Cobram Laundry Services Pty Ltd v Murray Goulburn Co-operative Co Ltd [2000] VSC 353

9. On 26 October 1990 the plaintiff and the defendant executed a written agreement for the provision of laundry services by the plaintiff to the defendant ("the 1990 contract"). The contract was in simple form providing for the "scope of work" to include the supply of protective clothing as required, the steam pressing of laboratory coats, the fixing and maintenance of labels and name tags and the laundering, repair and maintenance of garments to a high standard. The contract was for a four year period from 1 July 1990 to 30 June 1994. The 1990 contract provided, also, for the services by the plaintiff of a part time employee for a minimum of four hours per day to manage the maintenance, collection and distribution of the garments for laundering. The agreement contained a warranty as to suitability of the garments for purpose and stipulated the costing of the services of the plaintiff. The costs for the first 12 months of the term were fixed. Thereafter, the costing was variable by an amount not exceeding the consumer price index.

12. The 1990 contract provided that the agreement would remain in force for the term of the agreement, that is, until 30 June 1994. However, there was provision in the contract for a unilateral right of cancellation by the defendant by one months' notice in writing if the plaintiff failed to provide the services, the standard of laundry fell below the acceptable standard and/or the plaintiff did any other thing that was "outside of a normal supplier client relationship". The 1990 contract consisted of a letter that was signed and exchanged by the parties.

16. On about 12 August 1993 the plaintiff and the defendant entered into a new agreement prior to the expiration of the term under the 1990 contract ("the 1993 contract").

19. The 1993 contract consisted of a letter signed and exchanged between the parties. The contents of the letter were more detailed than the 1990 contract. It provided for a number of additional matters including detailed description of the type of garments to be supplied by the plaintiff at the defendant's plant and dealt with matters such as quality control and replacement of garments. The 1993 contract was for a period of three years from 1 September 1993 to 31 August 1996. It also contained a significant term for the purposes of the proceeding and is hereafter referred to as "Clause 7".

This Agreement shall cover the supply and servicing by the Supplier to the Purchaser of the items specified in the Schedule and other items subsequently supplied by the Purchaser at the request of the Purchaser. Supply shall continue under this contract for an initial period of three [3] years from the date the items are first supplied to the Cobram Plant and shall continue thereafter until three [3] months after written notice of termination has been given by either parties."

24. In essence, therefore, under the 1993 contract the parties agreed that the agreement would continue for a period of three years and thereafter indefinitely until three months' notice of termination was given by one or other of the parties. The 1993 contract also included provisions in relation to termination arising as a result of the insolvency of the defendant or late or non payment by the defendant of invoices and accounts of the plaintiff.

28. On 6 November 1996 the plaintiff and the defendant entered into a further agreement for the provision of uniform stock and the laundering of such garments by the plaintiff to the defendant for a three year period from 4 November 1996 to 3 November 1999 ("the 1996 contract"). Similar to the 1993 contract this contract made provision as to the type of garment to be supplied and the pricing per item. The 1996 contract included a clause setting out in identical terms the same provision as contained in clause 7 of the 1993 agreement. Hence, under the 1996 contract the parties agreed that the term of that contract would be for an initial period of three years and thereafter could be terminated by three months' written notice by one party to the other.

31. Clauses 5, 6, 7 and 8 of the 1996 contract provided:

"5. PRICES & TERMS Rental charges as set out below:-

$0.50 for overalls only that are presented for laundry.

All charges shall be based upon the number of items serviced at each tall or the minimum service charges where applicable. All charges shall continue uninterrupted, including public holidays.

Where items supplied by the Supplier are not required by the Purchaser for any period greater than 4 weeks, the Purchaser may notify the Supplier in writing of the items not required and the period for which the items are not required. The Supplier shall remove the items and for this period, the Purchaser shall not be liable for charges for those items.

This Agreement shall cover the supply and servicing by the Supplier to the Purchaser of the items specified in the Schedule and other items subsequently supplied by the Purchaser at the request of the Purchaser. Supply shall continue under this contract for an initial period of three (3) years from the date the items are first supplied to the Cobram Plant and shall continue thereafter until three (3) months after written notice of Termination has been given by either party.

The prices above are fixed for the period of the Contract being 3 years."

36. The 1996 contract provided that the prices stipulated under that contract were fixed for the period of the contract "being 3 years". It set out provisions in relation to other rights of termination such as in the event of the insolvency of the defendant. The 1996 contract incorporated by reference as terms and conditions of that contract a document entitled "the Purchaser's standard Terms and Conditions of Purchase" and a copy of that document was attached to the 1996 contract.

40. On 18 December 1997 the plaintiff wrote to the defendant in the following terms

"re: Contract S40/96. As previously discussed in our meeting in July of this year, we wish to request to have the above contract extended to a six 6 year term commencing on the 1st February 1998. Prices as outlined in Amendment Contract S40/96 dated 13/5/1997 will remain fixed for the original period of contract up until 1/11/1999. A price review will then take place for the remaining four 4 year period. We are requesting this change as we are about to commence construction of our new premises in which our laundry will be housed. This new building will comply with the Australian Standards for Laundry Practice ASA 4146 1994 and ISO 9002. As you can appreciate there will be a lot of capital expenditure involved and we would feel more comfortable with an extended contract period."

44. On about 26 March 1998 by letter bearing that date the plaintiff and the defendant agreed to amend the 1996 contract ("the 1998 amendment"). The letter was entitled "amendment contract S40/96". It provided:

" Please note the following amendment to the above contract: 5. PRICE & TERMS Rental Charges as set out below : Charges Price Laundered & Folded into Lockers Overalls - White, Grey, Navy & Royal $1.30 each Laundered, Pressed & Delivered to Offices Lab Coats $1.20 each Laundered, Pressed & Folded into Lockers Jackets $1.15 each Shirts $0.80 each Trousers - White $0.75 each

Hire Charges Per Garment per week on total issue $0.40 The above prices are fixed until 1 November 1999. 6. PERIOD 4 November 1996 - 3 November 2002. All other terms and conditions remain the same."

51. Prior to the execution of the 1998 agreement, in about November 1997 the defendant requested that the plaintiff change certain of the uniforms provided pursuant to their contractual arrangements from one piece uniforms to two piece uniforms. In December 1999 the plaintiff ceased to provide laundry services to the defendant in relation to garments known as "navy uniforms". Since that time navy uniforms have been provided to the defendant by another party.

54. On 15 December 1999 the defendant wrote to the plaintiff advising that due to "state wide consolidation of laundered garment services and occupational health and safety program" it would progressively scale down the services required by the defendant from the plaintiff from 3 January 2000 onwards with final completion of the scaling down in early April 2000. The parties treated the letter of 15 December 1999 as a notice of termination by the defendant. On 29 March 2000 the defendant, by letter, extended the notice of termination to 28 April 2000. Correspondence was exchanged thereafter between the parties but the defendant refused to resile from its termination of the contractual arrangements between the parties. The plaintiff treated the termination as a repudiation of the contractual arrangements between the parties and issued these proceedings.

58. In its amended statement of claim the plaintiff alleged that there was an agreement between the parties consisting of the 1996 contract and the amendment of that contract by the 1998 contract. The plaintiff alleged that by the letter dated 15 December 1999 the defendant evinced an intention to no longer be bound by the contract as amended and thereby repudiated the contract which repudiation was accepted by the plaintiff. As a consequence, the plaintiff sought declaratory relief in relation to the alleged true effect of the 1998 contract and damages.

61. In its amended defence the defendant admitted the 1996 contract and its variation by the 1998 contract. The ambit of the dispute between the parties on the pleadings was as to the operation of clause 7 as set out in the 1996 contract. Furthermore, the defendant denied repudiation and alleged that it was lawfully entitled to terminate the contract as it did.

65. It was the case of the plaintiff that the effect of the amendment by the 1998 contract was to give rise to a binding contract that lasted until 3 November 2002 and which agreement could continue thereafter until and unless three months notice was given by either party.

68. The position of the defendant was that because of the reservation of all other terms in the amended contract of 1998 clause 7 continued on foot and should be read as continuing to mean that at any time after the initial three year period, being from 4 November 1996 to 3 November 1999, three months' notice could be given and the contract thereafter terminated. It was the case of the defendant that it acted as it was entitled to do under the contract, including the 1998 variation, in giving three months notice of termination to the plaintiff by the letter dated 15 December 1999.

72. Mr G Nettle QC who appeared with Mr S Horgan for the plaintiff submitted that by its action terminating the contract the defendant repudiated the contract entitling the plaintiff to damages. It was submitted that the contract term did not expire until 3 November 2002 and that subject to the terms of the contract the plaintiff was entitled to the benefit of the contract until that date.

75. It was the case of the plaintiff that the only defence raised by the defendant was the allegation that clause 7 of the contract entitled the defendant to terminate the contract upon three months notice. The plaintiff submitted that if clause 7 was to be interpreted in this way it would be contrary to the extension of the contract to 3 November 2002 made by the letter dated 26 March 1998. It was urged that clause 7 was included in the original contract to provide for a 'over holding' period after the expiration of the original contract term. It was submitted that upon that the extension of the term the period of 'over holding' allowing three months notice could only apply after the extended contract period otherwise any other interpretation would be unreasonable and inconsistent with the clear intention of the parties.

79. Mr P Jopling QC who appeared with Mr S Anderson for the defendant submitted that pursuant to the amendments made to the contract, the period of the contract as set out in clause 6 of the 1998 amendment was amended from '4 November 1996 to 3 November 1999' to '4 November 1996 to 3 November 2002'.

82. It was submitted for the defendant that consequent upon the amendment of the period of the contract supply was to continue for an initial period of three years from 4 November 1996, which period under clause 7 was incapable of being reduced. However, as clause 7 provided after the initial three year period, it was said that the contract continued thereafter until three months' after written notice of termination had been given by either party.

85. Mr Jopling QC urged that this is the only interpretation which was open on the face of the contract and was supported by the clear terms of the letter of variation dated 26 March 1998 which provided:

"All other terms and conditions remain the same."

89. Hence, it was submitted, clause 7 of the contract must be interpreted in the light of these words which were said to make the position clear. Further, it was submitted that clause 7, following the 1998 amendment was neither ambiguous or uncertain in its meaning or terms, was readily and clearly understandable and the Court should give full force and effect to that meaning.

93. The evidence of the plaintiff consisted of an affidavit sworn 3 May 2000 by Anthony Joseph Startari, director of the plaintiff together with his witness statements. In summary, Mr Startari gave evidence as to the contractual history between the plaintiff and the defendant, the circumstances surrounding the notice of termination on 15 December 1999 and the events that followed. He also gave evidence concerning the loss and damage suffered by the plaintiff as a result of the termination, in particular, the consequential changes to the staffing arrangements of the plaintiff following the termination of the contractual arrangement. The evidence of Mr Startari was largely unchallenged. The plaintiff relied, also, upon an affidavit of Rodney Ian Miller, chartered accountant, sworn 4 May 2000 and a witness statement. Mr Miller gave evidence with respect to the loss and damage suffered by the plaintiff as a result of the termination of the contract. The plaintiff relied, further, upon the witness statement of Robyn Lucas, bookkeeper of the plaintiff in relation to documents that constituted annexures to the witness statement of Mr Miller. Miss Lucas was not called to give evidence and her statement stood unchallenged and unrebutted.

96. There was one witness called on behalf of the defendant, Mr Loke Ching Wong consisting of a witness statement and three pages of accounting calculations prepared by him (Exhibit 8). Hence the evidence of the plaintiff with respect to the documents that constituted the relevant contract, the surrounding circumstances and the correspondence between the parties was not in issue or challenged by the defendant. The defendant confined its case to a construction argument with respect to liability. The evidence of Mr Wong was confined to the calculation and assessment of damages.

100. The arrangements between the plaintiff and the defendant were struck in a business context. In construing the terms of the arrangements the appropriate starting point is to pay heed to the commercial nature of the transaction so as to give effect to the expressed arrangements and expectations of the parties: see Schenker and Co (Aust) Pty Ltd v Malpas Equipment and Services Pty Ltd and Anor [1990] VicRp 74; (1990) VR 834, 848; Di Dio Nominees Pty Ltd v Brian Mark Real Estate Pty Ltd [1992] VicRp 99; (1992) 2 VR 732, 741-742; Vroon BV v Foster's Brewing Group Ltd [1994] VicRp 53; (1994) 2 VR 32, 67-68.

103. The next matter is the method to be applied in construing the contractual arrangements between the plaintiff and the defendant. The defendant's case was that I was confined to the four corners of the agreement constituted by the 1996 contract and the 1998 contract. Mr Jopling QC for the defendant relied upon the statement of principle expressed by Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337 at 352:

"The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible or more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed."

107. The letter of 26 March 1998 whereby the amendment was effected to the 1996 contract commenced with the preamble that the clauses, being clauses 5 relating to price and terms and clause 6 relating to the period of the contract were an "amendment" to the "above contract" that was in turn referred to as "amendment contract S40/96" being the 1996 contract. After the setting out in the letter of 26 March 1998 of the substitute clauses 5 and 6, the letter stipulated that "All other terms and conditions remain the same". On one view, therefore, the sole purpose of the 1998 amendment was to insert new clauses 5 and 6 into the 1996 contract concerned with price and the term of the contract. The 1998 amendment went so far as to stipulate that all other terms and conditions contained in the 1996 contract remained unaltered. However, the effect of the 1998 amendment was to insert a new price schedule into the arrangements between the plaintiff and the defendant and to render the new price regime effective from 28 November 1998 until 1 November 1999. The 1998 amendment did not stipulate the price structure to apply between the parties for the balance of the new term ending on 3 November 2002. It cannot be said in simple terms that the 1998 contract did no more than insert a new clause 5 in relation to price and terms and a new clause 6 in relation to the period of the contract into the 1996 contract. By virtue of the words contained in new clause 5 fixing the application of the new price structure until 1 November 1999 the 1998 amendment amended the review period previously contained in clause 8 of the 1996 contract and substituted a new period for which the price structure was fixed. The 1998 amendment did not stipulate the manner in which prices were to be reviewed after 1 November 1999 during the balance of the new term until 3 November 2002.

110. The pivotal issue is the application, if any, of clause 7 to the 1996 contract as amended by the 1998 amendment. The use of the words " ... Supply shall continue under this contract for an initial period of three (3) year from the date the items are first supplied ... " on one view constitutes a reference to the term of the contract as originally agreed under the 1996 contract. On the other hand, there is ambiguity as to whether the words "this contract" in clause 7 is a reference to the contract in its original form in the 1996 contract or the contract as amended by the 1998 contract. Furthermore, there is ambiguity as to whether the expression " ... from the date the items are first supplied" is a reference to the date when the items are first supplied under the 1996 contract or a reference to the date when the items are first supplied after the 1998 amendment. In my view the ambiguity that arises from clause 7 enables me to go beyond the four corners of the contract as contemplated by Mason J in Codelfa, supra.

113. I turn then to consider the relevant authorities in relation to construction and severance of terms. In Plumrose Limited v Real and Leasehold Estates Investment Society Limited (1970) 1 WLR 52 the court was concerned with an option to renew a lease. A lease contained a provision (referred to as "clause 2") in the following terms:

"that they will retrospectively perform and observe the several covenants provisoes and stipulations in the lease expressed as fully as if the same covenants provisoes and stipulations had been herein repeated in full with such modification only as may be necessary to make them applicable to this demise."

" ... The question of construction comes down to this: The words of clause 2 are wide and general and clear and on their reading alone, without regard to any other circumstances or context, they are wide enough to include all the covenants in the previous lease, including the covenant for renewal. The principle which ought to be applied in construing this sort of covenant was laid down long ago by Lord Ellenborough CJ in Iggulden v May [1806] EngR 82; (1806) 7 East 237 where he says, at p.241: 'The rules of construction applicable to the covenants are so well know, that it is hardly necessary to cite authorities to show that every covenant is to be expounded with a regard to its context; that such exposition must be upon the whole instrument, ex antecedentibus et consequentibus, and according to the reasonable sense and construction of the words ... In conformity to which rules, and in support of the apparent intent of the parties, covenants in large and general terms have been frequently narrowed and restrained.' It has been pointed out to me that in that case the narrow construction was put upon it because otherwise one would find a perpetually renewable lease. In my judgment, that case illustrates the principle of construction that wide words can be cut down if the context leads the court to conclude that the words must be construed more narrowly. What, then, are the circumstances and the context at which I am entitled to look to decide whether they should be cut down or whether their wide meaning should remain? It is common ground that I can look at the whole of the words used in the 1963 lease. It is also common ground that I can look at the 1957 lease because of the word 'supplemental' in the first recital, which has the effect of bringing in the whole of the 1957 lease by way of recital into the 1963 lease. It has been submitted on behalf of the tenants that I cannot look at the letters to which I have referred, those of June 21, 1963, and July 3, 1963, but in my judgment they are clearly part of the surrounding circumstances and it is permissible for me to look at them. The effect of the letter of June 21, 1963, was to exercise the option which had been granted to the tenants by the 1957 lease, and that option was for seven years only, but a request was made that instead of taking it for seven years, as the option required, the term should only be for four years and that was agreed to by the then landlords. When I turn to the 1963 lease, and particularly recital (b), I find these words again ' ... in satisfaction of the tenant's rights of renewal which the landlords have agreed to do.' The only right of renewal which the tenants had was once and once only, for seven years, and it was that option which they were exercising by the letter although they were asking for something less than that to which they were entitled under clause 4 (D) of the 1957 lease. Taking all these things into consideration, that is to say, the former lease, the exercise of the option and the 1963 lease, I am constrained to hold that the covenants in clause 2 must be given a narrow construction so as not to include the covenant for renewal. I therefore propose to dismiss the action and, as rectification does not arise, to make no order on the counterclaim."

121. It can be concluded from Plumrose that it will often be the case where the terms of a contract are extended or an option to renew is exercised that the original terms of the contract must be interpreted consistently with such option or extension. Applying that approach to the present case the effect of the extension of the contract period would be rendered nugatory should the terms of clause 7 of the contract be interpreted in accordance with the defendant's position.

124. Similarly, in Update Constructions Pty Ltd v Rozelle Child Care Centre Limited (1990) 20 NSWLR 251 the Court of Appeal of New South Wales was concerned with a building contract that provided for the deletion of a standard term. As a consequence of the deletion other provisions in the contract were rendered meaningless. The Court of Appeal held that in the circumstances there was no inconsistency with the intention of the parties in simply ignoring the quoted words so as to preserve otherwise the remaining provisions of the clause as agreed between the parties. In N.G.L. Properties Pty Ltd v Harlington Pty Ltd [1979] VicRp 11; (1979) VR 92 Kaye J was called upon to consider the construction of the terms of a lease, in particular, the words "per annum" in the lease for the purposes of determining the appropriate rental payable per calender month. In considering the terms of the lease and the intention of the parties Kaye J held that the particular words "per annum" were superfluous and ought be rejected for the purposes of construing the lease. The learned judge observed (at 95):

"It is a rule of construction, moreover, that whatever expression found in a written instrument is inconsistent with the real intention of the parties, as it appears from the language of the instrument, ought to be rejected as superfluous: Walker v Giles [1848] EngR 20; (1848), 6 CB 662; 136 ER 1407; Re O'Brien, [1975] 1 NSLR 688. The rule was stated by Sir John Romilly, MR in Re Strand Music Hall (19865)[1865] EngR 570; , 35 Beav. 153 at p.159; [1865] EngR 570; 55 ER 853 at p.856, as follows: 'The proper mode of construing any written instrument is to give effect to every part of it, if this be possible, and not to strike out or nullify one clause in the deed, unless it be impossible to reconcile it with another and more express clause in the same deed.' In Gwyn v Neath Canal Navigation Co. (1868), LR 3 Ex. 209 at p.215, Kelly, CB expressed the rule in these words: 'When a court of law can clearly collect from the language within the four corners of a deed, or instrument in writing, the real intention of the parties, they were bound to give effect to it by supplying anything necessarily to be inferred from the terms used, and by rejecting as superfluous whatever is repugnant to the intention so discerned'."

128. From the judgments in Update Constructions and NGL Properties it can be concluded that wherever an expression is found in an instrument which is inconsistent with the real intention of the parties, as it appears from the language of the instrument, it is to be rejected as superfluous: see also, Greig and Davis, The Law of Contract, at pp. 401 et seq; Chitty on Contracts, 25th ed. at paragraph 765.

131. In Watson and Anor v Phipps (1986) 60 ALJR 1 the Privy Council considered a grazing lease that provided a term that the lessee might "offer to purchase the demised land". The Privy Council held that the clause was to be construed as creating a right to purchase not simply a meaningless power to make an offer that the lessee would have had at any time. In so doing their Lordships applied the ordinary sense of the words of the terms of the lease to avoid absurdity. Lord Brightman (at 3) stated:

"The function of a court of construction is to ascertain what the parties meant by the words which they have used. For this purpose the grammatical and ordinary sense of the words is to be adhered to, unless they lead to some absurdity or to some repugnance or inconsistency with the rest of the instrument, in which case the grammatical and ordinary sense of the words may be modified so as to avoid the absurdity or inconsistency, but no further; see the speech of Lord Wensleydale in Grey v Pearson [1857] EngR 335; (1857) 6 HLC 61 at 106, repeated by Lord Blackburn in Caledonian Railway Co v North British Railway Co (1881) 6 App. Cas. 114 at 131."

135. Similarly, in Fitzgerald and Anor v Masters [1956] HCA 53; (1956) 95 CLR 420 the High Court considered a contract of sale of land and construed the parties' intention to conclude that a clause in a contract was severable because to do otherwise would render the agreement between the parties a nullity (see especially Dixon CJ and Fullagar J at 426-427). Hence the power of the court to modify the written terms of the contract, in order to give effect to the true intention of the parties, is not limited to the deletion of words. It extends to substituting a word or phrase or to other modification as may be appropriate: see Watson v. Phipps, supra; Fitzgerald v. Masters at 427.

138. In Vroon BV v Foster's Ormiston J (as he then was) was concerned with a joint venture proposal cemented by a course of correspondence between the parties culminating in the belief of the plaintiff that there was full agreement on the "basic issues" between the parties. A draft agreement for the joint venture was drawn but not executed. Other related documents were signed and negotiations continued. The defendant in Vroon purported to terminate such of the arrangements as were in place. The plaintiff alleged that there was a joint venture agreement in place with commensurate obligations and sued for specific performance or damages. Ormiston J in the course of his judgment gave consideration to matters that were omitted or inadequately expressed as terms between the parties. The present case is somewhat different from that in Vroon in that there is not a question of implying a term. Rather, the issue is whether the parties intended to achieve the overlay outcome urged by the defendant, that is, the overlaying of clauses 5 and 6 on the 1996 contract effected by the 1998 amendment or, as the plaintiff urged, the application of clause 7 to the amended contract as if the parties were starting out afresh or, alternatively, the treatment of clause 7 as if it did not apply to the amended contract. Nevertheless, there are principles that can be extracted from Vroon that are relevant to the present case.

141. First, that in commercial transactions the court should strive to give effect to the parties' expectations. Ormiston J stated the principle thus (at 67-68):

"I would accept that in commercial transactions the court should strive to give effect to the expressed arrangements and expectations of those engaged in business, notwithstanding that there are areas of uncertainty and notwithstanding that particular terms have been omitted or not fully worked out. Where one should draw the line is difficult to state and equally difficult to apply. ... Where parties have deliberately written the terms upon which they wish to bargain but have omitted or inadequately expressed a term which might in other circumstances have been expressly or more precisely stated, the courts will endeavour to give effect to the fact that the parties did not see the absence or deficiency of such a term as preventing them from reaching agreement."

145. In Vroon Ormiston J was required in the context of that case to give consideration to the relevant authorities concerned with the implication of a term.[1] The second principle that can be relevantly applied from Vroon to the present matter was the statement by Ormiston J that the court should apply objective standards in determining the agreement, if any, reached by the parties and then apply a generous approach. In his reasons (at 71) Ormiston J referred to the earlier case of F. & G. Sykes (Wessex) Limited v Fine Fare Limited [1871] LRSC 2; (1967) 1 Ll. R. 53 and the observations of Lord Denning M.R. at 57:

"In a commercial agreement the further the parties have gone on with their contract, the more ready are the courts to imply any reasonable term so as to give effect to their intentions. Where much has been done, the courts will do their best not to destroy the bargain."

149. Ormiston J observed that the observations of Lord Denning had been cited with approval by the English Court of Appeal in Didymi Corp. v Atlantic Lines and Navigation Co. Inc. (1988) 2 Ll. R. 108 at 115. Following these observations of the English cases Ormiston J stated the principle as follows in Vroon (at 71):

" ... for the present I would accept that in those circumstances where the court is satisfied that the parties have reached agreement, judged by objective standards, then it should be more generous in giving effect to what is necessary to achieve business efficacy and the parties' intentions, although their communications might have an air of uncertainty and incompleteness about them".

153. I would follow the commercial pragmatism applied by Ormiston J. In the present proceeding the parties clearly wished to revise their fee structure during the life of the 1996 contract. More importantly, they wished to extend the contract during its life for a three year term ending November 2002. In this respect I am satisfied that the parties by the terms of the letter of 28 March 1998 evinced an express intention to extend the term for three years. As for clause 7, I consider that by effecting the 1998 amendment the parties agreed to extend their arrangement for three years. In so doing they rejected the entitlement of either party to terminate on three months' notice to the other party. I consider that unless clause 7 is approached in this way, that is, treated either as severed from the amended contract or as being a clause effective from the date of the amendment, the intention of the parties to continue their business arrangement for a further three years would be inexplicable if not a nonsense. It is to be recalled that the parties had been doing business together on a consistent basis since 1990. In the 1993 contract clause 7 and the right of termination came to light for the first time. Clause 7 in its identical form was re-stated in the 1996 contract. On each of those occasions the parties appear to have treated clause 7 as a term effective from the inception of the relevant contract. Hence, in my view in endeavouring to make commercial sense of the parties' arrangements the conclusion must be drawn that upon the amendments effected by the 1998 amendment the parties wished to start over again so far as the right of termination contained in clause 7 was concerned.

156. However, if this was not the correct construction, in my view, applying the principles expressed in the authorities the only business sense that could be made of the parties' arrangements would be to sever clause 7 entirely from the amended contract. Hence, I conclude that clause 7 was effective from the date of the 1998 amendment and that the clause insofar as it gave a right of termination started over again. The preferred approach is to sever clause 7 entirely from the agreement and treat the 1998 contract as a new contract. The only difficulty with the latter approach is the statement at the end of the letter of 28 March 2000 that the parties intended all other terms and conditions to remain as they were. Therein lies the ambiguity or nonsense point and hence unless clause 7 is excised from the amended contract no sense can be made of the parties' arrangements.

159. It follows from my findings, therefore, that the defendant was not entitled to terminate the contract between it and the plaintiff as it purported to do by its letter of 15 December 1999 and its conduct thereafter. Accordingly, I find in favour of the plaintiff on the issue of liability.

163. Before turning to consider the assessment of damages there is the matter of an application made by the defendant at the commencement of the proceeding on 28 August 2000 for leave to further amend its defence. The background circumstances of the amendment were that in about December 1999 the defendant introduced as part of the uniform for its employees at the Cobram plant a two piece uniform described as "high visibility uniforms". As a result of the introduction of this new uniform the defendant claimed that even if it had not served the notice of termination constituted by its letter to the plaintiff dated 15 December 1999 it would have required the plaintiff pursuant to the terms of the 1996 contract to supply high visibility uniforms under the contract to the defendant so that by 1 April 2000 all existing uniforms at the Cobram plant would have been replaced by the high visibility uniforms. The defendant asserted that the cost of purchasing and supplying the high visibility uniforms to the plaintiff would have been approximately $200,000 and that the plaintiff could not afford and could not have raised sufficient funds to expend the requisite sum of $200,000 for the purchase of the high visibility uniforms. On the basis of these asserted facts the defendant wanted to allege that the plaintiff was not entitled to any damages because there was no breach by the defendant of the relevant contract, alternatively, the defendant was entitled to repudiate the contract.

166. These matters were alleged in the proposed amended defence and the particulars were recited as being constituted by the witness statements of Russell John Gardiner and Loke Ching Wong. Mr Gardiner was the group purchasing manager for the defendant. Mr Wong was an external chartered account retained on behalf of the defendant to provide an assessment of financial matters relating to the plaintiff including its claim for damages.

169. It is necessary to set out some of the interlocutory history that relates to this matter. The proceeding was commenced in the Commercial List on 4 May 2000. The defendant filed its original defence on 22 May 2000. The amendment matters were not adverted to in any way. Following an amendment to the plaintiff's statement of claim the defendant agreed to file an amended defence by 1 June 2000. The proceeding was fixed by consent on 12 May 2000 for a trial commencing 14 August 2000. On 4 August 2000 the trial date was vacated and re-fixed on 28 August 2000 after application by the defendant on the ground of deficient discovery of documents by the plaintiff. No mention was made on the hearing of the application on 4 August 2000 of the defendant needing to further amend its defence.

172. Subsequently, after 3.00 p.m. on 23 August 2000, that is, two business days before the trial date the defendant served the witness statement of Mr Gardiner. The statement raised for the first time the factual basis whereby the defendant purported to allege that the plaintiff could not have met the cost of the supply of the high visibility uniforms, could not have met the requirements of the 1996 contract as amended in any event and, therefore, did not suffer any damage. The next development was that at about 4.00 p.m. on Friday 25 August 2000 the defendant gave notice to the plaintiff of its proposed further amended defence where it pleaded for the first time the financial incapacity point arising from the high visibility uniforms. Shortly after the commencement of the trial at 10.30 a.m. on 28 August 2000 the defendant sought leave to amend its defence to plead the financial incapacity point. The application was opposed by the plaintiff. I refused leave to amend in the form of the proposed pleadings. As a result, the defendant did not rely upon the statement of Mr Garder. I indicated to the parties that I would give reasons in my ultimate judgment. I do so now. My reasons were based on four grounds.

175. First, the 1996 contract, as amended by the 1998 amendment, did not require the plaintiff to supply garments other than those described in the contract. There was no provision for the supply of "high visibility garments". Hence it was not open to the defendant to assert that it would have required the supply of high visibility garments, that the plaintiff was financially incapable of meeting such demand and, accordingly, the defendant would have terminated the contract in any event.

178. Second, the characterisation of the 1996 contract as amended so as to accommodate the proposed amended pleading would necessitate contemplation of a unilateral variation of the contract by the defendant on a basis that was entirely hypothetical and not available under the contract. The fact remains that the issues before the court were that the defendant purported to terminate the contract by its letter of 15 December 1999 and the court was concerned with actual events that occurred thereafter. Mr Nettle QC for the plaintiff described the attempted variation and characterisation of the contract by the defendant as tantamount to a contract originally making provision for the supply of six Mini Minors for a period of one year followed by a unilateral variation by one party for the supply of six Rolls Royce vehicles followed by an allegation that because the party who originally provided the Mini Minors was not willing to provide the Rolls Royces or did not have the money to do so that party would have been in breach of the contract thereby entitling the ordering party to terminate the contract. The analogy makes the point against the defendant.

181. Third, the amendments proposed were in any event bad in law. For the reasons already stated it was not open to the defendant under the terms of the contract to purport to make the demands contemplated in the amended pleading. Notwithstanding the broad statement of principles as to the rights of parties to seek to amend pleadings the courts will not allow an amendment if it is obviously bad in law: see The Commonwealth v Verwayen (1990) 170 CLR 394, 456 per Dawson J; Ginson v Victoria Work Cover Authority [1995] VicRp 14; (1995) 1 VR 209, 215-216. The defendant relied upon the principle stated by the High Court in Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64 in support of its application for leave to amend. In my view the present matter can be distinguished from the circumstances in Amann because in that case the claimant had a contractual right that would have been exercised if a particular set of circumstances had come into play. Here, for the reasons already stated no such contractual right existed. Furthermore, it is to be noted that Gaudron J in Commonwealth v Amann observed (at 152): "It is fundamental that in an action on a contract a defendant is not liable for damages for failing to do that which he or she has not promised". Of course, in the present proceeding if there had been a contractual right on the part of the defendant to insist that the plaintiff provide $200,000 worth of new uniforms and if there was evidence that the plaintiff did not have and could not obtain the financial capacity with which to provide the $200,000 to purchase such uniforms I might have been able to take into account the probability of the incapacity issue as a fact in the reduction of damages claimed by the plaintiff. However, where there is no right in the defendant to ask for $200,000 worth of new uniforms and where there is no contractual obligation on the part of the defendant to provide such uniforms there cannot be any possibility of a breach giving rise to reduction of entitlement to damages, alternatively, an entitlement of the defendant to repudiate the contract on that basis.

184. The fourth matter to be considered on the basis of the authorities is the prejudice to the defendant if the amendment was allowed in any event: Commonwealth v Verwayen, supra; Queensland v JL Holdings Pty Ltd [1997] HCA 1; (1997) 189 CLR 146; Howarth v Adey [1996] VICSC 4; (1996) 2 VR 535. On the basis of the pleadings, without the defendant's foreshadowed amendment, and the witness statements it was apparent that if the amendment was allowed it would require the plaintiff to re-visit its case. In all likelihood, this would have lead to a substantial adjournment with no prospect of a fresh trial date earlier than March 2001. In my view, it would be undesirable for the plaintiff to proceed to lead the evidence it had and thereafter be granted leave to recall witnesses later in time. All this would be entirely disruptive not just to the discrete proceeding itself but to the overall conduct and management of the Commercial List. Far too often parties come before this court at the commencement or during a trial in the Commercial List and seek leave to amend a pleading by citing Verwayen, JL Holdings and Howarth as some kind of mantra. In my view this is not the principle contemplated by those cases. It is necessary for the court to whom the application for leave is made to be satisfied that there will not be prejudice to a party that cannot be satisfied by an appropriate order for costs and/or an adjournment. In my view in the present proceeding the disruption to the presentation of the plaintiff's case in the overall circumstances of the matter would be of such prejudice that the discretion ought not be exercised in favour of the defendant in any event. The plaintiff would be at risk of losing its place in the Commercial List and the high risk of its trial date going off for some time. The plaintiff would lose the entire advantage contemplated by the expeditious management applied by the List. Moreso, the defendant had ample opportunity to make the amendment as is apparent from the history of this matter in the Commercial List including the time made available by the vacation of a previous trial date. To these observations the further comment must be made that when a proceeding is in the Commercial List it is in a different category to other litigation. It has been observed that amendments to pleadings are discouraged in the Commercial List. In particular, the observations of Tadgell JA in Geelong Building Society (in liq) v Encell [1996] VicRp 44; (1996) 1 VR 594 at 608 are pertinent:

"The case was heard in the commercial list. As is well known, that list is dedicated to the prompt, efficient and economical resolution of commercial disputes. Consistently with that philosophy applications to amend pleadings, once they are put in proper shape for a trial, are discouraged and are very sparingly allowed, especially after the trial has begun. The reasons for that attitude are manifest and notorious."

188. Furthermore, Commercial List practice requires that in allowing an amendment an affidavit should be filed by an applicant explaining the delay or other reason for amendment: see Guide to Commercial List Practice. No explanation has been provided on affidavit by the plaintiff to support the application for leave to amend at the very last minute. In my view the defendant had an obligation to provide a satisfactory explanation to the court and no such explanation was forthcoming.

191. When all these matters were weighed together I was satisfied that it was inappropriate in the exercise of the discretion to grant leave to the defendant to amend its defence as sought. Furthermore, the observation must be made that the prejudice potentially suffered by the defendant was very much of its own making in having delayed bringing the application for leave to amend until the commencement of the trial. On the face of the proposed amendment and witness statement of Mr Gardiner it appeared that all of the matters sought to be relied upon could and should have been raised much, much earlier than they were.

196. Expert evidence as to the assessment of damages was provided by the plaintiffs through its accountant, Rodney Miller. On the defendant's side evidence was provided by Mr Wong the accountant retained by the defendant for the purposes of the trial.

199. The witness statement of Mr Miller was provided by the plaintiff to the defendant prior to the defendant providing its expert report. Furthermore, the defendant filed the witness statement of Mr Wong late. As a consequence, leave was granted to the plaintiff to elicit evidence viva voce from Mr Miller in the course of his examination-in-chief so as to respond to matters in Mr Wong's witness statement. Mr Wong was present in court throughout the evidence of Mr Miller. As events transpired that presence was significant in that during an overnight adjournment of the trial Mr Wong prepared an additional analysis that constituted a critique of the work of Mr Miller.

202. There is a further significant observation to be made with respect to the evidence of Mr Wong. He was relied upon by the defendant as providing independent expert evidence. However, in the course of cross-examination it became apparent that his independence was qualified. Mr Wong was retained by the defendant's solicitors on behalf of the defendants in or about early June 2000. As a result of the retainer Mr Wong prepared a written report contained in a letter dated 7 July 2000. Mr Wong conceded in the course of cross-examination that the report prepared by him dated 7 July 2000 was more favourable towards the plaintiff than the defendant than the report ultimately filed in the proceeding. He further acknowledged in the course of cross-examination that following discussions with the solicitors for the defendant he altered his opinion and that alteration formed the witness statement of Mr Wong eventually filed in court. Production was called for by the plaintiff of the first report of Mr Wong dated 7 July 2000. On behalf of the defendant privilege was claimed for the report of Mr Wong. It was produced under objection. I overruled the objection and informed the parties that I would state my reasons for doing so in my ultimate judgment. I do so now.

205. As a fundamental principle, when a witness is called in order to provide expert opinion evidence all of the facts and instructions upon which that witness bases the expert opinion are admissible and subject to production: see R v Meninga (1992) 66 ACLR 199; also, Cross on Evidence, Aust. ed., para. 2535. Furthermore, under the doctrine of fairness that applies to the claim for legal professional privilege with respect to a document, where it is fair so that the relevant evidence may be tested, a claim for legal professional privilege ceases to apply; it is taken to have been waived: Attorney-General (Northern Territory) v Maurice [1986] HCA 80; (1986) 161 CLR 475; Burnell v British Transport Commission (1956) 1 QB 187 (CA). Ultimately, the effect of upholding a claim for privilege necessarily involves withholding important information from the court that may in turn be at the expense of the administration of justice to one of the parties to the proceeding. Hence there must be good cause for the existence of any privilege: see Cross on Evidence, Australian ed., para. 25045; also, 8 Wigmore, para. 2190. In this matter I was not satisfied that there was some interest of the defendant protected by the privilege claimed such as to deny the plaintiff the opportunity to consider the first report of Mr Wong dated 7 July 2000. This view is augmented Mr Wong that at the behest of the solicitors for the defendant he had altered his formal opinion to be filed in his witness statement in the proceeding so as to present a worse picture for the plaintiff. Weighing all these matters up I considered that insofar as privilege attached to the first report of Mr Wong it was appropriate to set the privilege aside.

208. Turning then to the matter of damages, ultimately, after the completion of the evidence of both Mr Miller and Mr Wong it was apparent that the outcome of the differences between the approaches of the two witnesses was minimal. It is appropriate to describe the approach adopted by Mr Miller in his assessment. He calculated the expected revenue for the balance of the contract term until November 2002 by relying upon the actual income figures from when the contract was being fully performed. From those figures Mr Miller deducted the expenses which would not be incurred in the future by reason of the termination of the 1996 contract as amended. The outcome was a picture of the loss suffered by the plaintiff by reason of the defendant's repudiation of that contract. I accept the assessment of Mr Miller as the correct assessment. Overall, the approach of Mr Miller was sound and methodical whereas the approach of Mr Wong was tainted by the intervention of the defendant's solicitors.

211. Mr Miller calculated the value of the sales lost by the plaintiff as a result of the termination of the 1996 contract as amended at $645,796.76. From that amount Mr Miller allowed costs that would not be incurred by the plaintiff as a result of the termination of the contract totalling $229,322.41. As a result, Mr Miller calculated the loss of anticipated profits to the plaintiff in the sum of $416,474.35.

214. In so far as it is necessary for me to do so I note that, in any event, the approach adopted ultimately by Mr Wong was not that far removed from the final outcome determined by Mr Miller. Mr Wong applied a contribution margin ratio for the work that the plaintiff would have provided to the defendant if the contract had not been terminated at the rate of 46 per cent. The approach adopted by Mr Miller was to identify specifically each item of cost which could be saved as a result of not having to service the Murray Goulburn contract and deducting those amounts from the revenues foregone. The approach of Mr Wong was to take the same revenues foregone but to apply to them a contribution margin ratio to what he discerned to be the fixed cost. Mr Wong conceded that if the calculations are correct both methods would lead to approximately the same result. However, there was a substantial disparity between the calculation of damages by Mr Miller and the calculation by Mr Wong. As already stated the answer rested exclusively in the fact that Mr Wong chose a 46 per cent contribution margin ratio on the basis of an assumption that the ratio would equal the percentage of total revenues constituted by Murray Goulburn sales. However, the unchallenged evidence was that the profitability of the Murray Goulburn contract to the plaintiff was five times that of other work performed by the contract. Accordingly, in my view it was appropriate, as urged on behalf of the plaintiff, that if the approach to be applied was a contribution margin ratio the proper ratio was 79.55 per cent and not the figure of 46 per cent chosen by Mr Wong. It was demonstrated in the course of cross-examination of Mr Wong that once the analysis of 79.55 per cent contribution margin ratio is applied the outcome was $433,000, an excess of the amount calculated by Mr Miller.

217. Mr Wong accepted, in my view quite properly, that as a matter of accounting convention and sound accounting practice it is appropriate to assume that the equality of unit cost across the product range can be assumed. In the course of cross-examination Mr Wong accepted that there was a five to one advantage of contribution margin ratio in favour of the Murray Goulburn contract. The evidence of the plaintiff as to the value of the Murray Goulburn product which permitted the contribution margin ratio of 79.55 per cent stood unchallenged and indeed was accepted by Mr Wong on the basis that the profitability or value of the Murray Goulburn contract was five times that of any other contract of the plaintiff.

220. Another explanation for the divergence between the outcome calculated by Mr Miller and that calculated by Mr Wong lay with the initial approach of Mr Wong to excise from costs items that were properly classified as fixed costs but to treat such costs as variable costs. The calculation prepared by Mr Miller was based upon figures contained in an item described as "Schedule K". The matters contained in Schedule K were prepared by a bookkeeper employed by the plaintiff, Ms Robyn Wilson. Her evidence was produced from the computer records of the plaintiff in accordance with s.55B of the Evidence Act 1958. The evidence was not challenged. Following consideration of the fixed costs and variable costs submitted by the respective accountants I am satisfied that the appropriate approach is that adopted by Mr Miller. Each of the items identified by Mr Miller are properly categorised as fixed costs as is apparent from the nature of the costs. I accept the analysis and the basis upon which he reached the analysis, namely, his own knowledge of the business of the plaintiff and also the information he received from the principal of the plaintiff, Mr Startari. It is to be observed that in the course of the cross-examination of Mr Miller the only serious attack levied against him was with respect to his reliance upon the information contained in Schedule K. However, as already stated the evidence of the bookkeeper of the company, Ms Wilson, upon which Schedule K was based was not the subject of any challenge. The only other area of substantial challenge against Mr Miller was his calculation of working hours of employees of the plaintiff that changed as a result of the loss of the Murray Goulburn contract. Having heard the evidence of Mr Startari I am satisfied that Mr Miller made the proper calculation. Ultimately, on the basis of the expert witness reports and the cross-examination of the respective experts most of the evidence of Mr Miller stood unchallenged. Furthermore, it was unsatisfactory in my view that Mr Wong initially prepared the report of 7 July 2000 that was significantly more favourable to the plaintiff but after the intervention of the legal advisers of the defendant he altered his opinion to cause a deterioration in his projection of the position of the plaintiff. It is to be observed that as a result of the intervention of the defendant's legal representatives Mr Wong altered items that he previously categorised as fixed costs and categorised them thereafter in his final witness statement as variable costs. In this respect it is to be observed, further, that in the course of cross-examination Mr Wong conceded that items he ultimately treated as variable costs ought be treated as fixed costs (those costs being items relating to advertising, fuel and oil, registration and insurance, repairs and maintenance, tyres and tubes, discounts, charitable donations, freight and cartage, fuel reductions, superannuation and Workcover, labelling, legal costs and travelling expenses). Indeed, Mr Wong further discounted the calculation of damages of the plaintiff by reducing the rental allowance claimed by the plaintiff. In my view the basis for his rejection was misconceived as he failed to comprehend the role of the trustee company that owned the premises leased to the plaintiff. I was satisfied, as calculated by Mr Miller, that the rental allowance in the calculation of the plaintiff's damages should stand at $169,321.86 for the purposes of calculating fixed costs.

223. Ultimately, the plaintiff did not seek to have damages assessed by reference to the cost ratio contribution method. The issue arose as a result of the method wrongly applied by Mr Wong. I was satisfied, on the basis of the evidence of Mr Miller and the cross-examination of Mr Wong that had the method of cost ratio contribution been properly applied attributing the true cost ratio to the contract between the plaintiff and the defendant it would produce the same magnitude of loss as the method used by Mr Miller. Ultimately, for the reasons already stated I was satisfied that Mr Miller approached the issue of damages from the right direction, that is, he determined the revenue from the contract and then deducted the cost that would have been expended in earning such revenue.

226. On the basis of the expert evidence and my acceptance of the evidence of Mr Miller. I assess damages in the amount of $416,474.35.

[1] B.P. Refinery (Westernport) Pty Ltd v Hastings Shire Council [1977] HCA 40; (1977) 52 ALJR 20; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales, supra; Hospital Products Limited v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41; Hawkins v Clayton (1988) 164 CLR 539.