ACI Operations Pty Ltd v Berri Limited [2004] VSC 219

Supreme Court of Victoria|2004-06-25|Before: HABERSBERGER J

CONTRACT - Construction of supply agreement - Existing supplier has right of last refusal to match overall price in competitive offer made by third party supplier - Whether two competitive offers made by third party supplier to replace existing supplier were within the relevant clauses of the agreement - Whether products had been deleted from list of products to be supplied under the agreement.

The plaintiff in this proceeding, ACI Operations Pty Ltd ("ACI"), is a manufacturer and supplier of plastic drink bottles and plastic screw tops or bottle closures. The defendant, Berri Limited ("Berri"), is a bottler of fruit juices and other beverages. By an agreement in writing dated 30 May 2001 ("the ACI supply agreement"), ACI agreed to supply Berri with a range of bottles and closures ("Products") for a period of five years from 30 May 2001. The Products comprised thirty-three bottles and eight closures. Each of them was itemised in Schedule 1 to the ACI supply agreement by product description, material type, weight, Berri's delivery site and price.

Clauses 5.5 and 3.3 of the ACI supply agreement gave ACI "the right of last refusal" in certain circumstances to match an offer made to Berri by "a third party supplier". Brickwood Holdings Pty Ltd ("Brickwood") is another manufacturer and supplier of plastic bottles and closures to Berri. By a letter dated 11 December 2003 Brickwood made an offer for the supply of Products to Berri for the period between 12 months from the date of acceptance by Berri of the offer and 29 May 2006 ("the first offer"). By another letter dated 11 December 2003 Brickwood made an offer to Berri for the supply of Products to Berri, for the period between 30 May 2006 and 29 May 2013 ("the second offer"). By a third letter dated 11 December 2003 Brickwood made an offer to Berri for the continuation of the supply of products which Brickwood was already supplying to Berri for the period between the date of acceptance of the offer and 29 May 2013 ("the continuation offer"). Berri forwarded the three offers to ACI by a letter dated 12 December 2003 and required it to respond to the first and second offers by 9 January 2004 and to the continuation offer by 23 January 2004. ACI did not do so and by a letter dated 28 January 2004 Berri advised ACI that it had accepted the first offer and the second offer, that Brickwood would commence on 27 January 2005 to supply to Berri all products currently supplied by ACI to Berri under the ACI supply agreement and that from that time ACI would have no further supply obligations under that agreement.

In this proceeding, ACI seeks a declaration that the first offer is not within clause 5.5 of the ACI supply agreement and a declaration that the second offer is not within clause 3.3 of the ACI supply agreement. The status of the continuation offer is not an issue in this proceeding.

The introductory paragraphs to the ACI supply agreement recited that ACI had agreed to supply the Products to Berri and that Berri had agreed to purchase the Products from ACI as set out in the agreement, and that the parties had agreed to enter into this binding agreement "pending the negotiation and execution of definitive documentation in connection with the supply of Products." In fact, the parties have not entered into the "definitive agreement" contemplated by clause 2.1. Nevertheless, clause 2.2 made it clear that the terms of the ACI supply agreement were "binding and enforceable" unless and until such "definitive agreement" was executed.

Clause 1 of the ACI supply agreement contained a number of definitions, including "Products" which was defined to mean "the products listed in Schedule 1", and "Specifications" which was defined to mean "the specifications of the Products as set out in Schedule 3." That schedule was, however, blank. "Side Letters" was defined to mean "the agreements between the parties regarding the acquisition, amortisation and reimbursement of certain plant and equipment acquired by the Supplier for the purpose of supplying Products to the Customer, as evidenced by the letters dated 28 November 2000 and 9 March 2001, attached to this Agreement as Schedule 4".

As the dispute between the parties involves the proper construction of the ACI supply agreement, it is necessary to quote a substantial number of the remaining clauses in some detail. Thus, the relevant clauses of the ACI supply agreement read as follows:

"3. TERM 3.1 Initial Term This agreement shall be in effect for 5 years from the date of execution ('Initial Term'). 3.2 Extension of Term At the expiration of the Initial Term, if the parties agree, this Agreement shall be extended for a further term of five years. 3.3 Right to match on expiry of Term If the Initial Term is not extended and the Customer receives a bona fide arm's length offer from a third party for the supply of Products following the Initial Term but before the date which is 5 years after the expiration of the Initial Term (an 'Offer'), the Supplier will have the right of last refusal to match the terms and conditions set out in the Offer. 4. SALE AND PURCHASE OF PRODUCTS 4.1 Supply of Products The Customer shall purchase from the Supplier all of the Customer's requirements of Products. 4.2 Forecasts and firm orders (a) The Customer will: (i) on 1 July each year, provide the Supplier with a forecast of its requirements for Products for the following 12 months; (ii) on the first business day of each month, provide the Supplier with a rolling revised forecast of its requirements for Products for the following 4 months; (iii) on a weekly basis, provide the Supplier with a rolling 6 week forecast of its requirements for Products. The initial 4 week period of each such rolling forecast will constitute a firm order (a 'Firm Order'); and (iv) on a weekly basis, provide the Supplier with details (and an order number) of its requirements for Products for each day during the immediately following week. (b) The forecasts referred to in clauses 4.2(a)(i) and 4.2(a)(ii) will not be binding. The quantity of Products set out in each Firm Order referred to in clause 4.2(a)(iii) will be binding upon the Customer, although the Customer may vary its weekly drawdown volume in respect of such Products (provided that the full quantity of Products referred to in the relevant Firm Order are taken by the Customer within 2 months from the commencement of the period the subject of the Firm Order). 4.3 Capacity (a) The Supplier will supply to the Customer the Products the subject of a Firm Order to the extent of the most recent forecasts. (b) The Supplier will use its best endeavours to give priority of supply to the Customer and to meet the Customer's requirements for Products in excess of its forecast requirements by ensuring that: (i) any excess capacity in relevant manufacturing facilities of the Supplier is employed to satisfy such requirements of the Customer; and (ii) any excess capacity in relevant manufacturing facilities of the Supplier is employed to satisfy such requirements of the Customer in priority to any other customer of the Supplier whose requirements for Products exceeds the requirements as set out in the firm orders of that other customer. (c) The Supplier will review each of its manufacturing lines on a monthly basis to assess its ability to satisfy the Customer's forecast requirements for Products. In the event that it appears that the Supplier may not be able to meet the Customer's forecast requirements for Products, it will immediately notify the Customer accordingly, and use its best endeavours to meet the Customer's forecast requirements. 4.4 Delivery The Supplier will deliver the Products to the Customer's premises as specified in a Firm Order. 4.5 Title and risk ... 4.6 Specifications ... 4.7 Force majeure ... 4.8 Right to match in respect of the Products If the Customer receives a bona fide arm's length offer from a third party for the supply of products which are substantially the same as or substitutable for any Products ('ACI Product Offer'), the Supplier will have the right of last refusal to match the terms and conditions set out in the ACI Product Offer with the relevant products from the ACI Group. 5. PRICING 5.1 Prices The price payable by the Customer for each Product is set out in Schedule 1. 5.2 GST ... 5.3 Payment ... 5.4 Review of prices (a) The prices for the Products will be reviewed as set out in Schedule 2. (b) At the beginning of each financial year during the Term, representatives of each party will meet to assess the competitiveness of the prices payable by the Customer for Products, and to ensure that the Supplier and the Customer share equally in mutual cost reduction benefits (after the recovery of capital costs). 5.5 Meeting competition If the Customer receives a bona fide arm's length offer from a third party supplier for the supply of all of the Products on the same terms and conditions as those set out in this Agreement, and the overall price which would be payable by the Customer for the Products from the third party is lower than the overall prevailing price of the Products under this Agreement ('Competitive Offer'), the Supplier will have the right of last refusal to match the price set out in the Competitive Offer, failing which the Customer may acquire the Products from the relevant third party. 6. CHANGES TO TECHNOLOGY AND PROCESS The Customer may request the Supplier to implement new technology to improve the quality of the Products or the manner of supply of the Products, or may request that the Supplier manufacture some or all of the Products at the Customer's premises. The Supplier and the Customer will meet and discuss any such request in good faith, with a view to implementing the request."

Schedule 2 to the ACI supply agreement dealt with the mechanism by which the prices for Products would be reviewed. The plastic bottles are manufactured from what is called resin. Paragraph 2 stated that adjustments to the prices would take account of variations in:

"(a) the cost of resin, as nominated by the Customer; and (b) other costs of manufacturing Products, as indicated by changes in the CPI; and (c) currency changes."

Although it is not necessary to set out all of the formulas for calculating such variations, it is worth noting that the cost of resin adjustment involved ACI advising Berri of the fixed price for resin to be used in the manufacture of Products for periods of three months, six months and twelve months and Berri nominating to ACI which fixed resin price it wished to apply.

Mr Mukhtar QC, who appeared with Mr Waller of counsel for ACI, submitted that because ACI had agreed to supply on order and to deliver into Berri's sites around Australia (clauses 4.2(a)(iii), 4.3(a) and 4.4), ACI had to equip itself and stand ready to manufacture any of the Products if and when ordered. In addition, ACI had agreed to use its best endeavours to give priority of supply to Berri and to employ any excess capacity to satisfy Berri's needs (clause 4.3(b)). Further, ACI had agreed to do what it could to implement new technology to improve the quality of the Products or their manner of supply if so requested by Berri (clause 6).

Mr Mukhtar emphasised that nothing in the agreement obliged Berri to order any of the Products and that there were no minimum purchase requirements. However, Berri had promised to buy all of its requirements of Products from ACI (clause 4.1). Mr Mukhtar submitted that it was of the utmost importance to see that the consideration for ACI's willingness to stand ready to manufacture and deliver on order was Berri's promise not to buy any of the Products from anyone other than ACI. That valuable grant of exclusivity during the period of the agreement was subject only to the provisions of clause 5.5 and clause 4.8.

Mr Martindale of counsel, who appeared on behalf of Berri, submitted that this was not a correct overview of the ACI supply agreement and the consequent relationship between the parties. He submitted that it was unrealistic to say that ACI had to be ready to supply any Product to Berri, regardless of the course of dealing between the parties. Berri had to forecast its requirements on a twelve months, rolling four months and rolling six week basis (clause 4.2(a)(i) to (iii)). Further, Mr Martindale pointed to the evidence of the weekly meetings between representatives of ACI and Berri at which a multitude of matters were discussed, including, he submitted, the agreed phasing-out and discontinuance of some of the Products. Whilst he acknowledged that Berri had no obligation to order any Products and that there were no minimum purchase requirements, Mr Martindale emphasised that in fact this was a substantial contract for ACI (of the order of $30 million per year). However, I did not understand Mr Martindale to suggest that the exclusivity provision was not an important part of the ACI supply agreement. On the contrary, he described clause 4.1 as "pivotal". Mr Martindale also emphasised that the agreement was the result of negotiations between two large commercial entities.

Although there was nothing in the ACI supply agreement about variation, there is no reason why it could not be varied in accordance with the operation of ordinary contractual principles. As previously stated, there were thirty-three bottles and eight closures in Schedule 1, but it was common ground between the parties that another twenty-one bottles and one closure had been added, by agreement between ACI and Berri, to the list of Products, within the meaning of the ACI supply agreement ("the amended list of Products"). No doubt because it was common ground, the exact form and content of these agreed variations was not explored in evidence. Nevertheless, in paragraph 6 of the plaintiff's latest version of its statement of claim[1] it gave the following particulars of such variations:

"The additions were agreed at weekly or monthly meetings between the parties' representatives, and were included in quarterly price lists provided by the plaintiff to the defendant."

It was also common ground that one bottle, the "2.0 L Coles handle bottle", had been deleted from the amended list of Products by agreement between the parties. Mr Richard Ronald John Smith, the General Manager - Technical at ACI Operations, who gave evidence on behalf of ACI, said in his witness statement that this bottle, which was sold under the Coles brand rather than Berri brand, suffered from a high level of rejections during manufacturing and that it became uneconomical for ACI to continue manufacturing the small amounts being ordered. He said that ACI raised with Berri the idea that the bottle be deleted. In June 2003 Berri informed ACI that Coles had agreed to this course and Berri authorised ACI to remove the machinery used to attach the handle to the bottle.

However, as will be discussed shortly, there was no agreement between the parties about whether there had been any other deletions from the amended list of Products.

Perhaps not surprisingly, the wording of the first offer, contained in the 17 page letter of 11 December 2003 from Brickwood to Berri, was virtually the same as the wording of the ACI supply agreement. One difference was that a time limit of "10 business days" for the supplier to exercise its right of last refusal had been introduced into clauses 3.3, 4.8 and 5.5. ACI sensibly made no point about this more precise statement of how the supplier was required to exercise its rights.

For present purposes, it was more relevant that clause 3.1 of the first offer read as follows:

"Initial Term The Agreement will be binding on written acceptance of this offer by Berri. The terms of the Agreement will become operative and Berri will acquire the Products from Brickwood commencing on the date which is 12 months after the date of acceptance of this offer by Berri and will expire on 29 May 2006 ('Initial Term')."

It was the inclusion of this deferred date for the commencement of supply by Brickwood that gave rise to ACI's submissions that the first offer was not in accordance with clause 5.5 of the ACI supply agreement because it was not "on the same terms and conditions" and because ACI's price in twelve months' time was not known.

Another of ACI's grounds of non-compliance of the first offer with clause 5.5 of the ACI supply agreement arose out of the fact that it was common ground that the list of Products in the first offer did not include fifteen bottles and three closures from the amended list of Products. That is, the first offer, it was said, did not include the same products. In its latest defence[2], Berri pleaded various reasons why these omissions did not mean that the first offer was not within clause 5.5:

(a) Two of the missing bottles were said by Berri to have been omitted by Brickwood by "an oversight"[3];

(b) Eight of the missing bottles and the three missing closures were said by Berri to be "no longer required" by Berri to be supplied under the ACI supply agreement and that "this was notified" to ACI by Berri[4]; and

(c) Five of the missing bottles were said by Berri to be "no longer required" by Berri to be supplied under the ACI supply agreement and to have been "deleted by agreement of the parties as evidenced by their removal from the 1 April 2002 price list provided by the plaintiff to the defendant and to be implied from the fact that the defendant no longer ordered such items as at the date of the first offer."[5]

ACI's final ground for non-compliance of the first offer arose out of the allegation that there were a further three bottles and four closures not included. Berri disputed this claim and in Annexure B to its defence it listed the items in Schedule 1 of the first offer which it said corresponded with ACI's products. In respect of the three bottles, the issue was whether Brickwood had to offer to make the bottles from PET/PCR material or whether its offer to do so from only PET material was within clause 5.5. "PET" was said to be the common name for a family of Polyethylene Terephthalate polymer plastics. "PCR" was short for Post Consumer Recycled Polyethylene Terephthalate, which as its name indicates was produced from recycling waste PET bottles. In respect of the four closures, the issue was whether Brickwood had to offer plastic closures precisely matching their descriptions or whether its offer to supply allegedly similar but not identical closures complied with clause 5.5 of the ACI supply agreement. Both of these issues therefore raised questions of the description or identity of the products, that is, whether they had to be identical.

Freed of the comparative restrictions of clause 5.5 of the ACI supply agreement, the second offer, contained in the 29 page letter also dated 11 December 2003 from Brickwood to Berri, included a number of extra or expanded clauses. Examples of the former are new clause 4.9: "Recycled Content" and new clause 4.11: "New Products". Examples of the latter are expanded clause 4.1: "Supply of Products" and expanded clause 6: "Meeting Competition." However, it is not necessary to spend time analysing the terms of the second offer except to note that clause 3.1 provided that the agreement would be binding from the date of acceptance by Berri but that the terms would not become operative until 30 May 2006 and that Berri would acquire the Products from Brickwood from that date until 29 May 2013. It should also be noted that the list of Products in Schedule 1 and the price of each item in that Schedule was the same as the list and prices in Schedule 1 of the first offer.

I turn then to examine the grounds relied on by ACI for submitting that neither the first offer nor the second offer was made in accordance with the terms of the ACI supply agreement. This involves a consideration of what is meant by that agreement, in particular clauses 5.5 and 3.3. I will deal first with the arguments concerning the first offer, but not in the same order as set out above.

As previously stated, ACI's argument was that, because of the admitted omission of fifteen bottles and three closures, the list of Products included in the first offer was not the same as the amended list of Products covered by the ACI supply agreement, and therefore that the first offer was not within clause 5.5. The parties put their submissions in respect of this issue in three different ways.

The first, and simplest, way of looking at this issue was that the list of Products was not the same because of the two bottles which had been omitted. They were the "350 ml carb stock" bottle and the "500 ml lime squeeze" bottle. Mr Mukhtar submitted that clause 5.5 required the third party supplier's offer to be for "the supply of all of the Products" and that "all" meant "all". The rival supplier could not, he submitted, pick and choose which of the Products he would offer to supply. He contrasted the wording of clause 5.5 with that of clause 4.8 which referred to "any Products."

In paragraph 21 of its defence Berri had pleaded that in respect of the "500 ml lime squeeze" bottle:

"(a) its omission by Brickwood was an oversight; (b) the defendant's requirement for this item is of insignificant volumes; (c) there is an identical item offered to be supplied by Brickwood (other than its colour being yellow rather than green); and (d) the first offer substantially complies with the ACI supply agreement despite the exclusion of this item, ..."

The pleading in respect of the "350 ml carb stock" bottle, in paragraph 21A of the defence was the same, except that sub-paragraph (c) read:

"(c) there is a similar item offered to be supplied by Brickwood (being a 350 ml water bottle with the same weight and cost structure, but a different base) ..."

Mr Colin Laurens Kop, a director and the Chief Financial Officer of Berri, gave evidence of the matters pleaded in sub-paragraphs (b) and (c) of paragraphs 21 and 21A of the defence. He said that the "500 ml lime squeeze" bottle comprised 0.16%, and the "350 ml carbon stock" bottle 0.29%, of the total number of Berri's bottle requirements based on its forecast for the twelve months ending 31 October 2004. Mr Kop also said that the "500 ml lime squeeze" bottle was identical, "except for its colour", to the "500 ml lemon squeeze" contained in the list of Products in the first offer and that the "350 ml carbon stock" bottle had the same weight and cost structure, "but a different base", as the "350 ml water bottle" contained in the list of Products in the first offer. No explanation was given about what having "a different base" entailed. Further, no evidence was led to support the allegation that Brickwood had omitted those bottles by "oversight", but in any event that evidence would not have been relevant, in my opinion.

Mr Martindale submitted that on the proper construction of the phrase "all of the Products" there had been compliance with clause 5.5 because similar products to the two omitted were included in the first offer. He submitted that the only difference between the omitted lime squeeze bottle and the included lemon squeeze bottle was "the colour of their skin" and that the only difference between the two 350 ml bottles was the base. Otherwise they were similar and there was no disadvantage to ACI resulting from these omissions when it came to matching Brickwood's overall price.

Mr Mukhtar responded by submitting that the parties had separately identified each of the bottles in the two sets of allegedly similar bottles in the amended list of Products, presumably for good reason. No questions were asked of Mr Smith, the plastics engineer, about the alleged similarity between each set of bottles. Thus, Mr Mukhtar submitted that the concessions in Berri's defence that there were differences between the two bottles in each set of bottles proved ACI's point that they were not the same. He argued that it was irrelevant that the differences might be insignificant or that the number of products omitted might be small (two out of a total of 63 products) or that the volume of the omitted bottles as a proportion of the total volume of bottles supplied might be insignificant.

Mr Mukhtar submitted that no legal basis had been put forward to support the "near enough is good enough approach". There was nothing in the ACI supply agreement justifying this approach. On the contrary, the use of the word "all" in clause 5.5 indicated that the entire range of Products had to be included before it could be said that the Competitive Offer had complied with the terms of clause 5.5. He submitted that there was no legal principle justifying the "near enough is good enough approach". He referred to the following statement from Cheshire & Fifoot's Law of Contract:

"Failure to perform an obligation exactly as and when promised is a breach of the contract. Performance means precise compliance with the contract. An obligation is not discharged by its 'substantial performance'. Unless otherwise agreed, substantial performance is a breach of contract."[6] [Footnotes omitted]

The learned authors also discounted reliance on the maxim de minimis non curat lax as justifying the proposition that minute defects in performance did not constitute breach. They saw no real reason "to dilute the concept of breach in this way."[7]

Mr Mukhtar also submitted that the work and labour done or building cases, such as Cutter v Powell[8] and Hoenig v Isaacs[9], concerning substantial compliance, or as he said, more accurately substantial performance, were inapposite. They were concerned with the situation where a party sought to be relieved from strict performance of an entire contractual obligation. I agree. Indeed, Mr Martindale disclaimed reliance on any such principle.

Mr Mukhtar also argued that this was not a case of one of the contracting parties seeking to be excused from a small departure from complete performance. This was a case of a third party, a stranger to the contract, seeking to be relieved from the literal meaning of the words of the contract in order to gain an economic advantage over one of the contracting parties. I do not agree that this is the right way of looking at the situation. The question is whether Berri, one of the contracting parties, was entitled to rely on the first offer as being within clause 5.5 despite it not referring to all of the Products.

In my opinion, the contractual context makes it clear that ACI is correct in maintaining that the first offer should have included the two bottles in question. Without them, the first offer is not an offer "for the supply of all of the products" and therefore it does not comply with clause 5.5. In the end, it seemed to me that Berri virtually conceded this first ground, comfortable in the knowledge that the omissions were something that could, in the words of Mr Martindale, "readily be rectified in a future Competitive Offer."

The second way in which it was put that the list of Products was not the same related to the eight bottles and three closures which were admittedly not included in the first offer's list of Products but were said by Berri to be "no longer required" by it to be supplied under the ACI supply agreement and that "this was notified" to ACI by Berri. This was described by ACI as an attempt by Berri to make unilateral deletions from the list of Products.

In his witness statement Mr Kop said that, as at the date of the first offer and for the balance of the initial five year term of the ACI supply agreement, Berri did not require ACI to supply any of the eleven products in this category. They were the "300 ML CSD", "500 ML Kyneton Water", "1.25 LT Billboard M/L 4H", "5.00 L Stock Water 4H, "300 ML HDPE S/T", "500 ML HDPE S/T", "2.2 L Cordial 'Wadded'" and "2.2 litre HDPE" bottles and the "38 MM T/Tel Foil Tab", "38 MM T/Tel Cello Wad" and "38 MM VHJ IML - 'new'" closures.

Correspondence between the parties concerning three of these Products was tendered by Berri and Mr Smith was cross-examined about them. The first two Products looked at were the "300 ML HDPE S/T" and the "500 ML HDPE S/T" bottles (HDPE meaning High Density Polyethylene and S/T meaning screwtop). In about late 2001, Berri decided to replace these bottles with similar bottles except that they were to be made of PET. Discussion between ACI and Berri followed for a number of months about the manufacture of the replacement bottles and then by two emails from Mr Llewellyn Stephens of Berri on 30 August and 2 September 2002 respectively, ACI was instructed to "not make any more 500 ml HDPE bottles" and then to "immediately stop any further production of 300 & 500 ml HDPE bottles in WA." In an internal ACI memorandum recording the minutes of a meeting held on 3 September 2002, these instructions were noted and it was recorded that "ACI stopped production and moved personnel to different locations/Complete." In the minutes of the regular ACI-Berri Weekly Review meeting held on 5 September 2002 it was recorded under the heading "New Product Development" in respect of the "300 ml & 500 ml PET" bottles that "Production of these products in HDPE has now ceased." Despite further references to "brimful trials" and the finalisation of drawings and toolings for the "300 ml and 500 ml PET" bottles appearing in the minutes of these ACI-Berri Weekly Review meetings through to 28 July 2003, it would appear that ACI is not supplying such products to Berri. Although there was no oral evidence about this aspect, Mr Martindale conceded that this appeared to be the case.

The third Product looked at was the "2.2 litre HDPE" bottle. In an email from Mr Daniel Capaul of Berri on 20 March 2002, ACI was instructed "to stop producing 2.2 lt HDPE, indefinatly [sic]." Mr Smith said in cross-examination that this instruction was limited to a particular time and was not a general instruction to cease production. In any event, in December 2002 the issue was raised again. An internal email from Mr Simon Todd of Berri to Mr Stephens confirmed that ACI had been informed that February 2003 was the potential "deletion date" for the "2.2 litre HDPE" bottle. In the minutes of the ACI-Berri Weekly Review meeting held on 16 January 2003 it was recorded under the heading "Product Review" in respect of the "2.2 L HDPE" bottle that "Discontinuation date is 3 Feb. ACI will pick up 2.0 L in Queensland & SA as a result of this rationalisation." No oral evidence was called to explain what all of this meant in terms of any agreement between the parties.

The documentation referred to above was the only evidence adduced by Berri in respect of the eleven Products in this category. In response to a question from me as to what the evidence was in respect of the other eight products, Mr Martindale conceded that there was none and indicated that the defendant was content to have the issue decided in respect of the three products only. He said that this course had been adopted in order to keep the length of the trial to a minimum in order to obtain the early trial date. This seemed a rather strange course given that the evidence tendered in respect of the three products was purely documentary and the lengthy particulars in respect of the other eight products had already identified the documents which Berri alleged evidenced the notification by Berri to ACI that these products were no longer required. The result is that there is no evidence of any such notification in respect of the eight products. This is, therefore, a further reason why I must find that the Products listed in the first offer are not the same as the Products included in the amended list of Products covered by the ACI supply agreement, and therefore that the first offer was not within clause 5.5, whatever the outcome of the dispute in respect of the three products in respect of which evidence was led.

Mr Martindale submitted that the evidence in respect of the "300 ML HDPE S/T", "500 ML HDPE S/T" and "2.2 litre HDPE" bottles established that ACI had agreed to phase out and discontinue these Products, which ACI later removed from its price list. But, as Mr Mukhtar correctly, in my opinion, submitted the evidence had to, but did not, go further and establish that there was an agreement to vary the list of Products in Schedule 1 to the ACI Supply agreement. There may have been such an agreement reached between ACI and Berri but the necessary evidence was lacking. The documents relied on did not prove such an agreement, in my opinion, as distinct from an agreement simply to stop production for the time being. Moreover, the evidence in respect of these three Products did not establish that they had been removed from ACI's price list. Mr Martindale submitted that ACI's position was untenable because ACI had accepted that additions to the list of Products had been agreed at meetings between the parties and by inclusion on ACI's price list. However, the fact that additions had been made was agreed on the pleadings and so the exact circumstances of how it was agreed that these Products would be added was not examined. Further, deletions are not the same as additions, in my opinion, for the reasons discussed below.

Mr Mukhtar submitted that the consideration moving from Berri at the time the contract was made was the exclusivity of supply. It was Berri's burden, incurred at the time the contract was made, that it could not purchase the Products elsewhere. If Berri could unilaterally delete a product from Schedule 1 simply because it no longer required that product temporarily or at all, he submitted that the exclusivity granted to ACI would be defeated. It flouted legal principle and commercial sense for Berri to grant exclusivity of supply over a range of products but arrogate to itself the power to reduce that range.

Mr Mukhtar further submitted that it was not a matter of Berri simply unilaterally waiving a term or condition of the agreement which operated solely for its benefit. The agreed product range defined the extent of ACI's exclusivity. As such, it operated as much for ACI's benefit as for Berri's. Mr Mukhtar gave the example of Berri deciding, six months after entering into the agreement, that it did not require 30% of the Products, and that it notified ACI of that fact. According to Berri's argument, those particular products would then be "deleted" from Schedule 1 and ACI would no longer have an exclusive right to supply those products to Berri. One year later, if Berri decided, in good faith, that it now required those "deleted" products, on Berri's argument, it would be free to purchase those products from a third party, without breaching its contractual obligations to ACI.

Mr Mukhtar's reasoning, graphically illustrated by his example, has persuaded me that there cannot be any "unilateral deletion" and that any deletion of a Product from Schedule 1 must be the subject of mutual agreement. Further, this accords with normal contractual principles, in my opinion. Mr Mukhtar referred me to the following passage from Cheshire & Fifoot's Law of Contract:

"The existence of a contract of variation must be clearly demonstrated by reference to the rules of formation. A definite agreement, going beyond discussion or negotiation, must be established, but as with any contract such an agreement may be inferred from conduct. Similarly, an intention to create a legally binding agreement, as well as sufficient certainty of the varied terms, must be established; until then the original contract continues in undiminished operation."[10] [Footnotes omitted]

The evidence in respect of the three Products in question does not establish, in my opinion, any agreement to delete them from Schedule 1. It is, perhaps, possible that there were discussions to this effect but the brief references in the documents tendered in evidence do not enable me to reach any such conclusion on the balance of probabilities. It seems to me that it is also possible that at least in respect of the 300 ml and 500 ml bottles Berri may have had an argument under clause 4.8 of the ACI supply agreement. But that clause was neither pleaded nor relied on by Berri, so I say no more. The result is that I am not satisfied that in respect of these three Products there was any variation to delete them from the list of Products in Schedule 1 to the ACI supply agreement. This is, therefore, a further reason why the Products listed in the first offer are not the same as those in the ACI supply agreement and why the first offer is not within clause 5.5.

The third way in which it was put that the list of products was not the same related to the five admittedly omitted Products which were said by Berri to have been "deleted by agreement of the parties as evidenced by their removal from the 1 April 2002 price list provided by the plaintiff to the defendant and to be implied from the fact that the defendant no longer ordered such item as at the date of the first offer." They were the "2.4 lt Swing Handle Bottle - 90 gram", the "2.00 L Juice Bottle Stock 4H", the "2.00 L First Choice Bottle 4H", the "3.00 L Swing Carafe Berri Green Hdle [Handle] 4H" bottle and the "3.00 L First Choice" bottle. In its amended reply, ACI admitted that these five products did not appear in the price list of 1 April 2002 and that Berri was not ordering those products as at the date of the first offer, but pleaded that neither Berri's non-requirement of any product from Schedule 1 nor the absence of any product from a price list constituted an agreement to delete such product from Schedule 1.

Mr Mukhtar submitted that the mere presence or absence of a particular product from a price list did not of itself constitute evidence of an agreement to add or delete a product. He argued that in every case there would have to have been an antecedent agreement between the parties to delete the product from the amended list of Products. However, no other evidence was adduced by Berri to prove such agreements.

I have concluded that there is not sufficient evidence to enable me to find on the balance of probabilities that the five products in question were deleted from the amended list of Products in Schedule 1. As I have previously held, products cannot be removed by "unilateral deletion". There must be mutual agreement to that effect. Simply because at the relevant time Berri no longer required the five products does not necessarily mean that they had been removed from Schedule 1 and from the scope of the exclusivity right granted by Berri to ACI. Neither does the fact that ACI had removed the five products from its price list. That was in itself equivocal because the items may have been temporarily removed as a matter of convenience, and because the evidence showed that the price list was not always accurate in terms of Products included in the amended list in Schedule 1. An example of the latter was the "2.0 L Coles handle bottle", which the parties agreed had been deleted from the list of products in July 2003, but which was still on ACI's price list in March 2004. Mr Martindale correctly submitted that this example demonstrated that the inclusion of Product on the ACI price list was no evidence that Berri required that Product or that ACI was ready or even willing to supply it. But, equally, in my opinion, removal of a product from the price list does not of itself constitute evidence of an antecedent agreement between the parties to vary the list of Products in Schedule 1 to the ACI supply agreement and, apart from the agreed fact of removal, there was no evidence of any such agreement. This lack of evidence is a further reason why the Products listed in the first offer are not the same as those in the ACI supply agreement and why the first offer is not within clause 5.5.

Both sides attempted to make capital out of an exchange between the parties, after this proceeding had been commenced, concerning the state of ACI's price list. On 19 March 2004 Mr Capaul emailed Mr Tim Robinson of ACI asking for a number of items including the Coles bottle to be removed from the price list because the particular products had been "deleted". Ten days later Mr Robinson responded agreeing that the Coles bottle "should be deleted off the pricing sheet". As for the remaining products, he said:

"I do not agree that they should be deleted given that we may be obliged to supply these products to you in the future."

It seems to me that the same criticism can be made of each side, namely that each was possibly attempting to strengthen its position by some not too subtle self-serving conduct. I am not disposed to place any weight on this exchange given that hostilities had well and truly broken out by March 2004.

This was the first of the identical product issues. The products in question were the "2.4 lt Swing Handle bottle", the "2.00 L Integration" bottle and the "2.4 L Berri no handle" bottle. It was common ground between the parties that although the "material type" of the three bottles in the amended list of Products was designated to be "PET/PCR", the first offer did not contain any bottles to be manufactured from that combination of materials. In Annexure B to its defence, Berri identified each PET bottle which it said matched each of the three PET/PCR bottles supplied by ACI. Further, in response to a Notice to Admit, Berri admitted that it was not intended that such bottles, when produced, would contain PCR.

In its rejoinder, Berri pleaded that on a proper construction of the ACI supply agreement, the designation of the material type as "PET/PCR" in Schedule 1 was not mandatory but permissive in that Berri could choose to use PCR in those products but that there was no requirement for any particular PCR content nor any particular method of manufacture for incorporating any PCR. Berri further pleaded, and Mr Kop gave evidence, that it had no requirement for any PCR at all, any particular PCR content or any particular method of manufacture for incorporating any PCR, in those products. Mr Kop said that Berri's analysis was that over the life of the ACI supply agreement, the inclusion of PCR had resulted in a 0.2% lower price, which he said was "immaterial".

Mr Mukhtar submitted that extrinsic evidence was admissible to explain the meaning of a descriptive term especially an abbreviated one, such as "PET/PCR", or to understand the subject matter of the supply agreement.[11] This proposition was not disputed by Berri.

Mr Smith gave evidence that in 1993 ACI commercialised a multi-layer PET/PCR bottle, which was made with an inner layer of PCR "sandwiched" between a layer of PET on either side of it. This meant that there was no direct contact between the PCR material and the contents which were thereby protected from possible contaminants in the PCR. ACI and Berri were involved in discussions about the use of PCR before ACI submitted its tender in February 2000. In fact, the minutes of a meeting on 6 August 1999 between representatives of Berri and ACI, including Mr Smith, record that ACI "had been requested by Berri to pursue the option of including a percentage of PCR in final product." Mr Smith's evidence established that, in respect of each of the three bottles in question, the technical drawings and specifications accepted by Berri stated that the composition of the multi-layer bottle was to be 62% PET and 38% PCR. The relevant tooling depended on these matters being agreed. The PCR content of 38% was also mentioned in ACI's tender.

Whilst I did not understand that these matters were denied by Berri, in its rejoinder it did plead that the written product specifications relied on by ACI were not set out in Schedule 3 to the ACI supply agreement and were therefore not part of that agreement, and that any approval by it of any specification provided by ACI did not constitute an amendment of the ACI supply agreement. I consider that the 62%/38% composition was relevantly part of the amended ACI supply agreement, but even if it were not it would not matter, in my opinion. The requirement that three identified products be manufactured with "PET/PCR", whatever that description meant, was part of the agreement.

In my opinion, the first offer's list of Products was not the same as the amended list of Products covered by the ACI supply agreement because the former did not include the three bottles to be manufactured from PET/PCR. The ACI supply agreement did not refer to those three bottles being manufactured from PET/PCR if Berri required them to be produced in that way. Rather, it specified that the material type was to be "PET/PCR". No doubt, Berri could have complained had one or more of the identified bottles not contained the designated material. It is not to the point, in my opinion, that ACI was not disadvantaged in terms of matching the overall price if it used PCR compared with 100% PET. It is a question of what the agreement says.

Furthermore, I cannot accept the submission by Berri that the technical drawings and specifications in respect of the three bottles which were accepted by Berri in some cases before and in some cases after the making of the ACI supply agreement are not part of that agreement. I note that part of the correspondence concerning the cost of acquiring and amortising the tooling for the 2.4 litre bottle, namely the letter dated 9 March 2001 signed on behalf of both ACI and Berri, was one of the Side Letters contained in Schedule 4 to the agreement.

Once again, it seems to me that Berri's argument ignored the presence of clause 4.8 of the ACI supply agreement. If indeed Berri no longer had any requirement for bottles with PCR and if Brickwood's PET bottles were "substantially the same as or substitutable for" the PET/PCR bottles, then Berri could have given ACI "the right of last refusal to match the terms and conditions" of Brickwood's offer in respect of each of those bottles, failing which these items would have been legitimately deleted from the amended list of Products and Brickwood would not have had to consider them further in respect of an offer under clause 5.5. Mr Martindale submitted that clause 4.8 was concerned with new products that were not already being sourced by Berri from a supplier, but this made no sense in my opinion. There is no suggestion in clause 4.8 that it applies only to new products. The wording of the defined term as "ACI Product Offer" certainly suggests that it was not new business that was in contemplation. That is, clause 4.8 provides an opportunity for Berri to replace existing Products with ones that are "the same as or substitutable" for them, whether the latter are new products or simply other existing products which were now seen to be appropriate substitutes. This would seem to have been Berri's view when it decided that PET bottles could be substituted for PET/PCR bottles, but I make no findings in that regard.

This was the second of the identical product issues. It concerned four of the closures in the amended list of Products which ACI submitted were not included in the first offer. They were the "28 MM Double Lok - White", the "28 MM Double Lok - Other", the "38 MM S/Skirt T/Tel '3-start'" and the "38 MM T/Tel 2 start spigotted". Berri denied any omission and, in Annexure B to its defence, identified the closures to be supplied by Brickwood which Berri said matched those supplied by ACI. In its reply, ACI joined issue on the question of whether the identified products in the first offer were identical and set out the particular attributes or features of each of the four closures which distinguished it from the respective Brickwood closure. In its rejoinder, Berri pleaded that on a proper construction of the ACI supply agreement there was no requirement for the closures to have the particular attributes or features relied on by ACI. It said that a plastic closure for the corresponding bottle was all that was required.

Mr Smith gave evidence that there were a number of important elements to the design and manufacture of a closure. The first element was tamper evidency so that the consumer could tell if the bottle had already been opened or tampered with. The second element was that the closure had to seal the drink in the container. This was commonly done by "fins" or linings in the closure. The third element, which was especially important for carbonated drinks, was to allow proper venting of the pressure on opening. The fourth element was the means of thread engagement between the closure and the neck of the bottle. Some closures had multiple threads which gave a number of thread "starts".

The description of two of the four closures contained a reference to "Double Lok" and the description of the other two, a reference to "T/Tel" or "Tampertel". Mr Smith explained that "Double Lok" was a form of tamper evident band with a segmented fin arrangement that gave both visual and audible tamper evidence and that, at the time the ACI supply agreement was entered into, ACI had a licence from Alcoa Inc to use the "Double Lok" technology. However, the patents for the "Double Lok" closure lapsed in 2002. Mr Smith also explained that "Tampertel" was a unique tamper evident band which was owned by Owen-Illinios Inc, ACI's parent company, and that ACI had exclusive rights to use the technology.

Apart from the patented technology references in the descriptions of the closures, Mr Smith also pointed out some differences between the ACI products and those to be supplied by Brickwood. In three cases, there was more than one allegedly corresponding closure.

The closures which were said by Berri to correspond with the "28 MM Double Lok-White" closure were a "28 mm T/E Plastic (printed)" closure and a "28 mm Metal Zarvent" closure. Obviously, neither was a "Double Lok" closure, but without seeing the product specifications or samples, Mr Smith could not say what sort of tamper evident closure was being offered. He did point out that the "Zarvent" or "Zavent" was a pre-threaded metal closure not a plastic closure. It was said by counsel for Berri in argument that the inclusion of the metal closure was "a mistake". Nevertheless, the metal closure was part of the first offer and its list of suggested issues in respect of which Berri sought determinations or findings from the Court included the following:

"That the Brickwood offer is not invalid by reason only that it: ... (c) offers a metal Zavent closure rather than a moulded plastic closure ..."

The closures which were said by Berri to correspond with the "28 MM Double Lok-Other" closure were three types of "28 mm Polycap Double seal" closures. Mr Smith said that the "Polycap Double seal" was a single piece closure whereas the "Double Lok" was two piece. He described other design differences, which it is not necessary to refer to in detail, including that the "Polycap Double Seal" was made from HDPE whereas the "Double Lok" closure was made from PP or Polypropylene, as specified in the statement of material type in Schedule 1 to the ACI supply agreement.

The next ACI closure was the "38 MM S/Skirt T/Tel '3-start'" cap. Mr Smith explained that "S/Skirt" meant short-skirted which indicated that the cap had a reduced height. The reference to "3-start" meant that there were three points at which the thread engaged. This was said to give greater stability and more ready engagement. The allegedly corresponding closures were three types of "38 mm Twin Start" closures. Mr Smith had not seen any product specifications or samples of these products, but he pointed out that none of them were "Tampertel" closures and that their description indicated that they had two and not three thread starts.

The fourth ACI closure was the "38 MM T/Tel 2 start spigotted" cap. Mr Smith explained that "spigotted" meant "a bore seal closure" or "a fin that is moulded as part of the cap just underneath the top which meets the inside of the bottle-neck to create a seal." It performed the sealing function that the inner liner did on the other "Tampertel" closure. The allegedly corresponding closure was another type of "38 mm Twin Start". Again, Mr Smith had not seen any product specifications or samples. However, he pointed out that this product was not "Tampertel" and was not said to be "spigotted".

This factual background led to Mr Martindale submitting that clause 5.5 of the ACI supply agreement could not mean that the description of each attribute or feature of a product had to be precisely matched in every way in the competitive offer. Otherwise, he submitted, at the time the ACI supply agreement was entered into, the promise in respect of competitive offers was illusory because the third party supplier could never have matched the "Double Lok" or "Tampertel" closures because it could not gain access to the particular technology. And this was still the case with respect to the "Tampertel" closures. To suggest that the reasonable business people would enter into an agreement with this restricted and unrealistic meaning of the competitive offer provision was laughable in his submission. Clause 5.5 was workable if Berri could phase out its requirement for products which incorporated such intellectual property as was involved in the "Double Lok" and "Tampertel" closures.

Alternatively, Mr Martindale submitted that what clause 5.5 required was a Competitive Offer for the range of Products being supplied to Berri identified in a more general way, such as bottles and closures of a particular size and material type, and not requiring that each attribute or feature of each product be precisely matched in every way, including any patented technology aspect. That is, the products in the Competitive Offer did not have to be identical with the amended list of Products in Schedule 1 to the ACI supply agreement.

Mr Mukhtar submitted that clause 5.5 should be construed so as to require an offer for products identical to those described in Schedule 1. The ACI supply agreement was an agreement to supply stipulated products and clause 5.5 only allowed ACI to be deprived of that business if the rival supplier offered to supply all of the same products. Mr Mukhtar asked why Berri should be permitted to ignore the precise description of a Product when, as Mr Martindale conceded, ACI would be in breach of the contractual obligations if it did not supply a Product matching its description. Further, Mr Mukhtar submitted that an offer to supply products which were not identical but could be regarded as "substantially the same as or substitutable for" one or more of the Products could be made under clause 4.8. He submitted that this construction made it clear that clause 5.5 required the products to be identical.

In my opinion, clause 4.8 does provide the answer to what otherwise appeared to be a compelling point made by Mr Martindale about the unavailability of the intellectual property rendering clause 5.5 unworkable, if that clause were read as requiring the products in the competitive offer to be identical to the Products listed in the Schedule. Not only does this construction make sense of clause 5.5, it also gives clause 4.8 some work to do, whereas Berri's suggested construction of clause 5.5 would seem to me to make clause 4.8 quite superfluous.

Therefore, I conclude that the first offer is not within clause 5.5 because there was no product in the first offer which was identical to the three PET/PCR bottles, the two "Double Lok" closures or the two "Tampertel" closures.

Counsel for ACI submitted that, although the first offer provided that there was a binding agreement upon written acceptance of the offer, because the terms of the agreement would not "become operative" until twelve months after the date of acceptance, there was no offer "on the same terms and conditions" as those set out in the ACI supply agreement. It was submitted that, unlike ACI, Brickwood was not required to supply upon order from the date of execution. Instead, Brickwood was given a twelve month lead time which was not part of the ACI supply agreement.

Mr Martindale argued that there was nothing in the ACI supply agreement about commencement of supply. Therefore, it was submitted that an offer on the same terms and conditions as the ACI supply agreement did not require any stipulation as to supply commencing at a particular time. There was no condition in the ACI supply agreement which had been omitted from the first offer. On the contrary, the first offer was on the same terms and conditions, it was submitted, because when Brickwood commenced supply it would be on the same terms and conditions as those in the ACI supply agreement.

In order to explain why it said that it was reasonable and anticipated that the first offer have a deferred date for the commencement of supply, Berri relied on the evidence of Mr Smith, during cross-examination, concerning the lengthy process involved in developing a new bottle. Some of the required steps were the design of the bottle, the development, tooling and testing of the preform (the mass of resin from which the bottle is manufactured), the development, tooling and testing of the bottle, production tooling, commercial production and finally building stocks of preforms and finished bottles. He estimated that it would take any supplier six to twelve months to develop a new product from scratch and take it through all of these steps and agreed that the twelve months' lead time was a reasonable period of time for Brickwood to develop the Products. Further, Berri pointed to the evidence that in fact ACI was supplying Products to Berri before the agreement was entered into, and did not commence to supply other Products until after that date. Mr Smith said in re-examination that an existing supplier could virtually commence supply immediately so long as it had the installed capacity, that is the spare capacity on the injection moulding machines to produce the preform and the capacity at various sites around the country to blow the preform into a bottle and deliver it to the customer. However, Mr Martindale pointed to the example of the 300 and 500 ml HDPE bottles where ACI experienced all sorts of difficulties in changing to producing them from PET rather than HDPE. Mr Martindale also submitted that there was no evidence that Brickwood had the ability to use existing preforms or bottles in supplying Berri. I rather assumed that it did not, as otherwise there would seem to be no reason for delaying the operative date for twelve months.

Mr Mukhtar submitted that the "Meeting Competition" heading to clause 5.5 and the reference therein to a "third party supplier" envisaged an existing "player" in the plastics business bidding for Berri's business. He submitted that the competing offer must come from an existing supplier who was, at the time the offer was made, truly a competitor of ACI in the sense that it could step in virtually immediately to replace ACI if its offer were accepted. Mr Mukhtar argued that the clause did not contemplate a newcomer to the industry, or even an existing supplier, making an offer to supply at a time of its choosing after it had put itself in a position to supply. Rather, the competitor had to put itself in a position to supply and then make its offer. This, he submitted, was how the parties would have understood the clause.

After considerable thought, I have decided that ACI's construction of clause 5.5 is correct. First, on a literal approach, the very statement of Berri's argument shows, in my opinion, that the inclusion of clause 3.1 in the first offer, deferring the commencement of supply, means that the first offer is not on the same terms and conditions as the ACI supply agreement. It is not a question of a condition being omitted from the first offer but of an additional condition being included in the first offer which did not appear in the ACI supply agreement namely, that the terms would not "become operative" until twelve months after the date of acceptance. Secondly, I do not accept the submission that it is plain that when ACI and Berri signed the ACI supply agreement they did not contemplate that a Competitive Offer could be made on terms requiring supply to commence forthwith or that there could be no doubt that both parties knew as at the date of signing that anyone making a Competitive Offer for all of the Products would not be able to do so on the basis of supply commencing forthwith upon acceptance of the offer by Berri. Rather, I accept ACI's submission that the parties would have understood that clause 5.5 is concerned with immediate competition, being at the date of the Competitive Offer, not at some indeterminate time in the future.

Mr Mukhtar submitted that this issue was a corollary of the deferment issue. He argued that clause 5.5 required the overall price under the Competitive Offer to be measured against ACI's "overall prevailing price of the Products". That is, ACI's current price. Yet the first offer stated prices which were applicable in twelve months' time. As ACI's price in twelve months' time could not be known until the price review and adjustment provided for in clause 5.4 and schedule 2 had occurred, there was no congruency in the price comparison.

Berri responded with two different submissions. First, Mr Martindale submitted that the proper construction of clause 5.5 required an initial comparison to be made between "the overall price which would be payable by the Customer for the Products from the third party" whenever that might be and "the overall prevailing price of the Products under the Agreement". If the overall price in the Competitive Offer was lower than the overall price currently payable by Berri, then ACI had the right of last refusal "to match the price set out in the Competitive Offer" and to say to Berri that, at the time that the Competitive Offer would have become operative, it will supply at that overall price. Thus, it was irrelevant that ACI's overall price in twelve months' time could not be known.

Secondly, Berri submitted that Brickwood's overall price in the first offer was substantially lower than ACI's overall prevailing price and that it would remain so at all relevant times into the future and certainly as at 27 February 2005, when Brickwood would commence supplying Berri. Although the evidence on this topic from Mr Kop was objected to by ACI on the ground that it was irrelevant, I consider that it is admissible insofar as it involves Brickwood's offers but not the earlier offers from Visy Packaging Pty Ltd and Visy Industrial Plastics Pty Ltd, which really have nothing to do with this proceeding. It was submitted that what Mr Kop's analysis of the first offer showed was that:

(a) every item in the first offer was cheaper than ACI's price for the corresponding item;

(b) the substantial difference in the overall price (said to be approximately $8 million but this depends to some extent on the method used in calculating the overall price) was almost wholly made up of the non-resin or conversion costs, in particular the manufacturing costs;

(c) the resin costs were fixed for three, six or twelve months;

(d) the resin costs would move in line with the market, which could be determined by reference to what was described as the PCI Index; and

(e) the non-resin costs were adjusted every 1 July according to the CPI, but whatever changes occurred would not close the gap between the overall price in the first offer and ACI's overall price.

Mr Martindale acknowledged that various methods could be used to work out an "overall price". He submitted that, although for present purposes it was not really an issue, an appropriate method would be to apply the unit price for each Product to the volume of that Product being purchased or forecast to be purchased over a period of time including the date of the Competitive Offer. Mr Martindale then built on this approach by submitting that it was foolish to suggest that there should be included in such a calculation the unit price of a Product which, for example, Berri had said some time ago it no longer required and which had been removed from ACI's price list. Multiplying the unit price by zero volume would result in a zero addition to the "overall price". He submitted that what the parties were intending to achieve was a comparison of ACI's "overall price" for the products which Berri was buying at the date of the Competitive Offer with the rival supplier's "overall price" for the same products. Such a comparison could only be sensibly done by reference to Berri's current requirements.

Insofar as this submission rehearsed matters on which I have already ruled, I reject it. However, it was important to refer to this submission because it illustrates, in my opinion, why Mr Martindale's rather ingenious construction of "prevailing price" is not correct. What Berri gains under clause 5.5 is the ability to obtain the Products from a supplier other than ACI if that supplier can supply them at a lower overall price. It is therefore not much use to Berri if, as Mr Martindale would have it, the operation of that clause is limited to an unfavourable comparison between ACI's current overall price and the third party supplier's overall price in twelve months' time. In normal circumstances, one would have expected to find the future prices were higher. On Mr Martindale's construction, this would be the end of the matter. The third party supplier would have fallen at the first hurdle. Yet, if the comparison had been between what both ACI and the third party supplier would charge in twelve months' time, if such a comparison were possible, Berri may have found that the third party supplier's overall price was lower. And even more relevantly from Berri's point of view would be the comparison between the current overall price of each supplier.

This analysis strengthens my belief that reasonable and honest businessmen would have understood clause 5.5 to be concerned with a comparison between the overall price currently charged by ACI and that being offered by the competing supplier for immediate supply, not at some time in the future. I also consider that such businessmen would have been wary of placing too much credence on a construction of an agreement which required prices to be fixed in advance of their operation, 13.5 months in the case of the first offer and 29.5 months in the case of the second offer, despite all of the uncertainties involved in the costing exercise.

As it happens, apparently because of the significantly lower prices offered by Brickwoods, the first offer would overcome the first hurdle, that is, its overall price in twelve months' time is lower than ACI's overall prevailing or current price. In the circumstances, it seems to me that Brickwoods would have considerable incentive to arrange its affairs so that it could comply with clause 5.5 by offering to supply all of the Products immediately.

The second offer was purportedly made under clause 3.3 of the ACI supply agreement. It should be noted that the wording of clause 3.3 does not reflect the wording of clause 5.5. Under the former clause, the offer from the third party supplier can simply be for "Products". It does not have to be for "all of the Products". It means that the third party supplier can decide which of the Products it wants to include in its offer and ACI just has to match "the terms and conditions" on which the supply of those products is offered. The comparison to be made is on "the terms and conditions set out in the Offer" and is not limited to whether or not the overall price in the Competitive Offer is lower than "the overall prevailing price".

ACI submitted that the making of the second offer was premature and not within clause 3.3 of the ACI supply agreement because on a proper construction of that clause it only applied to an offer made by a third party if the Initial Term was not extended at the expiration of the Initial Term and the offer was made during the five year period following the Initial Term. Clearly, those events had not yet occurred.

Mr Mukhtar submitted that on a careful textual examination of clause 3.3, any offer from a third party must be received by Berri "following the Initial Term but before the date which is 5 years after the expiration of the Initial Term." It was said that it was clear that the temporal stipulation in the words just quoted referred to the time that Berri "received" the offer. The quoted words could not sensibly refer to the period during which the third party will "supply" the Products. This was so, he submitted, for the following reasons:

(a) First, the words "but before the date which is 5 years after the expiration of the Initial Term" suggested a precise time rather than a period of time. An offer will be received at a precise time whereas supply of products will occur over a period of time;

(b) Secondly, if the temporal stipulation referred to the period during which the third party will supply the Products, ACI's right of last refusal would be vitiated if the third party offered to supply Products for a period ending after 29 May 2011, even one day after;

(c) Thirdly, the second offer was for supply from 30 May 2006 to 29 May 2013. The fact that Berri had put this offer to ACI under clause 3.3 confirmed that Berri accepted that the temporal stipulation referred to the time that Berri "receives" the offer and not the period during which the third party will supply;

(d) Fourthly, it made no commercial sense to arbitrarily limit the period during which the third party might supply by effectively disallowing supply after 29 May 2011.

Thus, since the second offer was not received by Berri "following the Initial Term but before the date which is 5 years after the expiration of the Initial Term", it was submitted that it was not an offer that complied with clause 3.3

Berri submitted that the extension of the Initial Term under clause 3.2 did not have to await expiration of the Initial Term. That was quite unrealistic and not the natural interpretation of the clause. Mr Martindale submitted that the agreement to extend could be made any time. Similarly, Berri could inform ACI at any time that it would not be extending the Initial Term in any circumstances. It was said that the letter dated 5 November 2003 from Ms Alison Watkins, the Chief Executive Officer of Berri, to Mr John Dickinson of ACI did just that when she stated:

"For the avoidance of any doubt, Berri has no intention of extending the Initial Term of the Heads of Agreement."

However, I do not consider that this letter proves that the Initial Term will not be extended because, theoretically, it is still possible that Berri could change its mind and agree to an extension under clause 3.2 of the ACI supply agreement.

Mr Martindale pointed out that ACI's argument about clause 3.3 involved Berri having to allow the Initial Term to expire and informing ACI that it is not extending the Initial Term before Berri could ask ACI to match an offer under clause 3.3. Bearing in mind that a would-be competitor, such as Brickwood needed a long lead time if it was not already the incumbent supplier, Mr Martindale asked why the parties would have intended that Berri must risk being left in the position where ACI was informed that the Initial Term would not be renewed and then declined to match an offer under clause 3.3, but the competitor was not ready to commence supply for twelve months. He submitted that such an interpretation had no commercial justification and should be rejected.

Mr Mukhtar submitted that the construction of clause 3.3 which he urged the Court to adopt did not have the serious practical consequences suggested by Berri. First, there was nothing to stop Berri and the third party supplier negotiating in advance about what terms and conditions might be contained in its offer when it was eventually made, which could be as soon as the day after the Initial Term had expired. Secondly, Mr Mukhtar pointed out that a firm order for the following four week period could be placed by Berri on 29 May 2006. In addition, Berri could build up its stocks if there were concerns about how quickly the new supplier could commence supplying. Mr Mukhtar also submitted that it was not unreasonable to suppose that this clause had been drafted in a way which gave the parties an incentive to extend their agreement for a further term. Finally, there was no reason why the third party supplier should not prepare itself to be able to commence supplying Berri immediately the Initial Term expired.

Therefore, it seems to me that Berri has no answer to ACI's strictly textual argument concerning the construction of clause 3.3. This means that the second offer was made prematurely and was not within clause 3.3 because it was not received by Berri after 29 May 2006 and before 29 May 2011.

Mr Martindale further submitted that clause 3.3 of the ACI supply agreement must cease to apply if another supplier, such as Brickwood, replaced ACI under clause 5.5 during the Initial Term. Otherwise, the result would be that both ACI and Brickwood would have the right of last refusal if yet another supplier made an offer to supply all or any of the Products after the expiration of the Initial Term. He submitted that permitting Berri to activate clauses 3.3 and 5.5 at the same time eliminated that problem. Alternatively, he submitted that clause 3.3 simply ceased to have effect if ACI was replaced under clause 5.5. The contractual relationship between ACI and Berri would have been brought to an end by Brickwood replacing ACI as the supplier of the Products. Any agreement between Berri and Brickwood to extend the Initial Term of their agreement would not, therefore, involve ACI being given any right of last refusal to match the terms and conditions of Brickwood's offer for the extended term.

In my opinion, the problem of two suppliers having the right of last refusal does not exist. I accept Mr Martindale's alternative submission that the contractual relationship between ACI and Berri, including any right under clause 3.3, is brought to an end if ACI fails to match an offer under clause 5.5 and is thereby replaced as the supplier to Berri of all of the Products. This means that there is no reason to permit Berri to activate clauses 3.3 and 5.5 at the same time.

Moreover, there is another reason, apart from the strictly textual argument, why the offer under clause 3.3 is not to be made until after the expiration of the Initial Term. I have previously referred to the fact that the second offer was made 29.5 months in advance of when it would come into operation. Theoretically, it could be made 59.9 months in advance of its date of operation, if Berri's submission is correct. The longer the gap between the making of the offer and the date of operation the harder it will be to accurately fix the prices contained in that offer. Mr Martindale recognised this problem for the third party supplier when he tentatively suggested that, notwithstanding that the prices in both the first offer and the second offer were the same, when the second offer became operative on 30 May 2006 the applicable prices would be the current prices being charged by Brickwood, including any increases since it commenced supplying Berri, rather than the prices set out in the second offer. This is not how I would understand the second offer to operate and is a further reason why I consider that the second offer should not be made until after the expiration of the Initial Term.

I have therefore reached the conclusion that the first offer is not within clause 5.5, and that the second offer is not within clause 3.3, of the ACI supply agreement. Accordingly, there will be declarations to that effect.

[1] The second amended statement of claim filed 3 May 2004

[2] The third amended defence filed 14 May 2004

[4] Paragraph 6(b)(ii) and Part 2 Section 1 of Annexure A

[5] Paragraph 6(b)(iii) and Part 2 Section 2 of Annexure A

[6] Seddon and Ellinghaus: Cheshire & Fifoot's Law of Contract, 8th Australian Edition, para. 9.5

[7] Seddon and Ellinghaus: Cheshire & Fifoot's Law of Contract, 8th Australian Edition, para. 9.5

[10] Seddon and Ellinghaus: Cheshire & Fifoot's Law of Contract, 8th Australian Edition, para. 22.4

[11] Butt v Long [1953] HCA 76; (1953) 88 CLR 476 at 487 per Dixon CJ and at 490 per Fullagar J; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337 at 347-352 per Mason J and at 401 per Brennan J.

At a glance

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Decision date

Before

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Judgment (119 paragraphs)

Parties

Cases Cited (2)