Supreme Court of Victoria|2005-03-04|Before: Hansen, J

Contract - To supply wine grapes to producer for 10 years - Producer required to advise price before vintage - Interpretation and operation of agreement - Whether price advised merely indicative and reviewable - Whether price could be reviewed in light of actual prices in the area.

1 These appeals arise out of two proceedings heard together in the Magistrates' Court at Mildura. The plaintiffs, Janevruss Nominees Pty Ltd ("Janevruss") in the one case, and Robert and Lidia Mazza ("Mazza") in the other case, were growers of wine grapes who sued Hardy Wine Company Ltd ("Hardy") for the balance of the price owing for the sale of Merlot grapes to Hardy. The sales were made under written long term supply agreements with Hardy. The agreements were in the same terms, that with Janevruss being made on 29 October 1997 and that with Mazza being made on 14 October 1998, and under which Hardy agreed to purchase the grapes grown on the respective grower's vineyard for a term of 10 years, the term commencing on 1 January 1998 for Janevruss and 1 January 1999 for Mazza. The parties acted under the contracts for several years but differences arose as to the price to be paid by Hardy for Merlot grapes produced in the 2002 vintage. Janevruss and Mazza contended that Hardy underpaid the amount owing by $40,086.40 and $27,936.25 respectively, and sued for the amount of the shortfall. Janevruss abandoned the excess over $40,000 as that was the limit of the Court's jurisdiction.

2 On 15 September 2004 the Magistrate gave judgment in favour of the plaintiffs for the amounts claimed and made orders accordingly with interest and costs.

3 Hardy appealed from those orders under s 109 of the Magistrates' Court Act 1989. The right given by that provision is to appeal on a question of law. The appeals first came before a Master who on 4 November 2004, after hearing argument, decided that no question of law was raised and dismissed the appeals.

4 An appeal by Hardy from those orders was dealt with by Whelan J on 29 November 2004. In each case the appeal was allowed, the Master's order was set aside and Hardy was given leave to amend the notice of appeal. The purpose of the amendment was to change the question of law raised on the appeal. An amended notice of appeal was duly filed. In each case the question of law is in identical terms, namely whether the Magistrate failed to properly construe cl 5 of the agreement made between the appellant and the respondent as:

(a) the Magistrate misdirected himself by failing to accept that if the appellant paid or was willing to pay to the respondent more than the weighted average price of the Merlot grapes delivered in the Sunraysia area, the appellant had discharged its performance under cl 5 of the agreement; and

(b) the Magistrate misdirected himself by finding that the appellant was obliged, pursuant to clause 5 of the agreement, to pay to the respondent the price stated in a letter sent by the appellant to the respondent dated 19 December 2001 for the Merlot grapes delivered by the respondent to the appellant in the 2002 season.

In each case the grounds of appeal simply repeat the questions of law.

5 Hardy is both a grower of wine grapes and a producer of wine, the latter aspect of the business requiring Hardy to purchase grapes from other growers. For this purpose and to ensure continuity of supply Hardy entered into the agreements with Janevruss and Mazza and other growers (it seems about 350 in all) in the Sunraysia area. Hardy also had growers in other areas but they are not relevant for present purposes.

6 The structure of the agreements was that Hardy agreed to purchase the grapes grown on the grower's vineyard over the next 10 years (cl 1). The land on which the vineyard was located was specified in cl 3. Hence, the obligation undertaken by Hardy was to purchase the grapes grown on that vineyard. But two points should be noted.

7 First, cl 1 included a table which set out the "yield estimates of" the vineyard. The table stated the grape varieties (Merlot and Colombard for Janevruss, Shiraz and Merlot for Mazza) and as to each variety stated the area in hectares and a projected annual estimated yield. Doubtless such estimation was relevant to Hardy as a guide to that which it would be purchasing under the agreement.

8 Secondly, cl 4 dealt with the matter of future plantings. This was doubtless necessary because Hardy had agreed to purchase all the grapes produced as distinct from a specific tonnage, and it thus needed a measure of protection against increased costs of purchase resulting from increased plantings. Hence cl 4 provided that any changes to the mix of the varieties presently planted would only be recognised if the change was agreed to in writing; if not so approved Hardy was under no obligation to accept grapes produced from such new plantings.

9 Clause 5, upon the construction and operation of which the case turns, provides as follows:

The Company shall pay to the Grower for the grapes, a fair market price. The fair market price for each variety is defined as the price likely to be realised for the majority of fruit being purchased from a particular area (e.g. Sunraysia or Riverland). An indicative price range for each variety is normally published in December of each year after negotiations have taken place between winemakers and growers. The Company shall advise the price and payment terms to the Grower no later than seven (7) days prior to a delivery taking place. The price and terms of payment are subject to the provisions of any statute that may apply from time to time to grapes purchased for wine in any specified region.

The minimum payment terms the winery agrees to pay will be 1/3 of the purchase price within 30 days of the month of delivery and the balance in two equal payments prior to the last day in months of June and September following delivery of the grapes.

Minimum prices for the following varieties are guaranteed for the vintages:

10 The grower was required to deliver the grapes to Hardy's Buronga Winery in New South Wales and bear the cost thereof (cl 6), the matter of fruit quality was dealt with in cl 7, and cl 8 provided that Hardy would give the grower preference for the purchase of any additional fruit not covered by the agreement. Clause 10 provided that if the grower failed to deliver any of the grape vintages to which the agreement applied, Hardy shall be entitled to terminate the agreement and to recover any losses including loss of profits sustained as a result of such failure. It is not necessary to refer to the remaining provisions of the agreement.

11 The terms in which cl 5 are expressed may be understood in light of past practices in the industry including applicable statutory regimes, evidence of which was given by the witness called by Hardy, Angus Murray Kennedy. He was a senior employee of Hardy responsible for overseeing grape pricing mechanisms and negotiating grape prices with growers for each vintage.

12 The historic matters are these, in summary. Victoria (by the Wine Grape Processing Industry Act 1978, repealed on 17 October 1990) and South Australia (by the Wine Grapes Industry Act 1991) implemented minimum pricing and payment arrangements in the wine grape industry. The Victorian Act provided for a Negotiating Committee to determine or settle by consent minimum prices for wine grapes, and in relation to wine grapes grown in Mildura or Swan Hill authorised the Committee to meet with the like Committee established under corresponding New South Wales legislation.

13 The South Australian Act authorised the Minister, by order, to recommend a price (expressed as an amount per tonne) for wine grapes grown in a "production area" and sold to a processor. The section concerned (s 5) was headed "Indicative price". The price so determined could vary according to the variety of wine grapes. A further provision (s 6) authorised the Minister, by order, to fix terms and conditions relating to the time within which processors must pay for wine grapes, and such terms and conditions were implied into every supply contract. The Minister was required to consult representatives of producers and processors and other persons as he or she thought fit before recommending prices or fixing terms and conditions (s 7). The Minister did exercise his powers under the Act. As early as 17 December 1991 the Minister made orders recommending prices for wine grapes and fixed terms and conditions as to payment[2]. This order and subsequent orders[3] established a regime of paying for grapes by proportionate amounts at stipulated times, more particularly of three payments each of one-third of the purchase price. Such terms of payment are seen to have been included in cl 5 of the agreement.

14 The evidence does not refer to an order made under the South Australian Act since 1993, and one might suppose that for trade practices reasons none was made. Kennedy referred to a dispensation given by the Trade Practices Commission under which wine grape growers and wine makers met each year to exchange information about supply and demand in the Australian wine industry. This was called the National Wine Grape Outlook Conference which Kennedy believed started about 1992. From then until 1995 or 1996 "an indicator price for each variety was issued by this meeting and in the latter two or three years it was a range of prices. At the end of that time ... it was agreed that no indicator prices would be issued, just indicated by a plus or a minus as to whether there was upward supply and demand pressure or downwards supply and demand pressure". The indicator prices were not binding but gave a consensus view of the makers and growers about the outcome from the supply and demand position.

15 It is common ground that this evidence explains the reference in the third sentence of cl 5 to the publication of an indicative price range for each variety. It is also common ground that the publication of indicative prices ceased in 1996.

16 The particulars of claim set out in the Complaints are identical in substance. Each claim pleads the grower agreement and certain terms thereof including that Hardy would pay a fair market price for grapes purchased and would advise the price to the plaintiff no later than seven days prior to the plaintiff delivering the grapes. It is alleged that Hardy advised the plaintiff of the fair market price by a letter dated 19 December 2001. Then, the plaintiff delivered the wine grapes but in breach of the agreement Hardy failed to pay the full amount owing.

17 Hardy delivered a defence and notice of set off dated 29 May 2003. It was amended twice. Then, a further amended defence was filed pursuant to an order of the Magistrate on 14 July 2004. That was the first day of the hearing and the further amended defence is dated that day. It is apparent from the transcript that the amendment was available at the outset of the hearing. The defence did not raise a set off. With those remarks I summarise the points in the further amended defence.

(a) alleged that the letter dated 19 December 2001 set out an indicative price for the grapes to be delivered by the respondents but did not set out the fair market price for such grapes.

(b) alleged that Hardy advised the fair market price to be paid for Merlot grapes by a circular dated 13 June 2002.

(i) that price was only required to be paid in respect of tonnages referred to in the schedules to that letter.

(ii) Hardy did not advise that it would pay, and it was not obliged to pay, that price for tonnages of fruit delivered in excess of the nominated tonnages.

(iii) the impact of the oversupply of red grapes in the Sunraysia area was that the likely price to be realised for the sale of the majority of fruit in the area was reduced.

(iv) to take account of that reduction in the likely price Hardy devised the formula in the letter dated 13 June 2002 which ensured that the grower would be paid a fair market price for the total tonnages delivered.

(d) alleged that Hardy had paid a fair market price for the plaintiff's Merlot grapes, and that it was not liable to pay the amount claimed.

19 In each case a reply dated 13 July 2004 had been delivered to an amended defence dated 12 July 2004. This reply stands as a reply to the further amended defence. Among other things, the reply alleged that for the following reasons the circular dated 13 June 2002 did not advise the fair market price in accordance with the agreement: it was provided subsequent to delivery of the grapes, the price was less than the contracted minimum price of $566 per tonne, it varied the colour bonus advised on 19 December 2001 to an average colour of all deliveries, and the formula for fixing the price was uncertain.

20 There was documentary and oral evidence, in particular evidence of Kennedy, as to the procedures and dealings in respect of the vintages prior to 2002. I do not overlook the evidence but it is not necessary to set it out. It seems desirable however to refer to events concerning the 2002 vintage.

21 In accordance with past practice, Hardy sought from growers an estimate of the 2002 vintage intake. This was done by a circular letter dated 25 October 2001. The letter attached an "Estimate Form" which set out the varieties and tonnes delivered by the grower in the 2001 vintage and the tonnes the grower had on contract (by patch) for 2002. In the case of Janevruss for instance the form stated, in relation to Merlot, 94.82 tonnes delivered in 2001, and 90.00 tonnes contracted for 2002 from three hectares on patch one. The grower was requested, in bold type, to:

Please estimate AS ACCURATELY AS POSSIBLE the tonnes you believe you will deliver in the 2002 vintage by patch number.

Each plaintiff duly completed the form. Janevruss estimated 90 tonnes for Merlot and signed the form on 19 November 2001. Mazza estimated 65 tonnes of Merlot (against 6.78 tonnes delivered in 2001, and 70.00 tonnes contracted for 2002) and signed the form on 5 December 2001. The forms were returned to Hardy.

22 It is to be noted that in his evidence Kennedy said, referring to past estimates, that the estimates provided and the prices nominated in respect of 1999, 2000 and 2001 were not changed.

23 The National Wine Grape Outlook Conference met at Mildura on 15 November 2001. As mentioned earlier, the Conference discussed the matter of supply and demand, this time in relation to the 2002 vintage. As to the available information, Kennedy referred to a report which dealt with the expected national intake of Merlot in 2001 and 2002, and which anticipated a surplus over demand of 10,000-12,000 tonnes "over each of the three years 2000, 2001 through to 2003-2004 inclusive which is around 13% surplus". Kennedy said that the surplus of red grapes was due to plantings having increased ahead of demand. That surplus was anticipated and built into the general proposed pricing regime that "we talked about".

24 In December 2001 Kennedy considered the pricing for the 2002 vintage in the Sunraysia area, in which there were about 350 growers. In arriving at prices for the various varieties he took account of the industry perceived supply/demand position for each variety as evidenced in the summary published by the Conference, any past experiences of differences from the supply/demand data, and discussed the appropriateness of his considerations with other staff. He agreed that in performing these calculations and generally he was conscious of the obligation in cl 5 of the agreement to pay a fair market price.

25 On 19 December 2001 Hardy sent to growers the letter of that date referred to in the respondents' claims as constituting advice of the price and terms of payment pursuant to cl 5. The letter was signed by another officer of Hardy but Kennedy's evidence makes it clear that the information of the pricing in the letter was that which had been formulated by him or for which he was responsible. While the letter was in common form it attached a schedule which related to the particular grower addressee and set out "2002 Vintage Allocation and Payment Details". The letter is important, indeed it is the central basis of the case against Hardy. For that reason and because counsel for the respondents relied on particular words and phrases as supporting the construction of the letter for which they contend, it is necessary to refer to its full terms and to the attached schedule, in that regard it being sufficient to refer to the schedule concerning Janevruss. I note below the relevant details in the Mazza schedule.

Please find attached your Grape Tonnage Allocation for the 2002 Vintage, along with the nominated winery delivered prices and proposed payment terms in respect of the grape varieties to be delivered by you in the forthcoming vintage.

As in the previous year the basis of payment is calculated on a winery delivered price.

There are a number of changes to the pricing system and while they include some changes to Baume requirements, they largely relate to the NIRS testing for colour.

The door payments for the three premium varieties will be made at the following set prices:

This vintage growers will be required to take 3 field samples from each patch prior to harvest to be measured for colour and baume which will be used for streaming of fruit deliveries. To enable you to compare your field samples with the delivery samples, the payment for the 3 varieties above will be based on colour and averaged for each patch. Individual load results will be available upon request.

Payments will reflect the actual quality of fruit delivered as determined by the samples taken at the weighbridge.

The NIRS quality standard to be used this year will measure colour and the following table reflects the minimum and maximum colour that will be paid:

The three premium red varieties will range from a base price to a maximum bonus price, ie. $341 per tonne to $1,111 for Shiraz. However due to contractual obligations none of the premium red varieties will be paid below $566 per tonne. That is, all Shiraz grapes delivered below a colour rating of 0.96 will still receive $566 per tonne +/- baume adjustments.

All contracted fruit will be processed. Some Uncontracted fruit particularly red varieties which has been offered to BRL Hardy Limited has not been allocated as we have no need at this time for that fruit. Growers need to read their allocation sheets carefully to assess if they have been affected by this policy and contact the winery for clarification if necessary. The winery will be closely monitoring contractual arrangements during this vintage.

This year there is a requirement for BRL Hardy Limited to process red grapes to white juice.

There will be an opportunity to deliver the following varieties early (at 11º baume for this purpose) to be taken for white juice and these include:

Cabernet Franc, Cabernet Sauvignon, Grenache, Mataro, Ruby Cabernet, Sangiovese, Tarrango.

The prices offered for grapes taken for white juice are reflected in the attached schedule. It should be noted that Cabernet Sauvignon taken for white juice has been set at a price of $464 per tonne which is below the guaranteed minimum price of $564 per tonne.

Should growers choose to offer Cabernet Sauvignon for white juice, there will be a separate agreement entered into to waive the guaranteed minimum price for those grapes.

You should be aware that there are substantial quantities of red grapes in surplus to requirements throughout Australia. Whilst these are not necessarily located in the Sunraysia region, they are located in all other regions and they will affect the demand of grapes from this region.

Should you have any questions regarding the pricing arrangements please contact:

We also remind you of the requirement to return your 2001/2002 season spray diaries to Stanley Wine Company Viticultural office.

You should note that BRL is committed to achieving 100% return of spray diaries and the failure to return the forms when they are due will result in delays in making booking arrangements for the delivery of your fruit.

Actual price cannot be less than contracted minimum price (currently $566).
Quality bonus price structure $/tonne: Base $341 (0.50 ANTH) Std $726 (0.85 ANTH) Max $1111 (1.20 ANTH)

PAYMENT TERMS: One third no later than the end of the month following the month of delivery;

Colour = Milligrams of anthocyanins per gram of berry weight, as measured by NIRS system.

PLEASE NOTE: Grapes delivered to wineries outside Sunraysia will be paid at FARMGATE PRICES.

26 There are differences in the Mazza schedule due to the inclusion of Cabernet Sauvignon and Shiraz in addition to Merlot. Insofar as Merlot was concerned the schedule was the same save for the following matters. It stated 70 as the contract tonnes and 75 both as the estimated tonnes and allocated tonnes. It included the first footnote 4, but not the second footnote 4, in the Janevruss schedule. It also included the following as an additional footnote 4:

Merlot for white attracts a weighbridge price of $466 at 11.0 baume.

27 On the same date, 19 December 2001, Hardy sent a circular to growers advising that it could not purchase any un-contracted wine from the coming 2002 vintage with the exception of two neutral white varieties. The circular stated that the surplus of red wine stocks from 2001 will be exacerbated by further significant increases in red wine grape production in 2002.

28 Kennedy said in evidence that in January 2002 some growers provided re-estimates of likely yield but it was not apparent that the surplus was more than expected until late February, early March when the vintage started to come through. It was difficult to know what the surplus would be. Hardy sought re-estimates but on checking them it would be found there was more there. It was a moving feast as to what was out there, and extremely difficult to work out how much remained to be harvested.

29 On 26 March 2002 Hardy sent a circular to growers headed Urgent - 2002 Vintage Arrangements. It stated that the actual yields this year are far in excess of estimations which has caused significant intake problems. It advised arrangements for the intake of grapes. Kennedy explained that Hardy had to slow the wine intake to enable it to optimise the storage and processing capacity and organise other processing and storage arrangements.

30 Janevruss delivered 115.6 tonnes of Merlot grapes on 3 April 2002. Mazza delivered 134.44 tonnes of Merlot grapes by deliveries on 28 March, 3 April and 10 May 2002.

31 Hardy commenced paying growers on the basis of the pricing regime in the 19 December 2001 letter. The first payment to Mazza of one-third of the amount due was made on 30 April 2002, a second payment on 31 May and the third and final payment on 30 June 2002. Payments to Janevruss were made on 31 May and 30 June 2002. Each payment was accompanied by a statement which recorded the deliveries, the amount due in respect of them, and calculation of the payment.

32 Kennedy said that when the vintage was processed Hardy had taken in around 60,000 tonnes more grapes than had been planned. The major reason for the surplus had been the favourable conditions of the growing season. The crop was exceptional, said in the evidence to be one in 50 years.

33 It became apparent that the sheer volume of the surplus together with the high quality of the red grapes (colour and baume) meant that Hardy's purchase cost was significantly greater than anticipated. In these circumstances, according to Kennedy, it was considered necessary to review the pricing regime "proposed" in December as the factual premises on which it was based had changed significantly. The purpose of the review, Kennedy said, was to ensure that the growers were paid a fair market price. Having determined a way to achieve a fair market price, Hardy met with the growers on 11 June 2002 to outline the proposal. The proposal was also set out in a letter to growers dated 13 June 2002.

34 The letter concerned both the 2002 and future vintages. It stated that with the 2002 vintage nearly complete "we need to review how it went, and what we need to do to address the various issues that have arisen". The letter referred to high quality in the premium reds and to well above expected volumes of high quality Cabernet Sauvignon, Merlot and Shiraz. The colour effect, "on top of above final market prices set in January based on the understated grower estimates at the time, led to very high prices for these three varieties". This presented Hardy with a challenge to sell the wine in the competitive market place particularly bearing in mind the large tonnages of fruit purchased at "fire sale" prices by other wine makers. As a result, Hardy and the grower body needed to address the position of premium red wine stocks at above market prices to ensure their mutual benefit. To this end, Hardy proposed to institute the changes that were then set out, for the 2002 and subsequent vintages. It is sufficient to say that the effect of the changes was to reduce the price for Merlot set out in the 19 December 2001 letter. The letter concluded by saying that a revised grape supply contract would be forwarded for consideration.

35 As mentioned in relation to the respondents, on 30 June 2002 Hardy made a payment to growers. Attached to the payment statement was a Revised Pricing Calculation Sheet which showed a calculation of the price payable in accordance with the 13 June 2002 letter. In the case of Janevruss and Mazza the amount of the reduction was the amount they respectively sued for.

36 In September 2002 the weighted average prices for the 2002 vintage across the wine regions, including Sunraysia, became available. The weighted average price is calculated from a survey of all wine makers conducted after each vintage at the end of May, early June. The weighted average price is the statistical mean of the price for each variety. The weighted average price for Merlot in the Sunraysia area was $659, while the Hardy weighted average price was $917. When adjusted to take account of the weighted average price for the Sunraysia area the Hardy weighted average price became $796.

37 Before the Magistrate Hardy relied on the weighted average price of $659 as evidencing the fair market price as defined in the agreement. A check was made as to whether the respondents had been paid more or less than the sum due on that basis. Recalculation showed that Janevruss had been underpaid to the extent of $24,150.80 for which amount together with interest and costs Hardy submitted to judgment. Mazza was shown to have been paid more than it was due on this basis. It was thus submitted that Mazza had been paid above the fair market price and that the claim should be dismissed with costs.

38 At the outset of his reasons the Magistrate noted that there was little dispute about the facts, and that the issue was interpretation of the agreement. He set out cl 5, referred to the 19 December 2001 letter, to the delivery of grapes and the initial payment calculated on the basis set out in that letter. He noted that the respondents' case was that Hardy had advised them of the fair market price in the 19 December 2001 letter.

39 The Magistrate then considered cl 5. He commenced by referring to the second sentence which defined a "fair market price". He noted Hardy's submission that the respondents had been or will be paid a fair market price for the grapes and, accordingly, that there was no basis for alleging a breach of contract. He then said that:

The defendant's obligation was not to pay a "fair market price" in the ordinary meaning of that term but as that term is defined in clause 5. It was obliged to pay the price likely to be realised for the majority of the fruit.

He then referred to the fourth sentence of cl 5 as to advising the price and terms of payment, and said:

This term is mandatory. In its letter dated 19 December 2001, the defendant advised the plaintiffs of the "nominated winery delivered prices" for the 2002 vintage and the payment terms. As required by the fourth sentence of clause 5 this information was provided no later than seven days prior to delivery.

Following receipt of the letter 19 December 2001 the plaintiff's [sic] delivered the grapes which gave rise to this claim, and those grapes were accepted by the defendant.

[He then quoted the second paragraph of cl 5 and continued -]

Following delivery the plaintiffs were paid the first instalment as advised in the letter 19 December 2001.

The area agreement, the letter of 19 December 2001, and the delivery statements are expressed in clear, unambiguous language. I find that the prices and terms of payment advised were the prices "likely to be realised" within the meaning of clause 5 and those prices and terms of payment were described in the defendant's letter 19 December 2001 and accepted by the plaintiffs.

This interpretation is supported by the evidence of Mr Kennedy of the defendant. At page 196 of the transcript the following exchange is recorded between Mr Meldrum QC for the plaintiff and Mr Kennedy:

... you fixed the price on 19 November?
We set out proposed prices, yes.
You call them "proposed prices" but they were your view of the prices likely to be realised for the majority of the fruit being purchased from Sunraysia. Correct?
Yes.

The price "likely to be realised", must refer to an estimate of a future price. It must also follow that prices which the defendant contends should prevail cannot be the prices likely to be realised as they were determined at a time after delivery when the actual market price or actual fair market price could be ascertained.

40 Having thus analysed cl 5 and arrived at the above conclusions, the Magistrate then turned to consider the submissions of Hardy. He did this under three headings, fair market price, the letter of 19 December 2001, and the letter dated 13 June 2002.

41 As to the submissions concerning fair market price, the Magistrate disagreed with Hardy's submission that the issue was whether the growers received a fair market price for their grapes. The question was whether they received a fair market price as that term is defined in cl 5. For reasons stated, that price was advised in the 19 December 2001 letter. The Magistrate concluded this section of the reasons with the following observations:

I therefore do not accept, as was submitted, that if supervening events occur after the fair market price is nominated and accepted that the defendant is entitled to adjust its price or for that matter that the growers would be entitled to claim a higher price should the market price vary upwards at a later date.

The defendant was required to advise the price and payment terms no later than 7 days prior to delivery. The growers have the opportunity to object to the defendant's calculations of the fair market price. But their claim would be for the price "likely to be realised ..." as per clause 5; the actual price or fair market price in the ordinary meaning of that term may not be the same.

42 The Magistrate then considered the 19 December 2001 letter. He first noted Hardy's submission that the letter set out an indicative price, and that Hardy emphasised the words "nominated delivery prices and proposed payment terms". The Magistrate noted that the terms were advised more than seven days before delivery (as cl 5 required) and were accepted by the respondent. He said that the reference to an oversupply of red grapes following the reference to uncontracted fruit was not relevant to the contracted fruit, except that it acknowledged an awareness of a surplus of red grapes. He rejected a submission that the letter nominated a price only in respect of allocated tonnages, as distinct from all grapes from the stipulated block, and found that the allocation tonnages related to the scheduling of deliveries rather than the quantity of grapes to be accepted by Hardy.

43 He noted that Hardy had relied on a previous circular[4] which advised "proposed payment terms" and that Hardy would "monitor" the prices being paid in the Riverland region. He observed that Hardy may have offered to increase the price if the price had increased, but cl 5 did not require it to do so. And, he concluded, the 19 December 2001 letter did not refer to indicative prices. The letter contained the only price advised seven days before delivery.

44 The Magistrate then considered the letter dated 13 June 2002. In relying on this letter Hardy had argued that it was obliged to pay the fair market price but, the Magistrate said, this submission ignored the definition in cl 5. The letter was sent after the grapes had been delivered to and accepted by Hardy. For reasons stated, Hardy was not entitled to change the price on later discovery that the actual price differed from the price likely to be realised for the majority of fruit being purchased from a particular area.

45 In their written submission counsel said that the essential defences of Hardy were:

(a) it did not advise the respondents of the fair market price in the 19 December 2001 letter, and

(b) under the agreement it was obliged to pay a fair market price for grapes delivered and Hardy had paid, or would pay, the respondents a fair market price for their grapes.

46 The written and oral submissions of counsel considerably developed these points. Indeed, even in the oral submissions there was to the end of the reply a refinement of the orders sought. For these reasons it is convenient to attempt a summary of the submissions.

47 First, it was noted that the agreement is that for a term of 10 years Hardy will purchase all wine grapes of the designated type grown on the designated land of the grower. The grower is obliged to deliver the grapes to Hardy. The grower does not have the option of selling the grapes to another person; if a grower did that Hardy may terminate the agreement and claim damages.

(a) the definition of fair market price in the second sentence postulates, and provides the criteria for, an objective inquiry as to the price likely to be achieved. The inquiry is not as to Hardy's subjective view of that price; that view is not the determinant. The inquiry is as to the market for the particular variety of grape in the area, and not merely the grapes purchased by Hardy. The inquiry could be undertaken and answered at any time, before or after Hardy accepted the grapes.

(b) the third sentence had a history which Kennedy described. The indicative price was that formerly published by the Conference. But such prices had not been published since 1996. However, the sentence cannot be put aside from consideration. The provision of an indicative price in December, well before vintage, might provide a guidance for the future. Thus, what is reflected in this sentence is the sense of saying something that is not determinative but looks forward to the future.

(c) in the fourth sentence, colour to which is given by the third sentence, the price referred to was not the fair market price as defined in the second sentence. Rather, it was Hardy's estimation at that stage of the price likely to be realised, that is of what the fair market price will be. The purpose of providing the advice was to provide a basis for calculating the first payment; in the absence of such advice or agreement of the parties as to the price, there would be no basis for the payment.

(d) the fifth sentence is explained by the statutory regime already referred to.

(e) the provision for progress payments in the sixth sentence is also explained by the statutory history. Further, the first payment had to relate back to the advised price of Hardy in the third sentence, otherwise there was no basis for the calculation. Then, after the fair market price is established, the second and third payments can be made on that basis adjusted to allow for the initial payment.

49 Thirdly, Hardy did not advise the respondents of the fair market price in the 19 December 2001 letter. The prices were indicative, and by the letter Hardy did not undertake an obligation to pay them as the fair market price. The following points were made concerning the letter:

(i) it refers to "nominated" wine delivery prices and "proposed" payment terms.

(iii) it does not attempt to set the fair market price. It simply sets out prices proposed by Hardy. It does not refer to the market for grapes but simply proposes a formula for the calculation of the price.

(iv) it does not refer to any other terms of the agreement. It makes no reference to "the price likely to be realised for the majority of fruit being purchased from a particular area".

(v) the pricing structure depends on the quality of grapes delivered by the growers to Hardy, not the likely price of grapes in the market.

(vi) there was no evidence to support the Magistrate's finding that the price stated in the letter was the price "likely to be realised" within the meaning of the definition in cl 5.

50 In the absence of advice of the fair market price in accordance with cl 5, the respondents were entitled to be paid "a fair market price". As the respondents had not adduced evidence of that price, they had not established that they had not been paid a fair market price.

51 Counsel submitted that the weighted average price was the only evidence as to, and was to be equated to, the fair market price. The appellant had paid more than the amount calculated by reference to the weighted average price to Mazza and was willing to pay the required extra amount to Janevruss. However, this submission was qualified by counsel in their submissions in reply. In the reply counsel observed that the only evidence of the fair market price before the Magistrate was the weighted average price and the letter dated 13 June 2002 but each was unsatisfactory for that purpose. The weighted average price was not the same thing as the fair market price as defined. That is, it was not arrived at by applying the criteria in the definition of fair market price in cl 5. Then, the 13 June 2002 letter was a commercial proposition of Hardy that the respondent had not accepted. The only other material was Hardy's 19 December 2001 letter but that was only the view of one buyer (Hardy) in the Sunraysia market. This led on to the alternative manner of disposition of the appeals to which I refer below.

52 Alternatively, if the 19 December 2001 letter did advise the fair market price, the appellant was not bound to make payments in accordance with the letter. Clause 5 does not state that an advised price cannot be reviewed and adjusted by the appellant or the respondents. An interpretation of cl 5 that advice of price by the appellant was conclusive could lead to unreasonable, inconvenient and unjust consequences. The appellant's interpretation would simply mean that it was obliged to pay a fair market price and not some other price previously advised by it. That is consistent with the primary obligation to pay a fair market price. The Magistrate misdirected himself by failing to accept that if the appellant paid or was willing to pay to the respondents more than the weighted average price (being a fair market price) for the Merlot grapes delivered in the Sunraysia area, the appellant had discharged its performance under cl 5.

53 Coming then to the disposition of the appeals, counsel first suggested an alternative approach. The first alternative was based on the respondents having failed to show they had not been paid the fair market price, and, further or alternatively, on the basis of Hardy's submission that in the absence of evidence to challenge the weighted average of $659 as evidencing the fair market price, the Court should hold that that was the fair market price. On the latter basis Mazza had been overpaid and Janevruss underpaid by $24,150.80, and the appeals should be dealt with on that basis. Thus in the Mazza proceeding the appeal should be allowed, the orders made by the Magistrate be set aside, there be judgment in favour of Hardy against Mazza and Mazza pay the costs of the appeal and of the proceeding before the Magistrate. In the Janevruss proceeding, the appeal should be allowed, the orders of the Magistrate set aside and in lieu there be judgment in favour of the respondent against Hardy for $24,150.80, interest and costs, and the respondent pay Hardy's costs of the appeal.

54 If those submissions did not succeed and the Magistrate had not properly considered the matter of the fair market price as defined, in particular how, when and in what amount it is to be ascertained, the alternative was to remit the proceedings to enable that issue to be considered. In that event in each case the orders should be that the appeal be allowed, the orders of the Magistrates' Court be set aside, the proceeding be remitted to the Magistrates' Court for hearing and determination in accordance with law, and the respondent pay the costs of the appeal. Towards the end of his reply counsel said that the latter alternative of remitting the proceedings was the preferred course.

55 In a nutshell, the respondents supported the Magistrate's decision and reasoning. That is, in essence, that the fourth sentence of cl 5 required advice by Hardy of the fair market price as defined, that the 19 December 2001 letter provided such advice, and that Hardy was bound to it while the growers had a right to object as the Magistrate concluded. In the course of their written submission counsel observed that:

The plain reading of the agreement leads to a clear and commercially reasonable outcome. A contractual mechanism that:

(a) requires one party to advise the likely price as defined (seven days before delivery); and

(b) gives the other party a right to object that the price advised is not the likely price (as defined);

is simple and effective. It is far from unreasonable, extraordinary and absurd.

56 Further in the respondents' submissions, it was said that the letter dated 13 June 2002 amounted to an admission that the 19 December 2001 letter constituted advice of the price in terms of the fourth sentence of cl 5.

57 At a late stage in the respondents' oral submissions counsel suggested that Hardy's defence was deficient in that it had not alleged that the 19 December 2001 letter was not an indication of the price. This was a little opaque as the defence specifically alleged that the letter had set out an indicative price and denied that it set out the fair market price. It is plain enough that it was open to Hardy to address submissions to that effect. Such submissions must necessarily have involved or permitted an analysis of the letter and a contention that it did not constitute advice of the price under cl 5. And that is exactly what counsel for Hardy did before the Magistrate; see their written submission to the Magistrate paras 8, 9, 21 and 28. Yet counsel for the respondents said that if Hardy had properly pleaded its defence, the respondents could have pleaded (but did not) that the letter constituted a variation of the agreement or an offer that was accepted by conduct. If the respondents wanted to put that suggested case they could have done so, but there was no mention of it in the reply filed before the trial, there was no application to amend the particulars of claim in order to raise the point, and (it would seem) the contention was not run before the Magistrate. Notwithstanding that, the Magistrate's reference to the price being accepted reflects an awareness that if the growers delivered their grapes without objection to the price they would, all things being equal, be taken as having accepted the price by acquiescence. That, of course, is the notion of offer and acceptance, not as to the agreement generally, because it stood as being for a 10 year term but in relation to signification of acceptance of the price which Hardy advised, or offered as one might consider it. Such understanding was implicit in the case. Further, it was not clear to me where the point was meant to go on the appeal. It seemed to be that Hardy should not be permitted to argue that the letter was indicative only and not advice of the price under cl 5 or some other such point as might be open under cover of the defence. Counsel even used the word estoppel. If that was the point I reject it. On the other hand, perhaps as Hardy's counsel referred to in reply, it was an attempt to uphold the Magistrate's decision on a new ground. In my view it is better understood as a point with no substance.

58 I should add that the respondents' written submission includes reference to Hardy's written submission raising points that should have been pleaded. In my view the points are without substance. Among other things, they reflect an artificially narrow view of the issues encompassed by the pleadings and the conduct of the trial.

59 I have otherwise had regard to the written and oral submissions of the respondents, but consider it unnecessary to elaborate on them further at this stage.

60 As the first question of law is concerned with the weighted average price, it is convenient to deal with it before considering the interpretation of the agreement and whether the 19 December 2001 letter constituted advice of the fair market price within the meaning of cl 5.

61 Before me counsel submitted that the weighted average price was the only evidence as to, and was to be equated to, the fair market price. But, as counsel conceded, the weighted average price was unsatisfactory for this purpose. That was for the fundamental reason that the two things, the fair market price and the weighted average price are arrived at on different criteria. Hence, it is illogical to simply assert that the weighted average price is the fair market price, without having undertaken an evidentiary analysis of what the application of the criteria in cl 5 produced compared to the weighted average price. The Magistrate's reasons contain no discussion on this point, indeed it seems that the issue was not investigated before him. For these reasons alone the contention that the fair market price was, or should in the absence of other evidence be taken as being, the weighted average price must fail. The consequence is also that Hardy must fail on the first question of law raised on the appeal.

62 It is also convenient at this point to refer to the 13 June 2002 letter which the further amended defence had alleged advised the fair market price. I agree with the concession of Hardy's counsel before me that the formula in that letter could not provide the fair market price as defined. The letter was simply a commercial proposition of Hardy for the purpose of reducing its liability for the 2002 vintage, which the respondents rejected. For that reason, the ground of defence that Hardy advised the fair market price of Merlot grapes by the 13 June 2002 letter must have failed.

63 Having clarified these aspects of the case, I now turn to the interpretation and operation of cl 5.

64 At the outset it is useful to recall the interpretation of cl 5 adopted by the Magistrate. It went on these lines.

(a) The fair market price was an estimate of a future price.

(b) Hardy was required to advise its estimate of the fair market price no later than seven days prior to a delivery.

(c) After the fair market price is "nominated and accepted" Hardy is not entitled to adjust its price by reason of supervening events, and the growers are not entitled to claim a higher price should the market price vary upwards.

(d) However a grower can object to Hardy's calculation of the fair market price and, in that event, the grower's "claim" would be for the price "likely to be realised" within the meaning of cl 5.

65 Having thus construed cl 5 the Magistrate then had to determine whether the 19 December 2001 letter constituted advice of the price within the meaning of the fourth sentence in cl 5. In the passage quoted above at [39] he found that the letter did advise the price and terms of payment. In doing so, he rejected the contention of Hardy that the letter merely nominated or proposed prices or stated merely indicative prices.

66 The Magistrate found support for this conclusion in the evidence of Kennedy also set out at [39]. The Magistrate was in error in doing so. The question was whether the letter, properly construed according to its terms, did constitute advice of Hardy's estimate of the fair market price. This was an objective inquiry in which the personal belief or view of Kennedy as to what the prices were meant to be was inadmissible.[5]

67 With those observations I turn to cl 5. It commences with the critical requirement that Hardy pay a "fair market price" as that expression is defined in the second sentence. The definition provides the criteria by reference to which the price is to be ascertained. It is the price likely to be realised for the majority of the particular variety of fruit being purchased from the Sunraysia area. This postulates an objective inquiry which Hardy must undertake to arrive at "the price likely to be realised". Hardy could not, for instance, consistently with the concept of a fair market price and the terms of the definition, and the nature of the commercial arrangement, estimate the likely price on a personal whim, or undertake the task otherwise than in good faith in relation to the growers. Furthermore, what is to be considered is the likely price for the majority of all fruit of the variety in the Sunraysia area, thus encompassing all sales and to all purchases, not merely those of Hardy. In other words, the likely price is not merely in relation to transactions of Hardy with its growers, but all purchases from all growers.

68 What, then, follows in cl 5? The third sentence referring to an indicative price range is understood in the historical context of the former publication of indicative prices. Why was that sentence included? It placed no obligation on either party. It was not a contractual term or stipulation. What it was recording was that normally in December an indicative price range is published. The benefit of that publication was that it informed the parties of what may come to be the case on price in the future. That may be helpful to Hardy in forming its estimation of the fair market price and to growers in forming a view as to Hardy's estimation.

69 Of course this sense of requiring something that looks to the future is inherent in the concept of the fair market price, an essential requirement of which is an estimate of the price "likely to be realised". It is a prognostication as to the future, not the identification of a present price in the market in the Sunraysia area.

70 Then follows the fourth sentence which requires Hardy to advise the price and payment terms no later than seven days prior to a delivery. I should say at once that both counsel took the position that nothing turned on the use of the indefinite article "a" before the word "delivery". Relevantly the question was whether the 19 December 2001 letter constituted such advice, to which issue I return later.

71 It is important to see the requirement to give advice in context. That context includes that the advice is to be given before vintage and, necessarily, well before knowing the price realised for the majority of fruit purchased in the area. Nevertheless, to conform with the requirement, Hardy must arrive at an estimate of "the price".

72 But, one asks, why was it provided that the price so estimated by Hardy be advised at that time? It seems odd in a way that Hardy's obligation was not simply to pay a fair market price according to stated criteria. Clause 5 could, for instance, have not included the words "likely to be" in the second sentence. That would have meant that the price would be ascertained after the vintage was in and the price for the majority of fruit of the particular variety in the Sunraysia area had been ascertained. That, in effect, is the result that Hardy seeks to achieve. This analysis is useful because it is immediately apparent that it sits awkwardly with the terms of cl 5.

73 In the first place, it is not open to disregard the words "likely to be". Not only is there no indication that they were not intended to have meaning, but, as I understand it, the agreement was put forward by Hardy and is in common form with the growers. It is impossible to construe the clause on the basis that those words were surplusage that may be disregarded.

74 In the second place, the provisions in cl 5 which follow the definition seem to be consistent with and explain the intention behind the words "likely to be". That is the requirement of Hardy to advise "the price and payment terms" not less than seven days prior to a delivery. That this is required before vintage and actual knowledge of the price in fact paid for the majority of the fruit in the Sunraysia area explains the phrase "likely to be", as "the price" had to be an estimation of that price.

75 The next factor in cl 5 which emphasises the importance of and need for the early estimation of price is the provision for minimum payment. Hardy was required to commence paying for grapes delivered as early as the thirtieth day of the month of delivery. Under cl 5 the second and third payments were due on 30 June and 30 September respectively.

76 It is useful to see how this scheme of payments worked in practice, although this cannot affect the construction of the agreement. The payment advice statements record that Merlot was delivered as follows: by Mazza in March, April and May, and by Janevruss in April. Hardy made payments on an accelerated timetable to Mazza. In Mazza's case the payments were made on 30 April, 30 May and 30 June, whereas in Janevruss's case it made only two payments on 30 May and 30 June. Perhaps Hardy did not wait until September for the last payment as it wanted the growers to agree to its proposal in the 13 June 2002 letter. Not only did Hardy accelerate its payments to Mazza, but when it made the above payments it could not have known the weighted average price as that was not published until September. There is no suggestion that until that time Hardy could have known the price paid for the majority of Merlot in the Sunraysia area. Thus, even if Hardy had made payments in accordance with the minimum payment terms in cl 5, the first two payments would have been made before the weighted average price was known, or otherwise before the information which would enable the price for the majority of Merlot to be calculated was known. The last payment would have been due on 30 September and it might thus have been a close run thing whether the price for the majority of Merlot was known before even the last payment was made.

77 Thus far the discussion has addressed the minimum payment terms in cl 5. But, being minimum terms, it was open to Hardy to have notified more generous terms to the growers in their advice pursuant to the fourth sentence in cl 5. That would mean terms that accelerated the time for payment. In fact the 19 December 2001 letter did not advise more favourable terms of progress payments.

78 Regarded overall, cl 5 is seen to reflect an intention that the price to be paid by Hardy is that which it is obliged to estimate and provide not later than seven days prior to delivery. Put simply, the agreement requires a price for each vintage, and Hardy's advice triggers the ascertainment of that price. The advice of that price represents Hardy's offer. But the offer must be bona fide and doubtless for that reason cl 5 specifies criteria of an objective nature by reference to which it is to be estimated. It seems only reasonable that the growers be advised of Hardy's estimate before delivery of their grapes. That gives growers a timely opportunity in which to consider the advised price, take any dissatisfaction up with Hardy and otherwise seek advice or take steps that might be considered appropriate.

79 That is the way the parties have structured the agreement, or more accurately, the terms on which Hardy considered it appropriate to purchase grapes from independent growers. It is not for the Court to second guess Hardy's business judgment in this respect. In effect, it may be considered, the clause, indeed the agreement as a whole, reflects a business judgment of Hardy in connection with the tying up of hundreds of growers and a confidence in its own ability to accurately estimate the price at which the majority of fruit will be sold. It would have been easy for cl 5 to have excluded the phrase "likely to be" and to have provided for Hardy to make payments on account of and subject to a price to be ascertained and for adjustment to be made on ascertainment of that price.

80 It follows that I do not accept that an advised price is a mere indicative price that may be adjusted at the instance of Hardy when the price for the majority of fruit is known. The proposition runs counter to the express terms, structure and requirements of cl 5 and the intention therein disclosed. Indeed, the submission involves reading into cl 5 a right in Hardy to have the price for the majority of fruit objectively ascertained after vintage and for any necessary adjustment to be made to the advised price. In my view no such reading in, or implication, is necessary for cl 5 to operate according to its terms. Furthermore, it is not suggested, and it is no part of Hardy's case, that the price arrived at and notified by Hardy was affected by any vitiating factor.

81 I turn then to the question whether the 19 December 2001 letter did advise the price and payment terms to the growers within the meaning of cl 5.

82 The letter is to be read and understood in the context of the agreement, in particular of cl 5 which required Hardy to advise the price for the 2002 vintage. The provision of such advice was an essential requirement in that under the broad umbrella of the 10 year agreement it provided a statement of the amount which Hardy would pay for the 2002 vintage. Any grower that was content to accept (by acquiescence or express indication) the price thus offered thereby had an agreed consideration for the vintage. Any grower that did not wish to accept the price could take the issue up with Hardy or make a counter offer, one would suppose before delivering grapes as otherwise the act of delivery might be taken as constituting acceptance of the price.

83 This being the purpose of the advice of price, it is understandable that the requirement was that Hardy "shall advise the price". Hardy had no choice, it was obliged to estimate the likely price and advise that price to the growers as the amount it would pay.

84 It was not suggested by any party that Hardy had performed this obligation by a communication other than the 19 December 2001 letter prior to a delivery being made. This fact alone does not mean that the letter did constitute advice for the purpose of cl 5, but it would be surprising if Hardy had not performed its obligation to provide such advice.

85 The issue is also to be considered in the business context operating under the agreement. The agreements had subsisted for some years, without difficulty, at least of the nature of the present dispute. It is not necessarily to be expected that the letter would be drawn with a fine eye to the language of cl 5, with statements that it was given pursuant to the requirement to do so in cl 5, and otherwise using the language of cl 5. The letter is to be read as a communication passing between business people used to dealing with each other under a long term supply agreement and as being likely to be read, by the hundreds of growers, with a reasonable degree of common sense and with regard to its likely purpose and meaning in the circumstances.

86 Having read and re-read the letter, and considered counsel's submissions, I am of the view that the letter was intended to be and is to be understood as being advice by Hardy of the price and payment terms for grapes in the 2002 vintage pursuant to cl 5. The letter is a clear statement by Hardy of what it will pay and the basis of calculation of the price. Among other things, the letter discloses that Hardy is aware of a surplus of red grapes and states that that will affect the demand for grapes in the grower's area. That indicates that Hardy has taken the surplus of red grapes into account in setting the price. It is manifest in my view that the letter represents the results of Hardy's consideration of the 2002 vintage, the market and its likely financial outlay, in determining the price to be offered to the growers. It is not to the point that the letter did not say that the price was "the price likely to be realised for the majority of fruit being purchased from a particular area", or refer to the fair market price. The letter is to be understood, in context, as advising the price which Hardy would pay under the agreement and which represented the fair market price.

87 Much was made of the words "nominated" and "proposed" but these are not inappropriate bearing in mind that in advising the price Hardy was putting forward or offering its price. Indeed, in relation to the price for grapes for white wine the word "offered" was used. Furthermore the repeated use of the phrase "will be" in relation to payment is consistent with this being the price, and these being the terms, rather than merely being indicative of, or indefinite as to, price.

88 I am of the view therefore that the Magistrate was correct in concluding that the 19 December 2001 letter constituted advice of price and payment terms pursuant to cl 5.

89 I am further of the view that Hardy's alternative submission that it was not bound to pay for grapes in accordance with the terms of the letter must fail. The submission is that the price can be reviewed after the event in light of the price actually realised in the market. The submission must fail for the reasons given above. What has happened is that Hardy advised the price it would pay and the growers, or at least the respondents, seek payment of that price for their grapes. If the parties had intended that "the price" be open to review and adjustment in light of the actual market in the vintage overall, in the way that Hardy has suggested, they could have so provided in the agreement. There no mention of any such right and it is altogether impossible to read such a right into the agreement.

90 In fact, in my view, the rub here is not so much in the terms of the agreement, which in themselves represent a commercial decision by Hardy as to the appropriate terms upon which to tie up large numbers of growers for a 10 year term, but in the price and payment terms put forward in the 19 December 2001 letter. That price and those payment terms also reflected an assessment of business risk by Hardy. What resulted in Hardy paying much more than it had intended, was the exceptional vintage, quality and baume of the grapes which rendered the terms in Hardy's 19 December 2001 letter more generous than Hardy had judged would be the case.

91 For these reasons, the Magistrate was correct in finding that Hardy was obliged to pay for Merlot grapes in accordance with the 19 December 2001 letter. Accordingly question 2 and the related ground of appeal must be answered in the negative.

92 In each case the appeal will be dismissed with costs including reserved costs.

[1] A variation in the Janevruss contract is not relevant to the case.
[2] South Australian Government Gazette, 19 December 1991 p 2017.
[3] South Australian Government Gazette, 26 March 1992 p 937, 28 January 1993 p 483.
[4] Counsel informed me that the circular was that dated 15 February 1999.

[5] Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 352 per Mason CJ; FAI Traders Insurance Co Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343 at 351 per Brooking J; Ryan v Textile Clothing and Footwear Union of Australia [1996] 2 VR 235; Collins Hill Group Pty Ltd v Trollope Silverwood & Beck Pty Ltd [2002] VSCA 205 at [44] per Ormiston JA.

Magistrates' Court Act 1989