Court of Appeal (Vic)|2014-03-07|Before: Nettle JA, Beach JA

Cedar Meats (Aust) Pty Ltd v Five Star Lamb Pty Ltd [2014] VSCA 32 (7 March 2014)

1 This is an appeal from a judgment given in the Commercial Court. The judge rejected the appellant's ('Cedar Meats') claim for amounts alleged to be due from the respondent ('Five Star Lamb') under an agreement ('the Agreement') for the processing and packaging of lamb products at the Cedar Meats' abattoir at Brooklyn. His Honour concluded that the parties had abandoned the Agreement with the result that Cedar Meats' claim was extinguished and, in any event, that the amounts in question were in the nature of a penalty and, therefore, unenforceable.

2 According to the uncontested evidence, Five Star Lamb was established in August 2009 with the aim of becoming a high quality lamb producer. The idea was that it would arrange for the processing of lambs by a suitable export accredited lamb processing operator and thereafter for the marketing of the lamb to customers in predominantly overseas markets. To begin with, Five Star Lamb had in mind to engage CRF Group Ltd ('CRF') as its processor. CRF, however, was processing lamb for Coles and Coles objected to CRF processing competing brands. In the event, Five Star Lamb was introduced to Cedar Meats and retained Eckard Huebl of Intec Australia Pty Ltd ('Intec') to negotiate a processing agreement with Cedar Meats.

3 The Agreement was executed on 24 December 2009. It recited that Cedar Meats had agreed to provide Five Star Lamb with manufacturing, processing and packaging services for lamb products at the Cedar Meats' abattoir at Brooklyn and that Intec had agreed with Five Star Lamb to supervise Cedar Meats' performance of the services.

[Cedar Meats] will provide [Five Star] with quality lamb kill, further processing and packaging services for lamb products at the abattoir upon the terms and conditions set out in this Agreement.

5 Clauses 6, 7, 8 and 9 of the Agreement specified the services, the quantities of lamb to be processed during the term of the Agreement and the amounts to be paid by Five Star Lamb:

[Cedar Meats] will provide [Five Star] with quality kill, further processing, packaging, chilled storage and load out services for lamb products at the abattoir during the Term.
[Cedar Meats] will kill process and pack lamb in accordance with the agreed daily volumes set out in item 2 of Schedule 2
Where the daily volume total:

(a) falls more that 25% below the agreed daily volume as set out in item 2 of Schedule 2, as measured on a cumulative weekly basis, [Five Star] will pay to [Cedar Meats] a minimum of 75% of the agreed daily volume and price for those days.

(b) for those days and only those lambs where the volume exceeds the agreed daily volume as set out in item 2 of Schedule 2, by more than 10% as measured on a cumulative weekly basis, [Five Star] will not be obligated to pay the equipment assistance fee to [Cedar Meats] as set out in item 3 of Schedule 2.

During the Term, [Five Star] will pay to [Cedar Meats] a 'per head' price by period year for the provision of quality kill, further processing, packaging, chilled storage and load out services, in the amounts as set out in item 3 of Schedule 2.

The term of the agreement commences on 1 February 2010 and terminates on 30 June 2013 ('the Term').

7 Clause 12 provided for early termination of the Agreement in certain events:

This Agreement may be terminated:

(a) at any time in writing by mutual agreement of the parties: or

(b) immediately in the event that [Fives Star] or [Cedar Meats] goes into administration, liquidation or enters into a scheme of arrangement with its creditors; or

(c) by FSL if CM loses or fails to maintain any of its current export licences; or

(d) by FSL if CM fails to take reasonable steps to obtain a licence to export to Russia; or

(e) by FSL if Intec determines that there is a serious ongoing QA issue that CM fails to rectify within 14 days of receipt of written notice of same from Intec; or

(f) by FSL if CM fails to maintain adequate plant and contents, public and product liability insurance; or

(g) by FSL if CM fails to ensure that:

(i) FSL's product is to be the first to be processed every day except when Intec is notified with reasonable notice prior to processing by CM due to circumstances where FSL's lamb is not available to be processed or unsuitable to be processed. Upon notification by CM Intec has the right to take corrective action to ensure FSL's lambs are first to be processed.

(ii) The volumes in the Schedule are met; or

(iii) If CM fails to keep FSL's product separate and identifiable; or

(iv) If CM prevents access by FSL to its product for the purposes of removal from CM's premises.

(h) by either party if a defaulting party fails to rectify a default after receiving fourteen (14) days written notice of the default.

8 Clause 14 provided for the consequences of termination of the Agreement:

14.1 When the Agreement is terminated, [Cedar Meats] will render a final invoice for payment by [Five Star] (within 14 days of receipt) of all moneys owing under this Agreement.

14.2 After termination of the Agreement, [Cedar Meats] will permit upon reasonable notice the employees, staff or representatives of [Five Star] to attend at the abattoir or other agreed premises to collect and remove, any and all lamb, lamb by-products, whether alive or processed, packaging materials and any other property owned or supplied by [Five Star].

9 Clauses 20.9 and 20.10 provided for waiver and amendment of the Agreement:

20.9 A failure, delay, relaxation or indulgence by a party in exercising any power or right conferred on a party by this Agreement does not operate as a waiver of the power or right. A single or partial exercise of the power or right does not preclude a further exercise of it or the exercise of any other power or right under this Agreement. A waiver of a breach does not operate as a waiver of any other breach.

20.10 This document may only be varied or replaced by a document in writing duly executed by the parties.

10 Clause 20.4 provided that the Agreement was entire:

This Agreement contains the entire agreement and understanding of the parties hereto with respect to the subject matter to which this Agreement relates and supersedes any prior agreements reached between the parties. No other prior or subsequent agreements understandings terms conditions warranties representations covenants inducements promises or arrangements or undertakings oral or written whether express or implied between the parties hereby shall extend define or bind the parties hereto with respect to the subject matter to which this agreement relates.

11 The judge found that, right from the commencement of the Agreement, Five Star fell far short in providing Cedar Meats with the agreed daily volumes specified in cl 7 of the Agreement but that, for a considerable time, Cedar Meats did not press for payment of the amounts provided for in cl 8:

Despite [Five Star] not meeting the agreed daily volume, Cedar Meats never pressed for payment of the shortfall or sent any tax invoices in this regard or recorded the extent of the deficiency. It was common ground that Cedar Meats wanted to provide as much help and assistance to Five Star as possible.[1]

12 Matters then came to a head towards the end of 2010, resulting in the cessation of production:

During the latter part of 2010 Five Star was increasingly experiencing financial difficulties. In late October discussions were held with its bankers, National Australia Bank. It was clear that the business of Five Star needed to be restructured. Matters discussed between Five Star and its bankers included the requirement that additional equity be invested and a wind down of the business in its present form.

The Agreement was discussed on 27 September 2010 at a meeting between Eckard Huebl (Huebl) of Intec Australia Pty Ltd (Intec) and Cedar Meats. Intec performed quality control and manufacturing supervision services at Cedar Meats on behalf of Five Star, pursuant to an agreement between Five Star and Intec that was entered into around the same time as the Agreement. All present at the September meeting, except Joseph Kairouz (Joseph) of Cedar Meats held the view that the Agreement should come to an end because of the very low numbers. The discussions at the meeting are contained in an email sent by Huebl to Mark David Suttie (Suttie) of Five Star on 27 September 2010. The email contains the following paragraph:

There was a suggestion that CM should charge for all past shortages, but that was dropped after some discussions and my advise [sic] that FSL would not accept such a claim.

Although Huebl did not give evidence, the email was in the original court book and referred to during the case. Tony was cross-examined on the contents of the email. It is properly part of the evidence.

The Agreement was also discussed at a meeting two days later, on 29 September 2010, during which Joseph said he wanted Five Star to commit to the Agreement or let it go. Tony, who was at that meeting, gave evidence that he considered that the words attributed to his father, Joseph, were inaccurate. However he did not make his own notes of the meeting and his recollection was vague. Suttie recorded the discussions in an email of the same date (to the effect above) which he confirmed to be correct. It is clear that all parties were concerned about the low volume of production.

On Friday 29 October 2010 production ceased at the plant. There was no further production that year.

On the same day, Suttie attended a meeting at the plant. Joseph, Tony and Pierre Kairouz attended on behalf of Cedar Meats. Suttie discussed the wind down of the business, and ending the Agreement. Cedar Meats' representatives said they would think about it but that they wanted to keep and use Five Star's brand in the short term. If Five Star wanted to recommence production they would renegotiate the Agreement and start afresh. When Five Star was ready, it would be welcomed back to the plant to process in its own right. Suttie recorded the discussions in an email dated 30 October 2010 which he confirmed to be correct. In the email Suttie noted that Cedar Meats may try to enforce the 'volume requirements in retrospect if we were not to give them access to the brand'. There is a further email of 1 November 2010 to similar effect.

After production ceased, a meeting between Five Star and Cedar Meats was scheduled for 4 November 2010 (the November Meeting). Five Star placed much reliance on what was said at this meeting.

William Clarke (Clarke) and Suttie, both directors of Five Star at the time, proposed to attend the November Meeting and had discussions prior to the November Meeting regarding possible solutions. In an email to Clarke, dated 1 November 2010, Suttie noted that Cedar Meats wanted volume and a full commitment to a workforce in the boning room. He noted that Cedar Meats had suggested that they put their own product in Five Star's packaging until Five Star was ready to produce in its own right. Suttie also proposed, as an option, that Cedar Meats could invest in Five Star. At about this time the agreement between Five Star and Intec was terminated by agreement.

The November Meeting took place at the plant. There is no agreed or accurate written record of what was said at the meeting. The parties who gave evidence had different recollections and came away with different views as to whether the Agreement was on foot. On the whole the evidence was general and conclusionary. To a great extent it was based on reconstruction and impression rather than recollection. However, I hasten to add that I do

not regard any witness as being deliberately untruthful. With these considerations and limitations the court is required to do the best it can.

Those present at the meeting were Suttie and Clarke on behalf of Five Star and Joseph and Dick Merton (Merton) on behalf of Cedar Meats. Tony was not present for the entire duration of the meeting and has no specific recollection of the meeting.

Suttie gave evidence that both he and Clarke said words to the effect that Five Star was unable to continue with its current business model and the Agreement. According to Suttie he presented Joseph with a deed of termination of the Agreement and Joseph said that he was very sorry to hear that Five Star could not continue on and that there was no need for any written document because they were all hoping that Five Star could recommence production when it was ready and able to do so. According to Suttie, Joseph said that all Cedar Meats wanted was that if Five Star started to trade again it would use Cedar Meats' plant. Suttie gave evidence that when he left the meeting he thought the Agreement was no longer on foot. Had he been told otherwise he would have considered taking further steps.

Clarke's evidence was to similar effect. However, according to Clarke, Joseph said that Cedar Meats was happy to end the Agreement. Further, Clarke said that as far as he could recall the deed of termination was signed although he conceded that he did not observe the actual execution thereof and could not recall having sighted a signed copy. No signed copy has been produced. Clarke gave evidence that when he left the meeting he thought the Agreement was no longer on foot. Had he been told otherwise he would have considered taking further steps.

Other than Tony, no other witness gave evidence on behalf of Cedar Meats. Merton and Joseph were not called. Tony could not recall the November Meeting specifically or that his father Joseph said that he was happy to end the Agreement. Tony gave evidence of a general nature to the effect that he referred to the Agreement on many occasions, and in particular usually noted the failure by Five Star to comply with the volume requirements specified in the Agreement.

In the circumstances I am inclined to accept the uncontradicted evidence of Suttie and Clarke as far as it goes. Despite vigorous and sustained cross-examination they adhered to their version in every major respect.

After the November Meeting, Cedar Meats commenced marketing lamb under its own brand called 'Jimba'. In late December 2010 Five Star refused to permit Cedar Meats to pack its new Jimba branded product in Five Star's packaging.

...

In January 2011 Clarke met Joseph at Cedar Meats' plant. Clarke said words to the effect that he had a few lambs he wanted to put through but could not guarantee any numbers. Joseph responded that Clarke could put lambs through and, so far as numbers were concerned, could start with one, then two, then three, and build from there. According to Clarke the Agreement was not referred to or discussed. Joseph was not called and this evidence remains uncontradicted.

After the discussion between Clarke and Joseph, Five Star started production with Cedar Meats on an ad hoc basis. Five Star began processing very small quantities at the plant, on one occasion in January 2011, two occasions in March 2011, and then there was some [further] production in 2011 but no more than once a week. The production in 2011 consisted of small ad hoc quantities after a long break. Even Tony described the processing as being ad hoc.

The production of Five Star lamb at the Cedar Meats plant occurred when space was available, often on Friday afternoons. Cedar Meats also processed other products. This was not a situation where Cedar Meats reserved space at the plant each day, in case Five Star turned up with deliveries of the agreed daily volumes.

In relation to the ad hoc production that commenced in 2011 the following matters are relevant:

(a) Tax invoices were rendered by different entities. Brooklyn Meat Processors Pty Ltd rendered invoices for killing, Cedar Meats rendered invoices for boning and United Cold Storage Pty Ltd rendered invoices for storage. This differed from the position during 2010. From 1 February 2010 until 29 October 2010 all invoices had been provided by Cedar Meats. Further, the invoices rendered by Cedar Meats to Five Star in 2010, and the various invoices rendered in 2011, did not mention agreed numbers or shortages. They referred only to quantities actually processed.

(b) From November 2010 Intec was not involved in any quality control functions. Intec had been involved in quality control between February and October 2010. The quality control agreement between Intec and Five Star, which was negotiated and drafted together with, and entered into at about the same time as the Agreement between Cedar Meats and Five Star, and operated together with that Agreement, came to an end in November 2010.

(c) Cedar Meats processed other lamb products including Jimba and set aside Friday afternoons ─ or another specific day or period ─ to process Five Star lambs.

(d) A revised pricing schedule applied with effect from August 2011. The prices were higher than those recorded in the Agreement. In late July 2011 Cedar Meats notified Five Star of a change in prices. Instead of $21.50 per head of lamb it would charge $27.00 per head of lamb. From that time, the invoices reflected the increased price. Under the Agreement, prices per head were fixed for the duration of the agreement (clause 9). Tony said that Simon Neylon (Neylon) ─ a Five Star employee with an office at the Cedar Meats plant ─ was happy to accept the new charges, however Neylon said that he did not like it, so he spoke to Clarke about it, and at the end of the day Five Star agreed to the revised pricing schedule.

(e) Tax invoices rendered by Cedar Meats were paid by Five Star. These tax invoices reflected the new price and no reference was made in the tax invoices or otherwise to the Agreement.

(f) During 2011 there was no written reference at all by any party to the Agreement, the quantities referred to thereunder or that Cedar Meats reserved its position in that regard. Whether the matter was raised in discussions is a matter of some dispute. In my opinion it is more probable than not that the matter was not raised in 2011. Prior to 4 November 2010 there were complaints about short deliveries. They were usually in the form of emails.[2]

13 Based on those findings, the judge held that the Agreement had been abandoned. His Honour reasoned that:

In my opinion after both the November Meeting and the meeting in January 2011 between Clarke and Joseph, and at some point during 2011 that it is not necessary to identify, the parties conducted themselves and operated for a sufficient period of time on a different basis to the Agreement, in such a way so as to effectively abandon it. A number of matters inform this conclusion.

First, in 2011, and after a break of many months, ad hoc processing at the plant commenced. The volume was very small and far short of the agreed daily volume referred to in the Agreement. Nothing was said about this. Production was no more than once a week usually on a Friday. It was as if the parties started afresh as contemplated in the various discussions referred to.

Although the various meetings held in September, October and November 2010 did not result in the termination of the Agreement, they provide a relevant foundation for the new basis on which the parties conducted business in 2011.

Secondly, as referred to in paragraph 37(a) different companies provided the services and rendered tax invoices without any reference to the Agreement.

Thirdly, and with effect from August 2011, the pricing structure changed significantly. Although the parties agreed to the new pricing structure no reference was made to the Agreement. There was no need to. By this stage at the very latest it was clear to all that the Agreement was no longer relevant to the relationship between the parties. It had been abandoned and was of historical relevance only. The price increase is not without some significance.

In G W Fisher Ltd v Eastwoods Ltd,[3] the Court inferred that both parties treated a contract for delivery of 25,000 tonnes of cement at a fixed price per tonne as at an end as the parties proceeded to deal with each other at different prices. The Court held that the acceptance of deliveries at a figure below the contract price was an election to treat the contract as at an end, so that the contract was abandoned. It regarded the evidence of abandonment as cumulative. The position is the same in the present case. The price increase, not expressed as a variation to the Agreement, forms part of the relevant conduct of the parties.

Fourthly, as referred to in paragraph 37(b) Intec no longer provided quality control services.

Fifthly, from the various discussions it is clear that Cedar Meats was aware that Five Star had engaged in a financial restructuring and in effect commenced 2011 under 'Five Star Mark 2' and on a different basis.

Sixthly, if Cedar Meats had intended to charge for the shortfalls, it would presumably have included the shortfall amounts (which were in the millions of dollars) as an asset (receivable) in its balance sheet. However it did not do so in 2010, 2011 or 2012. Nor were the shortfalls referred to in Cedar Meats' debtor maintenance report. By itself this point may not be of great significance. However it is not irrelevant.[4]

Finally, the length of the period of inaction, or rather action on a basis different to the Agreement and without reference to it, is significant. The length of the term of an agreement is a matter of some relevance in assessing the likelihood of abandonment.[5] The Agreement had a total term of 3½ years. The period of inaction between the November Meeting and the letter of demand in December 2011 was about one third of the total duration of the Agreement. This is on top of the period of Cedar Meats' inaction in enforcing the penalty prior to the November Meeting.[6]

I consider that in these circumstances there was a lapse of time, sufficiently long so as to enable the Court to infer that both parties thought that each of them had treated the Agreement as at an end. The whole of the circumstances point to the conclusion that neither party continued to have the Agreement in mind throughout 2011. Again it is not necessary to identify a specific date or event or point in time. They communicated to each other, in the manner identified, that they were content to operate on a new basis and that the Agreement was a thing of the past.

...

...There was no express or even implied reservation of rights on the part of Cedar meats and although to its credit it was being helpful and supportive and did not enforce the Agreement, the conduct of the parties set out above evidences and intention (whatever the subjective intention of the parties) to move forward on a different basis which in fact occurred.[7]

14 The judge also held that, if the Agreement had not been abandoned, Cedar Meats would be estopped from contending that the Agreement remained on foot. His Honour reasoned that:

In my opinion the necessary representation that clause 8(a) would not be enforced and that the Agreement was at an end may properly and reasonably be inferred from the conduct of Cedar Meats. Its conduct as identified above was sufficiently clear and unequivocal to justifiably permit Five Star to assume that the Agreement had ended, clause 8(a) would not be enforced and that a new regime would apply to Five Star Mark 2.

The discussion at the November Meeting and the conduct (including silence) of Cedar Meats after the November Meeting are critical. What was communicated is sufficiently clear, unambiguous and unequivocal. When the trading relationship resumed in January 2011, it was very different to the relationship that existed between February and November 2010. The events which are set out in relation to the abandonment issue provide a sufficient foundation for the assumption made by Five Star that the Agreement was no longer on foot and that Cedar Meats would not enforce clause 8(a) of the Agreement. Although the Agreement did not stipulate when Cedar Meats was required to submit a tax invoice for any shortfall, the failure to invoice for the lengthy period referred to, together with the other conduct referred to, constituted sufficient conduct to provide a basis for the estoppel defence.

Further, Cedar Meats by its conduct (including silence) induced Five Star to adopt the assumptions or expectations. From February 2010 to November 2010 Cedar Meats did not insist on Five Star's compliance with clause 8(a), but rather led Five Star to believe, as was the case, that it was trying to support Five Star through Five Star's financial woes. This culminated in the November Meeting. From 4 November 2010 to 8 December 2011 Cedar Meats acted, and encouraged Five Star to act, as if the Agreement was not on foot. The relevant conduct is referred to in detail above in relation to the abandonment issue.

Five Star clearly relied on the representation. Such reliance was reasonable in the circumstances. The steps taken by Five Star in 2011 were based on the assumptions and expectations referred to. Five Star reorganised its affairs and finances on the basis that it would not, so far as Five Star Mark 2 was concerned, be encumbered by the Agreement and the potential 'noose' that clause 8(a) created.

Both Suttie and Clarke relied on the representations. Both understood, following the November Meeting, that the Agreement had ended, that Five Star had no obligation to provide minimum quantities, and that the agreed daily volume provisions would not be enforced by Cedar Meats. Suttie's evidence was that if he had known that Cedar Meats would later contend that the Agreement was still on foot, he would have pushed for termination harder. His understanding at the time was that there was the opportunity to renegotiate the contract and to come back to Cedar Meats when Five Star had got its financing together. Clarke's evidence was that if he had known that Cedar Meats would at a later stage argue that the Agreement remained on foot, he would have sought legal advice in order to ascertain whether that was true or not. He said that if there was any risk to Five Star in relation to payment of minimum quantities, which it could not in any event pay, he would have wound up the company. Further, when Five Star Mark 2 commenced operations in early 2011 he would have negotiated a new agreement and begun a fresh relationship with Joseph and Merton of Cedar Meats. In early 2011 the relationship between Clarke and Joseph was close. Clarke's understanding was that the original Agreement no longer stood, and when he chose to move to CRF he had no idea that there would be repercussions. Had he not had the belief that the Agreement was terminated, he would not have shifted processing to CRF. I accept this evidence.

If Cedar Meats was permitted to depart from the representation that created the assumption that was relied on, Five Star would be exposed to a substantial claim that it did not expect to have and indeed assumed that it did not have.[8]

15 The judge was persuaded, too, that, in view of what his Honour considered to be Cedar Meats' representation to Five Star Lamb (that Cedar Meats would not enforce cl 8(a) of the Agreement) Cedar Meats' claim for amounts said to be due under cl 8(a) amounted to misleading and deceptive conduct within the meaning of s 52 of the Trade Practices Act 1974 (or s 18 of the Australian Consumer Code) and, were it necessary to do so, the court would make an order under s 87 of the Trade Practices Act or s 237 of the Australian Consumer Code to prevent it. As his Honour put it:

Given the findings in relation to the abandonment and estoppel issues it is strictly not necessary to deal with this issue. However it probably follows from the reasoning, particularly in relation to estoppel, that the claim is made out.[9]

16 Finally, the judge held that, in any event, the amounts which cl 8(a) required Five Star to pay if it failed to deliver the agreed daily volumes were in the nature of a penalty and consequently unenforceable. After reference to a number of authorities, including the High Court's recent decision in Andrews v Australia and New Zealand Banking Group Ltd,[10] his Honour stated that:

In the present case, there was a requirement under clause 8(a) to pay $21.50 per head of lamb, in circumstances where this greatly exceeded the actual damages likely to be inflicted by a failure to deliver 75% of the agreed daily volumes. In Lake River, Judge Posner gave an example that a requirement to pay four times the lost profit was a huge windfall; and gave another example where the total gain was 2½ times the lost profit.[11] As in the present case, most of the costs of performing the contract (the variable costs) would be saved if the contract was broken, and this saving was not reflected in the damage formula. As a result, at whatever point in the life of the contract a breach occurred, the damage formula gives one party significantly more than its lost profits from the breach.[12]

Further, Cedar Meats had an established, operating meat processing plant since 2008. Its kill capacity was 4,500 heads per day. The only new element associated with the Five Star contract was the lamb boning line. Cedar Meats required new equipment for that line. But initially the equipment was borrowed and it was only purchased (by a different company) in mid 2010, after the Agreement had commenced, and for a lower sum than had been expected. Cedar Meats incurred any equipment-related expenses after, not before, it began supplying the customer. Further, as part of its schedule of fees, Cedar Meats also charged Five Star an amount of $0.50 per head (up to $280,000) in respect of equipment fee. The evidence establishes that the interruption to performance generated significant cost savings which are not reflected in the $21.50 per head fee. In contrast to a gas supply contract, where nearly all the costs associated with supply are sunk costs and once the pipeline is operational very little effort is required to push gas through, in the meat processing industry much effort is required, as the process of killing and boning is labour intensive. Insisting on payment of the full amount per head without making any allowance for the significant cost savings associated with not performing the relevant tasks constitutes in my opinion the stipulation for an extravagant amount that far exceeds the greatest loss suffered by Cedar Meats.[13]

17 Originally, Cedar Meats contended in its amended Grounds of Appeal and written outline of argument that the judge erred in holding that the Agreement was abandoned. At the outset of oral argument, however, counsel for Cedar Meats announced that he no longer pressed that contention in its entirety but rather only that the judge was in error in holding that the abandonment of the Agreement had the effect of discharging Cedar Meats' rights to cl 8(a) payments accrued due up to the point of abandonment.

(ii) Grounds 4, 5, 6, 7 and 8: Accrued rights

18 As has been seen, the judge held that, because Cedar Meats did not expressly reserve its rights to accrued cl 8(a) payments; did not seek to enforce those rights until November 2011; and, in the interim, processed some small quantities of lamb for Five Star on an ad hoc basis on terms different to the terms of the Agreement, it was to be inferred that Cedar Meats had abandoned its accrued cl 8(a) entitlements.

19 With respect, we take a different view. The consequences of the discharge of a contract by abandonment depend on the intention of the parties as manifested in the way that they have acted in relation to each other.[14] According to ordinary contractual principles, the manifestation of such an intention may be express or implied. Where, however, a contract has been partly performed, it is not lightly to be supposed that parties intend to abandon accrued rights.[15] Absent a clear indication to the contrary, it is to be inferred that the abandonment of a contract operates prospectively without prejudice to accrued entitlements.[16]

20 In this case, although the parties may have acted towards each other in and after November 2010 in a manner which implied that, thenceforth, they were prepared to deal on a new and different basis, non constat that Cedar Meats evinced an intention to give up valuable accrued rights in respect of the period up to the point of abandonment. Of itself, the fact that Cedar Meats later processed some small quantities of lamb on an ad hoc basis on new and different terms could hardly be seen as indicative of an intention to abandon accrued rights. So to act was not inconsistent with the preservation of accrued rights; and, although the fact that Cedar Meats did not attempt to enforce its accrued rights for a considerable time was a relevant consideration,[17] its significance could only be understood in the context of what led up to the point of abandonment. In that context, so far from Cedar Meats impliedly waiving its accrued rights, it appears to us that Cedar Meats made patently clear to Five Star Lamb that its preparedness to refrain from enforcing its accrued cl 8 rights was both limited and conditional.

21 As was earlier recorded, the judge's contrary conclusion was informed by what his Honour characterised as 'uncontradicted evidence' of Messrs Clarke and Suttie that, 'when [each of them] left the meeting [of 4 November 2010] he thought the Agreement was no longer on foot'; and, in Clarke's case, that if he had been told otherwise he 'would have considered taking further steps'.

22 With respect, however, that was not the thrust of the evidence. Clarke said at some points in his testimony that he believed that the Agreement had come to an end because he believed that Cedar Meats executed the deed of termination proffered by Five Star Meats. But, at other points in his evidence, he conceded that his state of mind was that he had been uncertain as to whether the deed of termination was signed. And, whether or not he honestly believed that the Agreement had been terminated, he readily acknowledged that Cedar Meats had intimated to him that it would waive its rights to payments under cl 8 only 'so long as' or 'on condition that', when Five Star was once again in a position to process further lambs, it retain Cedar Meats to do the processing. Thus in evidence in chief:

Counsel: What did he [Mr Kairouz] say as best you can recall? --- He said that if we hadn't lived up to our numbers and it was clear that we couldn't live up to our numbers, however if in the future - the penalty would be waived so long as when we wanted to produce lambs again that we went and spoke to Cedar Meats about processing lambs there.

23 And to the same effect in cross-examination, but more explicitly:

Counsel: If we can go to that meeting, the 4 November meeting, I believe? --- Yes, the termination meeting

Counsel: Well, that is what you call it? --- Yes.

...

Counsel: You said in your oral evidence now that Joseph Kairouz said words to the effect of that Five Star Lamb hadn't met its minimum quantities?---Yes.

Counsel: And wouldn't be charged?---Yes.

Counsel: So long as when you were able to produce meat in the factory you went to speak to Cedar Meats? --- Yes.

Counsel: I put it to you that there is some truth in that but what Mr Kairouz said to you was not so long as when you are able to produce meat you go and have a chat. What he said was so long as when you are able to produce meat, you produce it, that is Cedar Meats. It is only, - I mean it could only have been you might have overlooked it?--- Mm.

Counsel: But I put it to you that is probably more accurate that what he said is not that you come and have a chat but that you produce it at Cedar Meats? --- Yes, he said - his words were, 'We will not charge the penalty but if - that in the future that you would like to produce more meat, you come and talk to us, and subsequently, obviously, produce your lambs here at Cedar Meats.'

...

Counsel: But what he was really on about and what both parties understood is that if we could just paraphrase, Joseph Kairouz or Cedar Meats was not going to charge the penalty amounts, on condition that when Five Star was able to produce lamb it would produce it at Cedar meats? --- Correct.

...

Counsel: We will get back to that in a moment. If I just go back to where we were in 2011, part of the understanding between you and Joseph Kairouz which I have referred to, that understanding being that Cedar Meats will not seek payment of the amounts under the contract under condition that Five Star Lamb when they are able to kill, kill at Cedar Meats? ---Yes.

24 Suttie's evidence was even more unhelpful to Five Star's cause. His clear recollection was that Cedar Meats pointedly refused to sign the deed of termination and he, too, acknowledged that Cedar Meats conditioned their non-enforcement of accrued rights on Five Star Lamb entering into a new agreement:

Counsel: What is your understanding of what needed to be done in order to terminate the contract? You had said earlier you would have pushed harder for termination and I suppose if we go step by step you would say, 'I would have pushed harder for termination,' because hopefully had you pushed harder there would have been termination. Is that why you said that? --- Yes

Counsel: Not having pushed hard enough you didn't actually get to the point that Cedar agreed to terminate. --- That's correct because we had an understanding that we were going to proceed down a different path which was to basically come to a new agreement.

...

Counsel: Cedar wasn't prepared to put anything in writing or you hadn't even asked them to terminate in writing? --- We handed Joe Kyrous [sic] at

that meeting on 4 November the termination document that we prepared but it was, I think, from memory it was pushed away.

Counsel: He didn't sign it, you know that clearly? --- No, he didn't sign it.

...

Counsel: Let's just try to work out precisely where things were standing then. The contract was still in place. Would my understanding be correct to say that Cedar had let you believe that if the numbers aren't up to scratch in the near future they are not going to be enforcing the contract against you. They will tolerate that situation, would that be a good way to put it? --- Yes, yes.

...

Counsel: That Cedar was prepared to tolerate short deliveries or non-deliveries for the near future? --- Cedar was happy for well, I shouldn't say happy - would accept Five Star to come back in the plant if and when it was financially viable for it to do so.

...

Counsel: But I just want to go through the steps before that. So that they were prepared for the moment or for the next period that hadn't been specified for Five Star not to be delivering the agreed quantities under the contract or if necessary any quantities under the contract? --- Correct.

25 The objective effect of all that, as we see it, was that Cedar Meats was prepared to stay its hand with respect to its accrued rights in the hope that Five Star Lamb would thereby be enabled to recover financially to the point of recommencing large scale lamb processing, but only so long as or on condition that, when and if financially recovered, Five Star entered into a new agreement with Cedar Meats for Cedar Meats to carry out that large scale lamb processing. Consequently, so far, from Cedar Meats evincing an intention to abandon its accrued cl 8 rights, its acts and statements presented as tantamount to an express intimation of intention to keep its options open until and unless it emerged that Five Star Lamb could not or would not enter into a such new large scale processing arrangement.[18] In legal effect, the arrangement was either an accord executory,[19] and so remained unenforceable until and unless Five Star entered into a new large scale lamb processing agreement with Cedar Meats,[20] or an accord and satisfaction[21] conditioned on Five Star's entry into a new large scale lamb processing agreement with Cedar Meats,[22] which condition was never satisfied.

26 It will be recalled that the judge regarded it as significant that Cedar Meats did not record its accrued cl 8(a) entitlements as an actual or contingent asset in its financial statements.

27 For the sake of completeness, we should say that we respectfully disagree with that conclusion. Whether or not Cedar Meats agreed to abandon its accrued cl 8(a) entitlements is a question of law to be decided according to an objective assessment of the effect of Cedar Meats' and Five Star's actions and words to one another. There was and is no suggestion that Five Star saw or acted on the faith of Cedar Meats' financial statements. Hence, they were not part of the actions and words which needed to be considered. Perhaps, Cedar Meats' failure to record its accrued cl 8(a) entitlements could be seen as something in the nature of an admission. But, if so, it could be no more than an admission of Cedar Meats' subjective perception of the actions and words which needed to be considered. And, for present purposes, that was irrelevant. The assessment of the objective effect of Cedar Meats' and Five Star's actions and words towards one another is a question of law for the court. As in the case of construction of a written contract,[23] the subjective perceptions of the parties are beside the point.[24]

28 The judge held that what he found to be the conduct of Cedar Meats in relation to the abandonment and estoppel issues was 'sufficient to constitute an intention not to pursue, and therefore to waive, any claim for arrears under Clause 8(a) of the Agreement'.[25]

29 Again, with respect, we disagree. Putting aside the idea of waiver in the sense of estoppel,[26] Five Star did not give any consideration for a discharge of accrued obligations, and the absence of consideration precludes the possibility that what Cedar Meats said or did amounted to a binding waiver in the sense of a contractual variation of its accrued rights.[27] Equally, we do not consider that Cedar Meats' words and actions could have amounted to a waiver in the sense of an election, for the reason that neither the abandonment of the Agreement with respect to the future nor the ad hoc processing of small parcels of lambs on terms different to the Agreement was necessarily inconsistent with the preservation of Cedar Meats' accrued rights under the Agreement.[28] Nor was it suggested that Cedar Meats' acts and statements amounted to waiver in any of the other senses explored, but regrettably left unresolved by the High Court, in Agricultural and Rural Finance Pty Ltd v Gardiner.[29]

30 Counsel for Five Star argued that in fact Five Star gave consideration for Cedar Meats' forbearance (and thus, as counsel would have it, for Cedar Meats' agreement to abandon its accrued cl 8(a) entitlements), by later entering into the ad hoc arrangements with Cedar Meats for the processing of small quantities of lamb. In counsel's submission, Five Star's entry into those arrangements should be seen as satisfying the condition stipulated by Mr Kairouz at the November 2010 meeting that, when and if Five Star were financially able to do so, it enter into a new agreement with Cedar Meats for lamb processing.

31 We do not accept the argument. As Mr Clarke admitted in cross-examination, the quantities of lamb put through on an ad hoc basis on the few occasions of which he spoke were so small that another party might not have been able to persuade Cedar Meats to undertake the work. And, as Mr Clarke also conceded, the non-enforcement of the penalty in relation to those operations 'was done in the context of assisting Five Star Lamb to one day to become a major customer of Cedar Meats'. In those circumstances, a few desultory ad hoc arrangements for the processing of undersize quantities of lamb cannot sensibly be viewed as satisfying a condition that, when and if Five Star were restored to financial health and recommenced large scale operations, it engage Cedar Meats to undertake the processing. In reality, the ad hoc arrangements were no more than Cedar Meats doing what it could to assist Five Star back to the level of financial health which it was perceived was necessary for it to recommence large scale operations and so then satisfy the condition.

32 Finally on this aspect of the matter, it will be recalled that the judge reasoned that the facts of the case were sufficiently akin to those in G W Fisher Ltd v Eastwoods Ltd[30] to conclude that, because Cedar Meats processed some small quantities of lamb for Five Star on an ad hoc basis, Cedar Meats should be taken thereby to have abandoned the Agreement and thus its accrued rights to cl 8(a) payments.

33 With respect, the analogy with G W Fisher is misplaced. In that case, the original contract for the supply of cement was wholly executory and, consequently, there were no accrued rights on either side. The later agreement between the parties was in effect for supply of the same cement as was contemplated by the original contract but on significantly different terms. Because of the difference, it necessarily followed that the parties had abandoned the original contract in favour of the later agreement.[31] But so to conclude said nothing about (and the court did not pause to consider) what would have been the case if some cement had been delivered but not paid for under the original contract when replaced by the later agreement.

34 That leaves for consideration the issues of waiver in the sense of estoppel and of misleading and deceptive conduct.

35 As noted, the judge held that, by its conduct after November 2010, Cedar Meats impliedly represented that cl 8(a) of the Agreement would not be enforced and that, in reliance on that representation, Five Star organised its affairs and finances in the belief that it would not be encumbered by the 'potential noose that cl 8(a) created'. It followed, in his Honour's view, that it would be unjust and unconscionable for Cedar Meats to depart from that state of affairs; for as his Honour put it:

Five Star would suffer detriment as a result of Cedar Meats' conduct if Cedar Meats was permitted to resile from the representation that it made. Five Star lost the opportunity to take those steps, which it could have done at the time. A lost opportunity is sufficient detriment for estoppel. Five Star lost the opportunity to seek legal advice about the termination of the Agreement, and to closely monitor Cedar Meats' compliance with the Agreement in an attempt to find an event of termination. It lost the opportunity of renegotiating an agreement with Cedar Meats in early 2011, at a time when the personal relations were still good. Such a renegotiation had been envisaged by Joseph at the November Meeting. Five Star's financial situation at the time was so precarious that it was highly likely that it would have been able to negotiate a fresh agreement with much smaller volumes.[32]

36 With respect, we disagree. Unlike the judge we are unable to see that anything said or done by Cedar Meats amounted to a representation that Cedar Meats unconditionally abandoned its accrued rights to amounts due under cl 8(a). We repeat that, in view of Cedar Meats' explicit refusal to sign the deed of termination submitted by Five Star, and Mr Kairouz's statements to Messrs Clarke and Suttie that Cedar Meats' forbearance would be 'so long' as or conditional upon Five Star Lamb entering into a new lamb processing contract when and if financially able to recommence lamb production, we think that Cedar Meats made clear that it intended to maintain its entitlement to enforce accrued rights until such time as a new large-scale processing agreement was reached or it appeared that Five Star Lamb would not recover financially.

37 Possibly, as the judge found, officers of Five Star subjectively construed Cedar Meats' stance as an unconditional abandonment of accrued entitlements (although, in view of the passages of Messrs Clarke's and Suttie's evidence to which we have referred, it is difficult to see how that could be so). But, even if that were the case, it would not avail Five Star. Five Star's subjective perceptions of Cedar Meats' conduct might be relevant to the issue of reliance, but not to representation. So long as Cedar Meats acted according to the objective effect of its acts and statements to Five Star, it was not unjust or unconscionable for Cedar Meats to act contrary to Five Star's subjective perceptions of those acts and statements unless Cedar Meats were shown to have been aware of Five Star's subjective perceptions and to have allowed Five Star to continue on the basis of that misconception.[33] That was never suggested.

(v) Ground 14: Misleading and deceptive conduct

38 The same applies to the idea that Cedar Meats' conduct was misleading or deceptive. Nothing which Cedar Meats said or did was objectively misleading or deceptive and, even if Five Star Lamb were mistaken about the effect of it, there was nothing to show that Cedar Meats were aware of the mistake and allowed Five Star to proceed on the basis of it.

39 We turn therefore, finally, to the question of penalty; which, as we see it is determinative. Under cover of Grounds 2 and 15, counsel for Cedar Meats submitted that the judge was wrong in law in holding that the payments for which cl 8(a) provided were penal in nature and, therefore, unenforceable. In our view, the judge was correct on that point.

40 Much of Cedar Meats' argument proceeded on the basis that cl 7 did not impose any obligation on Five Star to deliver the agreed daily volumes for processing. It was submitted that the only obligation which cl 7 imposed was for Cedar Meats to process the agreed daily volumes when and if delivered for processing. Hence, it was said, cl 8 could not properly be viewed as security for performance of an obligation on the part of Five Star and, therefore, cl 8 could not properly be conceived of as a penalty.

41 Five Star's response was twofold. First, it contended that, although cl 7 may not have imposed an express obligation on Five Star, it was implicit in the Agreement taken as a whole that Five Star was bound to deliver the agreed daily volumes and, therefore, that cl 8 was a security for the performance by Five Star of a contractual obligation. Secondly, it was said that, if that were not so, cl 7 was nevertheless a stipulation in the sense essayed by the High Court in Andrews[34] for which cl 8 upon its proper construction operated as a security. Either way, in Five Stars' submission, cl 8 was prima facie penal and, because the amounts for which it provided were excessive and unconscionable, it was unenforceable.

42 Passing over the long history and many decisions concerning this area of the law, it is sufficient for present purposes to begin with the High Court's recent restatement of principle in Andrews.[35] The Court said there that:

In general terms, a stipulation prima facie imposes a penalty on a party (the first party) if, as a matter of substance, it is collateral (or accessory) to a primary stipulation in favour of a second party and this collateral stipulation, upon the failure of the primary stipulation, imposes upon the first party an additional detriment, the penalty, to the benefit of the second party. In that sense, the collateral or accessory stipulation is described as being in the nature of a security for and in terrorem of the satisfaction of the primary stipulation. If compensation can be made to the second party for the prejudice suffered by failure of the primary stipulation, the collateral stipulation and the penalty are enforced only to the extent of that compensation. The first party is relieved to that degree from liability to satisfy the collateral stipulation.[36]

...

... the term 'stipulation'... reflects the origin of the penal obligation or condition, as known today, in the stipulations (stipulatio) in Roman law at a period where stipulations for the payment of money were alone valid. The practical method at that period of stipulating for the performance of a collateral act was to make the payment of a money sum conditional on the non-performance of the desired act; that sum might be recovered in full even if it exceeded the value of the stipulated act or forbearance.[37]

[For this purpose]...'obligation' and 'condition' are not employed in the same or corresponding sense as appears in dealing with the breach of contractual promises, and [consequently it is not the case that] ...in a simple contract the only stipulations which engage the penalty doctrine must be those which are contractual promises broken by the promisor.[38]

43 Here, the third of those propositions is the most important. Prior to Andrews, it was generally considered to be the law that a provision of the kind in question was incapable of being a penalty unless it secured the performance of a contractual obligation.[39] Andrews re-established that such a provision may still be regarded as penal if it secures a primary stipulation even though the stipulation does not import a contractual promise.[40] Accordingly, where it is sought to secure the performance of a condition and, instead of exacting a promise from the obligor to perform the condition, the obligee exacts a promise from the obligor to pay a sum of money (or perhaps to convey property) if the condition not be performed, the promise is properly to be viewed as a security for the satisfaction of the condition and so, therefore, if the sum of money (or conveyance) is excessive and unconscionable, may now be treated as penal.[41]

44 For one reason or another, much of the argument before us centred on whether cl 7 should be seen as imposing an implied obligation on Five Star to deliver the agreed daily volumes of lambs and for that reason was to be seen as a penalty. Counsel for Five Star submitted that, read as a whole, the Agreement implicitly required that to be done. In particular, given that cl 7 referred to the quantities to be delivered as the 'agreed daily volumes', and given the general rule applicable to every contract 'that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract',[42] it was said that it was implicit in cl 7 that Five Star was required to deliver the agreed daily volumes. That implication was further supported by cl 8, it was said, in that it began with the words 'Where the daily volume total ... falls more than 25% below the agreed daily volumes'. It was contended that those words were redolent of failure to perform an obligation to deliver the agreed daily volumes.

45 Counsel for Five Star also invoked the reasoning of the Court of Queen's Bench in Churchward v The Queen,[43] that an agreement between Churchward and the Lords Commissioners of the Admiralty for Churchward to convey specified categories of mail did not impose an implied obligation on the Crown to employ Churchward to carry the mail. The court concluded that, upon its proper construction, the agreement required Churchward to maintain the facilities with which to carry the mail and for payment by the Crown to Churchward for maintaining that capacity. In reasoning to that conclusion, Cockburn CJ contrasted the contract in question with one from which it might have been inferred that the Crown were under an obligation to allow the carrier to carry mail:

In considering the subject, I must begin by saying that I entirely concur with the position taken by the learned counsel for the suppliant [Churchward], that although a contract may appear on the face of it to bind and be obligatory only upon one party, yet there are occasions on which you must imply - although the contract may be silent - corresponding and correlative obligations on the part of the other party in whose favour alone the contract may appear to be drawn up. Where the act to be done by the party binding himself can only be done upon something of a corresponding character being done by the opposite party, you would there imply a corresponding obligation to do the things necessary for the completion of the contract. ... So, if a man engages to work, and render services which necessitate great outlay of money, time, and trouble, and he is only to be paid by the measure of the work he has performed, the contract necessarily presupposes and implies on the part of the person who engages him an obligation to supply the work.[44]

...

If indeed the contract had been to pay, not in the shape of an annual subsidy, but according to the number of mails conveyed, then we might have been at liberty and perhaps bound to imply the covenant which is contended for on the part of the suppliant; because in that case he might have had his vessels in readiness, and have incurred all the attendant expenses, and although at all times ready and willing to fulfil his part of the contract, yet inasmuch as his remuneration was to depend, not on his being constantly ready and willing, but on the fact of mails being conveyed by his vessels, it would be but reasonable to infer a covenant to employ him. But according to my view of the present contract, so long as Mr Churchward was prepared to carry out all the terms of the contract to which he had bound himself, I think (supposing the question of the fund for payment had not been involved), he would be entitled to insist upon the performance of the contract, so far as the payment of his remuneration was concerned, at the end of the year, although only one mail bag might have been required to be carried by him in the course of a week, or even in none at all had been sent to him by the Post Office requiring him to convey it...[45]

46 Counsel for Five Star argued that, since the Agreement provided for payments on a per head of sheep processed basis rather than on the basis of an annual fee regardless of the number of sheep processed, it followed from the emphasised passage from Churchward that the Agreement imposed an implied obligation on Five Star to deliver the agreed daily quantities to Cedar Meats for it to process.

47 Counsel for Cedar Meats contended to the contrary that, read as a whole, the Agreement required of Cedar Meats no more than to maintain such facilities as might be necessary to process the agreed daily volume of lambs, when and if delivered by Five Star for processing, and that was why cl 8 made specific provision for the amount to be paid by Five Star in the event that the agreed daily volume was not delivered for processing. In counsel's submission, that conclusion was also supported by cl 12(g) of the Agreement, in that it expressly required Cedar Meats to maintain the facilities with which to process the agreed daily volumes and to give priority to Five Star production. A further indication to the same effect, counsel said, was that, although the Agreement provided for a multiplicity of events in which Five Star would be entitled to terminate the Agreement, including failure by Cedar Meats to maintain capacity and accord priority to Five Star production, the only entitlement of Cedar Meats to terminate was in the event of Five Star's repudiation of the Agreement.

48 In case it matters, we do not consider that either cl 7 of the Agreement or the Agreement taken as a whole imposed an obligation on Five Star to deliver the agreed daily volumes for processing. We allow that cl 9 provided for payments by Five Star on a per head basis and we accept that, taken alone, that could be viewed as indicative of an obligation on the part of Five Star to deliver sheep in order to enable Cedar Meats to process sheep and thereby derive the payments for which cl 9 provided. It goes without saying, however, that cl 9 must be read in context[46] and, therefore, in light of the express provision in cl 8 for what was to occur if the agreed daily volumes were not delivered. Ex facie, cl 8 was calculated to ensure that Cedar Meats received at least a very substantial part of the financial gain which it would have derived if the agreed daily volumes had been delivered for processing. As such, it necessarily implies that the benefit of the Agreement to Cedar Meats was not intended to depend on the agreed daily volume of sheep being delivered for processing.

49 No doubt, as counsel for Five Star suggested, the cl 9 fees were worked out on the assumption that the full agreed daily volumes would be delivered for processing and that, with that quantity of processing, Cedar Meats would be adequately compensated for the costs of maintaining the facilities necessary for Cedar Meats to comply with its obligations under cl 12(g). But, just as plainly, the cl 8 fees were calculated to ensure that Cedar Meats would be at least adequately compensated in the event of a production shortfall.

50 In the result, the implication which we derive from the Agreement taken as a whole is that, rather than seek to ensure that Cedar Meats be adequately compensated by means of imposing an obligation on Five Star to deliver the agreed daily quantities, Cedar Meats was to be secured by an obligation on Five Star to pay the cl 8 fees in the event that the agreed daily volumes were not delivered. If follows that, if Five Star failed to deliver the agreed daily volumes for processing, Cedar Meats only remedy would be its right to the cl 8 fees rather than damages for any shortfall in delivery; and, for that reason any claim for damages for breach of cl 7 would be bound to fail.

51 That said, however, we do not think that it does matter for present purposes whether the Agreement imposed an obligation on Five Star to deliver the agreed daily volumes or not. Either way, in our view, the result is the same. If (contrary to what we think to have been the effect of cl 7) the Agreement imposed an implied obligation on Five Star to deliver the agreed daily volume of lambs specified in cl 7, it was not disputed that cl 8(a) was a security for performance of that contractual obligation and, so (subject to questions of excessiveness and unconscionability), capable of being penal. Equally, if (as we think to be the case) the Agreement did not impose such an obligation on Five Star, it was nonetheless a promise by the obligor (Five Star) to the obligee (Cedar Meats) that, if the condition specified in cl 7 were not performed, Five Star would pay Cedar Meats the amount of money specified in cl 8; and thus (subject once again to questions of excessiveness and unconscionability) was capable of being penal.

52 That leaves the issues of excessiveness and unconscionability. As the judge rightly observed, in order for a stipulation to amount to a penalty at law or in equity, it must not only be a security for the performance of a contractual obligation or other primary stipulation but also extravagant and unconscionable in amount in comparison with the greatest loss that conceivably could be proved.[47]

53 The judge found that, having regard to all relevant considerations, the amount provided for in cl 8 was extravagant and unconscionable and, therefore, that cl 8 was unenforceable. Although his Honour did not deal with the matter at great length, he noted that there was evidence before him that the estimated loss of profits which Cedar Meats would suffer in respect of each sheep not delivered for processing ranged between $5.94 per head (or 28 per cent of the amount of $21.50 per head payable under cl 9) and $8.54 per head (or 39.7 per cent of the amount of $21.50 per head payable under cl 9), whereas the amount payable under cl 8(a) would be 75 per cent of the amount of $21.50 payable under cl 9 regardless of the extent of the shortfall. On that basis, his Honour concluded that:

Requiring a party to pay the full amount of $21.50 whether or not product takes place and in circumstances where the [loss of] profit would only be $8.54 or lower on the cases presented by Five Star is clearly extravagant.[48]

54 There is no ground of appeal which contests the validity of that conclusion and so, although counsel for Cedar Meats referred in passing to some factors which could be thought to militate against its validity, it is unnecessary and it would be inappropriate for us to decide whether we would have come to the same view as the judge. Nonetheless, when and if a similar question arises in another case, it would be well to bear in mind the injunction of Mason and Wilson JJ in AMEV-UDC Finance Ltd v Austin[49] against courts being too ready to find the requisite degree of disproportion 'lest they impinge on the parties' freedom to settle for themselves the rights and liabilities' following the failure of a primary stipulation. In a case like this involving commercial organisations of apparently equal bargaining power, courts should be prepared to allow a substantially larger degree of latitude than would be appropriate in case of a contract of adhesion.

55 As the judge said, correctly, a penalty of the kind in question is not wholly unenforceable. Despite the contrary conclusion of the majority of the High Court in AMEV,[50] the High Court said in Andrews:[51]

... If compensation can be made to the [obligee] for the prejudice suffered by failure of the primary stipulation, the collateral stipulation and the penalty are enforced only to the extent of that compensation. The first party is relieved to that degree from liability to satisfy the collateral stipulation.

56 Thus, as Gordon J later summarised the position in Paciocco:[52]

If ... the sum stipulated is not a genuine pre-estimate of damage and is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have been sustained by the breach, or the failure of the primary stipulation upon which the stipulation was conditioned, then the stipulation is unenforceable to the extent that the stipulation exceeded that amount. Put another way, the party harmed by the breach or the failure of the primary stipulation may only enforce the stipulation to the extent of that party's proved loss: Andrews High Court at [10].

57 Unfortunately, because the judge concluded that Cedar Meats had abandoned its accrued rights under cl 8(a), his Honour dismissed the claim outright and deemed it unnecessary to decide how much would have been recoverable by way of compensation if Cedar Meats had not abandoned those rights.

58 In the view which we take of the matter, it will be necessary to make that determination and so to order that the matter be remitted to the judge for determination of that question and the making of final orders.

59 In the result, we shall allow the appeal, set aside the judgment below and remit the matter to the judge for further determination according to law. Inasmuch, however, as the appellant has been only partially successful in the appeal, we shall order that the respondent pay but half the appellant's costs of the appeal.

[2] Reasons, [17]-[37] (footnotes omitted).

[4] In Warwick Entertainment Centre Pty Ltd (Receivers and Managers Appointed) v Silkchime Pty Ltd (Receivers and Managers Appointed) (No 2) [2012] WASC 275, the parties' accounting treatment of contractual obligations was the foundation of a finding that the contract was abandoned.

[5] Wallera [2003] FCAFC 279, [50]; Fazio v Fazio [2012] WASCA 72, [74].

[6] Nine months between February and November 2010 during which, despite constant short deliveries, Cedar Meats did not take action to enforce cl 8(a).

[7] Reasons, [47]-[57] (footnotes omitted).

[13] Reasons, [107]-[108] (footnotes omitted).

[14] Summers v Commonwealth [1918] HCA 33; (1918) 25 CLR 144, 151-2 (Isaacs J); D.T.R. Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423, 434 (Stephen, Mason and Jacobs JJ).

[15] Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420, 432 (Dixon CJ and Fullagar J).

[16] Westralian Farmers Ltd v Commonwealth [1936] HCA 6; (1936) 54 CLR 361, 369 (Latham CJ); Carter on Contract [31.020].

[17] Although compare Griffiths v Knight [1960] SR (NSW) 353.

[18] Ledingham v Bermejo Estancia Co Ltd [1947] 1 All ER 749, 751.

[19] McDermott v Black [1940] HCA 4; (1940) 63 CLR 161, 183-185 (Dixon J).

[20] Blue Moon Grill Pty Ltd v Yorkey's Knob Boating Club Inc [2006] QCA 253, [26]-[32] (Keane JA); cf Scott v English [1947] VicLawRp 67; [1947] VLR 445, 452-3 (Fullagar J).

[21] Osborn v McDermott [1998] 3 VR 1, 8 (Phillips JA); Baxter v Obacelo Pty Ltd [2001] HCA 66; (2001) 205 CLR 635, 658-659 [56] (Gummow and Hayne JJ); El-Mir v Risk [2005] NSWCA 215, [47]-[69] (McColl JA).

[22] Scott v English [1947] VicLawRp 67; [1947] VLR 445, 454; Osborn v McDermott [1998] 3 VR 1, 9-10 (Phillips JA); Scaffidi v Perpetual Trustees Victoria Ltd (2011) 42 WAR 159, [47] and see Restatement of the Law, Second, Contract 2d, 281(2).

[23] FAI Insurance Co Ltd v Savoy Plaza Pty Ltd [1993] VicRp 76; (1993) 2 VR 343, 350 (Brooking J); Arthurson v State of Victoria [ 2001] VSC 244, [313]-[315] (Eames J).

[24] CGM Investments Pty Ltd v Chelliah [2003] FCA 79; (2003) 196 ALR 548, [18] (Finkelstein J, rev'd on appeal but on other grounds); Marminta Pty Ltd v French [2003] QCA 541, [22] (Jerrard JA).

[26] Kammins Bathrooms Co Ltd v Zenith Investments (Torquay) Ltd [1971] AC 850, 883; The Commonwealth v Verwayen (1990) 170 CLR 394, 407 (Mason CJ in diss).

[27] Tropical Traders Ltd v Goonan [1964] HCA 20; (1964) 111 CLR 41, 52 (Kitto J); The Commonwealth v Verwayen (1990) 170 CLR 394, 471 (Toohey J); and see and compare Ledingham v Bermejo Estancia Co Ltd [1947] 1 All ER 749, 751; Re Synthetic Oils Pty Ltd [1990] 8 ACLC 95, 98; Ware v Amoral Pastoral Pty Ltd [2012] NSWSC 1550, [159].

[28] Cf. Crane v Colonial Mutual Fire Insurance Co Ltd [1920] HCA 64; (1920) 28 CLR 305, 326_; Grundt v Great Boulder Mines Ltd_ [1937] HCA 58; (1937) 59 CLR 641, 674-5_; Commonwealth_ v Verwayen (1990) 170 CLR 394, 409-10 (Mason CJ in diss).

[31] Morris v Baron and Company [1918] AC 1, 26 (Lord Dunedin).

[33] Verwayen v The Commonwealth (1990) 170 CLR 394, 413 (Mason CJ), 440-1 (Deane J).

[36] Ibid 216 [10] (citation omitted).

[39] AMEV-UDC Finance Ltd v Austin [1986] HCA 63; (1986) 162 CLR 170.

[42] Mackay v Dick (1881) 6 AC 251, 263; Butt v M'Donald (1896) 7 QLJ 68, 70-1; Secured Income (Aust) Ltd v St Martins Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596, 607 (Mason J).

[46] Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99, 109 (Gibbs J, in diss, but not on this point); Lewison and Hughes, The Interpretation of Contracts in Australia, [7.02].

[47] Reasons, [102] and [103]; Dunlop Pneumatic Tyre Company Ltd v New Garage & Motor Company Ltd [1914] UKHL 1; [1915] AC 79, 87; Andrews v Australian & New Zealand Banking Group Ltd [2012] HCA 30; (2012) 247 CLR 205, 236 [75].

[50] AMEV-UDC Finance Ltd v Austin [1986] HCA 63; (1986) 162 CLR 170.

[51] Andrews v Australian & New Zealand Banking Group Ltd [2012] HCA 30; (2012) 247 CLR 205, 216-217 [10]; cf AMEV-UDC Finance Ltd v Austin [1986] HCA 63; (1986) 162 CLR 170, 191-4 (Mason and Wilson JJ); and at 204 (Deane J).

[52] On remitter from the High Court: Paciocco v Australia and New Zealand Banking Group Limited [2014] FCA 35, [15.6].

Cedar Meats (Aust) Pty Ltd v Five Star Lamb Pty Ltd [2014] VSCA 32

At a glance

Court

Decision date

Before

Source

Judgment (125 paragraphs)

Cedar Meats (Aust) Pty Ltd v Five Star Lamb Pty Ltd [2014] VSCA 32 (7 March 2014)

Parties

Legislation Cited (1)

Cases Cited (18)