Colyer Fehr Tallow Pty Ltd (ACN 001 849 869) v KNZ Australia Pty Ltd

Colyer Fehr Tallow Pty Ltd (ACN 001 849 869) v KNZ Australia Pty Ltd - [2011] NSWSC 457 - NSWSC 2011 case summary — Zoe

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The tallow industry 3Tallow is a by-product of the meat industry. The main producers are abattoirs. However, there are also contract renderers who produce tallow from waste collected principally from butchers. Tallow is used for a variety of purposes including as an ingredient in animal feed, soap, lipstick, cooking products, oleo chemical production and (in recent years) as a raw material for the production of bio-fuels. There are various grades of tallow which are recognised in the industry. An important difference between the different grades is the content of free fatty acids. The greater the content of free fatty acids, the lower the grade of tallow. For example, tallow with a content of free fatty acids of less than 1 percent is regarded as a high quality tallow. The grade of tallow may also be affected by post-production processes, such as blending and bleaching. There is also said to be a question in this case whether a product known as "yellow grease", which is manufactured from used cooking oil, should be classified as a low grade tallow or not. However, framed in those terms, the question misstates the issue. The critical question is not whether yellow grease is a form of tallow. Rather, the question is whether the parties intended their agreement to cover the purchase and sale of yellow grease by Colyer Fehr. I return to that question below. 4In 1993 the total production of tallow in Australia was approximately 370,000 tonnes. That figure had increased to approximately 600,000 tonnes by 2006. There is both a domestic market for tallow and an export market. Roughly one third of the tallow produced in Australia is sold to domestic buyers, although the evidence suggests that the proportion available to exporters was higher in 1993 and has decreased over time. Generally, domestic buyers are willing to pay higher prices than exporters. That is because tallow is an essential ingredient in the products manufactured by them, so they must obtain quantities of it in order to continue production and to meet their contractual obligations. In addition, it is easier for domestic buyers to absorb the cost of the tallow in the sale price of the finished products manufactured by them. Moreover, they are often located near particular suppliers of tallow so that their transport costs, which can represent a significant component of the delivered price, are less than those incurred by exporters, who must transport the tallow to a convenient port. Consequently, exporters normally acquire tallow which is in excess of the requirements of domestic buyers. During the time of the agreement between Colyer Fehr and KNZA, there were a large number of domestic buyers. The principal exporters were KNZA, Gardner Smith Pty Ltd and, from about 1998, Australian Meat Holdings Pty Ltd, which was also a large producer of tallow. In about 2001 or 2002, Australian Meat Holdings was acquired by a company controlled by ConAgra Trade Group, Inc ( CTG ) and CTG commenced acquiring tallow from other suppliers for export. 5In some cases, producers of tallow enter into exclusive arrangements to supply the tallow they produce to particular buyers. For the most part, however, tallow is (and at all relevant times was) sold by tender. Producers who sell tallow by tender conduct tenders weekly or, more usually, monthly. It is the practice of some producers to notify potential purchasers of a proposed tender. Others simply rely on the fact that it is industry knowledge when their production for a particular period will be put out to tender. The tenders are normally informal. In the past, they were usually conducted by telephone, although in more recent years email has become a popular alternative. Tallow is bid for either on an "ex-works" basis (where the purchaser arranges and pays for transport from the supplier) or a "delivered" basis (where the supplier arranges and pays for transport to the nearest terminal and the costs of transport are included in the sale price). Tenders are normally awarded to the bidder who offers the highest price, although exceptions are sometimes made where there is doubt about the bidder's creditworthiness or where the producer has a poor relationship with a particular bidder. 6Some producers, but by no means all, may be prepared to reveal to a particular bidder the prices offered by other bidders and to give that bidder an opportunity to match or better the other prices. This practice is known in the industry as "a look". In some cases, producers are prepared to consider offers to acquire only part of their production. Many producers, however, are only prepared to consider offers to acquire their whole production for a particular period. Whether a particular producer is prepared to accommodate a bidder in various ways - such as by giving the bidder a look - depends very much on the personal relationship between the representative of the bidders and the representatives of the producers who were responsible for selling that producer's output. Those personal relationships, which can only be built up over time, depend in part on the personalities involved. However, they also depend on the relationship established between the parties by the course of dealings between them and the assistance that each is willing to give the other - for example, the willingness of a buyer to take a particular batch of tallow even though it is below specification and the promptness with which the buyer pays for the tallow and arranges for it to be collected. 7Another important feature of the way in which tallow is sold by tender is that the tenders are let before the tallow the subject of the tender is produced. Consequently, what is put out to tender is the opportunity to acquire a particular batch of tallow of an estimated quantity and quality at a specified price. If ultimately the tallow does not meet specification, the buyer has a right to reject it, although, as I have said, a buyer may still be prepared to take the tallow and to renegotiate the price rather than jeopardise its relationship with the producer by rejecting a particular batch.

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The parties 8KNZA was incorporated in about 1985. It is a wholly owned subsidiary of Kerry (New Zealand) Limited ( Kerry ), a company incorporated in New Zealand shortly before the incorporation of KNZA. From the time of its incorporation until 2007, Kerry was 75 percent owned by the Kuok Group, a large trading group based in Singapore and controlled by the Kuok family. Of the remaining shares, 15 percent was owned by Mr Hugh Spence, who was the managing director of Kerry between May 1986 and September 2007, and 10 percent was originally owned by Mr Glen Jones. Mr Jones sold his shares in Kerry to Mr Spence in about 2002 and Mr Spence sold his shares to the Kuok Group in September 2007, when he left the company. Subsequently, CTG was privatised and renamed Gavilon LLC. At about that time, the Gavilon Group acquired Kerry. 9Prior to the incorporation of Kerry in 1985, the Kuok Group had acquired tallow in Australia through a company known as Charlick Limited. For a time, Charlick acquired all the tallow it purchased in Australia from Colyer Fehr. The tallow was sold to Charlick on a cost and freight (CNF or CFR) basis. Colyer Fehr charged Charlick its cost of purchase plus a fee of $5 per tonne of tallow sold. It was responsible for clearing the tallow for export and arranging the shipping. Although it is not clear precisely when, that arrangement had ceased by the time or shortly after KNZA was incorporated and, subsequently, KNZA started acquiring tallow in Australia on its own account. In doing so, it competed with Colyer Fehr. 10Colyer Fehr was incorporated in 1980. Its ownership at that time is not important. However, two points are relevant. The first is that the managing director of Colyer Fehr between 1981 and 1990 was Mr Reginald Evans. Secondly, in 1990 the then principal shareholder of Colyer Fehr, Mair Astley, was acquired by a New Zealand company known as Mainzeal Property and Construction Limited. Following that acquisition, towards the end of 1991, Mainzeal Property and Construction commenced to wind up the business carried on by Colyer Fehr. Mr Evans continued on as a consultant of Colyer Fehr while that was done. He also established a company known as ARC Holdings Pty Ltd. At that time, it was Mr Evans' intention to develop a practice as an accountant and to continue Colyer Fehr's business of supplying domestic customers and small export customers with tallow through ARC Holdings. However, on 8 May 1993, following the winding up of Colyer Fehr's existing business, Mr Evans and his wife purchased all the issued shares in Colyer Fehr and, from that time, have carried on the business of buying and selling tallow through that company and Mr Evans assumed the role of managing director of Colyer Fehr again. Since then, Colyer Fehr has developed into a successful family business. As well as trading in tallow, it has expanded its operations to cover the transport, storage and processing of tallow. Several members of the Evans family work in the business, including Mr Damian Evans, a son of Mr Evans Snr. From about 2002, Mr Damian Evans gradually took over the role previously performed by his father in the company.

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The agreement between KNZA and Colyer Fehr 11KNZA did not operate successfully in the Australian market. As a result, in mid 1990, Kerry put a proposal to Colyer Fehr that KNZA would withdraw as a purchaser in the Australian market and instead would acquire tallow from Colyer Fehr. That proposal was put at a meeting in Auckland which was attended by various representatives of Kerry, including Mr Jones and Mr Spence, and Mr Evans Snr. At the meeting, it was agreed that Colyer Fehr would be the exclusive supplier of tallow for Kerry, that Kerry would only export tallow to China and that Colyer Fehr would remain free to continue its own export and domestic supply businesses. In return, Kerry agreed to pay Colyer Fehr its costs of acquiring the tallow plus $5 per tonne. The tallow was sold on a free on board (FOB) basis - that is, Kerry (or KNZA) was responsible for organising its own shipping and clearing the tallow for export. 12Those arrangements continued until late 1991, when Colyer Fehr ceased to carry on business. Shortly after that time, Mr Spence and Mr Evans spoke about Mr Evans' future plans. Mr Evans told Mr Spence that he planned to develop his accountancy practice and to continue a small tallow business. Mr Spence asked Mr Evans whether he would be prepared to buy tallow for KNZA. Mr Evans described that suggestion when giving oral evidence as a "godsend". 13There is a dispute about what happened next. According to Mr Evans, an agreement was reached over the telephone. Mr Evans proposed that he be paid a commission of $5 per tonne and he indicated that he thought he would be able to buy about 30,000 tonnes per year. According to him, there was no discussion of which legal entities would be the contracting parties and there was no discussion of who else Mr Evans was entitled to buy tallow for or any limitation on his right to do so. Nor was there any discussion whether Mr Evans would be able to carry on business of an exporter of tallow. However, Mr Evans said in his witness statement that, as a matter of common sense, he thought the relationship with KNZA would be impaired if he were to compete with it in the export market, and Colyer Fehr pleads in paragraph 6(b) of its amended statement of claim that it was a term of the agreement that Colyer Fehr "would not export tallow in competition with KNZA on its own behalf". 14Mr Spence, on the other hand, says that he and Mr Evans arranged to meet in New Zealand. That meeting took place over dinner at a restaurant called Plus-Ones in Auckland and Mr Spence says that Mr Jones was also present. At that meeting, Mr Spence proposed that Mr Evans would purchase tallow for Kerry whenever requested to do so and that the aim was to purchase in the order of 15,000 to 30,000 tonnes per annum. According to Mr Spence he said words to the effect of: Under the arrangement, you would not be acting in a major way for any other party. Also, you would not be permitted to enter into any other arrangement involving the export of tallow, whether in drums or in bulk. Mr Evans is said to have replied in words to the effect of: I understand. Mr Spence says that later in the conversation Mr Evans asked: Can Colyer Fehr export drummed tallow? Mr Spence replied that it could not. He says, however, that he was upset by the question because it was inconsistent with the basis on which he understood the parties had agreed to operate. Consequently, he raised the issue with Mr Evans the following day and Mr Evans' response was that he was just joking when he suggested that Colyer Fehr might be able to export drummed tallow. 15Mr Spence says that there was no discussion of the legal entities who would be parties to the contract, the question of exclusivity or the question whether KNZA would commit to buying any minimum tonnage of tallow per year. According to Mr Spence, the arrangement was sufficiently flexible to permit KNZA to purchase tallow from time to time from other suppliers. Mr Spence does say, however, that at about the time of the conversation with Mr Evans, he was aware that Colyer Fehr had an existing arrangement by which it purchased up to 12,000 tonnes of tallow per year for Unilever Australia and provided storage services for it; and that that arrangement was acceptable to Kerry.

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The course of dealings between the parties 16Following the agreement reached during the telephone conversation or at the meeting, ARC Holdings and then, when Mr Evans and his wife acquired the shares in Colyer Fehr, Colyer Fehr began to purchase tallow for KNZA. The basic pattern of how that occurred appears to have been established almost immediately and to have continued until the relationship terminated in 2006. Although the tallow was acquired on behalf of KNZA, Mr Evans received all his instructions from Kerry - principally, Mr Jones, until Mr Jones left Kerry in 2002. From about that time, Mr Evans Jnr took over his father's role and he dealt principally with Mr Spence. Generally, for tallow bought for KNZA, the invoices were made out in the name of KNZA and were sent directly to KNZA for payment or were forwarded for payment to KNZA by ARC Holdings and, subsequently, Colyer Fehr. Because of the close relationship between the parties, they were often confused. Consequently, KNZA was sometimes referred to as Colyer Fehr and, as I shall explain, sometimes invoices intended for Colyer Fehr were sent to KNZA by mistake. Colyer Fehr would also use KNZA's letterhead when negotiating or issuing instructions to third parties on KNZA's behalf. 17Mr Evans Snr and Mr Jones, and later Mr Evans Jnr and Mr Spence, spoke frequently to discuss the general state of the market, the bids that would be lodged on behalf of KNZA, shipping schedules and trading and stock management strategy. Mr Evans Snr estimates that he or Mr Evans Jnr spoke to representatives of Kerry and KNZA on average about 10 times per day. Those discussions took place against the background of a number of documents prepared by the parties. One type of document was a weekly shipping sheet prepared by Kerry summarising the quantities of tallow that it required to meet contracts that it had entered into with its overseas customers, the quality of tallow required and the port from which it would be shipped. 18Another type of document, prepared by ARC Holdings, and subsequently Colyer Fehr, was a running list of tenders which gave details of each tender, who had been successful in relation to that tender and the price that each bidder had submitted (to the extent that that information could be ascertained). When the bid was won by a domestic purchaser, Colyer Fehr would often describe the successful purchaser as a "local". Whether the local buyer was named or simply described, the list did not indicate whether Colyer Fehr had acted for the local buyer or indeed had bought the tallow in its own name. The list was sent to Kerry on a regular basis. 19A third type of document, also prepared by ARC Holdings and later Colyer Fehr, kept track of the quantities of tallow that KNZA required and showed the extent to which KNZA had tallow to meet those requirements. The last column of the document indicated whether KNZA was short or long in its requirements for each vessel and grade of tallow that Kerry had indicated KNZA required. Documents of this type were produced weekly but it was Mr Evans Snr's practice, which again was followed by his son, to destroy the documents shortly after the end of the week to which they related. Consequently, few of them remain in existence. 20In addition to the documents I have referred to, Colyer Fehr also kept what it called "contract books". These books, which were started by Mr Evans Snr in 1991, recorded all purchase and sale contracts which ARC Holdings or Colyer Fehr entered into, both for themselves and for other parties. Each contract entered into for KNZA was assigned a unique number in the contract book, beginning with the prefix "E", and then later "K", or occasionally no prefix. Non-KNZA contracts were not assigned numbers. On taking over the business, Mr Evans Jnr says that he only recorded contracts in the contract books that had been entered into on behalf of KNZA, although, in fact, some other sales were also recorded in the books from that time. There is a question whether, in those circumstances, the books accurately record the purchase of tallow on behalf of KNZA. In my view, they do. I accept Mr Evans Jnr's evidence that he recorded all contracts entered into on behalf of KNZA. The fact that some other contracts are recorded in the books after Mr Evans Jnr took over the principal role of buying tallow on KNZA's behalf is explained by the fact that Mr Evans Snr continued on occasions to buy tallow and, when he did so, he followed his past practice of recording all sales in the books. 21Generally, Mr Evans Snr and Mr Jones, and later Mr Evans Jnr and Mr Spence, discussed the bids that Colyer Fehr would lodge on behalf of KNZA for each batch of tallow offered for tender. However, in some cases, Colyer Fehr was given a discretion to bid an extra $5 per tonne, and in some cases Colyer Fehr was given a more general discretion to determine the price at which it would bid on KNZA's behalf. In the case of smaller suppliers, Colyer Fehr sometimes lodged a bid on behalf of KNZA without any instructions; and sometimes it lodged a bid in the expectation of failing simply in order to be seen as having a continuing interest in the relevant supplier's product. 22When KNZA was successful in a tender, Colyer Fehr arranged for collection and transport (if sold ex-works) or for the delivery (if sold delivered) to one of KNZA's terminals. It also faxed KNZA a purchase slip which recorded the price, expected grade and likely quantity of the tallow that it had purchased. The tallow that was the subject of a particular tender was normally produced and delivered progressively. Colyer Fehr would arrange for the delivery or collection of each batch and notify Kerry at that time of the precise quantity and quality supplied. It would generally arrange for the producer to invoice KNZA directly for each batch of tallow as it was supplied and would invoice KNZA separately for its commission of $5 per tonne. Colyer Fehr did not normally advise Kerry specifically if there was a variation in the quantity supplied compared to the amount for which KNZA had successfully tendered. 23In addition to advising Kerry in relation to the market, submitting tenders on behalf of KNZA and arranging for the delivery of tallow to KNZA's storage tanks, Colyer Fehr also performed a number of other services for KNZA. On some occasions, KNZA required tallow urgently to fill a particular order that had not been anticipated. On those occasions, Mr Evans Snr or Mr Evans Jnr arranged to fill those requirements by "borrowing" tallow from another tallow purchaser (such as Meadow Lea), or diverting tallow from a production that had been won by someone else on a tender, or by purchasing tallow off-tender by negotiation. Colyer Fehr also, on occasions, negotiated exclusive supply arrangements with particular producers on KNZA's behalf. In addition, Colyer Fehr negotiated container freight rates, tested and monitored tallow supplied by producers and renegotiated prices if the tallow proved to be off-specification, arranged for some tallow to be processed and for some to be placed in drums, arranged for tallow to be loaded or discharged from bulk tanker ships and arranged long term storage and transport contracts. In many cases, these additional services were supplied by Colyer Fehr itself, for which, depending on the nature of the service, it charged an additional fee. For example, in the financial year ending 30 June 2004, KNZA paid Colyer Fehr $469,046 in commission under the agreement, $554,122 for tallow cartage, $78,586 for tallow drumming and $172,577 for the storage, cartage and discharge of vegetable oil. In other years, it also paid Colyer Fehr for bleaching tallow. 24While KNZA purchased tallow in Australia for export, it did not carry on a business of selling tallow domestically. During cross-examination, Mr Spence suggested that KNZA was willing and able to do so, but did not do so as opportunities to sell domestically were not presented to it by Colyer Fehr. I do not accept that evidence. With one exception, there is no evidence that anyone from Kerry or KNZA told Colyer Fehr that it was interested in selling tallow domestically. The exception is that Mr Spence told Mr Evans Snr in about March 2006 that KNZA was considering selling tallow to Gull Petroleum in order for it to manufacture a form of bio-fuel. That aside, Mr Spence could not recall in cross-examination any occasion on which KNZA had sought out a domestic customer or asked Colyer Fehr to do so on KNZA's behalf. I do not think that that one example demonstrates that KNZA had a serious interest in selling tallow domestically. Moreover, it is difficult to see what contribution KNZA could make in the domestic market that would attract local buyers to it. Its activities were clearly directed to the export of tallow. 25ARC Holdings and Colyer Fehr were more successful in acquiring tallow for KNZA than the parties had expected. In the first year (1992), ARC Holdings acquired approximately 95,000 tonnes. That figure increased over subsequent years and reached a peak of approximately 130,000 tonnes in 1999 and then gradually declined to approximately 80,000 tonnes by the time the agreement was terminated. The reason for the decline is not entirely clear from the evidence. Mr Spence puts it down to increased competition from CTG. However, Mr Spence conceded in cross-examination that Colyer Fehr had done a good job in acquiring tallow for KNZA, and he did not suggest that Colyer Fehr had failed to acquire sufficient tallow for KNZA in order to permit it to fulfil its contractual obligations to its customers. 26As I have said, Colyer Fehr took over the role of acquiring tallow for KNZA from ARC Holdings following Mr and Mrs Evans Snr's acquisition of the shares in Colyer Fehr at the beginning of May 1993. Mr Evans Snr says that he met with Mr Spence in Kerry's offices in New Zealand at that time. He was in New Zealand to finalise the purchase of the shares in Colyer Fehr. At the meeting, Mr Evans told Mr Spence that he intended from then on to carry on business in the name of Colyer Fehr. Mr Evans says that at that meeting he made a reference to ARC Holdings having sold 200 tonnes of drummed tallow per month, that that comment had upset Mr Spence and that Mr Evans had responded in words to the effect of: Relax, Hugh. I was having you on. We haven't been exporting that much tallow. Mr Evans said that he made the comment he did because he had a large number of drums which he had hoped to sell to Kerry and that he was trying to encourage Kerry to sell more drummed tallow itself. Mr Evans says that Mr Spence is mistaken when he suggests that a conversation concerning drummed tallow occurred at the time it was agreed Mr Evans would buy tallow on behalf of KNZA.

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Acquisition of tallow by Colyer Fehr for others and for export 28There is no dispute that ARC Holdings and subsequently Colyer Fehr acquired tallow for entities other than KNZA. Mr Evans gave evidence that, during the period until May 1993, he bought quantities of tallow for Unilever and also bought small quantities of tallow, which was drummed, for export to Thailand. Mr Evans says that during this period, he conducted the business on the basis that ARC Holdings would not sell bulk tallow to overseas customers, and would not sell drummed tallow to KNZA's existing overseas customers, or to overseas purchasers who were previously customers of Colyer Fehr who he had introduced to KNZA. If ARC Holdings received an export enquiry for drummed tallow, he would refer the enquiry to KNZA. There is, however, evidence that Colyer Fehr exported small quantities of tallow other than to Thailand in later years. For example, Colyer Fehr exported food grade tallow to an entity referred to as "Bakels". Colyer Fehr also exported small quantities of low grade drummed tallow to Papua New Guinea, Nepal, Madagascar and France among other countries. KNZA exported to each of those named countries as well. Prior to May 2003, Colyer Fehr's export of tallow was minimal. Colyer Fehr exported 247 tonnes of tallow between May 2003 and April 2004, 817 tonnes between May 2004 and April 2005 and 1,374 tonnes between May 2005 and April 2006. 29ARC Holdings and Colyer Fehr also bought significant quantities of tallow for domestic users other than Unilever. Colyer Fehr often bought the tallow in its own name and then on-sold it to domestic customers. Various patterns developed for how that would occur. It is not necessary to describe them all. However, Colyer Fehr's purchase of tallow for others is critical to KNZA's cross-claim and it is therefore necessary to refer to some of them. The evidence focussed on the last few years of the agreement. One example related to Colyer Fehr's acquisition of tallow from Sunland, which was an abattoir in Queensland. Sunland produced roughly 500 tonnes of tallow per month and sold it on a weekly basis by tender. Generally, Colyer Fehr was given a discretion on how much it would bid on behalf of KNZA for Sunland's production. During the period 2002 to 2006, Colyer Fehr was successful in all but about 4 or 5 tenders a year. It was often given "a look" before tenders closed. One of Colyer Fehr's domestic customers was Ridley. Ridley had a factory close to the Sunland abattoir which produced, among other things, dog food. Ridley required approximately 40 tonnes of tallow every 6 weeks for that production. A practice developed by which Colyer Fehr would satisfy Ridley's requirements out of the tallow it bought from Sunland and make the balance available to KNZA. Mr Evans Jnr gave evidence that Sunland itself was a party to the practice and put its tallow out for tender on the basis that Ridley's needs would be met out of the tallow it produced. There is no reason to doubt that evidence and I accept it. On a number of occasions in early 2006, Colyer Fehr bought tallow from Sunland in its own name and on-sold part of that tallow to Ridley and part to CTG or, on some occasions, all of the tallow to CTG. 30I will say more about Colyer Fehr's relationship with CTG shortly. It is sufficient to observe in the present context that Colyer Fehr did not disclose to KNZA that it was acting for CTG. It simply described the successful tenderer as a "local". Moreover, according to KNZA, Colyer Fehr, at least on some occasions, sold the relevant batch of tallow to CTG at the price KNZA had offered to pay or at a lower price than KNZA had offered. Mr Evans Jnr frankly conceded that Colyer Fehr was "coy" about its dealings with CTG. However, I do not think that the evidence establishes that the price paid by CTG was necessarily the same or less than the price offered by Colyer Fehr on behalf of KNZA. The price offered on behalf of KNZA was a delivered price. The price paid by CTG was an ex-works price. In one case at least, the price paid by CTG was less than the price offered by KNZA. However, in that case the tallow was below specification. Nonetheless, there do appear to be a few occasions when CTG ended up paying the same price as had been offered by KNZA. Mr Evans Jnr explained this conduct on the basis that the amount of tallow was minimal, and it was expected to go to locals and it was desirable to drip feed CTG so that it did not itself bid for Sunland's production. 31On about 6 occasions, Colyer Fehr also bought small quantities of tallow from Bindaree Beef, with whom Colyer Fehr had negotiated an exclusive supply agreement on behalf of KNZA, and then supplied that tallow to Ridley. 32Another example of Colyer Fehr buying tallow for local customers concerned Valley Beef, which was a substantial producer of high quality tallow. Colyer Fehr generally lodged a bid for the whole of Valley Beef's production each month. However, on several occasions, it split the bid between KNZA and local customers, usually either Meadow Lea or Unilever or both. In those cases, Colyer Fehr bought the tallow in its own name and invoiced each of the entities on whose behalf it bought the tallow separately. It was generally paid a commission of $5 per tonne by each buyer for the tallow bought for that buyer, although it appears that Meadow Lea did not pay a commission. According to Mr Evans Jnr, the arrangements to split a tender were negotiated in advance of the tender being placed. He gave evidence that the arrangements were to KNZA's advantage because, in the absence of an agreement to split a tender, a local producer, such as Meadow Lea, was likely to bid successfully for the whole month's production. There are generally no documents relating to the agreements to split tenders and the fact that a tender was split was not recorded on the tallow tender result sheets. All those sheets show is that both KNZA and a local purchaser or purchasers were successful. However, there is a record of one conversation between Mr Evans Jnr and Mr Spence where it appears that Mr Spence refused to agree to a split and the evidence suggests that that tender was won by Gardner Smith. Mr Spence accepts that on one or two occasions he had discussions with Mr Evans Jnr concerning proposals to split a tender. However, he was not prepared to accept that the discussions in relation to the splitting of tenders went beyond that. 33A third example is Colyer Fehr's purchase of tallow from EC Throsby, which was located at Singleton. On a number of occasions, Colyer Fehr bid for the whole production for a particular month. However, only part of that bid was lodged on behalf of KNZA. The balance of the bid was made on Colyer Fehr's own behalf. In some cases, the two bids were at the same price on an ex-works basis. In other cases, Colyer Fehr placed a higher bid for the tallow it was seeking to acquire on its own behalf. Colyer Fehr then sold the tallow acquired by it to Arrow Commodities or companies associated with that company at a profit. Again, the tallow tender result sheets simply indicated that a local buyer had been successful in acquiring part of the production. 34In addition to these examples, in June 2005, Mr Evans Snr reached an agreement to buy tallow on behalf of CTG. By this stage, CTG was operating aggressively in the market. It was bidding for the production of a number of Colyer Fehr's long term suppliers such as Sunland, and producers in Western Australia known as Talloman and Harvey Beef. The agreement was reached in a meeting between Mr Evans and Mr Scott Weitemeyer and Mr Mark Frost, who at the time were both Senior Commodity Traders with CTG. At the meeting, Mr Evans suggested that Colyer Fehr could purchase and transport tallow for CTG. The representatives of CTG asked how Colyer Fehr could do so when it acted for KNZA, one of CTG's biggest competitors. Mr Evans replied that he would act for CTG and Mr Evans Jnr would act for KNZA. Following that meeting, Mr Evans Snr started to place bids on behalf of CTG and to advise CTG on the amount that it should bid. Colyer Fehr charged CTG a commission of $5 for each tonne bought. In some cases, Colyer Fehr placed bids for CTG where KNZA was unable to bid because of difficulties in transporting or storing the tallow. But, on some occasions, it placed bids on behalf of CTG in competition with bids that it placed on behalf of KNZA. In addition, as I have said, on several occasions, Colyer Fehr placed a bid with Sunland for KNZA and bid for the same tallow itself. In those cases, both bids were placed by Mr Evans Jnr. In some cases, it sold part of the tallow it acquired to Ridley and the balance to CTG. In the others, it sold all the tallow to CTG. Mr Evans Snr gave a number of reasons for his decision to enter into an agreement with CTG. First, it was in KNZA's interests to maintain good relations with CTG because CTG was also a supplier of tallow to KNZA. In addition, CTG produced a higher grade of tallow than Sunland. Consequently, the result of acquiring lower grade tallow from Sunland for CTG was likely to be that Colyer Fehr could acquire more higher grade tallow from CTG (which CTG found difficult to sell) for KNZA. Second, it was in KNZA's interests to have Colyer Fehr acquire tallow for CTG rather than to have CTG compete for the production of some of KNZA's long-term suppliers. Third, the agreement enabled Colyer Fehr to submit bids even where KNZA was not in a position to take the relevant batch of tallow. That assisted Colyer Fehr and KNZA to maintain good relations with the relevant producers. 35A number of different methods have been used to calculate the amount of tallow sold by Colyer Fehr to domestic customers. These amounts vary, but not significantly. Whatever method is used, the sale of tallow to domestic customers was never over 12,000 tonnes annually, with some years being significantly less. For example, prior to 2003 total sales apart from KNZA did not exceed 7,832 tonnes in any one year and between 1999 and 2002 they did not exceed 1,512 tonnes in any one year. Even in the period from 2002 until the time the agreement was terminated, during which there was an increase in sales to customers other than KNZA, total sales to other customers reached a peak in 2003 of 9,536 tonnes and reduced after that time (8,091 tonnes in 2004, 7,742 tonnes in 2005 and 3,270 tonnes in the 6 months to 30 June 2006).

[9]

KNZA's knowledge of Colyer Fehr's conduct 36Both Mr Spence and Mr Robert Bolton, who was the General Manager Australia of KNZA between 1990 and January 2008, denied in their affidavit evidence that they were aware that Colyer Fehr bought tallow for anyone other than KNZA and Unilever. There is no direct evidence that Mr Spence was aware that Colyer Fehr bought tallow for domestic customers other than Unilever, although, for reasons I will explain later, in my opinion he was aware that that was likely to happen. There is, however, direct evidence that Mr Bolton was aware that Colyer Fehr bought tallow for domestic customers. It is also relevant that both Mr Spence and Mr Bolton accept that they were aware that Colyer Fehr acquired tallow for Unilever and, on occasions, it was apparent that it did so in competition with bids lodged on behalf of KNZA or did so in circumstances where the bid was split between KNZA, Unilever and, in some cases, Gardner Smith. 37As to Mr Bolton's knowledge, there is evidence that he received a number of invoices from tallow suppliers which were not for tallow acquired by KNZA and a number of invoices for the transport of tallow to domestic customers. He passed those invoices on to Colyer Fehr for payment. In one case, there was correspondence between him and Mr Evans Jnr in relation to the invoice in which Mr Evans explained that the invoice related to a Colyer Fehr domestic sale and in another there was correspondence in which Mr Evans Jnr said that the relevant tallow had been supplied to a domestic customer. In other cases, Mr Bolton sent the invoice to Mr Evans with a question mark or with the words "these yours??" KNZA submitted that there was a question whether the first of these documents was received by KNZA. However, its primary submission was that there were a limited number of invoices that fell within this category out of the thousands received by Mr Bolton and that those invoices alone were not sufficient to establish that Mr Bolton appreciated that Colyer Fehr was buying tallow on behalf of domestic customers other than Unilever. I do not accept those submissions. There is no reason to suppose that Mr Bolton did not receive the first document. Mr Bolton turned his attention to the individual invoices and he sent them for payment to Colyer Fehr. In doing so, and despite his denials, he must have appreciated that they were for tallow bought by Colyer Fehr for other customers. There was no suggestion that Mr Bolton's knowledge was not the knowledge of KNZA. It follows KNZA knew that Colyer Fehr bought tallow for domestic customers, although it did not know the precise extent to which Colyer Fehr did so. 38In my opinion, the evidence also establishes that KNZA knew that Colyer Fehr was exporting a food grade tallow to Bakels in New Zealand. Mr Spence conceded in cross-examination that he was aware that Colyer Fehr was supplying tallow to Bakels and accepts that he may have asked Mr Evans Jnr to use Kerry ships to do so. However, he says that he thought that Colyer Fehr was simply arranging the logistics and that he did not know who the principal was. That, however, seems to me to be unlikely. In circumstances where tallow was being exported from Australia and Colyer Fehr was arranging the logistics, it is hard to see who else would be buying the tallow. If it were another exporter, the likelihood is that that exporter would have arranged the shipment itself. Moreover, Mr Olds, who worked for Kerry from 2000 until April 2006 and was principally responsible for arranging shipping, gave evidence that "Colyer Fehr used to buy and export food grade tallow to Bakels in New Zealand", although he cannot remember how he came by that knowledge. He did not regard it as an issue because it was a specialised food grade tallow. The likelihood is that he passed on what he knew to Mr Spence. Although Mr Spence was not employed by KNZA, there is no suggestion that his knowledge should not be imputed to KNZA. 39Apart from Bakels, the only evidence that KNZA knew that Colyer Fehr was exporting tallow is evidence that Mr Spence and Mr Bolton became aware of bills of lading that suggested Colyer Fehr had exported 2 or 3 container loads of drummed tallow in 2003 or 2004. Mr Bolton said that he raised the issue with Mr Evans Jnr and was told that Colyer Fehr had exported a small quantity of drummed tallow and that that tallow was a grade that KNZA did not want to purchase. Mr Bolton says that he responded that "As long as it is a one-off, then there should be no problem". As Colyer Fehr points out in its submissions, it is difficult to reconcile that statement with evidence given by Mr Bolton that he raised the issue with Mr Evans by saying "There's a lot of tallow going out of Sydney". Mr Spence said in evidence that he did not raise the issue with Mr Evans because he was not 100 percent certain that Colyer Fehr had exported the tallow and did not want to upset the relationship. Mr Spence's first explanation seems implausible. There was no doubt in Mr Bolton's mind that Colyer Fehr had exported tallow. The likelihood is that he discussed the matter with Mr Spence. On the other hand, Mr Spence's second explanation seems plausible. In my opinion, KNZA did not regard it as significant if Colyer Fehr exported small quantities of low grade tallow to customers other than its own.

[11]

Termination of the Agreement 41In March 2006, Colyer Fehr entered into a tallow purchasing agreement with BP, under which it was to supply BP with tallow and receive a $5 per tonne commission. The contract expressly permitted BP to obtain Australian tallow from other sources or buy it itself. However, it contemplated that Colyer Fehr would buy up to 120,000 tonnes of tallow per year for BP. The agreement was not to commence until 2007. Colyer Fehr and BP issued a press release announcing the agreement on 31 March 2006. Mr Evans Snr sent a copy of that press release to Mr Spence, who took objection to the proposal. 42Subsequently, on 6 April 2006, Mr Spence visited Colyer Fehr's offices in Mt Druitt to discuss the announcement. Mr Spence told Mr Evans Snr that the BP agreement was a "major breach" of Colyer Fehr's agreement with KNZA. Mr Evans Snr disagreed. In his view, BP would enter the market with or without Colyer Fehr. Given that, he thought that it would be beneficial to KNZA if Colyer Fehr was doing the purchasing for BP since it would be in a position to co-ordinate bids in a way that would maximise KNZA's prospects of getting the tallow that it wanted. Mr Spence, however, did not accept Mr Evans' view and, by letter of 10 April 2006, KNZA purported to terminate its agreement with Colyer Fehr on 14 days' notice. In correspondence between Colyer Fehr and KNZA from 10 April 2006 to 27 September 2006, Mr Evans objected to the period of notice given. In a letter to the chairman of Kerry (in Singapore), Mr Evans argued against any claim that the agreement would do damage to Kerry, stating that domestic trade had always been Colyer Fehr's area of operation, and that the termination was "spiteful" considering the BP agreement did not commence until 2007. There was no response by Kerry to Colyer Fehr's assertion regarding the domestic tallow trade, and no claim or allegation of a breach of contract was made in relation to termination of the agreement in any correspondence subsequent to the 6 April 2006 meeting. 43Following termination of the agreement, KNZA again started acquiring tallow on its own behalf. Again, however, it was unsuccessful and by September 2007 it ceased doing so. BP never bought any significant quantities of tallow either through Colyer Fehr or otherwise.

[12]

What were the terms of the contract? 44This question raises four main issues:

Was it a term of the contract that Colyer Fehr would not purchase tallow on its own behalf or on behalf of any principal other than KNZA or Unilever provided that it could not purchase more than about 12,000 tonnes a year for Unilever (as alleged in para 6(b)(i) of the Seventh Amended Defence ( 7AD )) or alternatively was it a term of the contract that Colyer Fehr would not do so where there was an actual or a real sensible possibility of conflict between the interests of Colyer Fehr or a third party and those of KNZA (7AD para 6(f)(ii))?
Was it a term of the contract that Colyer Fehr would not export tallow in drums or bulk on its own behalf or on behalf of any principal (7AD para 6(b)(ii)) or was it a term of the contract that Colyer Fehr would not export tallow in competition with KNZA on its own behalf (as alleged in para 6(b) of the Amended Statement of Claim ( ASC ))?
Was it a term of the contract that KNZA would not trade tallow within Australia (ASC para 6(c))?
Was it a term of the contract that the agreement was terminable (only) on reasonable notice (ASC para 6(d))? 45As pleaded, there is no dispute in relation to the third issue. However, Colyer Fehr claims that the reference to "trading tallow in Australia" should be understood as including a reference to purchasing tallow in Australia otherwise than through Colyer Fehr; and the answer to the question whether it was a term of the contract that KNZA would not buy tallow other than through Colyer Fehr is relevant to the assessment of damages. If it was not a term of the contract that KNZA had to acquire all its tallow from Colyer Fehr, then it is difficult to see what loss Colyer Fehr has suffered as a consequence of the termination of the contract without reasonable notice (assuming reasonable notice was required) since it would always have been open to KNZA to keep the contract on foot but to acquire tallow itself or through another agent. 46In addition, as I have said, there is a question whether the agreement extended to the purchase of yellow grease by Colyer Fehr. The answer to that question is only relevant to KNZA's claim for damages. If the agreement contained a term preventing Colyer Fehr from buying tallow other than for KNZA and Unilever and if the agreement extended to cover yellow grease, then Colyer Fehr is liable to account for the profits it earned or to pay damages in relation to its trade in yellow grease.

[13]

Some relevant legal principles 47In Masterton Homes Pty Ltd v Palm Assets Pty Ltd [2009] NSWCA 234 at [90], Campbell JA (with whom Allsop P and Basten JA agreed) said: In determining what are the terms of a contract that is partly written and partly oral, surrounding circumstances may be used as an aid to finding what the terms of the contract are: Stones v Dowler at LJ Ex 124; RR 884 per Martin B; Deane v The City Bank of Sydney at 209 per Griffith CJ, Barton and O'Connor JJ; Handbury v Nolan at 341-2 per Barwick CJ, at 346 per Stephen J, at 348-9 per Jacobs J; Liverpool City Council v Irwin [1977] AC 239 at 253C-E per Lord Wilberforce. If it is possible to make a finding about what were the words the parties said to each other, the meaning of those words is ascertained in the light of the surrounding circumstances: Deane v The City Bank of Sydney at 209; Handbury v Nolan at 341-2, 346, 348-9. If it is not possible to make a finding about the particular words that were used (as sometimes happens when a contract is partly written, partly oral and partly inferred from conduct) the surrounding circumstances can be looked at to find what in substance the parties agreed: County Securities v Challenger Group Holdings at [7]-[8] per Spigelman CJ. 48The relevant surrounding circumstances include the history of the relationship between the parties and their conduct prior to and at the time the contract was entered into. Where there is a dispute concerning the words spoken, the surrounding circumstances may assist in determining which account is more likely. However, the conduct of the parties may also itself be one of the means or the means by which the parties manifested their agreement. As Allsop J (with whom Drummond and Mansfield JJA agreed) explained in Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833; 117 FCR 424 at [369]: [A] number of authorities discuss the need not to constrict one's thinking in the formation of contract to mechanical notions of offer and acceptance. Contracts often, and perhaps generally do, arise in that way. They can also arise when business people speak and act and order their affairs in a way without necessarily stopping for the formalities of dotting "i"'s and crossing "t"'s or where they think they have done so ... Sometimes this failure occurs because, having discussed the commercial essentials and having put in place necessary structural matters, the parties go about their commercial business on the clear basis of some manifested mutual assent, without ensuring the exhaustive completeness of documentation. In such circumstances, even in the absence of clear offer and acceptance, and even without being able (as one can here) to identify precisely when a contract arose, if it can be stated with confidence that by a certain point the parties mutually assented to a sufficiently clear regime which must, in the circumstances, have been intended to be binding, the court will recognise the existence of a contract. Sometimes this is said to be a process of inference or implication. For my part, I would see it as the inferring of a real intention expressed through, or to be found in, a body of conduct, including, sometimes, communications, even if it be the case that the parties did not consciously advert to, or discuss, some aspect of the relationship and say: 'and we hereby agree to be bound' in this or that respect. The essential question in such cases is whether the parties' conduct, including what was said and not said and including the evident commercial aims and expectations of the parties, reveals an understanding or agreement or, as sometimes expressed, a manifestation of mutual assent, which bespeaks an intention to be legally bound to the essential elements of a contract . 49There is a question whether subsequent conduct of the parties can be taken into account in determining the terms of a contract (as opposed to the correct construction of a written term of a contract). In County Securities Pty Ltd v Challenger Group Holdings Pty Ltd [2008] NSWCA 193, Spigelman CJ expressed the view that it could: see [17] ff. Without expressly disagreeing with Spigelman CJ, McColl JA (with whom Beazley JA generally agreed: see [66]) preferred to state the principle in relation to subsequent conduct more narrowly. In her Honour's view, subsequent conduct was relevant to the extent that it constituted an admission of the parties' rights: see [162]. The issue was left open by Campbell JA (with whom Allsop P and Giles JA agreed) in Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; 76 NSWLR 603 at [325]. 50In this case, both parties proceeded on the basis that the approach taken by Spigelman CJ correctly states the law. In my opinion, I should follow that approach in this case. The subsequent conduct relied on in this case goes to the course of dealings between the parties. Where the parties have not reduced their contract in writing, that course of dealing is relevant in determining the terms of the contract: see Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 442 per McHugh and Gummow JJ; Thompson & Morgan (United Kingdom) Ltd v Erica Vale Australia Pty Ltd (1995) 31 IPR 335 at 345; Carmichael v National Power plc [1999] 1 WLR 2042 at 2050 per Lord Hoffmann. But that course of dealing will not normally occur until after the commencement of the contract evidenced by it. Consequently, to that extent at least, the conduct of the parties after the contract was entered into is relevant to the ascertainment of its terms: see, for example, Dodds v Premier Sports Australia Pty Ltd [2003] NSWSC 948 at [46] - [47] per Palmer J; Re Galaxy Media Pty Ltd (in liq); Walker v Andrew [2001] NSWSC 917; 39 ACSR 483 at [60] per Santow J. 51The court may also imply terms in a contract based on the party's presumed or imputed intention. In the case of written contracts, terms that are implied on this basis must meet the five requirements identified by the Privy Council in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 283 - that is, the term must be "reasonable and equitable", it must be necessary to give "business efficacy to the contract", the term must be so obvious that it "goes without saying", the term must be "capable of clear expression" and it must not contradict any express term. However, where the contract is not in writing, that test is not to be applied strictly. Rather, the question that must be asked is whether "the implication of the particular term is necessary for the reasonable or effective operation of the contract in the circumstances of the case ..." per McHugh and Gummow JJ in Byrne at 442, quoted with approval by Gaudron, McHugh, Gummow and Hayne JJ in Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (In Liq) [2000] HCA 25; 202 CLR 588 at [46]. See also Byrne v Australian Airlines Ltd at 422 per Brennan CJ and Dawson and Toohey JJ quoting Deane J in Hawkins v Clayton (1988) 164 CLR 539 at 573.

[14]

Was there a term preventing Colyer Fehr from acquiring tallow for others? 52The starting point in relation to this issue is the conversation between Mr Evans Snr and Mr Spence during which it was agreed that Mr Evans Snr would buy tallow for KNZA and KNZA would pay a fee of $5 per tonne. It is agreed between the parties that that conversation occurred in late 1991 and that there was no specific discussion of the legal entity through which Mr Evans would operate at that time. In May 1993, Colyer Fehr became the contracting party to the agreement reached in late 1991 as a result of the course of dealings between KNZA and Colyer Fehr following the acquisition of the shares in Colyer Fehr by Mr and Mrs Evans. Mr Evans says that the conversation in late 1991 occurred over the telephone. Mr Spence says that it occurred at a dinner in Auckland at which Mr Jones was also present. For reasons which will become apparent, I think that little turns on the resolution of this dispute. However, to the extent that it is relevant, I think that it is more likely that the conversation occurred over the telephone. There was a dispute between the parties about whether an adverse inference should be drawn against KNZA in accordance with the principle stated in Jones v Dunkel (1959) 101 CLR 298 from the fact that it did not call Mr Jones. However, having regard to the time that has elapsed since the conversation, I think the only inference that could be drawn from the fact that Mr Jones was not called was that he has no recollection of the conversation. Consequently, I do not think that his absence assists Colyer Fehr. Nonetheless, I accept Mr Evans' evidence that he had no reason to visit New Zealand in late 1991 and that the entries in the relevant contract book between October 1991 and January 1992 indicate that he was in Sydney during that time. In addition, I think that Mr Evans' account of his comment concerning drummed tallow which upset Mr Spence is more plausible. It makes little sense for Mr Evans to ask whether Colyer Fehr could export drummed tallow as a joke in the context of initial discussions concerning an agreement where Mr Spence had made it clear that Colyer Fehr was not to compete with KNZA or Kerry in the export business. It makes more sense for Mr Evans to make a joke about what was likely to be a sensitive subject after the relationship had been established and in a way which was directed at making a specific point. 53Both parties accept that there was no mention of Unilever during the conversation. Mr Spence says that he said to Mr Evans that Mr Evans could not act "in a major way for any other party" and Mr Evans agreed. Mr Evans disputes that part of the conversation. The pleaded term, however, is a term that Colyer Fehr would only act for Unilever and KNZA. The parties agree that Mr Evans described his plans to Mr Spence, which were to carry on an accounting business and to continue in the business of supplying tallow to domestic customers and small export customers. The impression that would have been conveyed to Mr Spence at the time was that Mr Evans did not intend to operate a substantial business. It is unlikely in those circumstances that Mr Spence would have thought it necessary to obtain a specific assurance from Mr Evans that that was his intention. In any event, I do not see how the pleaded term can be derived from the conversation, even on Mr Spence's version of it. The background to the conversation was that Colyer Fehr had, in the past, bought tallow for other customers at a time when it was buying tallow for KNZA. Mr Evans told Mr Spence that he proposed to acquire tallow on behalf of domestic customers, and the contract books reveal that Mr Evans had started doing so in the name of ARC Holdings. One of the domestic customers for whom Mr Evans proposed to act was Unilever. Mr Spence was aware that Mr Evans had a close relationship with Mr Ledley, who worked for Unilever, and Mr Spence no doubt appreciated that that was one customer for whom Mr Evans intended to act. However, even if he said that Mr Evans could not act in a major way for any other party his words could not have meant that Mr Evans could only act for Unilever. That is not what the words mean, and in the absence of any mention of Unilever during the conversation, it is difficult to see how Mr Evans and Mr Spence could have interpreted them in that way. In addition, that is not how the relationship between KNZA and Colyer Fehr had operated previously and it did not reflect what Mr Evans said he was proposing to do and was actually doing. 54KNZA puts two alternative submissions in this context. The first is that, even if the words spoken did not convey the meaning contended for by KNZA, a term to the effect pleaded should be implied from the conduct of the parties. The second is that the court should give effect to the words spoken by Mr Spence and Mr Evans according to their terms. I do not accept either of these submissions. 55As to the first submission, there is no course of dealing between the parties that could evidence or amount to an agreement that Colyer Fehr would only acquire tallow on behalf of KNZA and Unilever. Colyer Fehr acquired tallow on behalf of other local customers and, on the findings I have made, KNZA knew that it was doing so to a limited extent at least and did not complain about that fact. That is hardly surprising since Mr Evans told Mr Spence that that is what he (Mr Evans) intended to do; and on Mr Spence's evidence Mr Spence said words to Mr Evans that indicated that that was something Mr Evans was permitted to do provided it was not done in a major way. Mr Spence said in evidence that he was only aware that Mr Evans acquired tallow for Unilever and that he thought he acquired no more than 12,000 tonnes per year (in fact, it was substantially less than that) and that he had no objection to Colyer Fehr doing that but that he objected to Colyer Fehr acquiring tallow for anyone else. It is difficult to understand why Mr Spence had no objection to Colyer Fehr acquiring up to 12,000 tonnes from Unilever, but objected to Colyer Fehr acquiring any tallow for any other local customer. The identity of other buyers would not have affected Colyer Fehr's ability to meet KNZA's needs. What would affect its ability to meet those needs was the quantity acquired for other customers. It is also difficult to understand why Mr Spence used the words he said he did in his conversation with Mr Evans in late 1991 if he was only willing to agree to Colyer Fehr acquiring tallow for Unilever. For those reasons, I think that the likelihood is that Mr Spence appreciated that Colyer Fehr was acquiring tallow for local customers and did not object to its doing so provided the quantity acquired did not affect Colyer Fehr's ability to meet KNZA's needs. In any event, Mr Spence's subjective beliefs are irrelevant. KNZA cannot point to a course of dealing which was consistent with the subjective beliefs Mr Spence says he had. 56As to the second submission, KNZA pleaded in its Sixth Amended Defence (and in earlier versions of the defence) that it was an express term of the agreement "that [Colyer Fehr] would not, in Australia, enter into any other major tallow purchasing arrangement on [Colyer Fehr's] own or with or on behalf of any other party". That pleaded term was abandoned in the 7AD. Presumably, one reason it was abandoned was the apparent difficulty in establishing that Colyer Fehr had breached that term having regard to the quantities of tallow it actually acquired for local customers. I do not think that it is now open to KNZA to revive the abandoned term. 57KNZA submits that its alternative term - that Colyer Fehr would not purchase tallow where there was an actual or possible conflict - should be implied on the basis that it is necessary to give the contract a reasonable or effective operation. Having regard to the nature of the relationship between the parties and the tasks that Colyer Fehr performed, I think that there were some limitations on Colyer Fehr's ability to buy tallow for third parties or on its own behalf. However, I do not think that those limitations can be encapsulated in the implied term contended for by KNZA. Previously, Colyer Fehr had purchased tallow for KNZA in circumstances where it was expressly agreed that Colyer Fehr could continue to buy tallow for local customers and continue to export tallow other than to China. There is no suggestion that its right to do so was limited by an implied term that it could not do so in certain circumstances. If the implied term was not necessary to give the previous contract a reasonable or effective operation, it is difficult to see why it was necessary to give the contract in contention a reasonable or effective operation. Moreover, on KNZA's case, Colyer Fehr breached the implied term in many instances throughout the life of the contract. Yet Mr Spence gave evidence that he thought that Colyer Fehr had done a good job; and it was only the announcement of the contract with BP that caused KNZA to terminate the contract. A term should not be implied in those circumstances. 58As I have said, that does not mean that Colyer Fehr's ability to buy tallow for others was unrestricted. In my opinion, Colyer Fehr owed obligations arising from the fact that it was acting as an agent for KNZA. I return to this issue below.

[15]

Was there a term preventing Colyer Fehr from exporting tallow? 59Mr Spence says that he expressly said to Mr Evans in the conversation in late 1991 that he (Mr Evans) could not be involved in the export of tallow. Mr Evans denies that that was said but accepts that it was a term of the contract that Colyer Fehr could not export tallow in competition with KNZA. Whether the issue was discussed in late 1991 or not, in my opinion it was a term of the agreement that Colyer Fehr could not export tallow, although I think that term was varied to permit Colyer Fehr to export food grade tallow to Bakels in New Zealand. That variation arose from the conduct of the parties and is understandable having regard to the fact that the tallow in question was a special type and the export was to New Zealand, where Kerry was based, rather than to markets which Kerry would regard as true export ones. 60As to the term itself, prior to Mr Evans Jnr taking over the role of his father, Colyer Fehr's export of tallow was minimal. In 1993, when Mr Evans Snr suggested that he had been exporting 200 tonnes of drummed tallow per month, Mr Spence became upset and Mr Evans Snr said that he had been joking (as, in fact, he had been). Mr Evans' account of the conversation is that he said that Colyer Fehr had not been exporting "that much tallow". In my opinion, it is implausible that Mr Evans responded in those terms. That response begs the question of how much Colyer Fehr was exporting, but there is no suggestion that the question was pursued by Mr Spence. It is more likely that Mr Evans made his comment, that that upset Mr Spence, who regarded the conduct as a breach of the agreement, and Mr Evans responded in a way that made it clear to Mr Spence that Colyer Fehr was not exporting tallow or, if it had done so, the occasions on which it had done so were isolated ones. In my opinion, the practice followed by Mr Evans Snr and the conversation between him and Mr Spence establishes that it was a term of the contract that Colyer Fehr was not permitted to export tallow.

[16]

Was there a term requiring KNZA to buy all its tallow from Colyer Fehr? 61It is accepted that there was no express term to this effect. However, in my opinion the term is to be implied either from the course of dealings between the parties or on the basis that it is necessary to give the contract a reasonable and effective operation. 62As to the first basis, the practice of KNZA was only to buy tallow from Colyer Fehr. KNZA submitted that that practice does not establish a contractual obligation. The practice is equally explicable on the basis that it simply suited KNZA to acquire all its tallow from Colyer Fehr. In addition, KNZA did enter into an arrangement with Gardner Smith by which it acquired substantial amounts of tallow from it and supplied substantial amounts of tallow to it. Mr Evans Jnr gave evidence of the difficulties those arrangements caused Colyer Fehr because they had to be taken into account in managing KNZA's storage and shipping arrangements. However, on two occasions at least KNZA did buy tallow directly from a supplier and on those occasions KNZA paid Colyer Fehr commission. Its decision to do so can only be explained on the basis that it thought that it was bound to acquire tallow through Colyer Fehr. In my opinion, this conclusion is reinforced by the fact that KNZA thought that it was necessary to give Colyer Fehr notice of termination of the agreement. That notice would have been unnecessary if KNZA had been free to acquire tallow elsewhere. I do not think that this conclusion is undermined by KNZA's arrangements with Gardner Smith. Those arrangements involved the swapping of tallow. With one exception, the arrangements did not alter the amount of tallow that KNZA would otherwise acquire through Colyer Fehr. The exception relates to the fact that, as I have mentioned, on one occasion, the swap occurred in New Zealand. However, I do not think that a single instance is sufficient to undermine the point that generally speaking, Colyer Fehr was no worse off as a consequence of the swap arrangements. 63As to the presumed intention of the parties, Mr Evans Snr gave evidence of the impracticality of an arrangement by which KNZA was free to acquire tallow elsewhere. Such an arrangement would cause difficulties in coordinating shipping and storage on behalf of KNZA. These difficulties may not be substantial where KNZA acquired tallow from one other source. Mr Evans Jnr was able to manage the arrangement with Gardner Smith. However, Mr Evans Snr's evidence has more force if KNZA was free to acquire tallow from multiple sources. More importantly, it is clear that Colyer Fehr provided ancillary services to KNZA in connection with the acquisition of tallow - in particular, arranging for the transport, storage and loading of tallow. It was remunerated for those services by the commission it earned on the tallow it bought. The parties could not have intended that KNZA would be free to buy tallow elsewhere but that Colyer Fehr would still provide the ancillary services in respect of that tallow. Equally, however, the parties could not have intended that Colyer Fehr would cease to provide those ancillary services. The procedures by which KNZA indicated the amount of tallow it required and Colyer Fehr took responsibility for acquiring that tallow and coordinating its delivery to the relevant ships was an essential part of the arrangements between them. In those circumstances, it is necessary to imply a term that KNZA would not acquire tallow elsewhere to give effect to the arrangements agreed between the parties.

[17]

Was there a term that the contract could only be terminated on reasonable notice? 64It is necessary in this context to draw a distinction between a failure to specify a period of time for which a contract will run and a failure to specify a period of notice for termination (other than for breach). In the former case, courts are sometimes prepared to imply a term that the contract will continue for a reasonable period of time. As McHugh JA (with whom Priestley JA agreed) explained in Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438 at 447: [I]f a person in the initial stages of a business arrangement expends money or effort in developing the business, it provides a ground for implying a term that the business is to continue for a reasonable period. In determining what a reasonable period is, it is necessary to give the party making the expenditure or engaging in the effort a reasonable opportunity to recoup the party's initial expenditure or effort. In those cases, the question of termination does not arise until that reasonable time has elapsed. Courts are also often, in the absence of an express term, prepared to imply a term that a party will give reasonable notice of termination. As McHugh JA said in Crawford at 444: [O]rdinarily the nature of a commercial agreement will lead to the conclusion that the parties must have intended it to be terminable on notice. An implied term requiring reasonable notice serves a different function from a term that the contract is to continue for a reasonable period of time. Again, as McHugh JA explained in Crawford at 448: The chief purpose of a notice for a reasonable period, therefore, is to enable the parties to bring to an end in an orderly way a relationship which, ex hypothesi, has existed for a reasonable period so that they will have a reasonable opportunity to enter into alternative arrangements and to wind up matters which arise out of their relationship. Matters to be wound up will include carrying out existing commitments, bringing current negotiations to fruition, and, where appropriate, obtaining the fruits of any extraordinary expenditure or effort carried out within the scope of the agreement. The line between ordinary recurrent expenditure and effort and extraordinary expenditure and effort will not always be easy to draw. But in general it will be determined by what the parties would reasonably have contemplated was extraordinary effort or expenditure. Crawford has been applied in a number of subsequent decisions including Woolworths (SA) Pty Ltd v Basetone Pty Ltd [2006] SASC 225; Pacific Products Pty Ltd v Howard [2005] SASC 290; Kirchner v Mayne Nickless Ltd [2000] VSC 459; The Software Link (Australia) Pty Ltd v Texada Software Inc [2005] FCA 1072; Foxeden Pty Ltd v IOOF Building Society Ltd [2003] VSC 356 and Multi-core Aerators Ltd v Multi-core Aerators Pty Ltd (1997) 40 IPR 462 at 476 per Mandie J. 65A term requiring reasonable notice of termination will not always be implied. One type of case where generally it is not is in a case of "pure" agency or what Bowstead & Reynolds on Agency , 18 th ed, 2006, Sweet & Maxwell at 10-042 refer to as "unilateral" agency - that is an agency where the agent does not undertake any obligations to the principal, such as an obligation to use best endeavours. See also Martin-Baker Aircraft Company Ltd v Canadian Flight Equipment Ltd [1955] 2 QB 556 at 582. 66However, in my opinion, the task that must be undertaken is not to seek to classify the contract as one of pure agency or not for the purpose of determining whether a term should be implied. Rather, the task is to determine whether, having regard to the purpose of a notice provision, it is necessary to imply an obligation to give reasonable notice of termination in this case and, if so, to determine the length of that notice. The issue of whether a term should be implied is normally said to be determined by the circumstances existing at the date of the contract: Crawford (1988) 14 NSWLR 438 at 444. That is unquestionably correct where the contract is in writing, as in Crawford . In other cases, it is perhaps more accurate to say that the issue is to be determined in accordance with the principles generally applicable to the implication of terms based on the implied or presumed intention of the parties: see above para [51]. The latter issue (the length of time that is reasonable) depends upon the circumstances existing when the notice is given: Crawford at 444. 67In this case, on the findings I have made, KNZA was required to buy all its tallow through Colyer Fehr. Colyer Fehr placed bids on KNZA's behalf and where those bids were successful it coordinated the delivery and storage of the tallow until it could be loaded on ships arranged by KNZA. Colyer Fehr did supply other services to KNZA such as transportation and storage services but it charged separately for those and those services were not supplied under the contract in question. Taking account of these matters, I think that there was an implied term that the contract could only be terminated on reasonable notice. In my opinion, it was necessary for the reasonable operation of the contract that there be some period of time for an orderly transfer of the management of outstanding deliveries from Colyer Fehr to KNZA. I return to the length of that notice below.

[18]

Did the contract cover yellow grease? 68As a result of the conclusion that I have reached that Colyer Fehr was entitled to acquire tallow for domestic customers, it is not necessary to answer this question. However, since the issue was argued, it is appropriate that I express a view on it. 69Much of the debate in relation to this question centred on whether yellow grease was a form of tallow. Colyer Fehr submitted that it was not since it was not derived from animals and was not regarded in the industry as tallow. KNZA challenges the second proposition and points out that yellow grease can be used as a substitute product for low-grade tallow. It placed particular emphasis on the fact that Colyer Fehr's website in the products section places yellow grease under the heading "Tallow" rather than "Vegetable Oils". 70In my opinion, yellow grease was not covered by the agreement that was entered into in 1993. There is no debate that yellow grease was not discussed at the time. It is a different product from tallow which is sold by different suppliers. It was not a product that KNZA sought to acquire at the time the agreement was entered into. In particular, it was not referred to in the weekly shipping sheets identifying the quantities and grades of tallow required by KNZA. It appears that Colyer Fehr first approached Kerry about acquiring yellow grease following an approach to it by Coastal Recycled Cooking Oils, a manufacturer of yellow grease. It is not entirely clear when that approach was made. Mr Evans Jnr suggested that it was in the later part of the 1990s. On the other hand, Mr Evans Snr's recollection is that the approach was first made in 2000. Whichever is correct, by that stage, the relationship between Colyer Fehr and KNZA had become more complex and Colyer Fehr was supplying KNZA with a variety of services that fell outside the agreement. There is no suggestion that, from the time of the approach from Coastal Recycled Cooking Oils, KNZA and Colyer Fehr started applying the procedures that they followed in relation to tallow to the acquisition of yellow grease. In those circumstances, I am not satisfied that the parties intended their agreement to apply to yellow grease.

[19]

Did Colyer Fehr owe KNZA fiduciary duties? 71Agency is a recognised fiduciary relationship: see RP Meagher, D Heydon and M Leeming, Meagher, Gummow and Lehane's Equity Doctrines and Remedies, 4 th ed, 2002, Butterworths, para [5.005], quoting Mason J in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 96-7. Normally a fiduciary, including an agent, owes an obligation not to obtain an unauthorised benefit from the relationship and not to put itself in a position of conflict: Pilmer v Duke Group Ltd (in liq) [2001] HCA 31; 207 CLR 165 at [74] per McHugh, Gummow, Hayne and Callinan JJ citing Breen v Williams (1996) 186 CLR 71 at 113 per Gaudron and McHugh JJ. However, as Mason J went on to make clear in Hospital Products (at 97), where the agency arises from a contract, the scope of the fiduciary duties owed by the agent will be regulated by the contract: That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all-important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction. The relevant terms include those implied on the basis of the assumed intention of the parties. As the High Court said in John Alexander's Clubs Pty Limited v White City Tennis Club Limited [2010] HCA 19; 241 CLR 1 at [92]: The terms of contract include not only those expressed, but those implied, particularly those implied pursuant to the principles in Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1992) 149 CLR 337 at 352-355. ... Where a term to like effect as the suggested fiduciary obligation cannot be implied, it will be very difficult to superimpose the suggested fiduciary obligation upon that limited contract. 72An example of the application of these principles relied on by Colyer Fehr is Kelly v Cooper [1993] AC 205. In that case, a real estate agent had been engaged by the plaintiff to sell his property. The same agent was also engaged to sell the adjacent property but did not tell the plaintiff of that fact. A potential purchaser was interested in acquiring both properties so that members of his family could live next door to one another. The purchaser bought the adjacent property and then made an offer for the plaintiff's property, which was eventually accepted. When the plaintiff found out that the agent had acted on the other sale, he refused to pay the commission and sued the agent for damages. He claimed that he could have obtained a higher price if he knew that the purchaser had an interest in acquiring adjacent properties and had already acquired the property next door. In rejecting the plaintiff's claim, the Privy Council said (at 214): In the case of estate agents, it is their business to act for numerous principals: where properties are of similar description, there will be a conflict of interest between the principals, each of whom will be concerned to attract potential purchasers to their property rather than to that of another. Yet, despite this conflict of interest, estate agents must be free to act for several competing principals, otherwise they will be unable to perform their function. Yet it is normally said that it is a breach of an agent's duty to act for competing principals. In the course of acting for each of their principals, estate agents will acquire information confidential to that principal. It cannot be sensibly suggested that an estate agent is contractually bound to disclose to any one of his principals information which is confidential to another of his principals. 73I have already concluded that it was not an implied term of the contract that Colyer Fehr would not buy tallow where there was an actual or possible conflict. As the High Court pointed out in John Alexander's Clubs at [92] (quoted at para [71] above), where the term cannot be implied it will be very difficult to superimpose a fiduciary duty to the effect of the rejected term. 74However, there are other reasons for holding that no fiduciary duty of the type alleged exists in this case. KNZA contends that Colyer Fehr was obliged to buy all the tallow it could for KNZA. On the other hand, Colyer Fehr contends that its obligation was to acquire sufficient tallow to enable KNZA to meet its requirements as shown on the weekly shipping sheets prepared by Kerry. In my opinion, the latter characterisation is the more accurate one, although put in those terms, I think that it is an over-simplification. 75The acquisition by KNZA of tallow was determined by a number of factors. They included the price, the availability of ships that could call at particular ports, the availability of storage at those ports, the ability of KNZA to sell the tallow it bought and the contractual commitments it had made to sell tallow to particular customers. Ultimately, those various factors were reduced to a requirement for particular quantities of tallow of particular grades to be made available at particular ports as shown on the weekly shipping sheets. However, the contractual commitments that KNZA entered into depended on its views about the amount of tallow of particular grades that would be available and the likely price it would have to pay for that tallow. In reaching conclusions about those matters, it relied on its own judgment and on advice it received from Mr Evans Snr and later Mr Evans Jnr. No doubt its own judgment, to a large extent, was dependent on the information it received from Colyer Fehr through the tallow tender result sheets and information it received on how easy or difficult it was to acquire tallow to meet its requirements at the prices it was willing to pay. The conclusions that KNZA (and Kerry) reached on those matters would affect the contractual arrangements it entered into with buyers, which in turn would affect its demand for tallow. The fact that KNZA bought much more tallow than originally anticipated by either Mr Spence or Mr Evans Snr illustrates the fact that KNZA's actual experience in acquiring tallow affected its demand for tallow. These matters meant that Colyer Fehr owed obligations to keep KNZA accurately and properly informed about the market so that KNZA was in a position to make appropriate decisions concerning the amount of tallow it would seek to sell and buy. However, once those decisions were made, it was Colyer Fehr's primary obligation to acquire tallow that met those requirements at the best prices that it could obtain which were acceptable to KNZA. In discharging that obligation, Colyer Fehr on occasions bought more tallow on behalf of KNZA than was necessary to meet its immediate needs in anticipation that that tallow could be used to meet future orders. No doubt that was done where additional tallow was available at attractive prices and arrangements could be made for the tallow to be stored. But I do not think that that means that Colyer Fehr's obligations were different from those that I have described. Rather, I think that "going long" in a particular grade of tallow was simply one strategy used by Colyer Fehr (and KNZA) to ensure that KNZA was able to meet its contractual obligations. 76Another relevant matter to the scope of any fiduciary duties owed by Colyer Fehr is that, on the findings I have made, Colyer Fehr was entitled to purchase tallow for local customers. Necessarily, that meant that, on occasions, there would be a conflict between the interests of its local customers and the interests of KNZA. 77Taking these matters into account, I do not think that Colyer Fehr's fiduciary duties can be characterised as including a duty to avoid conflicts. However, as I have said, I think Colyer Fehr did owe a duty not to put itself in a position where it could not acquire sufficient tallow to meet KNZA's needs. It may well be that a term to that effect can be implied in the contract, but I do not see why it cannot also be characterised as a fiduciary obligation arising from the agency relationship. 78KNZA placed some emphasis in its submissions on the fact that Colyer Fehr obtained confidential information concerning KNZA's business. However, no separate claim is made that Colyer Fehr misused KNZA's confidential information. Rather, the submission appears to have been put in support of KNZA's submission that Colyer Fehr was not entitled to put itself in a position of conflict. I have already dealt with that submission.

[21]

The acquisition of tallow by Colyer Fehr on its own behalf or on behalf of others 80I have already concluded that there was no contractual provision that prevented Colyer Fehr from acquiring tallow from others and that Colyer Fehr's obligations were limited to keeping KNZA properly informed concerning the market and not putting itself in a position where it could not acquire sufficient tallow to meet KNZA's needs as identified on the weekly shipping sheets. However, in a number of cases, KNZA points to an additional factor which it says gives rise to a breach. Those cases are:

The acquisition of tallow for CTG, which was a major competitor of KNZA in the export market;
The agreement with BP, under which Colyer Fehr agreed to buy very large quantities of tallow;
The purchase of tallow for others from suppliers with whom KNZA had an exclusive supply agreement;
The sale to others of tallow that KNZA had won on tender;
The purchase by Colyer Fehr itself of tallow and the resale of that tallow at a profit. 81None of these additional factors involves a breach by Colyer Fehr of any contractual obligation; and, in my opinion, none of them involves a breach by Colyer Fehr of its fiduciary obligations. 82As to CTG, it is relevant to put KNZA's complaint in context. Colyer Fehr bought a total of approximately 2000 tonnes of tallow on behalf of CTG during the period from about July 2005 to March 2006. It earned total commission of about $10,000 on those purchases. Only a proportion of them involved Colyer Fehr bidding for both CTG (through Mr Evans Snr) and KNZA (through Mr Evans Jnr). There is no suggestion that Mr Evans Jnr revealed the amount of the bids lodged by him on behalf of KNZA to Mr Evans Snr or CTG. In its submissions, KNZA placed particular emphasis on the cases in which Colyer Fehr acquired tallow from Sunland and on-sold part or all of that tallow to CTG at a price which apparently was the same or lower than the price that KNZA was willing to pay. There were, however, very few occasions on which this occurred and the amount of tallow was small. In the cases where the conduct did occur, and the price appears to be the same or less than the price offered by KNZA, that fact can usually be explained on the basis that the price paid by CTG was an ex works price or was adjusted because the tallow was below specification. I accept the explanations given by both Mr Evans Snr and Mr Evans Jnr for why Colyer Fehr bought tallow on behalf of CTG. Both gave frank evidence when cross-examined even when they must have realised that the answers might damage Colyer Fehr's case. Their explanations are plausible. It makes no sense that they would jeopardise Colyer Fehr's relationship with KNZA by selling to CTG for a commission that they could have earned from KNZA unless they thought their conduct would assist KNZA or at least not harm it. There is no suggestion that the conduct prevented Colyer Fehr from meeting KNZA's needs as shown on the weekly shipping sheets. In those circumstances, I do not think that the conduct complained of involved a breach of fiduciary duty by Colyer Fehr. 83As to BP, the agreement with BP had the potential to cause Colyer Fehr to breach its obligation not to put itself in a position where it could not acquire sufficient tallow to meet KNZA's requirements. However, whether that would happen or not depended on how the agreement with BP operated. It depended on how much tallow BP actually sought to acquire through Colyer Fehr, the extent to which Colyer Fehr was prepared to bid on behalf of both BP and KNZA and what other steps Colyer Fehr might have taken to ensure that KNZA acquired the tallow it needed. In fact, as things turned out, the contract with BP would have had no effect at all on Colyer Fehr's ability to buy tallow for KNZA. 84As to the purchase of tallow from persons with whom KNZA had an exclusive arrangement and the sale of tallow that KNZA had won on tender, I do not think that this conduct involved a breach of duty by Colyer Fehr. Colyer Fehr had an interest in meeting the demands of its local customers. However, it was also important to KNZA that Colyer Fehr be able to obtain all the tallow it needed to satisfy KNZA's requirements. In some cases, that meant that it was necessary to obtain tallow urgently. That may have arisen where Colyer Fehr had difficulties in satisfying KNZA's requirements but it may also have arisen where those requirements changed at the last minute. One of the strategies that Colyer Fehr employed to enable it to acquire tallow in those circumstances was to swap tallow with local customers or "borrow" tallow from local customers. However, that strategy was not likely to be available unless Colyer Fehr was willing on behalf of KNZA to swap tallow at the request of a local customer or to lend tallow to a local customer. In my opinion, one of the reasons that Mr Evans Snr and Mr Evans Jnr were able to develop such a successful business is that they were very good at managing the necessary relationships. It is true, as I have said, that these arrangements benefited Colyer Fehr's local customers and, in doing so, benefited Colyer Fehr. But it needs to be borne in mind that the local customers often had an advantage because they were usually willing to pay a higher price than KNZA. In addition, the arrangements also benefited KNZA because they gave Colyer Fehr flexibility in meeting KNZA's requirements. In some cases, Colyer Fehr sold tallow that had been acquired by KNZA because it was off specification. Although KNZA pointed to a substantial number of instances where the conduct about which it complains occurred, it did not point to one instance where it says that the result of that conduct was that Colyer Fehr could not meet KNZA's requirements as shown on the weekly shipping sheets. On the contrary, as I have said, Mr Spence accepted that both Mr Evans Snr and Mr Evans Jnr did a good job in acting as KNZA's agent. For those reasons, I am not satisfied that the conduct complained of involved a breach by Colyer Fehr of the duties it owed KNZA. 85Similar points apply to the complaint that Colyer Fehr breached its duties by acquiring tallow itself and selling it at a profit. On the conclusions I have reached, Colyer Fehr was entitled to acquire tallow for local customers and I do not think that there was any reason why it could not do so in its own name and resell the tallow to the relevant customer. In addition, on many of the occasions on which Colyer Fehr acquired tallow in its own name, it did so in order to be able to split the tender between KNZA and a local customer. I accept the evidence given by Mr Evans Jnr that that benefited KNZA because the risk otherwise was that the local customer would lodge a tender for the whole amount and be successful. Once again, there is no evidence that this conduct prevented Colyer Fehr from acquiring sufficient tallow to meet KNZA's needs. On the contrary, it was one of the strategies adopted by Colyer Fehr to ensure that it would be able to do so and at the same time satisfy the needs of its local customers. For that reason, I am not satisfied that this conduct involved a breach by Colyer Fehr of its duties.

[22]

The export of tallow 86I have already concluded that it was a term of the agreement that Colyer Fehr would not export tallow. There is no dispute that it did so. Consequently, to that extent, it was in breach of the agreement. In those circumstances, the question is whether KNZA is entitled to terminate the contract for that breach or to claim damages in respect of the breach. 87In Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61; 233 CLR 115, the High Court accepted the classification of terms into conditions, intermediate terms and warranties adopted by the English Court of Appeal in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26. Conditions are essential terms of the contract any breach of which gives rise to a right of termination. Warranties are inessential terms which only give rise to a right to damages. Intermediate terms may give rise to a right of termination depending on the seriousness of the breach. Whether a term is a condition, intermediate term or a warranty depends on the correct construction of the contract. As Gleeson CJ, Gummow, Heydon and Crennan JJ said in Koompahtoo at [48]: It is the common intention of the parties, expressed in the language of their contract, understood in the context of the relationship established by that contract and (in a case such as the present) the commercial purpose it served, that determines whether a term is "essential", so that any breach will justify termination. 88In my opinion, the term that Colyer Fehr would not export tallow was an intermediate term. It was not an essential term of the contract. The contract was essentially a contract by which Colyer Fehr agreed to buy tallow for a commission. A limitation on Colyer Fehr's right to export tallow was not an essential feature of that contract. Indeed, under previous similar arrangements, there was no such term. Nonetheless, it was an important term the breach of which could, depending on the seriousness of the breach, undermine the relationship intended to be created by the contract. 89In my opinion, the breaches by Colyer Fehr were not sufficient to give rise to a right on the part of KNZA to terminate the contract. There is no evidence that they affected KNZA's export business. The amount of tallow exported by Colyer Fehr was small. Leaving aside the tallow sold to Bakels which, for the reasons I have given, is not relevant, the tallow exported by Colyer Fehr was of a low grade. KNZA had very little interest in exporting tallow of that grade. There is no evidence to suggest that Colyer Fehr sold any tallow to a customer of KNZA. 90Nor do I think KNZA has established that it suffered any damages as a consequence of Colyer Fehr's breaches. KNZA does not point to any sales it says that it lost as a consequence of Colyer Fehr's conduct. In particular, it did not lead any evidence to suggest that it would have made the sales to Colyer Fehr's customers if Colyer Fehr had not made those sales. 91There is a question whether, in the circumstances, there should be an award of nominal damages in favour of KNZA. Nominal damages are sometimes awarded where damages are an essential element of the cause of action. They are awarded to vindicate the plaintiff's right to a verdict or judgment: see Baume v The Commonwealth (1906) 4 CLR 97 at 116 per Griffith CJ. However, on occasions, courts are prepared to award nominal damages for a breach of contract; even though damages are not essential to the cause of action: see Chappel v Hart (1998) 195 CLR 232 at 270, 290 per Kirby J; Luna Park (NSW) Ltd v Tramways Advertising Pty Limited (1938) 61 CLR 286 at 301, 305 per Latham CJ, even though damages are not an essential element of the cause of action. 92In this case, KNZA was aware that Colyer Fehr was engaged in exporting some tallow, although it did not know the precise quantities or when that conduct occurred. On the findings I have made, it was not concerned by that conduct and took no action in relation to it. In those circumstances, I can see no reason for making an award of nominal damages in this case.

[23]

Acquisition of the assets of Toll Ports 93KNZA did not indicate precisely on what basis the acquisition of the assets of Toll Ports involved a breach of obligation on the part of Colyer Fehr. The acquisition of the assets by Colyer Fehr did not involve a breach of any term of the agreement. It appears that KNZA maintains that it involved a breach by Colyer Fehr of its fiduciary duties because the letter inviting offers was addressed to KNZA and Colyer Fehr did not pass the letter on but instead kept the invitation from KNZA and took it up itself. 94I do not accept that Colyer Fehr received the letter from Toll Ports as KNZA's agent. The letter was not concerned with matters that fell within the scope of the agency agreement - that is, the acquisition of tallow by Colyer Fehr on behalf of KNZA. KNZA and Colyer Fehr were frequently confused. Mr Bolton gave evidence, which I accept, that that confusion reduced over time. However, there is no reason why Toll Ports could not have sent the letter directly to KNZA if the invitation had really been intended for KNZA. In addition, Mr Evans Jnr told Mr Spence that Colyer Fehr was seeking to acquire assets in Western Australia and Mr Spence did not make any further enquiries about the nature of the assets, as might have been expected if KNZA had a real interest in acquiring assets itself. Mr Bolton gave evidence that he would have been keen to see the letter and that "[d]epending on what was for sale and the price at which it could be purchased, KNZA may have been interested in purchasing what was on offer". However, he did not give evidence that KNZA had any interest in the assets actually acquired by Colyer Fehr. He gave evidence to the effect that KNZA bought tallow in Western Australia on an FOB basis - that is, the tallow producer would store the tallow and arrange for it to be loaded on ships, and that Colyer Fehr was responsible for overseeing that process. In those circumstances, it is hard to see why KNZA would have had any interest in acquiring the assets that were available. For those reasons, I am not satisfied that Colyer Fehr breached any fiduciary duties it owed in connection with the acquisition of assets from Toll Ports.

[25]

Was the two weeks' notice of termination given by KNZA reasonable? 99In my opinion, it was. 100Colyer Fehr submits that 12 or 6 months was necessary because, on termination of the agreement, Colyer Fehr was deprived of a large portion of its gross profits and its only realistic chance of maintaining its level of profitability was to commence exporting on a large scale in competition with KNZA, which would take time to do. 101In my opinion, this submission places too much emphasis on one matter and ignores a number of other factors that must be taken into account. 102The contract that was terminated was a contract by which Colyer Fehr bought tallow on behalf of KNZA and provided ancillary services. The case is not concerned with agreements by which Colyer Fehr provided other services, such as transport and storage. Colyer Fehr did not require significant assets or need to make significant on going investments to provide the services the subject of the contract. Moreover, under the terms of the contract it was free to and did buy tallow on behalf of other customers, although it could not export tallow. It was free to enter into large contracts with domestic customers, which is what it did with BP, although it could not act in a way which prevented it from meeting KNZA's needs. The fact that the BP contract did not commence immediately was a matter for negotiation between Colyer Fehr and BP. On the other hand, KNZA was not entitled to buy tallow itself or through another supplier until the contract terminated. Once the contract was terminated, the evidence suggests that it would take a considerable time for KNZA to build up the relationships necessary to buy tallow successfully. It decided to terminate the contract because it was concerned that, once Colyer Fehr started buying tallow for BP, that would affect Colyer Fehr's ability to buy tallow on its own behalf. Whether that concern would prove to be correct or not, given the size of the tallow market and the quantities that BP was looking to buy, I do not think that that concern was completely unjustified. The position, then, was that, on termination, Colyer Fehr would be able to continue with its business of buying tallow for local customers, would have to wait for a period of time to start buying tallow for BP as a result of the contract it negotiated and would be in a position to build up an export trade which it had already started. On the other hand, KNZA would have to start buying its own tallow immediately and would need to develop strategies to compete with Colyer Fehr in circumstances where it was expected that Colyer Fehr may start buying large quantities of tallow for BP in the following year, where Colyer Fehr was likely to start competing immediately in the export market and where Colyer Fehr had the established relationship with suppliers which could only be built up over time. During any notice period Colyer Fehr could not export tallow but, more significantly, KNZA could not buy any tallow at all itself and consequently could not start building up relationships with suppliers. In my opinion, once KNZA had given notice that it intended to terminate the agreement, it would be unreasonable for it to be bound by that restriction for any period of time. On the other hand, having regard to the parties' respective positions once termination took effect, it does not seem to me unreasonable from the point of view of Colyer Fehr for the termination to take effect more or less immediately. A short period of notice was necessary simply to enable the parties to wind up their existing relationship in an orderly fashion. In my opinion, two weeks' notice was not unreasonable in those circumstances.

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Cases Cited (28)