GMA Garnet Pty Ltd v Barton International Inc - [2010] FCAFC 38 - FCAFC 2010 case summary — Zoe

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GMA Garnet Pty Ltd v Barton International Inc

[2010] FCAFC 38

Federal Court of Australia (Full Court)|2010-05-04|Before: Buchanan JJ, Siopis JJ

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Source facts

Court

Federal Court of Australia (Full Court)

Decision date

2010-05-04

Before

Buchanan JJ, Siopis JJ

Source

Original judgment source is linked above.

Judgment (12 paragraphs)

[1]

Background 177 Garnet is a mineral which is most commonly used as an industrial abrasive. The first appellant ("GMA") is the operating and marketing company for the GMA Garnet mine near Geraldton in Western Australia. The mine, its infrastructure and the garnet it produces are owned by the second appellant, which is the parent company of GMA, Garnet International Resources Pty Ltd ("GIRL"). 178 From early 2002 until 31 March 2005 GIRL and the respondent ("Barton") were partners, joint owners of the mine and equal shareholders in GMA. Garnet produced at the mine was produced for their joint benefit. Commencing in 2003 they had a bitter disagreement. Litigation ensued and has since been a recurring feature of their strained relationship. After protracted negotiations between respective legal advisers only (the officers of the two companies being unwilling to meet), agreement was reached to dissolve the partnership. Part of the settlement concerned the right of Barton to purchase garnet from GMA for 12 years at concessional rates. A series of instruments and agreements were executed to give effect to the settlement. They took effect simultaneously. At settlement GMA became the wholly owned subsidiary of GIRL, Barton was paid $18m, it transferred all its interest in the joint property to GIRL and it became entitled to supply under a garnet supply agreement ("the supply agreement") to which GMA, Barton and GIRL were each parties. It is the rights and obligations under the supply agreement which are at the heart of the present proceedings.

[2]

Principles of construction 179 The trial judge was persuaded that it was necessary for him to examine in some detail the course of negotiations between the legal advisers in order to ascertain the commercial framework in which the contracts were made. An examination of such matters from the point of view only of the parties risks a descent into an assessment of what was, or was likely to be, the subjective intentions of the parties rather than an examination of what the words of the contract would convey to a reasonable person knowing the commercial framework within which the contract was made. The fact that, as in the present case, contractual rights and obligations are commonly assignable to third parties who were not involved in negotiations makes it imperative that the task of construction remains based on an objective view of the contractual stipulations. In the present case, there was every reason to think that the parties intended that the settlement, and their ongoing obligations towards each other, would be comprehensively stated in the documents which they executed to accomplish the settlement. That conclusion is suggested by both the circumstances of the settlement, and the terms of the documents by which it was given effect. 180 The approach which was taken by the parties in the present case appeared to me to be supported by an assumption that, in recent years, the High Court has softened the previously strict necessity for an objective examination of the terms of the contract and has given its endorsement to the idea that an examination of the "surrounding circumstances" in which a contract was made now justifies acting on conclusions about the subjective intentions or desires of one party or of all parties. In my view, there is no reason to conclude that that has occurred. In order to illustrate why that is so it is necessary to make reference to the authorities. 181 In Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 ("Secured Income") Mason J said (at 606): The respondent also sought to rely on the oral testimony given by officers of the appellant and the respondent as to what was said and done during the course of negotiations leading up to the making of the contract, with a view to demonstrating that the parties had "commercial" leases in mind. This was said to be evidence of surrounding circumstances to which recourse could be had in interpreting the contract. In truth the evidence is not evidence of surrounding circumstances; it is evidence of the antecedent oral negotiations and expectations of the parties and as such it cannot be used for the purpose of construing the words of a written contract intended by the parties to comprehensively record the terms of the agreement which they have made. As Lord Wilberforce said in Prenn v Simmonds: " ... evidence of negotiations, or of the parties' intentions ... ought not to be received, and evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the 'genesis' and objectively the 'aim' of the transaction. As to the circumstances, and the object of the parties, there is no controversy in the present case. The agreement itself, on its face, almost supplies enough, without the necessity to supplement it by outside evidence." The comment by his Lordship in the last paragraph which I have quoted has equal application to the present case where the provisions of the contract itself so amply demonstrate that the purpose of the parties was to provide against the possibility that the respondent's investment return on the purchase price was less than the figure stipulated. (Citation omitted, emphasis added) 182 In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 there appears in the judgment of Mason J the passage which has been regarded as the seminal statement of the appropriate principle. His Honour said (at p 352): The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed. It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification. Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract. (Emphasis added) 183 Later cases have given more encouragement to consideration of surrounding circumstances than Mason J's observations suggest. Those later cases accept that surrounding circumstances may be taken into account to understand the meaning of contractual terms whether or not ambiguity is present (see the explanation in Masterton Homes Pty Ltd v Palm Assets Pty Ltd (2009) 261 ALR 382 per Allsop P at [1]-[3]). 184 In Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289 the High Court majority joint judgment said (at [10]): 10 In Codelfa, Mason J (with whose judgment Stephen J and Wilson J agreed) referred to authorities which indicated that, even in respect of agreements under seal, it is appropriate to have regard to more than internal linguistic considerations and to consider the circumstances with reference to which the words in question were used and, from those circumstances, to discern the objective which the parties had in view. In particular, an appreciation of the commercial purpose of a contract: … presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating. Such statements exemplify the point made by Brennan J in his judgment in Codelfa: The meaning of a written contract may be illuminated by evidence of facts to which the writing refers, for the symbols of language convey meaning according to the circumstances in which they are used. (Citations omitted, emphasis added) 185 The majority judgment then made an important observation (at [39]) about the possibility that the House of Lords had, in decisions made since Codelfa, taken a broader view of what might be relevant and admissible "background" to a contract: 39 Two further matters should be noticed. First, reference was made in argument to several decisions of the House of Lords, delivered since Codelfa but without reference to it. Particular reference was made to passages in the speeches of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society and of Lord Bingham of Cornhill and Lord Hoffmann in Bank of Credit and Commerce International SA v Ali, in which the principles of contractual construction are discussed. It is unnecessary to determine whether their Lordships there took a broader view of the admissible "background" than was taken in Codelfa or, if so, whether those views should be preferred to those of this Court. Until that determination is made by this Court, other Australian courts, if they discern any inconsistency with Codelfa, should continue to follow Codelfa. 186 Later High Court decisions have expressly accepted Lord Hoffman's statements in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 ("West Bromwich Building Society") at 912 as correctly stating the relevant principles (Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at [11]; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 ("Pacific Carriers") (at [22])). However, the necessity for an objective view of the terms of contracts has continued to be stressed by the High Court. 187 In Pacific Carriers the majority joint judgment said (at [22]): 22 … The case provides a good example of the reason why the meaning of commercial documents is determined objectively: it was only the documents that spoke to Pacific. The construction of the letters of indemnity is to be determined by what a reasonable person in the position of Pacific would have understood them to mean. That requires consideration, not only of the text of the documents, but also the surrounding circumstances known to Pacific and BNP, and the purpose and object of the transaction. (Citations omitted) 188 In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 ("Toll") the same five justices said (at [40]): 40 This Court, in Pacific Carriers Ltd v BNP Paribas, has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction. (Citations omitted) 189 The observations in Toll at [40] were applied in International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 at [53]. 190 Examination of the meaning of a contract involves a search for an objective meaning arising primarily from the language used in the contract. The cases in which the meaning suggested by the language used in the contract will be subordinated to a presumed intent arising from surrounding circumstances remain the exception. Any other approach would be destructive of contractual certainty and thus of contractual effectiveness. Recently, in Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101, Lord Hoffman referred to his earlier remarks in West Bromwich Building Society pointing out (at [14]) that: 14 … in some cases the context and background drove a court to the conclusion that "something must have gone wrong with the language". In such a case, the law did not require a court to attribute to the parties an intention which a reasonable person would not have understood them to have had. but continued (at [15]): 15 It clearly requires a strong case to persuade the court that something must have gone wrong with the language … 191 It does not remain accurate to suggest that evidence of surrounding circumstances is not admissible unless the terms of a contract are ambiguous or susceptible of more than one meaning even though no High Court decision has actually suggested that Mason J's formulation was, or has become, inadequate. However, I find it difficult to conceive a situation when Mason J's formulation would not be adequate to deal with every practical instance where reference to surrounding circumstances was necessary to understand the written terms of a contract (rather than imply terms into one). Whatever view may be taken about that issue, it remains true in my view that evidence of surrounding circumstances may not be used, as part of an exercise in construction of a contract, to contradict unambiguous contractual stipulations. Such evidence may have a part to play in an application for rectification of the terms of a contract, but that is an exercise of a different character, appealing to different, equitable, principles. 192 Furthermore, although the terms of the contract must, to the extent necessary, be viewed against the background of surrounding circumstances, and with the purpose and object of the transaction in mind, that does not mean that examination of the rights and obligations stated by the contract commences with the background rather than the terms of the contract (Ryledar Pty Ltd t/as Volume Plus v Euphoric Pty Ltd (2007) 69 NSWLR 603 at [106] - [109]). It is the words of the bargain, chosen by the parties to express their bargain, which are the lasting (and sometimes only) record of it. It is therefore the language of the contract to which primary regard must be paid. That is particularly important when, as here (and commonly), the benefits (and obligations) of the contract might be assigned to third parties who had no part in the negotiations, although they may be presumed to be familiar with the general commercial setting in which the contract operates. 193 Admonitions in the authorities to construe a contract without disregarding the surrounding circumstances do not amount to instructions to fit the terms of the contract into some independent view of such circumstances. Furthermore, an examination of surrounding circumstances must not be diverted into a surrogate examination of the subjective intention of the parties (Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 at [25]; Toll at [38]). Equally, the level of commercial reality is a matter for the parties. Admonitions to avoid commercial unreality should not be read as an encouragement to courts to involve themselves in the quality of a bargain made between contracting parties. If a party (or both parties) inadvertently make a bad bargain which none intended that is a matter for rectification, not a forced construction. 194 In Toll the High Court emphasised (at [42]) "the significance which the law attaches to the signature (or execution) of a contractual document" (see also Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 at [33] - [35]). Normally, it is to be presumed that parties have recorded their bargain in the document which they execute (Maybury v Atlantic Union Oil Co Ltd (1953) 89 CLR 507 at 517). As already indicated, there were good reasons in the present case to proceed upon the footing that the parties intended that their rights and obligations, both immediate and future, would be found in the terms of the documents they had executed.

[3]

The surrounding circumstances 195 Barton is a family owned company based in the United States of America. Before 2002 it was a shareholder in GMA. When, in early 2002, GIRL acquired a 50% shareholding in GMA, GIRL and Barton became partners. During 2003 and 2004 significant differences arose between them. GIRL approached the Australian Competition and Consumer Commission ("ACCC"). It suggested there had been contraventions of the Trade Practices Act 1974 (Cth). ACCC commenced proceedings. GIRL commenced proceedings in this Court seeking dissolution of the partnership. Relations between GIRL and Barton broke down completely, to the point where negotiations between them in an attempt to find a basis for an overall settlement were conducted between lawyers. Officers of the companies did not meet and were not in direct contact, such was the level of distrust and hostility between the two camps. That was the environment in which the settlement was negotiated and the settlement documents executed. 196 The overall settlement between GIRL and Barton (and including GMA) was effected by the execution of a number of contemporaneous agreements and instruments. They included a share sale agreement (whereby Barton sold its shares in GMA to GIRL), a partnership interest sale deed (whereby Barton sold all its interest in the partnership to GIRL), the supply agreement (by which Barton was guaranteed supply of garnet of up to 50,000 tonnes per annum for 12 years at concessional prices) and a number of other documents necessary to sever the existing relationship between Barton and GIRL and transfer Barton's interests in the arrangements to GIRL. The individual components of the settlement were brought together by the Principal Agreement. Important provisions of the Principal Agreement included the following: INTRODUCTION A. Through the chain of documents and events summarized in the Schedule, Barton and GIRL are equal partners in the Partnership and each holds 50% of the issued shares in GMA Garnet. B. The Partnership owns the GMA Garnet mine, processing plant, associated plant and equipment and infrastructure and the minerals produced therefrom, situated north of Geraldton, Western Australia. C. GMA Garnet provides mining and processing services to the Partnership and is the Partnership's exclusive distributor of garnet produced from the mine. D. Disputes have arisen between the Parties inter alia which resulted in the Proceedings being instituted. E. The Receivers were appointed to the Partnership and GMA Garnet in the Proceedings. F. Without admission of liability the Parties have agreed to settle all Disputes and claims between them, including those arising from the Proceedings, on the terms set out below. … Settlement Documents means this Deed, the Partnership Interest Sale Deed, the GMA Garnet Sale Agreement, the Deed of Covenant, the Supply Agreement and any other deed, agreement or instrument deliverable at Completion in the terms of any of the foregoing instruments. … 2. AGREEMENT 2.1 Settlement Documents Barton and GIRL undertake to one another, subject to the Conditions: (a) to execute and deliver to each other and to GMA Garnet on Completion each of the Settlement Documents to which they are a party; (b) to duly and punctually observe and perform all obligations on their part respectively contained or implied in each of the Settlement Documents to which they are a party; (c) to do all matters and things reasonably within its power or control to cause GMA Garnet at Completion to execute and deliver to the other the Deed of Covenant and the Supply Agreement. 2.2 Interdependence This Deed is interdependent with the Partnership Interest Sale Deed, the GMA Garnet Share Sale Agreement and the Supply Agreement. 2.3 Generally The Parties acknowledge: (a) that it is the composite transaction evidenced by the Settlement Documents that reflects the consideration under the Settlement Documents; and (b) that as part thereof, GMA Garnet wishes to promote distribution of Product (as defined in the Supply Agreement) within the United States of America and Canada and, for that purpose, GMA Garnet is allowing Barton a concessional rate for Product as provided for in clause 4.2 of the Supply Agreement. … 4 COMPLETION 4.1 Action at Completion Subject to clause 3, Completion shall take place at the offices of GIRL's solicitors, Williams & Hughes, Level 1, 25 Richardson Street, West Perth, Western Australia no later than 3pm on the Completion Date. At Completion:- (a) the Parties shall execute and effect the various deliveries and undertakings to each other required at Completion pursuant to the Partnership Interest Sale Deed and the GMA Garnet Share Sale Agreement; (b) Barton shall endorse each of the Promissory Notes in favour of GIRL and deliver them to GIRL; (c) GIRL shall deliver to Barton a bank cheque for the sum of $18 million; (d) each Party shall execute and do all matters and things reasonably within its power or control to procure GMA Garnet to execute the Supply Agreement and the Deed of Covenant; (e) Barton must pay GMA Garnet, in accordance with GMA Garnet's normal trading terms, for all GMA Garnet product taken by Barton and not paid for by Completion; and (f) the Parties shall execute and file with the Court and shall do all matters and things within their power or control to procure GMA Garnet to execute and file with the Court, the Consent Orders B. The obligations of the Parties in respect of Completion shall be interdependent. All actions at Completion shall be deemed to take place simultaneously and no delivery, execution or payment will be deemed to have been made until all executions, deliveries, filings and payments have been made. (Emphasis added except for headings) 197 Each of the parties (GIRL, Barton and GMA) released the others from past claims, each agreed to ensure that related entities performed and honoured any release, each agreed not to disparage the others and ensure their related entities did not do so. In my view the inference is irresistible that each side proceeded upon the basis that nothing was to be left to chance. 198 The findings of the trial judge make it clear that the contract was hammered out in detail against a background of mutual distrust. I think it may fairly be taken that the parties intended that their agreement was comprehensively stated in the documents they executed. They were hostile to, and wary of, each other. This was not a case where the parties were content to state the principal terms of their bargain and proceed otherwise in a mutual spirit of co-operation and give and take. The opposite was the case. It was a clear case where the parties may be assumed to have assiduously looked after their own interests and have been on notice that it was strictly necessary that they should do so.

[4]

The supply agreement generally 199 The parties to the supply agreement were GMA (defined as the "Seller"), Barton (defined as the "Buyer") and GIRL. The supply agreement guaranteed supply of garnet to Barton from the GMA mine of up to 50,000 tonnes each year for a period of just over 12 years. Provided the terms of cl 4.2 were met (as will be discussed in due course) garnet was to be supplied under the supply agreement at concessional prices representing a substantial discount to market price. 200 Rights and obligations under the supply agreement were assignable to third parties. It was clear from the Principal Agreement (and the supply agreement) that the supply agreement was to be read in conformity with the Principal Agreement (and therefore as part of an overall settlement) but otherwise the terms of the supply agreement were stated to be comprehensive. Clause 23 provided: 23. WHOLE AGREEMENT Subject to clause 2.3 of the Principal Agreement dated 21 February 2005 between the Buyer and GIRL, this document expresses the whole agreement between the Parties with respect to its subject matter and no extraneous warranty, representation, term or condition not expressly included in this Agreement will apply. To the extent to which there is any inconsistency between the provisions of this Agreement and any Purchase Order, invoice or other instrument issued ancillary to this Agreement, the terms of this Agreement will prevail. (Emphasis added) 201 The supply agreement provided a significant commercial benefit to Barton, and imposed corresponding obligations on GMA, which operated adversely after the overall settlement to GIRL as sole owner of the GMA mine and the garnet produced by it. Clearly, the benefits provided to Barton by the supply agreement were part of the consideration for the overall settlement, in addition to the $18 million cash payment at the time of settlement. 202 The supply agreement identified various alternative means of supply: loose bulk, break bulk (packaged), combination loose bulk/break bulk and container. Bulk garnet was least expensive. Commonly used packaging was identified (with corresponding market prices at the commencement date) but it was open to Barton to specify other packaging at additional costs to be borne by it. Packaged garnet then in common use was GMA branded.

[5]

Clause 2.5 - Branding 203 Clause 2.5 of the supply agreement provided: 2.5 GMA Branding All garnet purchased under this Agreement and distributed or sold by the Buyer which is 100% Product must be branded by the Buyer with the GMA Garnet name and logo (which may co-exist with the Buyer's own branding provided that the prominence of the GMA Garnet name and logo is not less than that which has applied during the 2004 calendar year) and the Seller grants to the Buyer a non exclusive licence to use the GMA Garnet name and logo on Product for this purpose. The Buyer must not use the GMA Garnet name or logo on, or in connection with, the distribution or sale of any garnet which is not 100% Product or hold out in any way that garnet which is not 100% Product, is Product. 204 As has been indicated already the "Buyer" was Barton. 205 The term "Product" was defined in cl 1.1 as follows: Product means 30/60 Mesh or 80 Mesh as the context requires. 206 In turn, the terms "30/60 Mesh" and "80 Mesh" were defined in cl 1.1 as follows: 30/60 Mesh means 30/60 mesh garnet or 60 mesh garnet produced from the Mine. 80 Mesh means 80 mesh garnet or 100/120 mesh garnet produced from the Mine. 207 Barton argued at first instance, and on the appeal, that the branding obligations in cl 2.5 did not apply to garnet purchased by it in bulk. It also argued that the obligations did not apply, in any event, to garnet on-sold by it to a related company, Barton Mines Company LLC ("BMC") which, in due course, sold garnet to external customers. 208 The first contention rested upon the fact that it is impossible to brand garnet directly; rather, it is only possible to brand packaging of some sort. Bulk garnet was ordered and supplied to Barton unpackaged. Barton argued that the contract did not require it to package garnet (at extra cost) in order to brand it and that, therefore, there was no intended obligation to brand bulk garnet and cl 2.5 should be read down to that extent. The second contention was based upon the fact that GMA (and GIRL) knew that Barton's practice was to sell garnet purchased by it to BMC rather than directly to ultimate customers. 209 Although I will examine the issues in greater detail, I may state my views immediately about these contentions as they each appear to me to depend upon an impermissible departure from the principles of construction to which I earlier referred. Each contention in its own way proposes the subordination of the language of the contract to an external or additional factor to accommodate the commercial significance of that factor to one party. Furthermore, in my view, each contention contradicts the plain language of the contract. In that sense, each infringes the injunctions expressed by Mason in Codelfa that evidence of surrounding circumstances is not admissible to contradict the language of a contract when it has a plain meaning. In my view, no subsequent High Court authority requires a different approach to this question, either generally or in the present case. 210 It followed directly, in my view, from the terms of cl 2.5, that Barton was contractually bound to brand all garnet purchased under the supply agreement (i.e. at concessional prices) which, when distributed or sold by it, was still 100% garnet produced from the GMA mine (which was itself defined and identified by reference to particular leases, a lease application and a prospecting licence). I see no room for any argument arising from the clear and unambiguous terms of cl 2.5 to the effect that Barton's obligations were suspended or modified if it distributed or sold the garnet (in an unblended form) at its own election to a related company rather than an "external" customer or ultimate user. I see no basis in cl 2.5 itself, or elsewhere in the supply agreement, for a contention that garnet purchased in bulk should be excluded from the positive and negative covenants in cl 2.5. The fact that some intermediate step might have been necessary for Barton to effectively brand some garnet (having chosen to buy it in bulk, rather than packaged and then to distribute or sell it unblended, rather than blended) did not remove or qualify the contractual obligation. Barton was obliged to take the steps necessary to enable it to perform its bargain (Secured Income at 607; Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126 at [36]; see also Beaton v McDivitt (1987) 13 NSWLR 162 at 185). There can be no doubt that, if having purchased in bulk, Barton chose to put unblended garnet into bags to sell to a customer it would be obliged to brand it under cl 2.5. It could not avoid the operation of cl 2.5 by reason only of the fact that it did not wish to package the garnet in order to brand it.

[8]

The rectification issue 214 The trial judge's conclusion on this issue depended on a prior conclusion that the parties intended that any obligation to brand should only arise at the point of distribution or sale to "a third party customer" so that "internal" distribution or sale to BMC was not intended to be covered by cl 2.5 and should be excluded by rectifying that clause. 215 I am, with respect, not able to accept the premise from which the analysis proceeded. The fact that BMC was known to be Barton's distributor in North America and that garnet supplied by the joint venture to Barton had been, on delivery to Barton, branded as BMC, does not mean, in the circumstances of this case, that cl 2.5 should not operate according to its terms or should be amended by an order for rectification. Barton's arrangements with BMC were a matter between them. The arrangement may not have been maintained. There was no reason for GIRL or GMA to concern themselves with such a matter. It is clear from the terms of the Principal Agreement that where the parties (GIRL, Barton and GMA) intended that obligations should fall upon a related company, that fact and the nature and extent of the obligation were specified. 216 Barton may have chosen to distribute and/or sell directly. It may have chosen another intermediary as its agent, whether a related company or not. It could certainly, in any event, have adapted its distribution and sale arrangements to the contract which it made so that it only distributed or sold "100% Product" to BMC which was already, as earlier, branded with BMC's name. The possibilities are numerous but, in my view, the obligation was clear. Clause 2.5 applied to all garnet purchased by Barton under the supply argument when distributed or sold by it to another legal entity. There was, in my view, an insufficient foundation for any finding that the elements necessary to rectify the terms of the contract were present. In particular it was not open to find the other parties had, in error, omitted to include terms actually agreed, which terms were reflected by the rectification order.

[11]

Clause 4.2 - Concessional pricing 220 Clause 4.2 of the supply agreement provided: 4.2 North American market The Parties acknowledge that the Seller wishes to promote distribution of Product within the United States of America and Canada and, for that purpose, the Seller shall allow to the Buyer a concessional rate for Product as provided in this Agreement. Accordingly, if the territory into which the Buyer ships and discharges Product under clause 2.1 after taking delivery of the same is the United States of America or Canada, the price for Product to be sold pursuant to orders to be placed by the Buyer pursuant to clause 2.1 shall be: (There are then price formulae which need not be set out.) 221 The concessional rate in cl 4.2 provided a substantial discount to the market price. It was common ground at the trial that the reference to GMA's marketing aspirations in North America reduced or eliminated any prospect that the concessional rate might be seen as anti-competitive by Australian regulatory authorities. A similar aspirational statement also appeared in cl 2.3 of the Principal Agreement which was earlier set out. There is, in my view, no particular significance which now needs to be attributed to that common view. Clause 4.2 must be construed in accordance with conventional principles, by reference principally to its own terms, in the context set by the supply agreement and having regard to the fact that the supply agreement was one of a series of interconnected elements of an overall commercial settlement. 222 In my view the opening sentence of cl 4.2 does not disclose any mutual intention to create legal rights and obligations. It is a statement similar to an introductory recital in a contract. It sets an acknowledged context to which reference could, if necessary, be made under conventional principles of construction but it has no independent contractual force. The relevant statement of contractual rights and obligations occurs in the second sentence. That statement is clear. The conditions to be met to compel a concessional price were: taking delivery followed by shipping to and discharge in the United States of America or Canada. Upon discharge in either place the entitlement to a concessional rate was complete. 223 Under the supply agreement, Barton was obliged, for each shipment, to provide a purchase order which specified quantity, grades, whether bulk or packaged product was ordered, the shipping port, estimated date of arrival and destination of the shipment (cl 6.1). Failure to comply with the requirements of cl 4.2 activated the provisions of cl 7.3: 7.3 Price uplift If the Seller notifies a Shipment price based on the Buyer's advice that the Shipment will be shipped and discharged into the United States or Canada and the Buyer subsequently does not ship and discharge that Shipment into either of those territories the Seller may give notice to the Buyer: (a) advising that the price for the quantity of Product in that Shipment is revised to such price as determined by the Seller in accordance with clause 4.1; and (b) attaching a tax invoice for the additional amount payable. The Buyer must pay the amount of the invoice to the Seller within 30 days after the Seller gives that notice. 224 The contractual scheme was self-contained and complete. 225 At first instance, and on the appeal, GMA argued that a contractual requirement arose from cl 4.2 that Barton was required to sell all garnet purchased at concessional prices in the United States of America or Canada without blending and branded as GMA garnet under cl 2.5. The argument was correctly rejected by the trial judge. 226 None of the additional elements suggested by GMA was a contractual obligation. Barton was not obliged to sell the garnet in either the United States of America or Canada after discharge in either of those places. It was not prohibited from blending it with garnet obtained from other sources. If it was blended then, under cl 2.5 branding was prohibited. 227 I would dismiss this aspect of the appeal.

[12]

Relief 228 I agree with the orders which North and Siopis JJ have decided should be made. 229 As there is no basis to conclude that cl 4.2 required all concessionally priced garnet to be branded, the question of what relief may be available for a breach of the branding obligation in cl 2.5 must be considered independently of the operation of cl 4.2. A declaration should be made to vindicate the appellants' position concerning the operation of cl 2.5 of the supply agreement. No reason was advanced by Barton why the Court should not make the declaration sought by the appellants if this aspect of the appeal succeeded. I agree, therefore, with the declaration proposed by North and Siopis JJ. 230 I also agree with North and Siopis JJ, for the reasons which they give, that it would not be appropriate to make a declaration about the lawfulness of the breach notices issued by GMA. 231 The appellants also sought that damages be paid for breach of cl 2.5 and cl 4.2 of the supply agreement but, in my view, there is no satisfactory basis on which any assessment of loss or damage for breach only of cl 2.5 could be made on the appeal. Neither, for the reasons which follow, is there a sufficient foundation to require the trial judge to give the matter further attention. 232 The obligation to brand under cl 2.5 of the supply agreement arose when Barton distributed or sold unblended bulk garnet to BMC. No loss to either of the appellants occurred at this point because the garnet was not exposed to the market. To the extent that BMC blended the GMA garnet with garnet from other sources it is as though the blending was carried out by Barton so far as exposure to the market was concerned. There was no loss of exposure to ultimate customers as a result. Arguably, to the extent that BMC sold unblended, unbranded GMA garnet to ultimate customers there was a loss of the marketing benefit that branding brought, but a claim put on that basis was not advanced. 233 Barton explicitly contended on the appeal that the appellants had never set out to make good a case of contractual loss from breach only of cl 2.5 of the supply agreement. That contention drew no rejoinder from the appellants. In their submissions on the appeal the appellants' primary claim for damages ($8,698,181) depended on success in relation to both cl 2.5 and cl 4.2 of the supply agreement. The claim amounted to a claim for a full refund of the discount given on the market price of garnet sold to Barton up to 17 November 2008 under the supply agreement. There is, in light of the outcome of the appeal, no basis for relief calculated in that way. The only alternative calculation advanced ($4,869,433) depended on an assumption in favour of the appellants that neither Barton nor BMC were contractually permitted to sell unblended garnet and that there was an entitlement, therefore, to recover at least the value of the discount referable to sales by BMC of blended garnet to third parties. That assumption has been rejected on the appeal. 234 In all the circumstances, it should be concluded that no case for damages based only on breach of cl 2.5 of the supply agreement was advanced by the appellants at first instance or on appeal. 235 In light of the outcome of the appeal, and the result of the appellants' various contentions, I agree that it is appropriate that the parties bear their own costs of the proceedings at first instance and of the appeal. I certify that the preceding sixty-one (61) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Buchanan.

Parties

Applicant/Plaintiff:

GMA Garnet Pty Ltd

Respondent/Defendant:

Barton International Inc

Legislation Cited (1)

Trade Practices Act 1974(Cth)

Cases Cited (28)

The applicable legal principles 20 It was against this background that the primary judge addressed a number of the issues of construction of the Supply Agreement. He began this task by setting out the legal principals applicable to the construction of the agreements ([89] - [102]). 21 As the appeal was argued there was no contention that the primary judge had applied the wrong legal principles. Rather, the appeal concerned the application of accepted legal principles to the construction of the agreements against the setting in which they were made. We agree with the statement of the law set out by the primary judge. In several instances we have reached different conclusions from those reached by the primary judge. That outcome has resulted from placing a greater emphasis on the language of the agreement than the primary judge placed on the language used. In other instances we have taken a different view of the commercial context or the relative importance of some of the surrounding circumstances in which the agreements were made. 22 The primary judge considered that each of the parties had proposed sophisticated and commercially justifiable sets of reasons for interpreting the Supply Agreement in the way they contended. Hence, he regarded the case as one where there was no obviously correct literal meaning of the contentious clauses. In these circumstances the following statement of Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1981) 149 CLR 337; [1982] HCA 24 at [24] (Codelfa) applied: …when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting. 23 The primary judge then adverted to an exceptional situation referred to by Mason J when the actual intention of the parties would prevail over the presumed intention. This occurs when parties specifically reject a particular provision which would otherwise have given effect to their presumed intention. 24 The primary judge then explained by reference to Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35 at [22] (Pacific Carriers), Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52 at [40] (Toll), International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151; [2008] HCA 3 at [8] and [53] (International Air Transport Association), that "the objective framework of facts within which the contract came into existence" referred to by Mason J is now commonly understood to mean that the proper construction of a contract should reflect what reasonable people in the position of the contracting parties would have understood by the relevant clauses considering not only their text but also the surrounding circumstances and the purpose and object of the entire transaction and its elements. The primary judge relied on the following passage from the judgment of Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ in Toll at [40] which was adopted in the joint judgment of Gleeson CJ, Gummow, Kirby, Hayne, Heydon, Crennan and Kiefel JJ in International Air Transport Association at [53]: This Court, in Pacific Carriers Ltd v BNP Paribas [footnote omitted], has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction. 25 The primary judge then said that, in view of the recent dicta in the High Court which made no mention of the need to establish ambiguity in the provision in question, there was no need for ambiguity to be demonstrated before the Court could have regard to surrounding circumstances known to the parties and the purpose and object of the transaction. 26 The primary judge then concluded at [96] that "the construction task to be undertaken by the Court requires consideration of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction". 27 He then said that when construing a commercial contract the business objectives of the parties should be taken into account. He referred to some authorities which determined that provisions in a commercial contract should be given a business commonsense or business like construction. But, the primary judge said this approach did not involve a free wheeling exercise. He relied upon the view of the Court of Appeal of New South Wales in Ryledar Pty Ltd t/as Volume Plus v Euphoric Pty Ltd (2007) 69 NSWLR 603; [2007] NSWCA 65 (Ryledar) quoting Palmer J in Euphoric Pty Ltd v Ryledar Pty Ltd [2006] NSWSC 2, who stated at [31] - [33] as follows: 31 However, that does not mean that when the Court begins the task of construction it puts the words of the document aside and endeavours first to ascertain the commonly known factual context and purpose of the transaction, often only by resolving a strenuous contest between the parties. The Court does not, once it has found the commonly known factual context and purpose, then look at the words of the contract and, if they do not readily accommodate the context and purpose so found, force them to do so by a process of interpretation. 32 When the Court is construing a commercial contract, it begins with the words of the document: there it often finds expressed the factual context known to both parties and the common purpose and object of the transaction. But the Court is alive to the possibility that what seems clear by reference only to the words on the printed page may not be so clear when one takes into account as well what was known to both parties but does not appear in the document. When that is taken into account, the words in the contract may legitimately have one or more of a number of possible meanings. It is then the Court's task to identify which of the possible meanings represents the parties' contractual intention. 33 However, when a party to a contract argues that the known context and common purpose of the transaction gives the words of the contract a meaning which, by no stretch of language or syntax they will bear then, in truth, one has a rectification suit, not a construction suit. 28 The primary judge then observed that a business commonsense construction may not be easy to ascertain. Minds may differ on that subject: Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181; [2001] HCA 70 at [43]. 29 Applying the principles of construction he outlined, the primary judge examined in detail ([102] - [365]) the factual matrix of the transaction and made findings concerning the surrounding circumstances, purpose and object of the transaction and the common understandings of the parties on significant issues.

The Respondent's Submissions 63 The primary thrust of the respondent's submissions was that it was not open to the appellants to challenge the rectification order. The appellants, it was argued, were bound by the case they had put to the primary judge. On this point the respondent relied on Metwally v University of Wollongong (No.2) (1985) 60 ALR 68;[1985] HCA 28 at [7]. 64 The respondent said that the appellants' case at trial included a claim for rectification. In support of that claim the appellants pleaded that there was a common understanding that Barton would ensure that BMC would comply with the branding obligation in cl 2.5. The respondent admitted this pleading. In those circumstances, the respondent submitted, the appellants could not now argue against the rectification order made by the primary judge. The Appellants' Submissions in Reply 65 In reply the appellants made two points. First they said that it was necessary to take account of all of the interlocking elements of their rectification case before the primary judge, and not select, as the respondent had done, one element of that case. Their case before the primary judge was that cl 2.5 applied to internal sales. Thus, Barton was bound to brand 100% Product on a sale to BMC. If Barton did not do so, then it was commonly understood that Barton would ensure that BMC would comply with cl 2.5. At the same time Barton would remain bound by its obligation under cl 2.5. Thus, the appellants opposed the respondent's rectification case at trial. On appeal they continued to do so. 66 Second, and in any event, the appellants argued that their contention on the appeal is an argument of law. The argument does not depend on leading any further evidence or challenging any of the fact findings made below and thus does not prejudice the respondent. The situation is as described in Connecticut Fire Insurance Company v Kavanagh [1892] AC 473 at 480 as follows: When a question of law is raised for the first time in a court of last resort, upon the construction of a document, or upon facts either admitted or proved beyond controversy, it is not only competent but expedient, in the interests of justice, to entertain the plea.

The Appellants' Submissions 79 The appellants submitted that the wording of cl 2.5 was clear. It specified that the branding obligation applied to all garnet purchased under the Supply Agreement which was distributed or sold by Barton and which was 100% Product. The appellants said that all means all. 80 The appellants disputed the primary judge's conclusion that the parties would have specified in the Supply Agreement that loose bulk garnet could only be on-sold in packaged form if that is what they intended. This finding was inconsistent with the primary judge's finding that GMA did not know that the Barton companies sold or distributed product in loose bulk form to ultimate customers. The primary judge found that GMA believed at the time of the making of the Supply Agreement that the Barton companies sold all garnet to third party customers in packaged form. This meant, as the primary judge found, that the parties did not turn their minds to the situation. But, if the parties did not turn their minds to the matter, contrary to the view of the primary judge, it could not be inferred from that failure to advert to the issue, that the parties intended that sales of loose bulk garnet would be free from the branding obligation. 81 The appellants then argued that the primary judge erred in the way he used the surrounding circumstance that GMA did not know that Barton companies sold or distributed product in loose bulk form to construe the agreement. Whilst it was legitimate to use surrounding circumstances to identify the subject matter of an ambiguous contractual obligation, it was not open to use surrounding circumstances to attach a condition or quality to the subject matter of a contractual obligation plainly stated. The appellants relied on the approach taken by Mason J in Codelfa at [22] as follows: The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. 82 In this case the contract has a plain meaning. The primary judge erred, so it was argued, by using the surrounding circumstances to attach a condition to the plain contractual description of the garnet to which the branding attached. That condition was that the garnet be in a packaged form. 83 As to the primary judge's observation that loose garnet could not be labelled and his view that, as a consequence, there was no obligation on Barton to label garnet sold in bulk, the appellants argued that Barton had an implied obligation to do all that was reasonably necessary to secure performance of the contract. By making the agreement to brand garnet, Barton impliedly promised that the garnet would be packaged at the time of sale in such a way that it could be branded: Secured Income Real Estate (Australia) Ltd v St Martin's Investments Pty Ltd (1979) 144 CLR 596; [1979] HCA 51 (Secured Income). 84 The appellants then took issue with the conclusion reached by the primary judge that Barton was entitled under the Supply Agreement to engage in unlimited blending, and consequently the appellants also took issue with the primary judge's reliance on this conclusion to support his construction of cl 2.5. The appellants submitted that the evidence concerning blending was not evidence of surrounding circumstances but was evidence of antecedent oral negotiations. Whilst the former was admissible for the purpose of construing the contract, the latter was not. Hence, the primary judge wrongly relied on the evidence concerning blending. 85 Further, the appellants contended that the findings made by the primary judge concerning blending were wider than the evidence justified. The evidence only permitted a finding that there was a common understanding that there had been, in the past, exceptional instances for niche applications involving the blending of hard rock garnet with alluvial garnet. The evidence did not support the finding that Barton was entitled to engage in unlimited blending.

Consideration 154 We agree with the primary judge that cl 4.2 contains no contractual obligation on Barton to promote the distribution of GMA garnet in North America. 155 The language of the first sentence of the clause speaks in terms of aspiration rather than in terms of legal obligation. Thus, there is a joint acknowledgement directed to a wish to promote garnet in North America. The wish is that of GMA, that is to say, of one of the parties alone. The acknowledgment by Barton of GMA's wish did not in terms, or in substance, identify any obligation on Barton to take steps to give effect to GMA's aspiration. 156 Whilst the language of the clause leaves no real doubt about the meaning, there are surrounding circumstances and common understandings which support the plain meaning of the text. 157 A particularly cogent factor supporting this construction is the concern which the primary judge found the parties had about the competition law implications on the terms of the transaction. 158 There was a particular sensitivity to competition law issues because one of the reasons for the acrimony which had developed between the parties arose from the complaint made by GMA to the ACCC about the Perth Agreement by which the parties had divided up Australia into exclusive trading territories. The resulting ACCC investigation led to proceedings in the Court against Barton which were resolved by consent when Barton agreed, inter alia, to pay substantial civil penalties. 159 The Principal Agreement expressly made the non-objection or approval by the ACCC a condition precedent to the operation of the Supply Agreement. 160 There was evidence before the primary judge of legal advice obtained by both sides as to the competition law issues which might arise following the proposed settlement. GMA was advised that it would contravene ss 45 or 46 of the Trade Practices Act if it had the purpose of hindering or preventing competition in Australia. The primary judge summarised the concerns in the passage extracted in [122] of these reasons. 161 The primary judge found that the parties commonly understood that an open supply agreement would limit the risk of the agreement being adversely regarded by the competition regulators. 162 Furthermore, Barton in the course of negotiations insisted that it would not undertake any obligation to distribute the product. It wanted the right to obtain supply of garnet from GMA but would not promise to take up any particular amount or meet any performance criteria. It rejected an early draft of cl 4.2 of the Supply Agreement which required it to "distribute" product, and replaced that wording with a promise to "ship and discharge" product. These surrounding circumstances and common understandings found by the primary judge were not contested by the appellant. They underscore the clear meaning of the text of cl 4.2 and speak against Barton undertaking any legal obligation to promote the distribution of GMA garnet. 163 A further factor strongly supportive of the construction that cl 4.2 did not impose a legal obligation on Barton to promote the distribution of GMA garnet relates to the issue of blending. The appellants rightly accepted that their construction could not succeed if Barton was permitted to blend product. The capacity of Barton to blend product and then sell or distribute free of the obligation to brand imposed by cl 2.5 would be inconsistent with an obligation to promote distribution of the discounted product in North America. 164 The appellants contended that the only relevant common understanding at the time the parties entered the Supply Agreement was that in the past there had been exceptional circumstances for niche applications involving hard rock garnet where alluvial garnet had been blended with hard rock garnet. The appellants said that this common understanding did not necessarily relate to GMA and only concerned blending of small amounts. It did not justify the far wider conclusion reached by the primary judge that Barton could engage in wholesale blending. 165 The criticism of the primary judge's finding does not take account of all the evidence on the subject and the full scope of the reasoning of the primary judge. Rather, it focuses on selected parts of the passage from the cross examination of Mr Cole extracted at [129]. 166 As explained at [119] - [124] of these reasons the primary judge analysed at length ([226] - [289]) the evidence of Mr David Williams, Mr Ketelsen, and Mr Cole on the parties common understanding or concurrence concerning intentional blending and marketing. An important reason for the primary judge's conclusion that cl 2.5 did not prevent blending was his interpretation of the course of negotiations and the sequence of drafting of the branding provision which became cl 2.5. The Principles of the Proposed Settlement GIRL/Barton document of 11 February 2005 prepared by Mr Williams required Barton to label all garnet. This proposal was followed by several conversations in which Mr Cole rejected such a wide obligation for the reason that Barton may engage in blending of garnet. The next draft provided by Mr Williams on 16 February 2005 limited the branding obligation in the terms of the final version of cl 2.5. The primary judge concluded at [278]: It seems reasonably plain, in these circumstances, that the parties through this process of negotiations between Mr Cole and Mr David Williams shared a common understanding that there may indeed be some intentional blending of GMA Garnet product by Barton International or entities associated with it, including of GMA garnet acquired under the terms of the proposed GSA. Mr Cole raised the prospect and Mr Williams ultimately accepted it was so, or assumed it was so for the purposes of drafting cl 2.5. Clause 2.5 of the GSA was ultimately negotiated and agreed upon in light of that common understanding or acceptance. 167 Thus, it was central to the primary judge's conclusion that the 16 February 2005 draft was accepted following Mr Cole's statement that there may be intentional blending. In other words, the primary judge regarded it as significant that no attempt was made by GMA to limit the scope of blending which might occur. 168 Further, the passage from the cross examination of Mr Cole does not link the past blending practices of Barton to any proposed future conduct. Mr Cole was not addressing Barton's possible conduct in the future except to say that there should be no restraint on blending. In the course of that conversation he made reference to past practice but not to suggest that any future conduct of Barton would necessarily follow the same path. Rather he sought to explain why any restraint on blending was unacceptable. 169 Additionally, read as a whole the passage from the cross examination of Mr Cole does not, as the appellants would have it, speak in terms of a trivial amount of blending. For instance, there is reference to blending for "special applications that they have from time to time to meet particular requirements". The emphasis is on the unusual nature of the requirement rather than on the size of the order. It is quite open to read the passage as referring to substantial orders albeit of blended garnet for special purposes. 170 To the limited extent that there may be debate about the overall effect of the evidence of Mr Williams, Mr Ketelsen and Mr Cole on the issue of blending, the primary judge enjoyed the advantage of assessing their evidence by seeing them in the witness box and in the context of the entirety of the evidence at trial. This Court would be slow to interfere with the conclusion reached as a result of that advantage: Fox v Percy (2003) 214 CLR 118; [2003] HCA 22. The appellants' argument that the primary judge's findings that cl 2.5 did not prohibit blending went wider than the evidence justified is not made out. 171 Finally, there is no scope for the appellants' submission that Barton was under a duty to cooperate to deliver the benefit of the Supply Agreement to GMA in accordance with the reasoning in Secured Income. That implied duty only arises in aid of a right provided by the contract. In this case that foundation is missing.

(1981) 149 CLR 337

(2003) 214 CLR 118

(2008) 234 CLR 151

(2001) 210 CLR 181

(1985) 60 ALR 68

(2004) 218 CLR 451

(2007) 69 NSWLR 603

(1979) 144 CLR 596

(2004) 219 CLR 165

(1982) 149 CLR 337

(2009) 261 ALR 382

(2002) 186 ALR 289