FEDERAL COURT OF AUSTRALIA

Zwanenberg Australia Pty Ltd v Moira Mac’s Poultry and Fine Foods Pty Ltd (No 2) [2014] FCA 1401

THE COURT DECLARES THAT:

1.    The respondent has, in trade or commerce, engaged in misleading conduct in contravention of s 18 of the Australian Consumer Law, Sch 2 to the Competition and Consumer Act 2010 (Cth), by representing, on 16 July 2012 and thereafter until 3 December 2012, that the fixed manufacturing costs which it would incur, regardless of volume, in the production of snack foods under contract to the applicant would be, per annum –

(a)    in relation to the cost items set out in the first column of the table below, of the order of the amounts correspondingly set out in the second column of that table, and

(b)    in total, of the order of $443,500,

without having reasonable grounds for doing so.

2.    On the proper construction of the expression “the actual fixed component of the Manufacturing Costs (calculated in accordance with the model in Part B of Annexure B)” in cl 5.3 of the agreement referred to in para 6 of the Further Amended Statement of Claim (“the letter agreement”) -

(a)    the respondent was, subject to the other provisions of that clause, entitled, in respect of each item set out in Part B of Annexure B, to include in each monthly invoice a sum representing the costs which it actually incurred in the month concerned, and so on from month to month until the total of the costs so invoiced in respect of that item since the commencement of the year in question (the years being measured from the date of the commencement of the letter agreement) reached the sum set out, in respect of the item, in Part B of Annexure B;

(b)    the costs which the respondent actually incurred in a month were to be calculated conformably with para 10 of the reasons of the court published this day.

3.    The respondent repudiated the letter agreement on 1 July 2013.

4.    The applicant accepted the said repudiation on 30 October 2014.

THE COURT ORDERS THAT:

5.    The claims made in items BB, D, E, F(1), G, H, I, and II of the Amended Originating Application be refused.

6.    There be judgment for the cross-claimant in the sum of $77,358.74 under para 1 of its Amended Notice of Cross-Claim dated 14 April 2014 (“the Cross-Claim”).

7.    Execution of the judgment referred to in the previous order be stayed pending the determination of the outstanding matters in this proceeding or further order.

8.    The claims made in item 2B of the Cross-Claim be refused.

9.    The proceeding be fixed for hearing at 10:15 am on 1 June 2015 for the purposes of dealing with the following questions:

(a)    whether the applicant has suffered loss or damage because of the respondent’s conduct referred to Declaration 1 above, and, if so –

(i)    what is the amount of that loss or damage, and

(ii)    whether the letter agreement should be declared void, and if so from what date;

(b)    whether the cross-claimant has suffered loss or damage because of the cross-respondent’s breach referred to in para 346 of the reasons of the court published on 6 October 2014, and, if so, what is the amount of that loss or damage;

(c)    what was the respondent’s entitlement under cl 5.3 of the letter agreement in respect of each of the months April 2013 - January 2014 inclusive;

(d)    whether, and if so the extent to which, either party is entitled to set off any amount owing by it under these orders, or to become its liability consequent upon the determination of the outstanding matters referred to herein, against any like amount owing to it, or to become its entitlement consequent upon the determination of the outstanding matters referred to herein;

(e)    interest; and

(f)    costs.

10.    On or before 27 February 2015 –

(a)    the applicant file and serve an affidavit, or affidavits, containing the evidence upon which it proposes to rely in support of its claims referred to in Order 9(a) above, including full particulars and detailed calculations where appropriate;

(b)    the cross-claimant file and serve an affidavit, or affidavits, containing the evidence upon which it proposes to rely in support of its claims referred to in Order 9(b) and (c) above, including –

(i)    full particulars and detailed calculations where appropriate; and

(ii)    in relation to the claims referred to in Order 9(c), a schedule or schedules setting out –

(A)    its actual fixed manufacturing costs, calculated conformably with Declaration 2 above, for each item in Part B of Annexure B to the letter agreement, in each month from the commencement of that agreement to January 2014; and

(B)    the amounts paid by the cross-respondent pursuant to the cross-claimant’s invoices ostensibly issued under cl 5.3 of the letter agreement.

11.    On or before 10 April 2015 –

(a)    the respondent file and serve its affidavit or affidavits, if any, in response to the evidence referred to in Order 10(a) above;

(b)    the cross-respondent file and serve its affidavit or affidavits, if any, in response to the evidence referred to in Order 10(b) above, including full particulars of any outgoing, payment or allowance required to be set off against, or to be taken into account in the calculation of, the cross-claimant’s entitlement under cl 5.3 of the letter agreement.

12.    On or before 1 May 2015, the parties file any affidavit or affidavits upon which they propose to rely in reply to those referred to in the previous order.

13.    On or before 22 May 2015, the parties file and serve outlines of the submissions which they propose to make at the hearing referred to in Order 9 above.

14.    Costs be reserved.

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

REASONS FOR JUDGMENT

1    The substantive issues in this proceeding were resolved in a judgment delivered on 6 October 2014: Zwanenberg Australia Pty Ltd v Moira Mac’s Poultry and Fine Foods Pty Ltd [2014] FCA 1072. These reasons should be read in conjunction with the court’s reasons published on that day.

2    It is now necessary to address the following outstanding matters:

    the content of the expression “calculated in accordance with the model in Part B of Annexure B” in cl 5.3 of the letter agreement (see paras 237 and 279-280 of the court’s reasons of 6 October 2014);

    the orders to be made to reflect those reasons, and to reflect also the determination of the cl 5.3 point referred to above; and

    the directions necessary for the programming of issues of quantification, which were left for later resolution and not dealt with on 6 October 2014.

3    Commencing with the cl 5.3 problem, I do not need to add to what I said on 6 October 2014 by way of identifying the nature thereof. In submissions made on the present occasion, the applicant has maintained the position for which it contended at trial, namely, that the sums set out in Part B of Annexure B were binding contractual approximations, but it made an additional submission in the alternative which sought to come to grips with the matter of how the “model” in Part B actually worked in a practical setting. The respondent performed what could only described as a volte-face with respect to its position on Part B of Annexure B. It submitted that the sums there set out were, to the dollar, its annual entitlements under cl 5.3. It abandoned the position, which, subject to conformity with the model contained in the part, I upheld in my reasons of 6 October 2014, that it was entitled to invoice the applicant for the actual costs incurred in a particular month regardless of their relationship with those sums. It abandoned also any reliance on the minimum fee invoices which it had issued to the applicant with respect to the period April 2013 – January 2014, to the extent that those invoices related to fixed manufacturing costs.

4    Factoring in the position for which the respondent now contends, there remain two aspects of the practical operation of cl 5.3 which require determination. The first is the relationship between the terms of the clause, and of Part B of Annexure B, on the one hand and the costs actually incurred by the respondent in a particular month, on the other hand. The second relates to the content of Part B of Annexure B itself. I shall deal with them in turn.

5    I consider that, to the extent that the respondent now accepts that the sums set out in Part B of Annexure B represent a ceiling on its entitlement to invoice the applicant in respect of annual fixed manufacturing costs, I should accept that concession, and proceed conformably with it. So much at least is now common ground. However, the respondent’s position, as I understand it, involves the corollary that it was entitled to invoice the applicant, each month, in the amount of $36,958.33, being one-twelfth of $443,500. The position now taken by the applicant departs from that in two ways. First, the applicant says that the respondent was entitled to raise a cl 5.3 invoice only where the costs in question had in fact been incurred, such that Part B of Annexure B provided, in effect, a ceiling on the respondent’s entitlement. And secondly, the applicant says that the exercise contemplated by cl 5.3 was to be done item by item, as it were. So the respondent’s entitlement (subject to having actually incurred the costs in question) was not to the amount of $36,958.33, but to one-twelfth of the sum allocated to each of the items in Part B of Annexure B.

6    Neither of those submissions should be accepted as it stands. The respondent’s submission is inconsistent with the position which it put at trial, and which I accepted, that cl 5.3 operated by reference to its actual costs. By all means the respondent is entitled now to concede that Part B of Annexure B provided a ceiling on its entitlements, but the submission that it was not confined to actual costs involves something very different from a concession, and cannot be accepted. The applicant’s submission is not so self-evidently unsound, but accepting it would give cl 5.3, and Part B of Annexure B, a most peculiar operation which the parties could not have intended. It is self-evident that many of the costs in Part B of Annexure B would not be incurred systematically month-by-month in unvarying amounts. There would be some months in which no costs of a particular kind were incurred, and other months in which costs very much greater than one-twelfth of the corresponding figure in Part B of Annexure B were incurred. Take costs of a kind which are usually incurred and paid only annually, such as, at least in the traditional case, council rates. Acceptance of the applicant’s submission would mean that the respondent was entitled to nothing in the first eleven months of every year, and only to one-twelfth of the rates figure set out in Part B of Annexure B in the twelfth month. The parties could not have intended that cl 5.3 would operate in that way.

7    In my view, the way that cl 5.3 operated, in this respect, was that the respondent was entitled to invoice the applicant for its actual costs, within the various categories, each month, regardless of any relationship which those costs bore to one-twelfth of the respective sums listed in Part B of Annexure B. However, the sums there listed were ceilings, or maxima, on the respondent’s annual entitlements in the categories referred to. Once the respondent had reached the annual ceiling in respect of a particular category (the years running from the commencement of the letter agreement), it had exhausted its entitlement under cl 5.3 until the commencement of the following year, when the clock would be reset, as it were. I shall make a declaration accordingly.

8    This construction of cl 5.3 will have a practical consequence in the calculation of the respondent’s entitlements under the clause in the remaining part of the present proceeding. Although I understand that the parties are, pragmatically, treating the months of the operation of the letter agreement down to, and including, March 2013 as a closed event, it will be necessary to perform the calculations for those months as part of the running account of the respondent’s entitlement, and the applicant’s obligations, over the first twelve months. The orders I make will reflect that reality.

9    Turning to the content of the items in Part B of Annexure B, here the problem to which I referred in para 233 of my reasons of 6 October 2014 remains. On the present occasion, the respondent made no submission about that problem, or its resolution. As mentioned above, the applicant did, but only in the alternative. The respondent did not address the applicant’s alternative submission. To the extent that it makes a useful contribution to the resolution of this problem, the submission has been taken into account in what follows.

10    In respect of each of the cost items listed in Part B of Annexure B, I make the following determinations as to the requirements of the model for which that part provided.

11    The bases of some of the above determinations are self-evident. Others require an explanation. By way of initial comment, I would note that the respondent chose not to accept the invitation to have Mr Russell go into evidence to provide further particulars of the basis upon which he derived each of the sums in Part B of Annexure B. Further, in a number of areas, there was no evidence of how the respondent in fact operated, or anticipated that it would operate under the letter agreement. In each of these respects, some of the determinations set out above reflect a conservative approach, adversely to the respondent. I shall place further flesh on these bones below.

12    The determinations with respect to rent, rates/water, management, insurance, utilities, maintenance and cleaning are based on Mr Russell’s evidence, to which I referred in my reasons of 6 October 2014. With respect to utilities, the evidence was that electricity was separately metered, so I have not found it necessary to devise a formula for apportionment.

13    With respect to accountancy and audit fees, there was no evidence of the nature of the respondent’s pre-existing arrangements, or of how the new snack foods line of business was to be accommodated within them. There was, of course, evidence of the time that Mr Smith had to spend on sorting out the dispute which ultimately brought the parties to court, but that was not the kind of thing that the model in Part B of Annexure B contemplated. Conservatively, I have confined the scope of the relevant costs to those incurred in the preparation of the respondent’s annual accounts and (in the case of accountancy) tax returns, and used what would have been its costs incurred in the absence of the snack food production business as the relevant base line. I have confined the costs to those incurred to a contracted accountant or auditor.

14    With respect to office costs, the problem is not in the connotation of the adjective “office”: costs of this kind are familiar enough to anyone involved in small business. Rather, the problem lies in the identification of which of these costs were intended to be to the applicant’s account, pursuant to the respondent’s entitlement to recover its actual costs under cl 5.3. I consider that the provision was confined to additional outlays made necessary by the establishment of the snack foods business, and did not contemplate, for example, the allocation of some part of the wages of personnel employed in the respondent’s office, of some part of any existing rental of computers or other office equipment, or of some part of the respondent’s outlays for pens, non-specific paper items, replacement light bulbs etc.

15    With respect to safety, laundry and materials, in the absence of any assistance from the respondent, I have had no choice but to ignore “materials”, which I regard as a nothing word in the present context. I have limited “safety” to outlays which had the purpose of discharging the respondent’s statutory or common law obligations to provide a safe working environment in the snack food production area, and I have limited “laundry” to the cost of laundering, or having laundered, protective garments used wholly in the production of snack foods. If the respondent wanted the court to define these items more generously to itself, it ought to have led evidence of the way it operated, and the costs it incurred, in relevant respects.

16    With respect to the “laboratory” item, Mr Smith said that the respondent used “a few laboratories” from which it received invoices. There was no suggestion in the evidence that the respondent had its own laboratory for testing and analysis. In the circumstances, I have limited this item to amounts paid to any contracted laboratory or like organisation.

17    With respect to the item “pest control”, there is no evidence as to the respondent’s modus operandi. In the circumstances, I have taken the same approach as I did in relation to “laboratory”.

18    I consider next the terms of the orders that should be made at this stage. There are three categories: orders, including declarations, which can and should be made to reflect the reasons published on 6 October 2014; orders by way of identifying the matters that remain to be dealt with by the court; and orders finally to dispose of claims which were rejected on 6 October, which cannot stand alongside the reasons published that day, which are no longer being pursued in the light of those reasons, or which have fallen by the way for other reasons.

19    The applicant sought the making of a declaration to record the court’s conclusions under s 18 of the Australian Consumer Law, Sch 2 to the Competition and Consumer Act 2010 (Cth) (“the ACL”). The respondent countered that, until the applicant had established that it had suffered loss or damage by reason of its own misleading conduct, the applicant’s very cause of action under s 237 of the ACL had not been established. That is so, but the relevant delict is defined by s 18, and its existence has been judicially determined in a final hearing. I would not be disposed to make a declaration for no purpose other than as a waypoint along the road to some other remedy, but, considering the staged nature of the process by which the applicant’s claims are being tested, it is, in my view, in the interests of justice that the success which the applicant has obtained to date be authoritatively, and finally, articulated. I propose to make a declaration under s 18.

20    There should also be a declaration to record the construction which I would give to cl 5.3 of the letter agreement. This was a major item of controversy in the case and, as my reasons above demonstrate, it remained so to the bitter end. The controversy related to, and my declaration will deal with, not only the purely grammatical construction of the provision but also the working of the provision in a practical setting. The declaration will, I expect, resolve important issues in the quantification exercise which remains in the proceeding.

21    It was common ground that I should declare that the letter agreement was repudiated by the respondent, and record the date of the repudiation. Also, I intend to make a declaration recording that the applicant accepted the repudiation, which it did in court on 30 October 2014. Both parties were content that I take that additional step.

22    The matters which remain to be considered in the proceeding are the following:

(a)    whether the applicant has suffered loss or damage because of the respondent’s contravention of s 18 of the ACL, and if so, what is the amount of that loss or damage, and whether the letter agreement should be declared void, and if so from what date;

(b)    whether the respondent has suffered loss or damage because of the applicant’s breach of the implied term of co-operation, and if so, what is the amount of that loss or damage;

(c)    what was the respondent’s entitlement under cl 5.3 of the letter agreement;

(d)    whether, and if so the extent to which, either party is entitled to set off any amount owing by it, or to become its liability, against any like amount owing to it by the other party;

(e)    interest; and

(f)    costs.

Items (a), (b) and (c) will require the filing of additional evidence. I shall give directions for that purpose.

23    With respect to the matters referred to in paras 402 and 403 of my reasons of 6 October 2014, in written submissions filed on 29 October 2014 counsel for the applicant informed the court that it had been discovered that there were 23 registered interests under the Personal Property Securities Act 2009 (Cth) in relation to the machinery which had priority ahead of the applicant’s relevant interest registered on 3 June 2013. In the circumstances, the applicant decided that there was no utility in seeking to establish its entitlement to purchase the machinery, and it did not do so. I shall refuse this aspect of the applicant’s claims.

24    The other respects in which I now refuse the claims made by the parties reflect my reasons of 6 October 2014, and these reasons. They do not call for specific mention here. In doing so, I have taken a slightly different approach from that proposed by the parties. They each submitted that I should comprehensively “otherwise dismiss” the claims that had not been reflected in the grants of positive relief which the orders I make will embody. In my view, that would leave scope for some later argument as to whether it was open to one or other of the parties to uphold so much of their claims as are yet to be quantified or otherwise resolved by recourse to a claim item which had been swept away in this kind of undiscriminating tide. To the extent that some claims have today been neither granted nor rejected, I take the view that there may be circumstances in which the party concerned would have legitimate reasons to rely on them in some aspect of the case which is yet to be addressed.

Associate:

Dated:    19 December 2014