops and Smith corresponded on the subject of that invoice. Mr Koops wanted more information, and withheld payment on the invoice in the meantime. Mr Smith provided a deal of information, but insisted on the invoice being paid. I was not assisted by a submission from either party as to the rights and wrongs of the matters dealt with in this correspondence, and I do not propose to enter upon it. However, Mr Smith’s plea of 21 June 2013 for the invoice to be given the applicant’s urgent attention, and his warning that some of the respondent’s suppliers were threatening to put it on “stop credit”, was obviously an important communication. Without further prompting from Mr Russell, the applicant made a limited payment on 28 June 2013. When Mr Russell made at least the second of his threats on 1 July 2013, the applicant’s advice that it had made that payment had come to his attention, but it is not clear whether Mr Russell had been aware of the payment when he made the first of those threats.
310 At this stage it is important to identify, with some precision, what were the contractual entitlements and obligations of the parties immediately before Mr Russell made that threat. To that point, the respondent had issued invoices of two kinds, production invoices under cl 5.1, and minimum fee invoices under cl 5.3, of the letter agreement. Under cl 5.2, production invoices were payable on the same terms as were observed by the major retailers. There was no evidence of what those terms were, but the clause itself noted that they were “usually 30 days of the end of the month in which the Products are manufactured and delivered”.
311 Taking the date borne by a particular invoice as representing delivery of the relevant products to the applicant, of the re-issued invoices given by Mr Smith to Mr Koops on 31 May 2013, those which related to April had a total face value of $137,130.44 and those which related to May (including invoice No 84 which was dated 28 May 2013) had a total face value of $90,238.52. Under cl 5.2 of the letter agreement, the April sum would have been payable on 31 May 2013. In fact, the sum of $195,000 was paid by the applicant on 27 May 2013. This would have put the applicant in credit to the tune of $57,869.56. The May sum would have been payable on 30 June 2013. Ignoring for the moment the payment which the applicant made on 28 June 2013, using the face value of the May invoices, the applicant then owed the respondent the sum of $32,368.96.
312 To be set against that figure, however, was the respondent’s credit note of 4 June 2013, in the (GST inclusive) sum of $31,988.00. The result was that, under cl 5.2 of the letter agreement in its application to production invoices, the applicant was obliged to pay the sum of $380.96 (GST inclusive) to the respondent by 30 June 2013 at the latest. It had in fact paid more than that on 28 June 2013: the payment of $124,598 implicitly included the sum of $14,602 (GST inclusive) for production invoices. However, as I have held, Mr Russell was not, when he made the threat, aware of that payment.
313 Calculation of the respondent’s entitlement with respect to its minimum fee invoice No 88 is more problematic, because of the dispute which existed between the parties in relation to that entitlement and the applicant’s decision to pay only the undisputed amount of the invoice. However, as I have held elsewhere in these reasons, the invoice did not conform to cl 5.3 of the letter agreement. It may be accepted that the respondent was, at the very low production levels that were then being achieved, entitled to something under this provision, but it seems clear that invoice No 88 contained claims which, on any view, the respondent had no contractual entitlement to make.
314 There is, moreover, another dimension to Mr Russell’s threat of 1 July 2013 which is relevant to the applicant’s repudiation case. As mentioned above, the invoice was raised on 6 June 2013. Although it was dated 31 May 2013, in his evidence Mr Smith made it clear that he dated every minimum fee invoice the last day of the month to which it related. For example, the invoice which was dated 31 March 2013 was in fact sent to the applicant on 24 April 2013. In the case of invoice No 88, Mr Smith’s own evidence is that it was sent to the applicant on 6 June 2013. That was, of course, subsequent to the series of meetings which ended in acrimony. Here I would say that the expression “date of invoice” at the end of cl 5.2 of the letter agreement should be understood as the date on which the invoice was in fact sent to the applicant. That the drafters of the agreement might have intended that the respondent would be able, in effect, to deny the applicant the 30 days given by cl 5.2 by applying a retrospective date to an invoice is, in my view, a vanishingly unlikely proposition in a commercial document.
315 The position was, therefore, that the applicant had until 6 July 2013 to make any payment on invoice No 88. Quite apart from the issues with the correctness of the invoice which the applicant justifiably had at the time, it was entirely within its contractual rights to wait until that day before making any payment. To the extent that Mr Russell’s threat of 1 July 2013 related to this invoice, it was referable neither to the applicant’s obligations nor to the respondent’s entitlements under the letter agreement.
316 In that threat, Mr Russell said that the applicant would go on stopped supply as of 5 pm that day if “outstanding invoices remain unpaid”. Taking (as I must) an objective approach, I consider that this would reasonably have been understood by the applicant as a reference to all invoices that had been given to it down to that point. It would not have been understood as a reference only to invoices on which the payments were overdue under the terms of cl 5.2 of the letter agreement. In my view, the “outstanding invoices” to which Mr Russell referred included invoice No 88. Indeed, because of the size of that invoice, and the relative insignificance of the amount which, even absent the remittance of 28 June 2013, was then required to be paid under the production invoices, I take the view that the applicant would reasonably have understood that Mr Russell was referring primarily to that invoice.
317 Doubtless the respondent would contend that, when Mr Russell made his threat on 1 July 2013, he was unaware of the applicant’s payment of $124,598 on 28 June 2013. I am, however, constrained by the authorities to take an approach to the matter of repudiation which is less lenient to the position of the respondent than that implied in such a contention. In this area of the law, the subjective state of mind of the putative repudiator is not relevant. The circumstance that Mr Russell may not have known of the remittance made by the applicant on 28 June 2013 is not, therefore, to the point. The objective fact is that the remittance was made, and must be taken into account in deciding whether the conduct of the respondent evinced an intention of a kind that would bespeak repudiation. I must, therefore, proceed on the basis that, on 1 July 2013, the applicant was not overdue on any payment, even the $380.96 previously owing on the production invoices.
318 Objectively, I can see nothing in the conduct of the applicant itself that would speak against understanding Mr Russell’s email as repudiatory. It is true that, in the week commencing on 24 June 2013, Mr Smith was frustrated with being unable to speak to Mr Koops about invoice No 88, but it was not put to the latter (during his evidence) that the applicant was, at the time, falling short on the performance of its obligations under the letter agreement. Clearly it was not.
319 All things considered, I take the view that Mr Russell’s email to Mr Millisevic of 1 July 2013 would have been reasonably understood by the applicant as demanding a payment to which the respondent was not then entitled under the letter agreement, and as threatening non-performance of what was on any view its own central contractual obligation – delivery of product – to enforce compliance with that demand. By this email, the respondent evinced an intention to perform the contract only on condition that the applicant make a payment which it was not obliged to make. That amounted to repudiation.
320 The next question is whether the applicant, in the knowledge of that repudiatory conduct, elected to affirm the letter agreement. As pleaded in its Defence, the respondent’s case was that there had been affirmation constituted by the correspondence to which I have referred at paras 154-158 above, namely, the letters of 6, 11 and 18 December 2013 and the emails of 31 January and 10 February 2014 (albeit that the letter of 11 December was, contrary to the indication given in the Defence, sent not by the applicant’s, but by the respondent’s, solicitors). In the submissions made on its behalf at trial, however, nothing of substance was said about these letters and emails. Rather, the respondent’s affirmation case was based on the applicant having, after receipt of Mr Russell’s email of 1 July 2013, continued to order, and to pay for, product through the months of July, August and September 2013.
321 If that were all there was to it, I would accept that the applicant’s conduct should be understood as involving an unequivocal election to keep the letter agreement on foot: see Sargent v ASL Developments Ltd (1974) 131 CLR 634, 646. However:
Where a contract can be terminated at the option of a promisee, the right to terminate is not necessarily lost by the promisee doing any act consistent with the continuance of the contract. If the act is also consistent with the reservation of a right to terminate in certain events, the right to terminate is not lost by the doing of the act.
Immer (No 145) Pty Ltd v The Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26, 30. Likewise:
[W]here there has been no intimation of avoidance, the question whether delay, after knowledge of the facts giving rise to avoidability, or things said or acts done during the delay, constitute such an election to go on with the contract as puts an end to the right to avoid, depends upon “the length of the delay and the nature of the acts done during the interval, which might affect either party, and cause a balance of justice or injustice in taking the one course or the other, so far as relates to the remedy”: Lindsay Petroleum Co. v. Hurd (L.R. 5 P.C. 221 at 240).
O’Connor v SP Bray, Ltd (1936) 36 SR (NSW) 248, 261-262. As Mason J said in Sargent (131 CLR at 656):
A person confronted with a choice between the exercise of alternative and inconsistent rights is not bound to elect at once. He may keep the question open, so long as he does not affirm the contract or continuance of the estate and so long as the delay does not cause prejudice to the other side.
322 In their letter on the very same day as Mr Russell’s conduct now alleged to have been repudiatory, the applicant’s solicitors described that conduct as involving the respondent’s “fundamental obligation” under the letter agreement, and expressly reserved the applicant’s rights. Their further letter of 3 July 2013 asked for explanations as to how the respondent justified the claims made in invoice No 88 (and other invoices). They gave the respondent until 11 July to furnish a response, and reserved the applicant’s rights. Mr Smith’s email to Mr van der Laan on 5 July 2013 did provide a response, but, while setting out a justification of sorts for the respondents’ position, the email appeared not to remove the applicant’s concerns as to the consistency of that position with the letter agreement. This proceeding was commenced a week later. In its Statement of Claim, the applicant alleged that the respondent had repudiated the letter agreement. In its Originating Application, it sought a declaration that it may terminate the letter agreement by reason of that conduct.
323 It is true that the applicant continued to order, to receive and to pay for supplies of snack foods from the respondent. But, given the stage which the litigation had then reached, and the position for which the applicant contended in its pleading, there is no reasonable basis upon which its conduct might be interpreted as amounting to affirmation. In its Defence filed on 16 August 2013, the respondent denied the allegation of repudiation, but, notwithstanding that the applicant had continued to trade ostensibly under the letter agreement for about a month, did not allege affirmation. At that stage, therefore, affirmation was not an issue in the proceeding. In that setting, the parties went to mediation on 2 October 2013, after which the applicant effectively shut up shop.
324 It was only in its Defence to Amended Statement of Claim, filed on 13 February 2014, that the respondent took the opportunity to allege affirmation, and then only in respect of the correspondence of December 2013 – February 2014 to which I have referred. Should it be necessary to refer to that correspondence, I would note that the applicant’s solicitors’ letter of 16 December 2013 was written “without prejudice to our client’s position whatsoever”.
325 In its case as presented in court, the applicant did not suggest that it had accepted the respondent’s repudiation. Indeed, it accepted that the letter agreement continued in operation, albeit in the absence of any orders being placed, or production being undertaken, under it. However, as the authorities show, a party in the position of the applicant is entitled to reserve its position so long as its conduct is not consistent only with affirmation and the other party to the contract is not prejudiced. Whether the respondent’s conduct in early July 2013 amounted to repudiation would have presented as a question of some difficulty to the applicant and its advisers at the time, particularly since the facts which would ground invoice No 88 in cl 5.3 of the letter agreement were substantially within the knowledge of the respondent. In its solicitors’ letter of 3 July 2013, the applicant made an apparently conscientious attempt to elicit information which would enable it to understand the claims made in that invoice. In my view, the applicant has proceeded conformably with the authorities, its conduct amounting neither to acceptance of the respondent’s repudiation nor to affirmation of the contract.
326 On these facts, I would hold that the applicant has not elected to affirm the letter agreement.
The respondent’s implied terms case
327 I turn next to the respondent’s case that the letter agreement included two implied terms, namely, (1) that each party would do all such things as were necessary on its part to enable the other party to have the benefit of the agreement, and (2) that the applicant would have discussions with retailers and place orders with the respondent for the duration of the agreement. The applicant admits that the first term was implied, and denies that the second term was implied. I shall, in the circumstances, commence with the respondent’s allegation that the second term was implied in the letter agreement.
328 In this respect, the respondent relied on the principles in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266. It was submitted on its behalf that the letter agreement required the applicant to “go and drum up business, and when it drummed up business by speaking to its customers, the benefit of that would flow to [the respondent] and that’s how [the respondent] would recover what it had spent in equipping itself to undertake this agreement.” It was not submitted that there was any particular volume of product that the applicant was obliged to order from the respondent, but it was not sufficient for the applicant to withdraw from the snacks food market altogether, as it had done in October 2013 and to pay the respondent only so much as was its minimum obligation under cl 5.3 of the letter agreement. Under such a scenario, it was stressed on behalf of the respondent, it would lose the benefit of the 3% profit margin which was associated with sales of product, however modest be the level of those sales.
329 The respondent found sustenance for these submissions in several provisions of the letter agreement itself. Fundamentally, it was said that the agreement contemplated the production and sale (by the respondent to the applicant) of snack foods over a term of seven years. The agreement required the respondent to make a substantial investment on the undeniable commercial expectation that it would receive orders from the applicant, whose specialised machinery had been purchased by the respondent for the purpose of meeting such orders. It was submitted that cl 4.3 of the agreement implied, if it did not in terms require, that there would be orders the result of discussions with retailers.
330 Certain aspects of the term sought to be implied should here be noted. First, the obligation imposed by the term would be absolute, in the sense that it would not be limited to circumstances in which the applicant’s failure to have discussions or to place orders was done in bad faith or was unreasonable. Even if the applicant had every reasonable ground to desist from such discussions and did so desist in good faith, it would still be in breach of the term alleged by the respondent. Secondly, the term would take no account of the applicant’s own, otherwise legitimate, commercial interests. It would operate as a promise upon which the applicant had to make good over the term of the agreement, regardless of the consequences for itself. Thirdly, it would operate even – and perhaps especially – in circumstances where the facts would not sustain a finding of a breach of the first (admitted) term alleged by the respondent. Thus, even where the applicant had done all such things as were necessary on its part to enable the respondent to have the benefit of the agreement, if those things did not include the discussions and orders referred to in the second term, the applicant would be in breach.
331 Against those considerations must be set two quite relevant aspects of the commercial relationship between the parties which the letter agreement sustained. The first is, as I have mentioned much earlier in these reasons, that the relationship was an unusual one which had about it some of the features of a joint venture. One of the early issues which Mr Russell raised for the applicant’s consideration was whether there was enough profit in the snacks operation for the two companies involved. While the respondent was entitled to expect to receive its 3% margin under normal conditions, likewise the applicant was entitled to assume that its outgoings would not be of such an order as to exclude completely any prospect of making its own profit from introducing its snacks products on to the Australian market. Unlike the respondent’s margin, the applicant’s profit was not a contractual expectation, of course, but it cannot have escaped the respondent’s reasonable notice that the applicant’s management was, in the negotiation of the rates that would be written into the letter agreement, assiduous in its attempts to keep its expected outlays within bounds which would allow for such a profit.
332 The second aspect is, as the respondent stressed in its submissions, that it was mutually understood between the parties that cl 5.3 was intended to protect the respondent against the prospect of its costs being insufficiently covered by unit prices in situation of low, including zero, production. I have rejected the respondent’s case that the operation of Part B of Annexure B was limited to situations of zero production, but on any view the situations in which it was designed to operate included those in which no orders were placed at all.
333 In this contractual and commercial setting, would the term alleged by the respondent be implied under the principles in BP Refinery? I would not hold the implication of the term, in the categorical way it was put, to be reasonable or equitable, in the sense that it would require the applicant to continue generating and placing orders in a situation that was, for reasons beyond its own control, conspicuously loss-making for it. If the letter agreement, on its true construction, had that effect, so be it. However, if it did not have that effect, I do not accept that it would be reasonable or equitable for the term sought to be implied by the respondent to step in to supply the deficiency. For the same reason, I would not consider that the implication of the term would be so obvious that it goes without saying. It may be one thing to contend for the implication of a term like this in circumstances such as were mutually anticipated by the parties when they entered into their contract, but to suggest that the term would introduce an obligation, beyond anything specifically agreed by the parties, requiring the applicant to continue generating and placing orders in a loss-making situation of the kind to which I have referred would be another thing altogether.
334 Here it must be recalled that, under the originally-contemplated scenario of the respondent producing 1,000 t of product each year, the overhead coverage which it would have achieved from the sale of that product would have amounted to $710,000 (ie $0.71 x 1,000 x 1,000). In Mr Russell’s pre-contractual expressions of concern about the vulnerability of his company to overhead expenses in situations of low production volumes, there was never a hint that $710,000 would not provide sufficient coverage. Yet, we now know from Mr Smith’s model of 24 May 2013 that a sum approaching double that figure was likely to be claimed under cl 5.3. What might be considered reasonable and equitable, and as so obvious that it goes without saying, must, of course, be determined in the light of the commercial circumstances in which the parties were placed when they negotiated the contract in question, and of the purposes for which parties entered into the contract. The implication of the respondent’s term would, in the facts which have emerged, involve a very substantial departure from anything that the parties had in mind when they executed the letter agreement and could not be regarded as satisfying these tests.
335 The second term referred to above is not, in my view, to be implied under the BP Refinery principles.
336 The question which remains in this area of the case is whether the applicant was in breach of the first implied term, the existence of which as pleaded is admitted. The conduct of the applicant which the respondent alleges breached the term was its conscious withdrawal from the snacks food market in Australia subsequent to the mediation. The communications which Mr Koops had with Woolworths (see para 152 above) were said to illuminate the nature of the applicant’s thinking at the time, but, as I understand it, the breach as alleged would arise not only from what the applicant did but from its refusal even to try to develop, or to maintain, any semblance of a presence in the retail market for snack foods. As those communications demonstrated, the applicant could not, according to the respondent, plead consumer dissatisfaction in justification for its actions. Indeed, the applicant’s apparent long-term intentions, as communicated to Woolworths, to return to the Australian market were said to justify the inference that it was something about its relationship with the respondent, and about the letter agreement in particular, that lay behind its decision to withdraw from that market.
337 In Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596, Mason J said (with the concurrence of Gibbs, Stephen and Aickin JJ) (144 CLR at 607-608):
It is easy to imply a duty to co-operate in the doing of acts which are necessary to the performance by the parties or by one of the parties of fundamental obligations under the contract. It is not quite so easy to make the implication when the acts in question are necessary to entitle the other contracting party to a benefit under the contract but are not essential to the performance of that party’s obligations and are not fundamental to the contract. Then the question arises whether the contract imposes a duty to co-operate on the first party or whether it leaves him at liberty to decide for himself whether the acts shall be done, even if the consequence of his decision is to disentitle the other party to a benefit. In such a case, the correct interpretation of the contract depends, as it seems to me, not so much on the application of the general rule of construction as on the intention of the parties as manifested by the contract itself.
In the present case, it is argued on behalf of the applicant that the letter agreement contemplated a situation in which there was zero production of snack foods at Bendigo, and gave the respondent the rights to remuneration for which cl 5.3 provided. At an early stage of the parties’ negotiations, Mr Russell had raised for consideration the assumption by the applicant of an obligation to place minimum orders, but that idea had not been progressed. Rather, the respondent’s protection under the letter agreement as executed arose under cl 5.3.
338 I do not think that the applicant’s argument sufficiently answers this aspect of the respondent’s case. In the first place, the existence of the term has been admitted: the court is spared the tasks of considering whether the term should be implied, and of how it should be expressed in point of detail. In the second place, the letter agreement fits comfortably within the situation described in the first sentence in the passage from the judgment of Mason J set out above. At the centre of the agreement, was the term in cl 4.1 that the respondent “shall manufacture the Products” for the applicant. The only way that the respondent would derive any benefit at all from the letter agreement was by the manufacture of snack foods for the applicant. It derived no benefit under cl 5.3: that provided only for the coverage of certain costs, and included no element of profit. Although this was not a joint venture as a matter of form, and although the respondent retained a limited right to use the machinery which it purchased and installed at Bendigo for food production which was not to the applicant’s order (but not, without the applicant’s consent, for the retail food market), the commercial reality of the relationship sustained by the letter agreement involved the applicant securing the business and the respondent producing the goods.
339 The applicant advances a number of other arguments as to why its conduct in October 2013 and thereafter should not be regarded as having been in breach of the implied term of co-operation. First, it relied upon the observation of Sellers J in Terrell v Mabie Todd & Co Ltd (1952) 69 RPC 234, 236, endorsed in Electricity Generation Corporation v Woodside Energy Ltd (2014) 306 ALR 25, 36 [42], that an obligation to use reasonable endeavours would not oblige the achievement of a contractual object “to the certain ruin of the company or to the utter disregard of the interests of the shareholders”. This observation, however, related not to an implied term of the kind with which I am presently concerned, but with an express term requiring a party to use its “reasonable endeavours”. Further, as a matter of fact, I could not be satisfied that the applicant’s conduct in the present case was the only course open to it to avoid certain ruin or the utter disregard of the interests of its shareholders. In this latter respect, the relationship between the performance of the applicant’s obligation under the implied term and the unexpected demands of the respondent under cl 5.3 of the letter agreement is a subject to which I shall turn presently.
340 Secondly, it was argued that the implied term “must be understood by reference to the general rule that where a promise permits performance in a number of ways, the promisor has the right to elect which method of performance will be undertaken”. The existence of such a rule may be accepted, but it assumes the identification of a promise and the availability of a duality or multiplicity of modes of performance. Whether such an assumption is well-founded in a particular case depends, of course, on the terms of the contract. Here, the term is as admitted by the applicant. The applicant’s argument (which found expression in its written outline only) did not make it clear what were the “number of ways” in which the term was permitted to be performed. If it was intended to propose that it might be performed by discontinuing completely the commercial operations which the letter agreement was intended to support and by leaving the respondent to its cost recovery entitlement under cl 5.3, I would, for reasons already given, reject such a proposition.
341 Thirdly, it was argued that the principles which give rise to the implication of the term “and related notions of fair dealing” were not “fixed or external to the parties’ intentions but draw their precise content and requirements from the particular contract and its wider context”. The argument, however, proceeded from that point to consider some of the recent writings on the subject of good faith. The subject presently under consideration is a different one. When it came to the application of the very high-level proposition contained in the applicant’s submissions to the facts of the case, three things were said: that there was, in the letter agreement, no express obligation of good faith or best endeavours, that the parties were agreed that the applicant was not obliged to make minimum orders and that the implied term could not be used as a mechanism to oblige the applicant to maintain dealings with the respondent that would have required it to incur losses. The first of these propositions goes no further, in my view, than to set up a straw man. The second I have already dealt with. The third raises the important and difficult issue of the consequences of the applicant being obliged to comply with the implied term in circumstances where the result would be, on its case, the need to carry on business for seven years at a loss. It is to that aspect that I next turn.
342 In point of fact, it has not been established that the applicant would make a loss if the letter agreement were permitted to operate over the long term. I accept that it would do so if the overheads component under the costs tables in Part A of Annexure B were to be $2.65 as proposed by Mr Smith in May 2013, and/or, under any scale of operations that was reasonably within the parties’ contemplations, if the fixed manufacturing cost reimbursement to which the respondent was entitled under cl 5.3 was of the order of one-twelfth of $1.325m every month. But the reasons which I give today would not sustain the conclusion that the respondent was and is entitled to this extent. In advance of hearing the parties on quantification issues, I cannot put a figure on the respondent’s entitlements under cl 5.3. It is, however, as clear as may be that, in October 2013, the applicant held the strong view that the respondent was overreaching the actual terms of the letter agreement by a considerable extent in the cost recovery claims which it was then making. Rather than await the resolution of this proceeding, the applicant effectively closed down the trading relationship for which the letter agreement provided.
343 I make it clear that it is no part of the reasoning expressed in the previous paragraph to assign fault, or bad faith, to the applicant. Those issues do not arise. In this general area of the case, the applicant relied on the joint memorandum of counsel to which I have referred in para 149 above in support of a submission that its cessation of business in October 2013 was no more than the uncontentious consequence of what was then expected to be a consensual settlement of the proceeding. Since I do not know, and am not permitted to know, the basis upon which the parties then seemingly entertained such an expectation, I cannot accept the applicant’s implicit invitation to assume that it would have involved the end of operations under the letter agreement. However that may be, the unhappy fact is that, in advance of the achievement of any such settlement, the applicant acted in the way it did and must now confront the reality of the operation of an implied term in the letter agreement, the existence of which is uncontroversial.
344 The contention that observance of the implied term would inevitably involve the applicant in ongoing losses – being, presumably, losses which would not have arisen in the absence of the operation of such a term – needs also to be placed in the relevant commercial context. Since the execution of the letter agreement, the applicant had endured a start-up period of nearly four months during which it was making payments to the respondent under cl 5.3 but was deriving no income from sales to retailers. Following that, there was a period of slightly over six months when its orders on the respondent were about 65 t only, the equivalent of an annual production of about 130 t. I am prepared to assume that the applicant derived a gross profit from the sales of the products concerned, but the evidence is not sufficient to find, and, intuitively, it seems far from self-evident, that that profit was sufficient to cover the expenses that the applicant had incurred over that period. The point is that this seven-year arrangement was still in relative adolescence. In the circumstances, I am not prepared to assume that losses of the order that confronted the applicant in October 2013 would necessarily have represented its experience when its relationship with the respondent, and, perhaps more importantly, with the Australian market, had reached the level of maturity which the parties contemplated when they executed the letter agreement.
345 The issue which has caused me the greatest concern in deciding this aspect of the case is how the implied term of co-operation speaks in a context in which the promisee has repudiated the contract and the promisor has neither accepted the repudiation nor affirmed the contract, as I have held to be the case here. Doubtless the applicant would say that, having commenced litigation to determine, amongst other things, whether the respondent’s conduct was repudiatory, it would have been counterintuitive for it, at the same time, to have continued with business as usual under the letter agreement. I can see the practical force in such a position, but, ultimately, I take the view that it cannot be located in any department of the law of contract that is relevant to the resolution of the issue. The applicant had reserved its position, and now accepts that, as things stood in October 2013, the contract remained on foot. So long as that was the situation, the applicant remained bound to comply with the implied term.
346 For the above reasons, I accept the respondent’s case that the applicant’s conduct in terminating its supply arrangements with Woolworths amounted to a breach of the implied term of co-operation.
The applicant’s case UNDER S 18 OF the ACL
347 In its Further Amended Statement of Claim, the applicant alleges that, during the course of the negotiations for the letter agreement, the respondent represented that the projected fixed costs for the snacks operation at Bendigo were “reasonably estimated” to lie between $443,500 pa for “minimum production” and $710,000 pa for the production of 1000 t of products. It is also there alleged that the respondent represented that those projected fixed costs would comprise the items which ultimately appeared on the list in Part B of Annexure B to the letter agreement. It is said that this was a representation as to a “future matter” within the meaning of s 4(1)(a) of the ACL, and that the respondent did not have reasonable grounds for making it. By s 4(1) of the ACL, the representation was taken to be misleading, thus giving rise to a breach of s 18(1) of the ACL. By s 4(2) of the ACL, the evidentiary onus with respect to the existence of reasonable grounds is on the respondent.
348 In this part of the applicant’s case, I should say at the outset that there is nothing in the evidence to sustain the allegation that the respondent made a representation that its fixed manufacturing costs would be $710,000 at 1000 t of production, or $0.71/kg at that production level. The figure of $0.71/kg originated from Mr Baan. Using the respondent’s financial data for the previous two years, he calculated that this would represent the incremental unit cost to the respondent of operating the proposed snacks line (on an assumed annual production of 1,000 t). Although he originally expressed reservations about it, ultimately Mr Russell agreed with this figure. The respondent’s relevant conduct was not that of making a representation, it was that of entering into a contract which entitled it to be paid a specified price for each kilogram of product which it produced, that price having been calculated by reference to costs which included this $0.71.
349 The real issue in the case relates to the applicant’s allegation that the respondent made, and the applicant relied on, a representation that, at minimum production, its fixed costs would be $443,500, constituted as set out in the second attachment to Mr Russell’s email of 16 July 2012 (see para 52 above) and continued thereafter in the form of Part B of Annexure B to various drafts of what became the letter agreement.
350 For reasons which will appear, it is important to commence by identifying the content of the representation, and by locating it within the context of the parties’ negotiations between July and December 2012. As first made on 16 July 2012, the representation involved two elements: first, the categories of fixed manufacturing costs that the respondent would incur at minimum production volumes, and secondly, the amount of those costs. At that time, the purpose of the representation was to identify, for the applicant’s consideration, the cost categories and amounts that would be included in the letter agreement by way of the respondent’s contractual entitlement under cl 5.3 where production volumes were not such as would cause those costs to be covered by the overheads component in the price of goods sold. Had the letter agreement been executed in that form, the likelihood is that any suggestion of the respondent’s conduct having been misleading for the purposes of s 18 of the ACL would have been moot: the respondent would have been contractually limited by the categories and amounts in Part B of Annexure B, regardless of how accurate its estimate was.
351 In relation to the categories themselves, that remained the case: whether or not the respondent’s representation was misleading, it was contractually limited to the categories the subject of the representation. The applicant could not have suffered loss as a result of the categories being too limited, wrong, or made without reasonable grounds, because the respondent’s rights under cl 5.3 could not overreach the categories to which it agreed. This sets the present case apart from Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388, at least factually.
352 The same, however, cannot be said of the amounts assigned to the categories. As a result of the changes in the letter agreement originated by the respondent’s draft of 2 August 2012, the proposal was that the respondent would be entitled to invoice the applicant for the actual fixed manufacturing costs which it had incurred, in the various categories, subject only to the calculation thereof proceeding in accordance with the model in Part B of Annexure B. From that point, the amounts in the drafts of Part B stood as bare representations, and were not to become, and did not become, contractually limiting. For the applicant, however, the importance of these estimates being at least close to the mark was significantly increased, a circumstance which ought to have appeared self-evident to the respondent.
353 The representation first made by the respondent on 16 July 2012, and continued in various drafts of the letter agreement, had currency for the whole of the subsequent period until the signing of the agreement by the applicant on 3 December 2012. Until the latter date, the representation was on the table, as it were, for the applicant’s consideration as part of the business case for its execution of the agreement. I shall deal with the matter of reliance below, but, anticipating the conclusion that I propose to reach in that regard, the execution of the letter agreement by the applicant, and the assumption of the contractual obligations which that involved, marked the end of the period during which the representation existed as such and gave rise to consequences under the ACL.
354 The representation was of the fixed manufacturing costs, at minimum production volumes, that the respondent would be likely to incur. These estimated costs were not to be understood as minima in the sense that the respondent’s actual costs might be anything more than them: for reasons which I have explained above, the context was such that the applicant sought, and the respondent provided, the latter’s estimate of the costs that it would unavoidably incur at low production levels.
355 The applicant accepted that the respondent’s representation should not be seen as a precise one. When it received its list of fixed cost items, it took the money sums attributed to them as best estimates, such that the question should now be not whether the respondent had reasonable grounds to represent that its fixed costs would be the various sums set out in the list, to the dollar in each case, but whether it had reasonable grounds to represent that its fixed costs would be of the order of those sums.
356 I turn then to the question whether the respondent did have reasonable grounds for the representation which it made. Here I must drill down into the various items in the second attachment to Mr Russell’s email of 16 July 2012.
357 I would introduce my consideration of this aspect of the applicant’s case with a note of clarification. A deal of the submissions made by both parties focussed on how it came to be that Mr Russell’s list of 16 July 2012 – and Part B of Annexure B to the letter agreement for that matter – proved to be so conspicuously inadequate as a predictor of the costs that found expression in Mr Smith’s email of 24 May 2013. While the fact of that inadequacy may, in some or all instances, be a circumstance which is relevant to the present inquiry, it must be stressed that it would not of itself establish that Mr Russell did, or did not, have reasonable grounds, in the period July-December 2012, for making the representation on which the applicant sues. The question which I must address is whether, over the period when the representation was extant, the respondent had reasonable grounds to make it.
358 Commencing with rent, the representation was that the respondent’s annual outgoing would be of the order of $75,000. In his evidence-in-chief, Mr Russell said:
Negotiations with the landlord concerning the area to be vacated by Pasta Master took place between May and October 2012. The figure of $75,000 in BB was based on the landlord’s quote for Stage 1 .... At that date, that was the minimum area which was anticipated by me to accommodate the snacks operation. At that date, I did not know the total area that would be required to accommodate ZFG/ZA’s snacks line. Subsequently, the additional area … was required to house additional materials and equipment used in the snacks operation, at a further rent of $30,120. By May 2013, warehouse space was required in the premises to house substantial volumes of packaging, trays and sticks sent by ZFG from Europe. The bulk volume of these products was in excess of Moira Mac’s needs and was not requested by Moira Mac’s.
Mr Russell was not cross-examined on this evidence.
359 The applicant’s submission on the matter of rent was that the parties knew, with a reasonable degree of certainty, that the Pasta Master premises would most likely be used for the snacks line by June 2012 at the latest. It was said that it was “inconceivable that a reasonably accurate assessment of the rent could not have been made”. This submission, which implicitly treats the rent figure in Mr Smith’s email of 24 May 2013 as that which ultimately had to be paid by the respondent, joins issue with the wrong proposition. The question is not whether the respondent ended up paying more in rent than was estimated by Mr Russell on 16 July 2012. It is whether, over the period during which Mr Russell’s representation was extant, he had reasonable grounds for having made it. Here the applicant’s failure to cross-examine Mr Russell on the evidence set out above is problematic for its case, but not terminal.
360 Correspondence to the respondent from its landlord on 22 September 2012 – tendered by the respondent itself without objection – referred to a meeting the previous day between Mr Russell and the landlord’s representative Mr Leon Scott. The letter set out what had been agreed between those parties. The rent for the Pasta Master area from 1 December 2012 would be “$68,160.00 + GST + oncosts”, and the rent for the load out chiller from 1 March 2013 would be “$25,200.00 + GST + oncosts”. Additionally, it was said in the correspondence that other designated areas would be held for the respondent’s use “within this timeframe”, and that a further designated area was available for storage and staff quarters at a rent of “$17,800.00 P/A + GST + oncosts”. The meeting on 21 September 2012 was four days before Mr Russell signed the letter agreement.
361 The correspondence to which I have referred was not the subject of a submission on behalf of either party. For that reason, I am unable to say whether the additional areas mentioned in the correspondence were then reasonably in Mr Russell’s contemplation as being required for the snacks operation, or merely held available by Mr Scott in case they were needed. But there seems no doubt, and I would find, that the first two areas – the Pasta Master area itself and the load out chiller – were intended to be used. On 23 November 2012, the landlord’s solicitors sent the respondent’s solicitors a draft lease which specified monthly rentals from 1 December 2012 and 1 March 2013 for the first of those areas, and for both areas combined, respectively, which corresponded exactly with the annual rentals set out in the correspondence of 22 September 2012.
362 The position which was known to Mr Russell on 22 September 2012, therefore, was that the respondent would be paying $17,040 for the first three months, and $70,020 for the remaining nine months, of the first rental year (assuming, favourably to the respondent, that Mr Russell was justified in assuming that 1 December 2012 would be the starting date for its entitlements under the letter agreement). This would give a total of $87,060 over 12 months. This figure is to be compared with the figure of $75,000 which the respondent estimated would be its annual rent under the proposed business arrangement with the applicant.
363 It is true that Mr Russell first made that estimate in July 2012, before (at least so far as the evidence shows) having had his discussions with Mr Scott. But the representation constituted by the estimate remained live thereafter, and was, of course, forwarded to the applicant in the copy of the letter agreement executed by the respondent on 25 September 2012. As mentioned above, I would hold that the representation remained live until the letter agreement was executed by the applicant, which was subsequent to the respondent being put in possession of the draft lease. But I would also hold that the grounds for Mr Russell to make a reasonable estimate of what the respondent’s rental outgoing would be over the first year of operation were in his possession before he signed the letter agreement in September 2012.
364 In my view, $75,000 cannot be regarded as a reasonable estimate, even on an indicative basis, of an annual rent believed at the time to be of the order of $87,060. We are not here dealing with a representor which was ignorant of the actual rent which it was likely to pay, and made its best estimate on the information then available to it. We are dealing with a representor which had had detailed discussions with its landlord, and which knew, to the dollar, the rent which the landlord intended to charge for premises which were then reasonably expected to be used in the industrial operation concerned. On the evidence to which I have referred, I would hold that the respondent did not have reasonable grounds to represent to the applicant that its rent for the first year would be, indicatively, $75,000.
365 With respect to rates and water, the representation was that the respondent’s annual outgoing would be of the order of $8,500. In his evidence-in-chief, Mr Russell said:
Both council rates and water rates would increase in proportion to the increase in tenancy area. Moira Mac’s was paying council rates of $9,503 and water rates of $22,999 on its existing core business for approximately 3000 square metres of area. I estimated the snacks area would be around 750 square metres; that meant the snacks area would incur rates of around $34,000 divided by 4 = $8500.
Mr Russell was not cross-examined on this evidence.
366 Notwithstanding that omission, there is evidence, led by the respondent, which establishes that Mr Russell did not have reasonable grounds to make that representation. In the correspondence of 22 September 2012 to which I have referred, he was informed that the total area under consideration was 1136 m2. That was also the area to be let to the respondent under the draft lease sent to it on 23 November 2012. By basing his representation upon the supposition that the leased area would be about 750 m2, Mr Russell acted contrary to information of which he is reasonably assumed to have been aware. I would hold, therefore, that the respondent did not have reasonable grounds to represent to the applicant that the costs to be incurred in respect of rates and water for the first year would be, indicatively, $8,500.
367 With respect to management, the representation was that the respondent’s annual outgoing would be of the order of $50,000. In his evidence-in-chief, Mr Russell said:
Moira Mac’s management team in 2012 (consisting of myself, Darren burgess, Shannon Simpson and Judith Shuter) cost approximately $500,000 per annum. I estimated that the additional management tasks in operating the snacks line would be 10% of this cost ($50,000 p.a.) assuming that once it was established and employees were satisfactorily trained.
Mr Russell was not cross-examined on this evidence.
368 Unlike a number of other elements of Mr Russell’s representation, this one did not involve a prediction of the costs that would be imposed on the respondent by an external agency. Rather, it involved a judgment by him of the extent to which members of his existing management team would be required to occupy themselves in the snack foods business. He was challenged neither on the correctness of the total management cost figure of $500,000 nor on the reasonableness of his 10% estimate. It is inevitable, in the circumstances, that I should hold that the respondent did have reasonable grounds to make this representation.
369 With respect to insurance, the representation was that the respondent’s annual outgoing would be of the order of $50,000. In his evidence-in-chief, Mr Russell said:
I included the figure of $50,000 for insurance after consulting Mr. David Bakes of the Bendigo firm, Bendigo Insurance Brokers. I informed Bakes that Moira Mac’s would be acquiring an additional $2m worth of plant and equipment. He said that if Moira Mac’s existing policy cover was increased (rather than a separate policy being created and issued) the policy would cost an additional $50,000. (In fact the insurance cost was $32,000).
Mr Russell was not cross-examined on this evidence.
370 Nothing in the evidence was drawn to my attention, and I am not aware of anything otherwise, which would cast doubt on the reasonableness of the basis offered by Mr Russell for making his estimate of the additional insurance costs which the respondent would incur upon the establishment of the snacks line. I would hold that the respondent had reasonable grounds to make this representation.
371 With respect to utilities, the representation was that the respondent’s annual outgoing would be of the order of $30,000. In his evidence-in-chief, Mr Russell said:
The annual estimated cost of electricity and gas in Moira Mac’s core business was $82,387 and $34,890 respectively. Moira Mac’s was averaging $2,500 per month simply to have the electricity and gas connected. So that at 0 production, the minimum cost to Moira Mac’s was $30,000 per annum. I did not know what actual electricity and gas prices would be in circumstances where I had not had experience in cost of operating a snack line (for example, which used electric fryers) and the carbon tax had not been introduced, but was anticipated to increase electricity charges by 20%. The utilities price would be adjusted to conform with actuals once these contingencies were known.
Mr Russell was not cross-examined on this evidence.
372 It is clear from that evidence, however, that Mr Russell’s estimate was based entirely on the annual connection charge for the utilities concerned. As I have held above, I do not accept that these cost representations made by the respondent were based on an assumption that the new snacks operation would lie idle, or that the applicant would reasonably have so understood them. The content of the utilities representation was that, even at low production levels when the costs concerned would not be covered by the unit-based fee which the respondent would charge for goods produced for the applicant, the respondent would incur costs of the order indicated. Clearly, the annual connection charge alone did not provide a reasonable ground for the respondent to have made the representation. Further, the drift of Mr Russell’s evidence set out above is that, where electricity prices were “anticipated” to increase by 20% as a result of the introduction of a carbon tax, he ignored that in his estimate forwarded to the applicant. In this respect, the respondent had reasonable grounds to believe that that estimate would prove to be wrong. For these reasons, I would hold that the respondent did not have reasonable grounds to make the utilities representation.
373 With respect to maintenance, the representation was that the respondent’s annual outgoing would be of the order of $10,000. In his evidence-in-chief, Mr Russell said:
The maintenance expenses in Moira Mac’s existing core business were substantial: I believed maintenance was costing approximately $234,000 annually. This was because in most cases the plant and equipment was older and required high levels of maintenance. In the case of the equipment being acquired by Moira Mac’s from ZFG, I was informed that the equipment if not new had been refurbished as new. In fact, as I address later in this statement, the ZFG machinery malfunctioned with regularity at substantial expense. My estimate of $10,000 was a minimum figure required to keep the snacks line and factory in running order at 0 production regardless of use, and involved greasing and oiling as part of scheduled maintenance, wall surface repair and corrosion removal. I anticipated this maintenance would involve 1 worker, on 1 day per month costing $3,600 in labour and the balance in consumables. I did not make allowances for breakdown and repairs as I assumed, on what ZFG had told me, that new and refurbished machinery would require minimal maintenance.
Mr Russell was not cross-examined on this evidence.
374 There is nothing self-evidently unreasonable about Mr Russell’s evidence about his estimate of maintenance costs. Although here too he appears to have based that estimate on an assumption of zero production, the position differs from that with which I dealt above in the area of utilities in that the court cannot take judicial notice, in effect, of the circumstance that maintenance costs would necessarily be higher than the modest levels estimated by Mr Russell if the snacks line were running, but at minimal production levels. Without the matter having been tested by counsel for the applicant, I am in no position to reject the reasonableness of Mr Russell’s estimation. I would hold that the respondent had reasonable grounds to make this representation.
375 With respect to cleaning, the representation was that the respondent’s annual outgoing would be of the order of $10,000. In his evidence-in-chief, Mr Russell said:
I adopted the figure of $10,000 as a minimum estimate to keep the snacks line presentable with 0 production. The snacks production area was about ¼ of the size of the existing business, but it would need to be kept sterile. It would be subject to regulatory audits and factory visits. The grease traps would require regular cleaning. The cleaning/rubbish removal costs in Moira Mac’s core business was $22,000. I estimated that 1 labourer on 1 day per month at a cost of $2,500, plus 2 contractor visits to clean the grease traps (at $1,5000 [sic] each) together with consumables of around $4,500 (hand towels, sterile masks and gloves, detergents, disinfectants and sterile feet washers).
Mr Russell was not cross-examined on this evidence.
376 The facts in respect of this item are relevantly indistinguishable from those dealt with above in the area of maintenance. I would apply the same reasoning as I did in that area, and hold that the respondent had reasonable grounds to make this representation.
377 With respect to all the other items listed in Mr Russell’s representation – supervision, QA officer, accountancy, bank fees, safety/laundry/materials, laboratory, audit fees, pest control, office costs and sundry – the respondent led no evidence of the grounds upon which the estimates in question were based. Although the applicant’s case was not conducted with any particular attention being given to these items, that case did include the proposition that what the applicant called “the fixed cost representation”, as a whole, first made on 16 July 2012 and carried through into Part B of Annexure B to the letter agreement, was made without reasonable grounds. In relation to these miscellaneous items on the list, I am bound by the terms of s 4(2) of the ACL to uphold that case.
378 It follows from the terms of s 4(1) of the ACL that the representations referred to above which were made without reasonable grounds were misleading, and that the applicant has made good its case of a contravention, or possibly of a series of related contraventions, of s 18 of the ACL.
379 Turning to the question whether the applicant relied on the representation, it was submitted on behalf of the respondent that the court should be wary of a party who, having made an unwise business decision, seeks to use a finding of the kind that I have made above to avoid the natural consequences of that decision. For a party to act in such a way, it was submitted, amounted to opportunism to which the court should give no support. That was an appropriate submission for the respondent to have made at a high level, and I propose to approach the applicant’s reliance case with the degree of scepticism which the submission implies. Even under that approach, however, there can be no doubt but that the applicant relied on Mr Russell’s fixed cost estimates in making its decision to execute the letter agreement.
380 Originally, the applicant’s proposal contained no fixed cost guarantee for the respondent. It was the respondent which introduced the need for such a guarantee into the negotiations. Mr Baan’s early suggestions were too limited for Mr Russell’s liking, and he came up with his own list. Although I have, in a number of respects, found that Mr Russell did not have reasonable grounds for the figures which he included on his list, the applicant would reasonably have assumed otherwise. Only four days before Mr Russell’s list was first forwarded to the applicant, Mr Koops informed him that Mr Baan had advised “to run with your approach and use your estimate for these costs”. Mr Koops asked Mr Russell to “fill in the ??”, and he did so. The list which Mr Russell sent on 16 July 2012 was accepted by the applicant, and was uncontroversial as between the parties thenceforth.
381 The importance of Mr Russell’s estimates for the applicant was given a sharper edge by the amendment of cl 5.3, and of Part B of Annexure B, of the draft to entitle the respondent to recover its actual costs. Had there never been any suggestion of the applicant being obliged to cover the respondent’s fixed manufacturing costs regardless of volume, as was the case under the draft agreement prepared by the applicant’s solicitors in early May 2012, the absence of broadly reliable estimates of those costs would have been irrelevant to the applicant’s liability and, therefore, irrelevant to its decision to execute the letter agreement. However from 2 August 2012 the applicant knew that it would have to reimburse the respondent its actual manufacturing costs, subject only to them having been calculated in accordance with the model in Part B of Annexure B. Objectively, this would have given the applicant concerns in two areas: first, the need to avoid double payment by ensuring that it was given credit for overhead cost recovery under product invoices, and secondly, the need to have a reliable approximation of what its exposure would be whatever the extent of that recovery. The first concern was dealt with by the amendments to the draft of the letter agreement done on 25 September 2012.
382 It was the purpose of the respondent’s representation, now taking the form of the amounts set out in Part B of Annexure B, to allay the second concern. That the applicant would have executed the letter agreement, knowing what it did about the operation of cl 5.3, without an estimate of the kind made in Part B, would, in my view, have been a most unlikely outcome. It would have implied a cavalier approach to its own monetary exposure in the area of a significant investment that would have been wholly at odds with the otherwise careful and meticulous approach which it took to such matters.
383 Favourably to the respondent, I am prepared to infer that there were many other aspects of the business case for entering the snack foods market in Australia that the applicant took into account. I am satisfied, however, that keeping its own exposure to production costs under control was a critical consideration. It is also true that the impact of cl 5.3 was to be felt only at low production volumes, such that, once volumes reached a certain level the respondent’s claim under that clause would be effectively cancelled out by the overhead cost component of the prices which it had charged for products in the month in question. But the operation of cl 5.3 was limited only by the size of the costs which the respondent was entitled to claim under it: the more the respondent’s actual costs exceeded those set out in Part B of Annexure B, the higher production volumes would need to be before this cancelling out process cut in. That is to say, the applicant was exposed under cl 5.3 not only at “low production volumes” defined exogenously: its exposure was tied to the level of the respondent’s actual fixed manufacturing costs.
384 For the above reasons, I am satisfied that the applicant relied on the respondent’s representation as a significant element in the decision it made to enter the letter agreement.
385 What are the consequences of these findings of contravention and reliance? As noted above, the applicant seeks an order under ss 237(1) and 243(a) of the ACL that the letter agreement is void, an order under ss 237(1) and 243(d) directing the respondent to return the machinery which was purchased from ZFG and damages pursuant to s 236(1). Both s 236 and s 237 require that the person claiming the remedies to which they refer have suffered – or, in the case of s 237, be likely to suffer – loss or damage because of the conduct found to have been contravening. I shall deal with remedies as such in a later section of these reasons. Here, I propose to consider whether the applicant has established that it suffered, or is likely to suffer, loss or damage, and if so, how that arose, or would arise, and what is the nature thereof.
386 It was submitted on behalf of the applicant that its “true loss” was “being tied to a loss-making contract”. Whether the letter agreement was loss-making for the applicant in some general sense was not, however, the subject of its evidentiary case. To the contrary, it made it clear that its only claimed loss, and thus the only loss which it sought to establish for the purposes of the ACL, was the amount which (as it was put in the applicant’s outline) it “may have to pay on [the respondent’s] invoices, on top of those amounts it should properly have to pay”. What “properly” means in this context, it seems (and here I quote from another paragraph of the applicant’s outline), is “properly chargeable under the letter agreement”. In final oral submissions, the focus of counsel for the applicant was on the additional outlays to which it would be exposed under claims of the kind foreshadowed in Mr Smith’s model of 24 May 2013 and actually made in invoice No 88. It was also submitted that the applicant was, in effect, locked into the losses implied by the need to make these outlays once it executed the letter agreement, which it did in reliance on the respondent’s contravening representation.
387 With respect to those involved, I would have to say that this way of putting the matter of loss for the purposes of the ACL is a most curious one. The dispute about the respondent’s entitlement under cl 5.3 of the letter agreement has been agitated in this case. The applicant was never exposed to the need to make payments to the respondent greater than the latter’s entitlement under the letter agreement, properly construed. I have held that this entitlement was not reflected in invoice No 88. The applicant’s loss cannot be measured by the necessity to make outlays greater than those for which the letter agreement provided because, by definition, there was no such necessity.
388 On the other hand, to the extent that it is put that the applicant is locked into a contract which does require the making of outlays higher than those the subject of the respondent’s representation, the applicant’s case is intelligible. Conceptually, I consider that such a case is one that should be accepted. Had the representation not been made, the applicant would not have entered into the letter agreement and, subject to appropriate findings of fact at the level of detail, would not have been subject to such a requirement.
389 The difficulty is that the answer to the question whether the applicant has suffered, or would be likely to suffer, loss under the operation of the letter agreement depends substantially on a calculation of the respondent’s monthly entitlement under cl 5.3. The approach which I have decided to take in that area of the case has been dealt with at paras 279-280 above. The applicant’s case on the merits under s 18 of the ACL has been made good not in the sense that the costs chargeable under cl 5.3 are more than was represented by the respondent, but in the sense that the respondent did not have reasonable grounds for making the representation. It remains an open question, therefore, whether the applicant has suffered loss or damage because of the representation. This is not merely a question of the quantification of damage: it is also the anterior question of whether an action lies under ss 236 or 237 at all.
DISPOSITION OF THE PROCEEDING
390 Based upon the reasons which I have given above, there are some orders which may, and should, now be made in final disposition of this proceeding. There are, in addition, some matters which will require to be addressed by the parties in the light of those reasons, and liberty to apply will need to be reserved in some instances.
391 I propose to dismiss the respondent’s claims (as cross-claimant) that the applicant breached cll 5.1(a) and 5.3 of the letter agreement by failing to make the calculation, and to undertake the review, there referred to.
392 The respondent is entitled to judgment in respect of its unpaid production invoices.
393 I propose to reject the respondent’s claim to payment of the invoiced sum under invoice No 88. I have made sufficiently clear my reasons for adopting this course. The final determination of its entitlement under this invoice will be stood over. I have not dealt specifically with the respondent’s minimum fee invoices subsequent to No 88, and I anticipate that the answers to such questions as may arise in this respect will fall into place once the position under that invoice has been resolved.
394 I propose to dismiss the applicant’s claim under cl 9.1 of the letter agreement.
395 I am prepared to make a declaration that the respondent repudiated the letter agreement on 1 July 2013, but I shall do so only if the applicant, on the settlement of the orders, undertakes to accept that repudiation within 48 hours of the making of the declaration.
396 The respondent (as cross-claimant) has succeeded in establishing a breach of the implied term of co-operation. It will be necessary to give directions for the assessment of the damages to which the respondent is entitled. I shall hear the parties on that issue.
397 The applicant has succeeded in establishing a contravention of s 18 of the ACL. The primary remedy sought by the applicant in this area of the case is not damages but the voiding of the letter agreement by an order under ss 237(1) and 243(a). I could not contemplate taking that step until it has been established that the applicant suffered loss or damage because of the respondent’s representation. Not only would the basis for the exercise of the court’s jurisdiction then be established, but the court would know the extent of the divergence, if any, between the costs represented by the respondent in the lead up to the execution of the letter agreement and its contractual entitlements under cl 5.3 in respect of the early quarters of the operation of the agreement. That would, of course, be a matter relevant to the exercise of the court’s judgment under s 237 of the ACL.
398 Also relevant to the judgment whether to void the agreement under s 237 would be the result of the applicant’s decision whether to accept the respondent’s repudiation, which I have held it is entitled to do. An affirmative decision in that area would presumably foreclose any suggestion of voiding taking effect after the acceptance, but there may still be a question whether it was open, or appropriate, for the court to take such a step with effect from some earlier date.
399 Although not its primary case under s 18 of the ACL, I do not understand the applicant to have abandoned its claim for damages in that area, save with respect to future loss and damage. That is to say, the applicant appears only to seek damages – and then only in the alternative – to compensate it for the losses which it has sustained under the operation of the letter agreement to date. The court (and the parties, for that matter) will be in a better position to assess such damages as the applicant may be entitled to after final determination of issues arising under cl 5.3 of the letter agreement.
400 For these reasons, I shall stand over the finalization of the applicant’s case under the ACL pending the determination of those issues and the applicant’s decision on the repudiation aspect.
401 In the event that the finalisation of the case conformably with the reasons set out above involves each party having an entitlement to money outcomes at the expense of the other, the applicant proposed that comprehensive set-offs should be allowed, and I did not understand the respondent to resist that proposal. Even at this stage it is clear that the applicant is in debt to the respondent under the latter’s unpaid production invoices, and the respondent will need to account to the applicant in relation to the $200,000 government grant and other capital items. Once the quantification aspect of the case has been concluded, I shall permit the parties to make such further submissions as they consider necessary on any set-off issues that remain outstanding.
402 There are some respects in which the applicant has sought declarations marking the extent of such success as it was able to achieve in the proceeding. Save with respect to its repudiation case, I have not decided, at this stage, to grant any such claim. Generally, I take the view that the remedy of declaration should not be used simply as a statement of the factual or legal basis of some other remedy which has been granted or refused. However, I am not inflexible in this approach, and would be prepared to receive such submissions as the parties may wish to make, on the settlement of the orders, on this issue.
403 Although something of a sidebar to the issues in the proceeding, the fate of the machinery purchased by the respondent from ZFG for installation at Bendigo would become an issue if certain of the relief which the applicant has claimed were to be granted. It sought to deal with the machinery in two different circumstances, either of which had the potential to arise in the many-pronged case which it ran. The first circumstance would arise under cl 5.6, operating in combination with cl 9.1, of the letter agreement. The applicant sought a declaration that it may purchase the machinery under cl 5.6. However, since I have rejected the applicant’s case of breach under cl 9.1, nothing further needs to be said about this claim.
404 The second circumstance would arise under s 243 of the ACL. As a condition of the court making an order voiding the letter agreement from a specified date, it was proposed that the court should also order the applicant to purchase the machinery from the respondent at its “residual fiscal value”, calculated as the balance of the loan account as between the respondent and its banker. Because I have stood over the applicant’s case under s 243, I shall take the same approach to the matter of the purchase of the machinery.
405 I note that the applicant’s case did not deal with the consequences, if any, of an accepted repudiation for the disposition of the machinery purchased by the respondent from ZFG.
406 The detailed drafting of orders to be made at this stage is better done after the parties have brought in their short minutes, which they will be invited to do.
| I certify that the preceding four hundred and six (406) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jessup. |
Associate:
