AAP Industries Pty Ltd v Rehau Pte Ltd [2017] NSWSC 390 | Case summary

Supreme Court of NSW|2016-11-03|Before: Davies J

Solicitors: W H Lawyers (Plaintiff) Matthews Folbigg Lawyers - as agents for O'Loughlins Lawyers (Defendant) File Number(s): 2014/365787

Judgment

This is a claim for breach of contract. There is one written contract executed by each of the parties and made on 29 September 1999. It is a contract for the supply by the Plaintiff (AAP) to the Defendant (Rehau) of certain plumbing articles. In addition there are said to be seven informal contracts constituted by purchase orders and associated documents passing between Rehau and AAP for other plumbing articles.
The principal issue in the proceedings is whether both the formal contract and the informal contracts had an implied term of exclusivity. The contracts were said to be breached in 2013 when Rehau ceased to order the plumbing articles from AAP. AAP thereafter accepted what was said to be Rehau's repudiation, and brings these proceedings claiming damages from it.

The contracting parties hereby make this Supply Agreement for AAP to reserve production capacity to meet the requirements of REHAU and to plan the raw material necessary to ensure that deadlines are met. The contracting parties agree that only those terms stated or referred to herein shall apply for the term of this Supply Agreement and hence for each call-off order placed under this Supply Agreement. Other terms enclosed by AAP in acknowledgements of call-off orders shall not apply in the relationship between the parties hereto. Execution of an order shall imply acceptance of these terms. II. The quality of the articles subject to this Supply Agreement shall meet REHAU's specifications and instructions. The individual orders are subject to Technical Delivery Specifications forming an essential part of this Supply Agreement. … REHAU's Conditions of Purchase supplement and form an essential part of this Supply Agreement. III. AAP undertakes to make available and keep ready for consignment as specified in the Technical Delivery Specifications sufficient production capacity for the quantities required by REHAU. The applicable quantities, dimensions and weights are those determined by REHAU in incoming goods inspections. REHAU shall not be obliged to accept non-agreed partial or multiple deliveries. AAP shall maintain a minimum buffer stock of 2 months of the articles subject to this Supply Agreement for REHAU free of charge. The quantities held shall follow the break-down of quantities to be delivered as stipulated by REHAU. … IV. AAP shall ensure delivery fulfilling the deadlines and required quantities specified by REHAU. The deadlines for delivery and any deadlines for collection are fixed. These deadlines are thus absolutely binding. Any failure to meet a deadline shall place AAP in default of performance (delivery). REHAU shall then be entitled at its discretion (a) to demand later delivery or compensation for non-performance or (b) to withdraw from this Supply Agreement. REHAU is further entitled to make covering purchases to maintain production. … V. … VI. … REHAU shall be entitled to withdraw from this Supply Agreement should deliveries be made repeatedly in non-compliance of technical delivery specification. … AAP undertakes to conduct an outgoing inspection of the agreed articles in accordance with REHAU Control Instructions. The REHAU Control Instructions correspond to the Technical Delivery Specifications (Customer Specifications) of the end customer. AAP bears product liability. VII. AAP undertakes to regard as business secrets and treat confidentially the work and articles arising from the work together with all associated documents, equipment, tooling, etc. The samples, drawings and other documents supplied by and the stipulations made by REHAU are the sole determinants of type, design and make-up of the goods to be delivered. … VIII. AAP undertakes to keep secret and not supply any customer of REHAU with any knowledge of customers and any other business secrets gained from REHAU until two years after termination of this Supply Agreement. … IX. Aids to production such as gauges, dies, moulds, matrices or stencils, models, samples, tooling, drawings and other documents etc. made available by REHAU for execution of the work shall remain the property of REHAU and must be returned on completion of the work. Such tooling used in production of the agreed articles as the Supplier may manufacture or have manufactured shall also become the property of REHAU. The tooling may not be handed to any third party except with REHAU's express consent. The parties hereto are agreed that the tooling shall become the property of REHAU on payment or, if no payment is agreed, irrespective of any agreed payment outstanding. In consideration for the passage of title, REHAU shall loan the tooling to AAP for the execution of orders placed by REHAU with AAP. AAP shall at their own cost insure the tooling against fire, theft and any other damage, treat it with due care, always keep it up to date with revisions to drawings, and at their own cost, always keep it ready for use. The tooling may be withdrawn without specified reason. Aids to production as defined in Paragraph 1 above that are supplied by REHAU or manufactured by AAP to REHAU's specifications may be used for orders from REHAU only. The tooling may be neither reproduced nor made accessible to any third party. Prior written consent from REHAU is required for conveyance of title in this tooling - such as mortgage of goods, liquidation, distraint etc. - to any third party. The same applies for goods produced using these aids to production. X. ... XI. This Supply Agreement comes into force with immediate effect and is made for a term of one year upon signing of agreement. The right to immediate termination on good reason remains unaffected. In particular, breach of the obligations set out in this Supply Agreement shall be considered good reason for termination notwithstanding the date of expiry of the minimum term. This Supply Agreement shall be extended by one year each time it is due to expire unless notice of termination be given at least three months before the date of expiry. XII. Collateral agreements, additions, supplements and modifications to this Supply Agreement must be made in writing on the same document in order to be valid. XIII. In the event of one or more of the provisions of this Supply Agreement being ineffective for any reason, this shall not affect the validity of the remainder of the Supply Agreement. The parties undertake instead to agree on a provision whose effect is as close as possible to the ineffective provision. …

Rehau's standard Conditions of Purchase were said in Clause II of the Supply Agreement to "supplement and form an essential part of the Supply Agreement". Of some relevance is condition 15 which provides: Termination 15. The Buyer may at any time in its absolute discretion terminate this contract in whole or in part by notice in writing irrespective of whether the provisions of Clause 17 are applicable or not and upon such termination the Seller shall cease all further work under this contract and terminate all orders directly relating thereto. The Buyer shall pay to the Seller the price (if unpaid) under this order for all work actually completed and the reasonable costs of all work actually incurred by the Seller in carrying out this order to the date of such termination provided such costs are directly attributable thereto. The Seller shall do its best to minimise all such expenses, and if any work has been sub-contracted with the Buyer's consent shall ensure a clause in the terms of this clause is inserted in any sub-contract. The Seller shall also ensure a similar clause is inserted in any contract it has entered into for the supply of materials to enable it to fulfill this order. This clause is not applicable if this contract is terminated under any other provision herein contained, and no claim under this clause shall be entertained after the expiration of two months from the date of such termination. The Buyer's liability under the terms of this clause shall be limited to the total amount due under the order less all amounts paid and shall in no circumstance exceed this sum.

The Further Supply Agreements

There were said to be seven informal contracts, constituted by purchase orders placed by Rehau with AAP. These were referred to in the submissions as the Further Supply Agreements. These agreements were said to deal with brass articles other than those referred to in the Supply Agreement. Those Further Supply agreements are identified from the following documents:

Email of 29 September 2000 from Simon Ho at Rehau to "Terry" at AAP. Terry Bambury was the Managing Director at that time. The email is as follows: With reference to our telephone conversation, the quantity required for each fitting is shown below: Description Article no. Annual quantity 1. Adaptor 20-R3/4 257346 15,000 2. R coupler 20-16 257356 35,000 3. Coupler 16 259455 5,000 4. Coupler 20 259465 20,000 5. Adaptor 16-R1/2 259485 44,000 6. Adaptor 20-R1/2 259495 12,000 Please provide a quotation for these fittings with delivery to our sales office Sydney, Melbourne and Brisbane in pallet form. Packaging, material and roll marking are to be included as per packaging directive and technical specification respectively. A copy of the drawings for all three adaptors will be faxed to you for your reference.
After the quotation was provided Rehau sent a purchase order dated 21 December 2000 to AAP as follows: ITEM DESCRIPTION QUANTITY UNIT PRICE AMOUNT $AUD 1 259455 - COUPLER 16 X 2.2 (DRAWING NO. PKY-21331D) 70,000 0.63 44,100 2 259465 - COUPLER 20 X 2.8 (DRAWING N0. PKY-21332E) 35,000 0.92 32,200 3 257356 - REDUCING COUPLER 20 X 2.8-16 X 2.2 (DRAWING NO. PKY-22858E) 40,000 0.89 35,600 4 259485 - ADAPTOR 16 R 1/2(DRAWING NO. PKY-21320G) 44,000 0.84 36,960 5 257346 - ADAPTOR 20 R 3/4 (DRAWING NO. PKY-.U322F) 15,000 1.26 18,900 AUD 167,760

Email dated 8 February 2001 from Mr Ho to Mr Bambury: Please provide quotation for the above-mentioned fitting [Art 138253, adaptor 20x2.8-Rp3/4] based on annual demand of 10,000 pieces. A copy of the drawing will be faxed to you as well as sent by email.
- Mr Bambury provided a quote.
- Email dated 17 July 2001 from Mr Ho to Mr Bambury: Thank you for your quotation on adapter 20-R1/2". The annual quantity for this article in Australia is about 5,000 and the price should be A$0.94/piece. There is an Asian demand of about 15,000 per year. If you are able to supply these quantity at A$0.94/piece CIF Singapore, then the annual demand will be 20,000. Please advise whether you are able to supply art. 259495 at A$0.94
- On 3 August 2001 Mr Ho sent an email to Mr Bambury saying: Thank you for your quotation for the adapters. Please confirm whether you are able to supply these adapters at the following prices: Description Annual demand Price/piece Delivery term 1. Art. 257336 2,500 A$1.98 FIS Australia 2. Art. 259515 15,000 A$0.83 FIS Australia 3. Art. 259505 15,000 S$1.50 CIF Singapore
- An email from Mr Bambury dated 6 August 2001 confirmed the price for article 259515 but said that it was uncompetitive to supply the other two articles at the prices stipulated.
- On 7 August 2001 Mr Ho sent an email to Mr Bambury regarding article 259475 saying: Thank you for your quotation. We have checked on our annual demand so far and find that 5,000 will be sufficient for one year. Please advise whether you can supply art. 259 475 at A$1.51. There is a change in the annual demand for art. 259 495, adapter 20-R1/2. It should be 5,000 for Singapore and 5,000 for Australia. Please provide quotation for this article.
- Subsequently a purchase order dated 17 August 2001 was sent to AAP as follows: ITEM DESCRIPTION QUANTITY (PCS) UNIT PRICE AUD AMOUNT AUD 1 Art. No. 257346- Adaptor 20-R ¾ 20000 1.26 25,200.00 2 Art. No. 138253 - Adaptor Int/thread 20-Rp ¾ 10000 1.61 16,100.00 3 Art. No. 259455 - Coupler 16 50000 0.63 31,500.00 4 Art. No. 259465 - Coupler 20 45000 0.92 41,400.00 5 Art. No. 259495 - Adaptor 20-R ½ 15000 0.94 14,100.00 6 Art. No. 259475 - Coupler 25 5000 1.51 7,550.00 7 Art. No. 259515 - Adaptor with Int Thd 16-Rp ½ 15000 0.83 12,450.00 148,300.00

Note: 1) Delivery of Articles 257346 & 138253 will be from wk 40 onwards. 2) The rest of the Articles will be delivered in Year 2002.

On 22 January 2002 a purchase order was sent from Rehau to AAP as follows: ALL PRICES EXCLUDE GST GOODS AND SERVICES REQUIRED QUANTITY PRICE VALUE No. 01 Straight Coupling 25mm (02) AAP (259475-002) 5000 1.5100 7330.00 Straight Coupling 16mm 50000 0.6300 31500.00 (259455-002) No. 01 Straight Coupling 20mm AAP (259465-002) 35000 0.9200 32200.00 No. 61 Stopper 16mm (02) AAP (137793-001) 10000 0.5500 5500.00 Connecting Barb 16mm (02) AAP (268781-001) 500000 0.5400 270000.00 Connecting Barb 20mm (02) (268791-001) 120000 0.9300 111600.00 No. 01R Reduce Coupling 20-16mm AAP (257366-002) 20000 0.9900 17800.00 No. 01R Reduce Coupling 25-20mm (02) AAP (257366-002) 2500 1.1900 2975.00 No. 03 Straight Conn 16x1/2" MT AAP (259485-002) 45000 0.6300 30600.00

These documents result in the Further Supply Agreements being related to the following article numbers: 257346, 259485, 259495, 138253, 259515, 259475 and 257366. The article numbers referred to in the Supply Agreement and the Further Supply Agreements were Rehau's identification numbers.

Course of dealing and termination of the contract

For the period 1999 until about 2009 the contracts continued. No notice was given pursuant to cl XI of the Supply Agreement and supply continued to be requested and made of the articles in the Supply Agreement and the Further Supply Agreements. The evidence suggested, however, that AAP and possibly Rehau were unaware of the contractual arrangements reflected in the Supply Agreement. Mr Sarapuu at AAP said that he did not ever see the Supply Agreement until July 2010. He simply acted in accordance with prior practice that he had learnt when he first assisted Mr Bambury. On Rehau's part, an email from Sarah Lemke (set out below at [11]) suggested that there was uncertainty about the terms of the agreement under which the parties were operating.
In 2009 all of the articles referred to in the Supply Agreement and those referred to in the Further Supply Agreements were redesigned by Rehau to allow the polymer sleeve manufactured by Rehau to fit over the redesigned articles. Rehau provided drawings to AAP of the redesigned articles requesting (amongst other things) new pricing and expected lead times. AAP provided this information.
From at least 2010 there were discussions between the parties about the price of the articles being supplied by AAP. Rehau pointed out that AAP's prices were higher than those articles which could be obtained from Europe and China.
On 1 July 2010 a meeting was held between representatives from AAP and Rehau. An email from Mr Sarapuu dated 5 July 2010 reflects what was discussed: Meeting took a place (sic) on 1st of July at Leve8/1 (sic) Rider Boulevard, Rhodes NSW 2138, Australia People involved: Steven Nennstiel, Franz Huelle, Christoph Schrader, David Watts, Sarah Lemke, Jonathan Li, Kalev Sarapuu, Krishna Sharma, Jeff Bua. Rehau introduced new people in they (sic) structure: Steven Nennstiel - State Sales Manager/Business Unit Leader Sarah Lemke - Executive Training & Projects Australia/New Zealand Christoph Schrader - takes over Franz Huelle tasks and duties. AAP provided requested updated stock position of change over to new designs for all fittings (old stock, new stock, etc, etc - attached) Rehau announced Polymer sleeves will be on the Australian/New Zealand market from 1st of October 2010. Rehau also announced Brass fittings such as 257366, 259475, 257356, 259465 and 259455 will be replaced on the Australian/New Zealand market by new Polymer fittings from 1st of February 2011. Rehau still want 6 to 8 weeks of stock after 1st of February 2011 of mentioned fittings above. Jonathan Li will be sending through estimated quantities for 257366, 259475, 257356, 259465 and 259455 what Rehau want to Purchase before 1st of February 2011. Rehau is going to provide AAP with new/alternative drawings of fittings which possibly could be made by AAP instead of range what's going to be Polymer. Franz Huelle wanted to set date for visiting AAP premises/factory with Christoph Schrader at 31 Monro Avenue, Kirrawee 2232 NSW before 25 of July 2010. [The highlighted articles formed part of the Supply Agreement.]
On 17 August 2010 Sarah Lemke of Rehau sent an email to Kalev Sarapuu at AAP saying this: After recent meetings and discussions, we received your revised pricing (at at 16.08.2010) and appreciate your amendments as shown below. In regard to certain products - mainly connection barbs - our internal pricing review is not completed yet - subject to European supplier quotations. Until completion of our internal required processes, we can't confirm the required competitiveness of AAP's pricing relating to certain products and therefore would like to inform you about a potential discussion referring to these products at a later stage. For the time being and based on the below provided pricing, we are pleased to inform you that will (sic) place our orders as per our requirements of AAP. As mentioned before during our meeting for our future business relationship we would like to draft a formal and updated supply agreement. As discussed during our meeting and in order to make sure we are working on the same basics, I would appreciate if you could forward me the latest agreement on-hand for comparison with our documentation.
Mr Sarapuu replied by saying that it looked as if the latest supply agreement between the parties was in September 1999, and he asked if they wanted a copy of it. Ms Lemke replied by saying there was no need to send it over - Rehau had the same paperwork. She concluded by saying: I will come back to you regarding the supply agreement a little bit later.
The discussions regarding pricing continued during 2011 and 2012.
On 6 July 2012 Mr Shawn Teo at Rehau sent an email to Mr Sarapuu saying this: Would like to follow up with you since our last conversation at the meeting with Stefano and Steven regarding stocks. As agreed, we will require from you: 1. Stock level of finished goods as of today. 2. Possible price reductions given the change in quality control standards (Australian standards against German standards). 3. Amount of finished goods available if the raw material stock you carry is to be utilised fully. We also seek the understanding that until we come to a conclusion to this discussion, production of these articles should not continue in the interim.
The Defence pleaded that this email was a notice of termination within the meaning of clause XI of the Supply Agreement with the result that the Supply Agreement terminated in July 2013. The Plaintiff pleaded that the Defendant repudiated the contract by not purchasing exclusively from the Plaintiff and that the Plaintiff accepted that repudiation by letter dated 2 June 2014.
The letter of 2 June 2014 was not annexed to any of AAP's affidavits but was contained in Volume 4 of the Court Book which consisted of the parties' discovered documents. The letter was, mysteriously enough, marked "Without prejudice save as to costs". When Mr Zammit for AAP sought to tender this letter he said that he waived the privilege imposed by the heading. However, Mr Heath for Rehau correctly pointed out, in the circumstances, that the privilege belonged to both parties and he declined to waive it.
The matter rested there until final addresses. Mr Zammit sought to rely on the part of the letter which, in terms, asserted repudiation of the contracts between the parties and the acceptance of that repudiation. When I asked him if the balance of the letter contained some offer of compromise he said that it did.
During his submissions Mr Heath said this: Can I just try and assist your Honour on the repudiation question and the date of 2 June 2014. Can I just draw your Honour's attention to the pleadings because this is the only basis that your Honour has to work with. Does your Honour have the statement of claim, vol 1 of the court book? HIS HONOUR: Yes. HEATH: If your Honour goes to p 9 using the printed numbers at the top of the page and your Honour will see para 16 is where the plea is made, the plaintiff as was entitled to do accepted the defendant's repudiation of the further supply agreements and the particulars are said to be this letter, there is no such letter in evidence. I cannot say to your Honour and I won't, and I don't say to your Honour, we did not receive a letter dated 2 June 2014 but so far as your Honour is able to deal with this question, your Honour would then turn to the defence which is under the next tab and the defendant's plea in response at para 18. HIS HONOUR: Yes, well that's the anterior question about whether there was a breach of [scil. or] repudiation. HEATH: That's right, so to the extent I can assist your Honour on the question of repudiation or what is said to be an acceptance of the repudiation, that is all the material that's before your Honour so your Honour has to construe it in whatever manner you do. I don't put in dispute that we received a letter dated 2 June 2014. HIS HONOUR: I suppose it's fair to say though the parties didn't conduct themselves after that time as if they were still in the contractual arrangement, did they? HEATH: That's probably right, but the difference may be, I suppose, this: If 2 June were not the date then the filing of the claim would be the date. HIS HONOUR: That's probably right. That was 12 December. HEATH: That's right, which has the consequent effect on any calculations for damages.
In the light of what Mr Heath said I have read the whole of that letter. It contains no offer of compromise nor any material which could have justified a "without prejudice" heading. It is in the form of a letter of demand where the repudiation is detailed, asserted, accepted and a claim for damages is made. No ground is given nor compromise suggested in what is asserted and claimed. The letter should not have been marked "without prejudice". I consider that I should have regard to it when examining the question of the termination of the contractual arrangements.

The evidence and the issues

The Plaintiff read three affidavits of Mr Kalev Sarapuu. Two of those were sworn on 14 August 2015 and a third was sworn on 21 August 2015. The Plaintiff sought to read a fourth affidavit of Mr Sarapuu sworn on 27 October 2016. I declined to permit the Plaintiff to do so because of its late service. The affidavit was said to be a more efficient way of answering a Notice to Produce served by Rehau. However, the Notice to Produce was served on 17 February 2016 and was not responded to.
An explanation for that was that the first date for the hearing of the matter on 3 May 2016 was vacated by consent. However, that occurred some considerable time after the Notice to Produce ought to have been answered. Further, nothing further was done in relation to the Notice to Produce until Mr Sarapuu's affidavit of 27 October 2016 was served. That was done in the knowledge that the matter had been refixed for hearing on 2 November 2016. The affidavit sought to claim a further sum of $95,303.00 said to be the scrap value of the metal contained in articles that the Plaintiff was unable to dispose of in any other fashion after the purported repudiation by Rehau. Counsel for Rehau said that he was not able to meet that additional claim at such late notice.
The result was that I refused to allow the Plaintiff to rely on that affidavit of Mr Sarapuu and a related updated affidavit of the Plaintiff's expert Mr Trevor Vella also sworn on 27 October 2016.
The Plaintiff also read an affidavit from Mr Vella of 21 August 2015.
Although the Defendant had served affidavits, it did not read any affidavits at the hearing.
The parties agreed five issues in the proceedings as follows: 1. Did the implied terms of the kind alleged by the Plaintiff in respect of the Supply Agreement and/or the Further Supply Agreements form part of the respective contracts. 2. Did the Defendant repudiate the Supply Agreement and/or the Further Supply Agreements or did the Defendant terminate the respective agreements. 3. If the Defendant repudiated the Supply Agreements and/or the Further Supply Agreements was any damage caused by any breach of the implied terms. 4. If the Defendant is found to be in breach of either the Supply Agreement or the Further Supply Agreements what loss has the Plaintiff suffered. 5. If the Defendant repudiated the Supply Agreement and/or the Further Supply Agreements did the Plaintiff take reasonable steps to mitigate its loss.

(1) Is there an implied term in the contracts?

AAP submitted that there was an implied term in the Supply Agreement and the Further Supply Agreements of exclusivity, that is, that Rehau was bound to order all of the 16 identified articles from AAP and from no one else. In support of the implication of such a term the Plaintiff pointed to a number of the express provisions contained in the Supply Agreement. Those submissions caused me to ask Mr Zammit whether the issue could not be resolved by properly construing the existing terms of the contract without the need to imply a further term.
It is apparent from the authorities that there is no bright line between properly construing the terms of a contract and the implication of a further term to give the contract business efficacy. However, the difference between the two concepts may be significant because of rules relating to adducing evidence about post-contractal conduct. The general rule is that evidence of the way the parties have conducted themselves after the contract is made cannot be relied upon to construe the meaning of the contract. On the other hand, authority suggests that such conduct can be admitted to determine whether a term should be implied: Council of the City of Sydney v Goldspar Australia Pty Ltd [2006] FCA 472 at [164]. Further, that position is clearer where the asserted contract is not clearly embodied in an agreement with the terms spelt out: County Securities Pty Ltd v Challenger Group Holdings Pty Ltd [2008] NSWCA 193 at [17], [20]-[21].
In Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337; [1982] HCA 24 Mason J said (at 345-347): [2] … The appellant's case is that a term has to be implied in the contract to give it business efficacy, to make it workable. Consequently, there is no contest as to what constitutes the contract; rather the contest is as to its meaning and effect. [3] When we say that the implication of a term raises an issue as to the meaning and effect of the contract we do not intend by that statement to convey that the court is embarking upon an orthodox exercise in the interpretation of the language of a contract, that is, assigning a meaning to a particular provision. Nonetheless, the implication of a term is an exercise in interpretation, though not an orthodox instance. [4] Of course, I am speaking of an implied term necessary to give business efficacy to a particular contract, not of the implied term which is a legal incident of a particular class of contract, of which Liverpool City Council v. Irwin [1976] UKHL 1; (1977) AC 239 is an example. … … [6] For obvious reasons the courts are slow to imply a term. In many cases, what the parties have actually agreed upon represents the totality of their willingness to agree; each may be prepared to take his chance in relation to an eventuality for which no provision is made. The more detailed and comprehensive the contract the less ground there is for supposing that the parties have failed to address their minds to the question at issue. And then there is the difficulty of identifying with any degree of certainty the term which the parties would have settled upon had they considered the question. [7] Accordingly, the courts have been at pains to emphasize that it is not enough that it is reasonable to imply a term; it must be necessary to do so to give business efficacy to the contract. So in Heimann v. The Commonwealth [1938] NSWStRp 47; (1938) 38 SR (NSW) 691, at p 695 Jordan C.J., citing Bell v. Lever Brothers Ltd. [1931] UKHL 2; (1932) AC 161, at p 226 , stressed that in order to justify the importation of an implied term it is "not sufficient that it would be reasonable to imply the term. . . . It must be clearly necessary". To the same effect are the comments of Bowen L.J. in The Moorcock (1889) 14 PD 64, at p 68; Lord Esher M.R. in Hamlyn & Co. v. Wood & Co. (1891) 2 QB 488, at pp 491-492 ; Lord Wilberforce in Irwin (1977) AC, at p 256 ; Scrutton L.J. in Reigate v. Union Manufacturing Co. (Ramsbottom) (1918) 1 KB 592, at pp 605-606 . [8] The basis on which the courts act in implying a term was expressed by MacKinnon L.J. in Shirlaw v. Southern Foundries (1926) Ltd (1939) 2 KB 206, at p 227 in terms that have been universally accepted: "Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying. . . " [9] The conditions necessary to ground the implication of a term were summarized by the majority in B.P. Refinery (Westernport) Pty. Ltd. v. Hastings Shire Council (1977) 52 ALJR 20, at p 26 : "(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract." (emphasis added)
His Honour went on to discuss to what extent evidence of surrounding circumstances was admissible to assist in the interpretation of a contract. Having done so, his Honour said this (at 353): [27] However, it is equally obvious that in making the inquiry whether a term is to be implied the court is no more confined than it is when it construes the contract. For the implication of a term is an illustration of the process of construction, though differing from the more orthodox ascertainment of the meaning of a contractual provision. (emphasis added)
The matter was discussed further by the High Court in Commonwealth Bank of Australia v Barker (2014) 253 CLR 169; [2014] HCA 32: [22] Implication of a term in fact in a contract, by reference to what is necessary to give it business efficacy, was described in Codelfa Construction Pty Ltd v State Rail Authority of NSW as raising issues "as to the meaning and effect of the contract". Implication is not "an orthodox exercise in the interpretation of the language of a contract, that is, assigning a meaning to a particular provision." It is nevertheless an "exercise in interpretation, though not an orthodox instance." The implication of terms in fact was also characterised in Attorney General of Belize v Belize Telecom Ltd as an exercise in construction. Lord Hoffmann, delivering the judgment of the Privy Council, said: it is not enough for a court to consider that the implied term expresses what it would have been reasonable for the parties to agree to. It must be satisfied that it is what the contract actually means. The distinction thus drawn is appropriate even though the scope of the constructional approach adopted by Lord Hoffmann has been debated. [23] In Codelfa, the implication of a term in law was said to be based upon "more general considerations" than those covered by the concept of business efficacy. That distinction attracted authoritative support in Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd. [24] It has also been argued that some "terms" said to be implied in law are in fact rules of construction and that all implied "terms" of universal application fall into that category. The application of that proposition to what has been treated as a contractual duty to cooperate is considered below. Debates about characterisation have attracted persuasive protagonists on both sides. They involve taxonomical distinctions which do not necessarily yield practical differences. Those debates are not concerned with the distinct question whether, and when, implication of a term is to be regarded as an exercise in the construction of a contract or class of contract. [25] It has been accepted in this Court that some rules treated as implications of terms in law in particular classes of contract, or contracts generally, can also be characterised as rules of construction. Mason J, in Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd, so characterised the principle enunciated by Lord Blackburn in Mackay v Dick: where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect. What is the part of each must depend on circumstances. The language of Lord Blackburn was indicative of a rule of construction rather than of implication. Nevertheless, Mason J also referred to the rule as defining an implied "duty to co-operate". (Emphasis added; citations omitted)
Subsequently in Regreen Asset Holdings Pty Ltd v Cashtricum Brothers Australia Pty Ltd [2015] VSCA 286 the Victorian Court of Appeal discussed the relationship between the construction of a contract and the implication of a term to give business efficacy to the contract as well as to the difficulties in relation to admissible evidence by reason of that relationship. The Court said: [133] It is well established that evidence of the parties' post-contractual conduct is not admissible for the purpose of construing the provisions of a formal written contract. [134] It is also well established that, where no formal written contract exists, such evidence is admissible for the purpose of determining whether a contract was formed, who the parties to the contract are and whether a particular term should be inferred (scil. implied). Similarly, in the case of an oral contract, when the issue is not interpreting words but determining the subject matter of the contract as a fact, the court may have regard to post-contractual conduct. [135] However, the question of whether evidence of post-contractual conduct is admissible for the purpose of determining whether a term should be implied into a contract remains unsettled. [136] In Arthurson v Victoria, Gillard J held that, in limited circumstances, evidence of post-contractual conduct may be admissible in relation to the implication of a term. He said the following: Whilst it is accepted that a party may make an admission of law, it would indeed be a very rare case, that a court could admit into evidence a party's statements or conduct, on the question of whether or not the Court should imply a term into a contract. This must be so, because the implication of a term is the result of the presumed intention of the parties, and is a question of law. It follows that it is difficult to place any probative value on any statements or conduct. First, the party may have an erroneous view as to what the contract meant. Secondly, the party may have an erroneous view as to the effect of the contract. Thirdly, the admission of such evidence would not be permitted if it involved the question of construction, and the implication of a term is a question closely allied to the question of what a contract means. It would be difficult in practice, in most cases, to keep the questions separate. Finally, any such evidence would have to be clear and unequivocal, leading to a clear conclusion that it was the presumed intention of the parties. In my opinion, as a matter of strict principle, the conduct of the parties subsequent to an alleged contract may be admissible to determine what the terms of the contract were, including an implied term. This would be because their conduct may establish the presumed intention of the parties at the date the contract was made. It must follow again, on principle, that one party to the agreement may make an admission which accords with the presumed intention of the parties. But in considering the evidence, it must be borne in mind that it is not admissible on the construction of the term. Although the evidence of an admission may be admissible, it would be a rare case that any weight could be given to the admission. [137] Gyles J has also supported the proposition that evidence of post-contractual conduct is admissible in relation to the implication of a term. In Sydney City Council v Goldspar Australia Pty Ltd, he stated: I can see no difficulty in regarding subsequent conduct as relevant to the question as to whether a term is necessary to give business efficacy to the contract. Indeed, if a contract has been performed without adhering to, or without inconsistency with, the claimed term, without complaint or commercial difficulty, that would be powerful evidence that the term is not necessary. The law prefers facts to prophecies … It would be odd to imply a term as necessary where such a conclusion would be contrary to the facts as they later appeared. If conduct may be relevant to negative the implication of a term as being necessary then it should also be relevant to support the implication of a term on the same basis. [138] In ACN 074 971 109 Pty Ltd v The National Mutual Life Association of Australasia Ltd, this court cited Goldspar for the proposition that evidence of post-contractual conduct "might be admissible in support of the existence of an implied term." The Court did not give any reasons for this statement because the possibility of an implied term of the type postulated in that case was excluded by the express inconsistent provisions of the contract under consideration. [139] In Fenridge Pty Ltd v Retirement Care Australia (Preston) Pty Ltd, Hargrave J held that it was impermissible for the defendant in that case to rely on evidence of the plaintiff's subsequent conduct for the purpose of determining whether a particular term should be implied in the contract under consideration. He cited FAI in support of this conclusion. In Intermail Explorenet Pty Ltd v Vardanian [No2], Moore J held that, as implication of a term arises because the parties have not addressed the subject matter to which the postulated implied term relates, it is difficult to see how subsequent conduct can be taken to be a manifestation of the parties acting conformably with the term. [140] As discussed at [75] above, in Barker, French CJ, Bell and Keane JJ referred to the view of Mason J in Codelfa that the implication of a term is an instance - albeit not an orthodox instance - of the construction of a provision of a contract. However, despite the similarities in the two processes, the law on the admissibility of evidence of post-contractual conduct has not developed with the same clarity for both processes. Fortunately, for the reasons set out at [152] to [158] below, it is not necessary for us to seek to reconcile the authorities relating to the admissibility of evidence of post-contractual conduct on the implication of a term, or to express a view on this issue. (emphasis added)
It is important to set out the whole of the passage from the judgment of Gyles J in Goldspar. His Honour said at [164]: The proposed implication is consistent with and supported by, but does not depend upon, the conduct of the parties in the performance of the contract. There has been considerable debate about the use that can be made of post-contractual conduct: see, for example, S Charles, "Interpretation of Ambiguous Contracts by Reference to Subsequent Conduct", (1991) 4 JCL 16. The current received wisdom is that it may not be used for purposes of construction of the contract: Winstonu Pty Ltd (t/a Harvey Norman Electrics) v Pitson [2001] FCA 541; Magill v National Australia Bank Ltd (2001) Aust Contract R 90-131; [2001] NSWCA 221; Collins Hill Group Pty Ltd v Trollope Silverwood & Beck Pty Ltd [2002] VSCA 205). However, Charles QC (as he then was) referred with approval to the view of D W Greig and J L R Davis (The Law of Contract, Law Book Co, Sydney, 1987, pp 436-8) that subsequent conduct could provide a basis for implying an additional term into an existing contract. A similar view is expressed by the authors of J Carter and D J Harland, Contract Law in Australia, 4th ed, LexisNexis, Sydney, 2002, para [719]. I can see no difficulty in regarding subsequent conduct as relevant to the question as to whether a term is necessary to give business efficacy to the contract. Indeed, if a contract has been performed without adhering to, or without inconsistency with, the claimed term, without complaint or commercial difficulty, that would be powerful evidence that the term is not necessary. The law prefers facts to prophecies: HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; 211 ALR 79; [2004] HCA 54 at [39]. It would be odd to imply a term as necessary where such a conclusion would be contrary to the facts as they later appeared. If conduct may be relevant to negative the implication of a term as being necessary then it should also be relevant to support the implication of a term on the same basis. …
Different legal and factual considerations apply to the Supply Agreement on the one hand, and to the Further Supply Agreements on the other. It is necessary, therefore, to consider them separately.

Submissions

The Plaintiff pointed to a number of the terms of the Supply Agreement (set out at [3] above) and submitted that they led to the conclusion that the contract, properly construed, required Rehau only to order from AAP. The Plaintiff submitted that the requirements of BP Refinery were met. The requirement of being equitable and reasonable was a reference to fairness as between the parties: New South Wales v Banabelle Electrical Pty Ltd (2002) 54 NSWLR 503. The Plaintiff submitted that the burden to AAP and the benefit to Rehau by the express terms made it fair to imply a term of exclusivity.
The Plaintiff submitted that if the term was not implied AAP would be reserving its production capacity for Rehau but without obtaining any benefit or certainty from the transaction. In that way it would be contrary to commercial common sense for AAP to enter into such a transaction without obtaining a benefit of the implied term.
The Plaintiff submitted that such a term is so obvious that it goes without saying and that the word "shall" in clause I means that the parties, as reasonable persons, would have readily agreed to the implied term if it had been suggested to them: Banabelle at [50].
The Plaintiff submitted that such a term is capable of clear expression and that was not disputed by the Defendant.
The Plaintiff submitted that the implied term was not inconsistent with any of the express terms of the agreement. On the other hand it was entirely consistent with clause XI because such a provision would not otherwise have been necessary.
The Plaintiff submitted that the subsequent conduct of the parties was consistent with the implied term. In particular from at least 2006 Rehau provided AAP with complete information relating to Rehau's future Australian requirements of the articles listed in the Supply Agreement. Further, in July 2010 Rehau gave notice to AAP that it intended to replace some of the brass articles with new polymer articles.
The Defendant submitted that there is a general presumption against implying terms into written contracts, and made reference to what Mason J said in Codelfa at [6] (set out at [28] above). In the present case the Defendant submitted that because there is a formal contract apparently complete on its face the BP Refinery test is applied more stringently than if the contract was an informal one.
The Defendant drew attention to the submission of the Plaintiff that at the time the Supply Agreement was made it was the only supply agreement Rehau had entered into for the supply of the brass articles and that previously Rehau had placed single orders with various suppliers. The Defendant submitted that the past ordering pattern of Rehau and the entry into this agreement threw no light on the question of exclusivity. Nor was a mere expectation that Rehau would order exclusively from AAP sufficient to imply a term.
The Defendant relied on the similarity of the factual position in Colonial Ammunition Co. v Reid (1900) 21 NSWR 338 and the holding in that case.
The Defendant submitted that the Supply Agreement was a comprehensive and detailed contract and pointed to the third paragraph of clause I which said that only the terms stated in the Agreement or referred to in it should apply for the term of the agreement and that clause XII required collateral agreements, additions, supplements and modifications to be made in writing in order to be valid. The Defendant submitted that the implied term would be inconsistent with what appears in the third paragraph of clause I.
The Defendant submitted that it is not enough for a court to consider that the implied term expresses what would have been reasonable for the parties to agree to. Rather, following what was said in Barker at [22] the Court must be satisfied that that is what the contract actually means. The Defendant submitted that the references to the Supply Agreement providing for a reservation of production capacity and the obligation for AAP to maintain a two months buffer stock was simply perfectly reasonable commercial requirements that were open to negotiation when the contract was entered into. Nor, the Defendant submitted, was the Supply Agreement all one way because under clause IX Rehau had to make available to AAP aids to production.
The Defendant submitted that such a term was not necessary to give business efficacy to the contract because the Supply Agreement could effectively operate without such a term. The Defendant submitted that AAP obtained a benefit and certainty from the Supply Agreement because of the minimum term referred to in clause XI together with the extension in the absence of a notice of termination.

Consideration

By reason of what was said by Mason J in Codelfa, by the joint judgment in Barker and AAP's approach in the present matter, a determination of whether there is such an implied term of exclusivity depends in large part on the construction of the express terms of the Supply Agreement. In Electricity Generation Corporation v Woodside Energy Ltd [2014] 251 CLR 640; [2014] HCA 7 the joint judgment of French CJ, Hayne, Crennan and Kiefel JJ said at [35]: Both Verve and the Sellers recognised that this Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption "that the parties ... intended to produce a commercial result". A commercial contract is to be construed so as to avoid it "making commercial nonsense or working commercial inconvenience".
A number of provisions in the Supply Agreement suggest that on a proper construction of that agreement Rehau is bound to obtain its supplies only from AAP. Those matters are these: (a) The first requirement of the agreement is that Rehau shall purchase the stipulated articles from AAP. Prima facie, the word "shall" means "must" in the sense that there is an obligation on Rehau to do so. (b) The parties state that they make the agreement "for AAP to reserve production capacity to meet the requirements of Rehau and to plan the raw material necessary to ensure that deadlines are met". Such a term would be unnecessary if Rehau was entitled to satisfy its requirements from other sources either because AAP did not have the required production capacity or because it did not have the raw material to ensure that deadlines were met. (c) That is underlined by the undertaking in clause III by AAP to make available and keep ready for consignment sufficient production capacity for the quantities Rehau requires. That is further emphasised by the third requirement in clause III that AAP is to maintain a minimum buffer stock of two months of the stipulated articles free of charge to Rehau. (d) The matter of deadlines is said to be absolutely binding in clause IV and a failure in that regard gives the right of Rehau to withdraw from the Supply Agreement. If exclusivity was not required there would be no necessity to stipulate the consequence of a right to withdraw from the agreement. (e) In similar vein is the right in clause VI for Rehau to withdraw should deliveries be made repeatedly in non-compliance of technical delivery specification. (f) Clause XI says that the Supply Agreement is in force for one year upon signing of the agreement and is then automatically extended by a year each time it is due to expire unless Notice of Termination is given in accordance with the clause. If Rehau is under no obligation to purchase all of the articles from AAP there would be no need for such provisions. The parties do not contend that condition 15 of the standard conditions of purchase detracts from what is in clause XI of the Supply Agreement. Mr Heath quite properly directed my attention to an interlocutory judgment of McCallum J in the matter which he suggested might amount to an issue estoppel against Rehau's interests. On 10 April 2015 McCallum J determined a motion by Rehau that sought to set aside the Statement of Claim and stay the proceedings on the basis that Singapore was the exclusive jurisdiction for determination of disputes: AAP Industries Pty Limited v Rehau Pte Limited [2015] NSWSC 468. It was necessary for her Honour to consider how the standard conditions of purchase fitted in with the terms of the Supply Agreement. In his submissions to McCallum J Mr Zammit for AAP drew attention to the words "this contract" in condition 15 of the standard conditions of purchase. Justice McCallum said at [12]: Mr Zammit, who appears for AAP, noted that the construction clause makes reference, in terms, to "this contract." He submitted that, on a complete reading of the whole of the Supply Agreement and the conditions of purchase, it may be seen that the reference to "this contract" must be to any individual purchase, which would be governed in each individual case by the conditions of purchase. He submitted that it makes no sense to import those conditions into the Supply Agreement, noting they are "just standard terms" more readily applicable to individual purchase orders. In my view, there is force in that submission. I do not consider that there is any issue estoppel raised by McCallum J's judgment in that regard but I agree with her Honour's view and the submission made by Mr Zammit. The result is that condition 15 does not qualify what is contained in clause XI of the Supply Agreement.
If the agreement between AAP and Rehau was one which merely regulated the arrangements between the parties in the circumstances when Rehau ordered product from AAP, many or all of the provisions to which I have referred would be unnecessary. All that would be necessary would be for Rehau to stipulate how AAP was to perform its task in meeting the supplies requested at any given time by Rehau. Moreover, it is difficult to see what consideration is provided by Rehau for the requirements in clause III of the Supply Agreement if Rehau was under no obligation ever to order the articles from AAP.
The effect of the Defendant's arguments is that Rehau was under no obligation to order any of its products from AAP despite the obligation of AAP to keep a two months' supply of each of the nine articles set out in clause I of the agreement. If Rehau was entitled to order from other suppliers it must, in the absence of any obligation at least to order some quantities of each of the articles from AAP, be entitled not to order any. The parties could not have intended that that would be the result of entering formally into an agreement and no commercial purpose would be served by such an agreement. Such an interpretation would not be a businesslike interpretation on the assumption that the parties intended to produce a commercial result. Such a construction, and the consequential failure to imply a term of exclusivity, would be making a commercial nonsense of the agreement.
I do not consider to be of any relevance in a determination of this issue the evidence of Mr Sarapuu (a) that he did not see the Supply Agreement until 2010 and he simply acted in accordance with prior policy, and (b) that he understood that AAP was just one of a number of manufacturers globally who supplied to Rehau. The principal reason is, of course, that post-contractual conduct is not to be considered when construing a contract. Nor can Mr Sarapuu's understanding, belief or actions constitute admissions or any form of estoppel against AAP. Mr Sarapuu was the operations manager. He cannot be equated with AAP. Even if he could, his understanding or belief could not amount to an admission. As to his actions, Rehau does not suggest that it acted on the basis of anything Mr Sarapuu said or did when it ordered from other suppliers.
It is necessary to say something about the decision in Colonial Ammunition Co. v Reid. Mr Heath for Rehau submitted that the agreement in that case was very similar to the Supply Agreement. It was an agreement between an ammunition company and the Crown for the supply of ammunition.
Clause 1 said this: The said company shall and will during the period of seven years from the date hereof supply and deliver for the use of the government of the colony of New South Wales small arms ammunition at such price in such manner and subject to such conditions as are hereinafter specified.
Clause III said that the ammunition was to be delivered in such quantities at such times as may from time to time be directed by an order in writing (from the State). Clause IV gave the government the right to purchase elsewhere, essentially if the company was not able to provide what was required within a stipulated period. Clause IX provided that in the case of ammunition supplied pursuant to an order being rejected on account of being unable to pass the tests referred to in the agreement within a certain period of time the government had the right to purchase ammunition elsewhere at the company's expense.
The question in the case was whether the government had breached the contract by purchasing different ammunition elsewhere without giving a formal notice as clause IV contract provided.
The Chief Justice (whose view was agreed by Owen and Cohen JJ although in separate judgments) said this: I am of opinion that there is no contract on the part of the government to take any ammunition, except such ammunition as the government chose to order. Once they order the ammunition there is a contract to take the ammunition, but until they give the order, this agreement is nothing more than a tender on the part of the plaintiffs to supply to government at the prices therein named with the ammunition ordered.
Although the contract in Colonial Ammunition has some similarities to the Supply Agreement there are significant differences. The obligation in Colonial Ammunition was for the company to supply and deliver ammunition that was ordered by the government. So much is noted in the Chief Justice's judgment where he said (at 347): So here there is no promise on the part of the Government to give orders, but when the orders are given then there is an agreement to pay the stipulated price. On the other hand, in the Supply Agreement the requirement is that Rehau "shall purchase" the articles.
Secondly, the agreement in Colonial Ammunition did not contain a number of the provisions to which I have made particular reference including the period of the agreement, the production capacity, the buffer stock and the remedy of Rehau for failure to meet deadlines. These matters appear to me to mean that the Supply Agreement is significantly different from the contract in Colonial Ammunition, and that that case does not require the result for which Rehau contends.
I am comfortably satisfied from the express terms of the agreement that, as a matter of construction, the agreement obliges Rehau only to order the articles from AAP and not from any other supplier or from internal resources. In those circumstances, it may not be necessary to imply a term of exclusivity but, to the extent that the authorities suggest that a term is implied by reason of the proper construction of the contract, I consider that a term of exclusivity is so implied in this contract.
The requirements in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 are satisfied. When AAP is required to reserve production capacity and (effectively) raw materials, and to hold two months buffer stock, it is entirely equitable and reasonable to imply the term. As to business efficacy, in New South Wales v Banabelle Electrical Pty Limited (2002) 54 NSWLR 503; [2002] NSWSC 178 Einstein J said: [49] To my mind, these authorities indicate that the requirement that a term be 'necessary to give business efficacy to the contract' does not mean that the term must be so necessary that without the term the contract would, for all purposes be ineffective, but that the term must be necessary to make the contract effective and workable according to the presumed intention of the parties, as disclosed by the terms of the contract and the admissible surrounding circumstances. Without a term of exclusivity the contract would for all purposes be ineffective because it would contain no obligation at all on Rehau.
The requirement of obviousness is said by Einstein J in Banabelle at [50] to overlap considerably with business efficacy. The requirement is also made out because I have held that, on a proper construction of the contract, exclusivity operates. Rehau does not dispute that the term is capable of clear expression.
I do not consider that the implied term is inconsistent with any express terms of the Supply Agreement. Rehau points to what is said in clause I about the only terms applying being those stated in the Agreement. However, such a clause cannot be used in a blanket way to prevent a term being implied if it is otherwise necessary and appropriate to do so. The requirement for no inconsistency is more specifically directed to the substance of the term being implied. The question that should be asked is whether there is any term which tends to suggest that Rehau has the right not to buy from AAP. The answer to that question is clearly in the negative.
In those circumstances, it is not necessary to resort to a consideration of post-contractual conduct, and to do so may be dangerous in the sense that, as has already been pointed out, the authorities suggest that such conduct may not be taken into account when construing the terms of a contract. I would merely observe that the matters relied upon by AAP, that is, the ongoing provision of complete information by Rehau of its Australian requirements relating to the brass articles in the Supply Agreement, and the notice in 2010 that it intended replacing some of the articles with polymer articles, is at least consistent with the implication of such a term. Those actions do not compel the conclusion that a term should be implied because they are explicable for other reasons as well. For example, the information concerning Rehau's requirements may have been limited to its requirements for supply from AAP rather than the entirety of its requirements. The notice it gave in relation to polymer articles might be explicable by commercial courtesy given the obligations that AAP had to reserve production capacity and maintain buffer stock for Rehau.
In that way, the conclusion I have reached about the implication of a term of exclusivity for the Supply Agreement is not dependent upon the assessment of post-contractual conduct.

The Further Supply Agreements

In Byrne v Australian Airlines Ltd (1995) 185 CLR 410 McHugh and Gummow JJ (at 442): Secondly, where the contract is not in writing and is oral or partly oral or it appears that the parties themselves did not reduce their agreement to a complete written form, caution is required against an automatic or rigid application of the cumulative criteria identified in BP. We should proceed on the footing that the present case is to be approached in this way. In such situations, the first task is to consider the evidence and find the relevant express terms. Some terms may be inferred from the evidence of a course of dealing between the parties. It may be apparent that the parties have not spelled out all the terms of their contract, but have left some or most of them to be inferred or implied. Some terms may be implied by established custom or usage, as described above. Other terms may satisfy the criterion of being so obvious that they go without saying, in the sense that if the subject had been raised the parties to the contract would have replied "of course". If the contract has not been reduced to complete written form, the question is whether the implication of the particular term is necessary for the reasonable or effective operation of the contract in the circumstances of the case; only where this can be seen to be true will the term be implied.
In County Securities Pty Ltd v Challenger Group Holdings Ltd [2008] NSWCA 193 Spigelman CJ said: [8] In the absence of a written document or a conversation constituting the Transfer Agreement in the relevant respect, it is necessary for the Court to consider the full range of relevant surrounding circumstances when determining the subject matter and terms of the contract. Principles of law based on the parol evidence rule are not applicable. … [15] There are numerous examples in which extrinsic evidence has been used to identify the subject matter of a written contract. (See Bank of New Zealand v Simpson [1900] AC 182 at 187-189; Gordon-Cumming v Houldsworth supra at 541, 545; R W Cameron & Company v L Slutzkin Pty Ltd (1923) 23 CLR 81 at 87-87; Hope v RCA Photophone of Australia Pty Ltd (1937) 59 CLR 348 at 356; White v Australian and New Zealand Theatres Ltd (1943) 67 CLR 266 at 270-271; Akot Pty Ltd v Rathmines Investments Pty Ltd [1984] 1 Qd R 302 at 303-304; Wharf St Pty Ltd v Amstar Learning Pty Ltd [2004] QCA 256 at [7]; Kim Lewison The Interpretation of Contracts, 4th ed (2007) Sweet & Maxwell at [11.03] pp 416-420; Gerard McMeel, The Construction of Contracts, (2007) Oxford University Press at [5.46]-[5.49]. … [17] In the case of an oral contract, when the issue is not interpreting words but determining the subject matter of the contract as a fact, the position is a fortiori. In such a case the relevant surrounding circumstances extend to both pre-contractual and post contractual conduct.
Although, as Byrne makes clear, it may be easier to imply terms, it is also necessary to look first at the express terms of any informal contract to see if the suggested term should be implied.
In the present case all that the evidence makes clear is that quotes were sought for what in some cases were identified as annual demand but in other cases could be inferred as annual demand, of seven articles which were not covered by the Supply Agreement.
In the absence of the express terms in the Supply Agreement which, I have concluded, point strongly towards an exclusive purchase arrangement, it is difficult to see the basis upon which a term of exclusivity would be implied into the Further Supply Agreements. There was, for example, no obligation on AAP's part to hold buffer stock of the items in the Further Supply Agreements. There were no terms that dealt with the obligation to maintain deadlines, nor was AAP required to set aside production capacity so that the articles the subject of the Further Supply Agreements could be made available as Rehau required them.
The implication of a term of exclusivity would fail at a number of points. The term was not reasonable and equitable in the absence of the obligations I have identified on AAP's part, the contract had business efficacy without the term and it was not so obvious that it went without saying. The parties were free at any time to amend the Supply Agreement simply by adding the further articles for which supply was required by Rehau. They chose not to do that but to operate on the informal arrangement that the documents identify.
AAP places considerable weight on the course of conduct between the parties in relation to the Further Supply Agreements. AAP points in particular to the evidence of the formation of the Further Supply Agreements and the material contained in paragraphs 40-49 of Mr Sarapuu's affidavit dealing with specifications, sampling, quality assurance and auditing. However, those matters are consistent with an ordinary contract of supply whether formally or informally made. They say nothing about whether the purchaser was obliged not to go elsewhere to buy the products. They deal only with the way the products had to be manufactured if products were ordered by Rehau.
If AAP felt that it had to reserve production capacity or have buffer stock on the expectation that Rehau would keep ordering the articles the subject of the Further Supply Agreements from it, it was open to AAP to have the Supply Agreement amended to include the further articles. However, nothing obliged it to do those things. For that reason, as well, Reahu had no obligation to order these articles from AAP.

(2) How did the Agreements come to an end?

AAP contended that in July 2013 no further orders were placed by Rehau with AAP and as a result Rehau evinced an intention no longer to bound by the Supply Agreement and the Further Supply Agreements. In that way Rehau repudiated those Agreements entitling AAP to terminate them and to claim damages. AAP submitted that it did so by the letter of 2 June 2014. AAP submitted further that no notice of termination of the Supply Agreement was given by Rehau to AAP pursuant to clause XI of the Supply Agreement. Nor did Rehau give reasonable notice of termination under the Further Supply Agreements.
Rehau submitted that the email of 6 July 2012 ([14] above) made it clear that production of the specified articles should not continue. That email, it was submitted, constituted written notice of termination of the Supply Agreement for the purpose of clause XI of the Supply Agreement. Rehau submitted that it also constituted notice to cease production of the articles the subject of the Further Supply Agreements if the Court found an implied term of notice for which AAP contends. Rehau submitted that the Further Supply Agreements contained no expiry date because the Agreements came into being when purchase orders were presented. There was no fixed term or termination date in the Further Supply Agreements.
I do not consider that the email of Mr Teo of 6 July 2012 amounted to notice under the Supply Agreement. What that email did was ask for a temporary pause in production until a number of matters were resolved. The expectation in the email was that production would resume. So much is clear from the words "in the interim" and from the requirement of "possible price reductions". If production was not to be resumed at all there would have been little point in seeking price reductions.
The email did not indicate with any clarity that it was a notice of termination as clause XI required. It is significant that the Subject of the email was "Stocks". That was principally what the email concerned itself with.
In any event, Rehau kept ordering from AAP. On 22 August 2012 an email sent from David Watts at Rehau to Mr Sarapuu said: Attached is a new order for delivery in November. I believe Shawn has already mentioned that you will need to produce some of these items. Four of the items were articles referred to in the Supply Agreement.
On 29 August 2012 Shawn Teo from Rehau sent an email to Mr Sarapuu asking for an updated table of articles showing stock in hand and orders placed by Rehau for the next three months.
On 24 September 2012 David Watts sent an email to Mr Sarapuu for Rehau's "December order". Four of the items were articles referred to in the Supply Agreement. Thereafter similar emails were sent for further orders on 17 December 2012, 10 April 2013 and 11 July 2013.
Moreover, clause XI required any notice of termination be given at least three months before the date of expiry of the Supply Agreement. The Supply Agreement must be taken to have been made on 29 September 1999 because that was the date on which the second party (AAP) executed the agreement. Accordingly, any notice of termination would have been require to be given prior to 29 June 2012 for the contract to have been brought to an end on 29 September 2012. The email required production to cease immediately, and not even at the expiry of three months after its date. If the email was a notice of termination it would only have had effect on 29 September 2013. If, as Rehau asserts, it was purporting to terminate the agreement, the email itself amounted to a repudiation because of the requirement to cease producing immediately.
The combination of that email and the failure of Rehau to place orders with AAP after 11 July 2013 amounted, as AAP asserts, to a repudiation of the Supply Agreement. For the reasons I have given, the highest position that can be asserted by Rehau is that the Supply Agreement came to an end on 29 September 2013 by reason of the email of 6 July 2012 and clause XI of the Supply Agreement. In the meantime and from a much earlier time, however, Rehau had breached the Supply Agreement by failing to order from AAP and in that way had repudiated the Agreement.
The letter from AAP's solicitor to Rehau dated 2 June 2014 makes no mention of the email of 6 July 2012. The letter makes reference to the email from Ms Lemke of 17 August 2010 ([11] above) and said that there had been no notice from Rehau that it had changed its position since that email, and no notice of termination of the Supply Agreement had been given. The assertion in the letter of 2 June 2014 was simply that Rehau had breached the Supply Agreement by failing to order and purchase products from AAP pursuant to that Agreement. Those were the products specifically identified in the Supply Agreement. The letter said that AAP accepted Rehau's repudiation of the Supply Agreement, gave notice of the termination of the Agreement and sought damages for the repudiation. There was no mention in the letter of the other products ordered under what at the trial were described as the Further Supply Agreements.
The statement in the email of 6 July 2012 that production should not continue "in the interim" with the resumption of ordering from August 2012 leads me to the conclusion that the email of 6 July 2012 was not a notice terminating the Supply Agreement. That email did not bring the Supply Agreement to an end. Rather, it was brought to an end by AAP's letter of 2 June 2014 accepting Rehau's repudiation of that agreement by ordering the articles the subject of that Supply Agreement elsewhere.
Rehau submitted that if it was the letter of 2 June 2014 that brought the Agreement to an end the expiry of the Supply Agreement was 2 September 2014, presumably because of the second paragraph of Clause XI. That seems misconceived for two reasons. First, the letter of 2 June 2014 was not a notice under Clause XI. It was an assertion that Rehau had breached the contract to the point of repudiating it. The acceptance of that repudiation brought the contract to an end forthwith, not on any anniversary date as provided by the contract. Secondly, if, contrary to that view, the letter was such a notice, the Supply Agreement would be brought to an end, not on a date three months after the letter but on the expiry of the Agreement which was on the anniversary of its making. The "date of expiry" was on each such anniversary.
In my opinion, the acceptance of the repudiation meant that the Agreement came to an end on the date of receipt by Rehau of the letter of 2 June 2014. The first paragraph of clause XI reinforces that. "Good reason", which includes breach of obligations under the Agreement, produces immediate termination. That, as the Defendant submits, has implications for the calculation of damages, to which matter I shall return presently.
It is arguable that Rehau breached the Supply Agreement when it announced at the meeting of 1 July 2010 that three of the articles in the Supply Agreement were to be replaced with polymer fittings - AAP could not produce such fittings. Strictly speaking, Rehau should have given notice before the date three months prior to 29 September that year that either the whole Supply Agreement was being terminated because of that change or, more likely, that Rehau wished to vary the agreement to removed reference to those three articles. AAP did not complain of this matter either at the time or in the proceedings. It is not, therefore, necessary to say anything further about the matter.
Rehau submitted in its supplementary submissions that counsel for AAP in opening said that the Plaintiff was not suing on the articles which were changed over to polymer in July 2010 but complained that a claim was still maintained for those articles. I can see nothing anywhere in AAP's counsel's remarks that suggested no claim was being made for the articles changed over to polymer.
As far as the Further Supply Agreements are concerned, those Agreements can be regarded as ad hoc arrangements whereby an order was placed and the goods were supplied. There was no agreement, express or implied, that a further order in any case would be placed. Rehau was free to place a further order or not as it chose. The Further Supply Agreements did not, therefore, come to an end in the way the Supply Agreement did. No breach was involved by any decision of Rehau not to place a further order in respect of those articles. The letter of 2 June 2014, as I have said, did not mention these Further Supply Agreements.

(4) What loss has been suffered?

In the light of my earlier determination concerning whether a term of exclusivity was to be implied, the questions of loss and damage can be conveniently considered together.
AAP claims three heads of loss being: (a) Loss of profits; (b) Loss in respect of completed stock manufactured for Rehau remaining on hand; (c) Loss in respect of raw materials acquired for the purpose of manufacture of goods for Rehau remaining on hand. AAP originally claimed damages on the basis of loss of opportunity but that claim was abandoned at the hearing.
Prima facie, by reason of the breaches of the Supply Agreement, AAP has suffered loss represented by the three heads identified. In relation to each of those heads Rehau submits that it is necessary to separate matters between the Supply Agreement and the Further Supply Agreements. This, it is said, applies to buffer stock as well as raw material. The damages calculated by Mr Vella proceed on the assumption that the articles the subject of the Further Supply Agreements are to be treated in exactly the same way as the articles the subject of the Supply Agreement. That includes the provision of two months buffer stock. Rehau's submission should be accepted.
In the light of my determination that there was no term concerning exclusivity in relation to the Further Supply Agreements or even that there was a term or period during which the Further Supply Agreements existed, the figures put forward by AAP are no longer relevant. That means it is not possible to calculate damages on the evidence available to me. The parties accepted during submissions that, in the event that I found a distinction between the Supply Agreement and the Further Supply Agreements, the parties would need to recalculate losses that flowed.
The best I can do on the material is to indicate a number of matters by way of principles or guidelines for the proper calculation of damages.
AAP claims damages to 31 December 2015. The basis for this was never satisfactorily explained.
In Johnson v Perez (1988) 166 CLR 351 Mason CJ said (at 355-356): There is a general rule that damages for torts or breach of contract are assessed as at the date of breach or when the cause of action arises. But this rule is not universal; it must give way in particular cases to solutions best adapted to giving an injured plaintiff that amount in damages which will most fairly compensate him for the wrong he has suffered:… The general rule that damages are assessed as at the date of breach or when the cause of action arose has been applied more uniformly in contract than in tort and for good reason. But even in contract cases courts depart from the general rule whenever it is necessary to do so in the interests of justice.
Brennan J said (at 371): The general rule as to the date at which damages are to be assessed is subject to the principle governing the measure of damages. A plaintiff who has suffered damage as a result of a defendant's tort or breach of contract is entitled to such a sum as will, so far as possible, put him in the same position as he would have been in but for the tort or breach of contract: Wenham v. Ella [1972] HCA 43; (1972) 127 CLR 454, at p 466; Todorovic v. Waller [1981] HCA 72; (1981) 150 CLR 402, at pp 412,442,463; Livingstone v. Rawyards Coal Company (1880) 5 App Cas 25, at p 39. The time at which damages are assessed must be so fixed as to give effect to the governing principle. In giving effect to that principle, matters occurring after the tort or breach may be excluded from consideration by selecting the date of the tort or breach of contract as the date for assessment; conversely, such matters may be included by selecting the date of the trial as the date for assessment. In either case, it is the governing principle rather than the temporal rule which determines what is to be taken into consideration and what is not.
In the present case Rehau breached the Supply Agreement at various times from 2007 to the time its repudiation thereby was accepted in June 2014. That acceptance marked the last date at which it is appropriate to assess the damages.

(a) Loss of profits

In Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 Mason CJ and Dawson J said: [23] The general rule at common law, as stated by Parke B. in Robinson v. Harman [1848] EngR 135; (1848) 1 Ex 850, at p 855 [1848] EngR 135; (154 ER 363, at p 365), is: "that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed". This statement of principle has been accepted and applied in Australia: see Wenham v. Ella [1972] HCA 43; (1972) 127 CLR 454, per Gibbs J. at p 471. [24] The award of damages for breach of contract protects a plaintiff's expectation of receiving the defendant's performance. That expectation arises out of or is created by the contract. Hence, damages for breach of contract are often described as "expectation damages". The onus of proving damages sustained lies on a plaintiff and the amount of damages awarded will be commensurate with the plaintiff's expectation, objectively determined, rather than subjectively ascertained. That is to say, a plaintiff must prove, on the balance of probabilities, that his or her expectation of a certain outcome, as a result of performance of the contract, had a likelihood of attainment rather than being mere expectation. [25] In the ordinary course of commercial dealings, a party supplying goods or rendering services will enter into a contract with a view to securing a profit, that is to say, that party will expect a certain margin of gain to be achieved in addition to the recouping of any expenses reasonably incurred by it in the discharge of its contractual obligations. It is for this reason that expectation damages are often described as damages for loss of profits. Damages recoverable as lost profits are constituted by the combination of expenses justifiably incurred by a plaintiff in the discharge of contractual obligations and any amount by which gross receipts would have exceeded those expenses. This second amount is the net profit.
AAP is entitled to the loss of profits it would have made if all of the articles the subject of the Supply Agreement had been ordered from it and not from elsewhere. It should be noted, however, that the proceedings commenced by the filing of a Statement of Claim on 12 December 2014. The period of the loss of profits is limited to commence on 13 December 2007. That affects a number of items and totals in Schedule 3 to Mr Vella's report. That Schedule claims for units ordered from other plants for both the 2007 and 2008 financial years and for units ordered from internal suppliers from 1999 to 2013.

(b) Finished goods on hand

Mr Vella's calculation relating to finished goods on hand at $99,118 is in turn based on Mr Sarapuu's calculation of the cost of manufacturing that stock.
In Mr Sarapuu's affidavit that calculation was derived from a table showing the costs to produce each of the numbered articles. If only the articles referred to in the Supply Agreement were considered the figure would be $62,293. However, what the table does not identify is whether the number of units of each article equated only to two months of stock or whether the number of units identified simply happened to be the number that were at hand on 1 July 2015 which was the first day of the financial year following the letter accepting the repudiation of 2 June 2014.
The obligation was to hold buffer stock of two months for each article. That would, no doubt, involve a small additional margin so that the two month period could be continuously complied with. On the other hand, Rehau would not be liable simply because AAP happened to have manufactured and retained a quantity of a particular article that exceeded the two month supply together with a small margin.

Rehau submits that the only obligation on AAP was to maintain a minimum two months of buffer stock of the articles the subject of the Supply Agreement. Rehau said there was no obligation to maintain raw materials. Whilst that is true in terms of what the Supply Agreement obliges AAP to do, it is difficult to see how AAP could constantly maintain a buffer of two months stock if it did not maintain a measure of raw material to enable that buffer stock to be available. Further, clause I says that one of the reasons the Agreement is made is "for AAP… to plan the raw material necessary to ensure that deadlines are met". Clause IV provided that those deadlines were "absolutely binding".
Mr Sarapuu calculated the loss from the value of the raw material on hand at that time to be $266,280.00, reduced by $141,629.00 being the quote from Southern Cross Metals Pty Ltd of 4 August 2015. That figure was adopted by Mr Vella for his calculations. Ultimately those figures were reduced so that, taking into account what was realisable for scrap value the loss by reason of raw materials on hand was said to be $75,059.00.
There are two difficulties with this head of damage. First, there is no division between the raw materials required to produce the articles the subject of the Supply Agreement and those that were the subject of the Further Supply Agreements. Secondly, and similarly to the point made about finished product, it is not clear to what extent the raw materials simply happened to be in stock as opposed to being required absolutely to maintain the minimum two month buffer stock under the Supply Agreement. Mr Sarapuu's evidence suggested that there was more than two months' stock remaining.

(5) Failure to mitigate

On 4 August 2015 AAP received an offer from Southern Cross Metals to purchase scrap brass. Mr Sarapuu said that he did not accept that offer. It is clear, however, that Mr Vella has made an allowance in his calculations for what could have been obtained from Southern Cross in that regard.
Rehau submits also that AAP failed to mitigate because it could have disposed of completed articles by selling them through the factory in Estonia or, indeed, other places such as New Zealand. Mr Sarapuu said that he did not do that because it would not be appropriate to sell a product made for the customer. He said also that there was the difficulty that the products were hard stamped with Rehau's name and logo. Whilst it would have been possible to remove that name and logo by a machine it would have been a massive cost.
The onus is on a defendant who alleges that the injured contractual party has failed to mitigate its loss. I am not satisfied that Rehau has discharged that onus in circumstances where the articles concerned were engraved with Rehau's name with the necessity for an expensive process to be employed to remove that name and logo resulting in a less than perfect product for sale.

Conclusion

In the light of my conclusions on liability it will be necessary for the parties to re-calculate the damages that flow to AAP.
The parties should bring in Short Minutes to reflect my reasons and to provide for a judgment in AAP's favour for an agreed sum. I will hear the parties on costs if agreement cannot be reached.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 21 April 2017

AAP Industries Pty Ltd v Rehau Pte Ltd

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