Inlon Pty Ltd v Celli SpA

Supreme Court of NSW|2017-04-21|Before: Parker J

Solicitors: Aubrey Brown Solicitors (Plaintiff) Hilliard and Berry Solicitors (Defendant) File Number(s): 2017/72020 Publication restriction: Nil

Judgment

The plaintiff ("Inlon") carries on business as an importer and distributor within Australia of farm machinery. The defendant ("Celli") is an Italian company which manufactures rotary tillers, rotary hoes and other similar farm machinery. Its manufacturing facilities are at Forlì in Italy.
The proceedings arise out of a written agreement between Celli and Inlon dated 8 November 2012 ("the Distribution Agreement") pursuant to which Inlon has been distributing Celli products in Australia.

Issues for decision

Inlon seeks a declaration that Celli's purported termination of 10 January 2017 was invalid and an order restraining Celli from supplying products the subject of the exclusive distribution clause for distribution in Australia to any person other than Inlon for the remainder of the contractual term (until 10 September 2017 unless the Distribution Agreement is lawfully terminated before then).
Inlon also seeks damages for breach of contract. When the proceedings were before White J, his Honour made an order by consent that the quantum of damages be determined separately and after all other issues in the proceedings. Accordingly, for the purpose of this hearing my task is to determine questions of breach only.
Prima facie, in refusing to supply Inlon with any of its products and in supplying such products instead to Farmgard, Celli has breached the exclusive distribution obligation under the Distribution Agreement (although the scope of the products covered by that obligation may be in dispute). Accordingly, it seems to me that the onus lies on Celli to establish breaches on the part of Inlon which would justify Celli's termination. Counsel for Celli did not dissent from this view.
By the close of submissions, a number of the contentions which had previously been advanced by one or either of the parties had been abandoned. The remaining issues in the proceedings may be summarised as follows.
Celli now relies on alleged breach by Inlon of two of Inlon's obligations under the Distribution Agreement.
First, Celli alleges that Inlon breached the minimum order obligations in clause 2.3. Celli alleges that it has a resulting right of termination under clause 2.11(a), which it exercised by its letter of termination of 10 January 2017.
Second, Celli alleges that Inlon, by applying for the Celli trade mark, breached an obligation to "co-operate and act reasonably" which, so Celli alleges, was implicit in the Agreement. Celli relies on both contractual and common law rights of termination arising from that alleged breach.
Furthermore, if Celli fails to justify its termination, it contends that injunctive relief should not be granted to Inlon and Inlon should be remitted to its claim for damages at common law.

Breach issues

Clause 2.3 of the Distribution Agreement provided: (a) The Distributor [Inlon] must place orders for the Supplier's [Celli's] Products to the Supplier at the address set out in Schedule 1 or to such other address as may subsequently be notified by the Supplier. The total value of orders for every year must not fall below 80% of the minimum figures set out in clause 2.3(b) below for 2 consecutive years. (b) The Supplier will set the annual budget of purchases of Products taking into consideration the minimum figures listed here below: 2013: 1,100.000 Euro 2014: 1,200.000 Euro 2015: 1,250.000 Euro
In the ordinary interpretation of the clause's language, the "minimum figures" referred to in sub-clause (a) were those set out at the end of sub-clause (b), and the budget figures to be set by Celli under sub-clause (b) were to be distinct from, and might be higher or lower than, the "minimum figures" listed. In fact, budget figures were nowhere else referred to in the Agreement and on this reading the process of setting budget figures was contractually meaningless. Inlon pointed out that in fact no budget figures were notified to it. Nevertheless, Inlon did not dispute the reading I have set out above, and I will proceed accordingly.
For the purposes of applying the clause, Celli draws a distinction between machinery and accessories on the one hand and spare parts on the other hand. According to Celli, the "Products" were machinery and accessories only and did not include spare parts. This is one of the construction issues which must be resolved.
It is common ground that in the 2014 year Inlon ordered less than €960,000 in Celli products. That is so whether or not spare parts are included in "Products". Thus the minimum order requirement was not met for that year.
The minimum order requirement for 2015 was €1,000,000. In 2015, Inlon ordered €884,537 in machinery and accessories and €107,352 in spare parts. If Celli's contention is correct, the spare parts are to be ignored. But even if Inlon is correct and the spare parts are included, the total was only €991,890. Inlon, however, argues that certain products ordered pursuant to a separate agreement between the parties in November 2014 are to be included in the 2015 purchases. On that analysis the total was €1,001,377 and Inlon (just) complied with its minimum purchase obligation for 2015.
The Distribution Agreement contained no express figure for 2016. Celli contends that it was implicit in the Agreement that for 2016 Inlon was required to order at least the amount which the Agreement required it to order in 2015. This is disputed by Inlon. However, it is common ground that Inlon's orders for 2016, even if spare parts are included, did not in fact reach the 2015 minimum order level of €1,000.000.

Scope of "Products"

Clause 1.1 of the Distribution Agreement contained a definition of the term "Products". The term was defined to mean "the Products described in Schedule 1".
Clause 2.1 provided: The supplier [sic] grants to the Distributor and [sic] the exclusive rights during this Agreement to distribute for sale from Supplier to the Customer in the Territory specified in Schedule 1 ("the territory") this [sic] of its Products specified in Schedule 1 ("the Products") subject to stipulation [sic] of this Agreement.
Schedule 1 contained an entry for "PRODUCTS" which stated "Refer to Annexure A" (quotes in original). Annexure A stated: PRODUCTS RELATED TO THIS CONTRACT: Rotary Tillers, Rotary Hoes (fixed, side-shift and folding), Frangors spike rotor cultivators (fixed and folding), Power Harrows (fixed and folding), Spading machines. Mulchers (fixed and folding)
Pricing was dealt with in clause 2.4 which provided: a) The current price list is export price list (E47) here attached as Annexures [sic] B. The Supplier will inform the Distributor in advance about the average price increase and provide a new price list in writing at least 1 month before the expiry of the previous list. Unless the technical specifications of the Products vary, the price increase will not be more than the rounded inflation rate in Italy for the previous 12 months period. b) The new spare parts price list (E47) is attached as Annexure C and then shall be revised every year within the month of June. c) The discount rate will be 35% for all the rotary tillers, power harrows and spading machines and 40% for mulchers. Terms of delivery will be: Ex Works Forli, being that all risks shall pass to the Distributor upon the Product leaving the factory of the Supplier. d) All prices will be in Euro.
Although clause 2.4 referred to the price list(s) as being attached, no such list was in fact attached. Instead, there are annexure pages which purport to identify the price list(s). Annexure B states: Machines PRICE LIST: E47 and its subsequent
Annexure C states: Spare parts PRICE LIST: E47 and its subsequent
During the hearing, I raised with the parties the question whether the price list(s) which had been thus incorporated by reference into the Agreement might be relevant to its interpretation. This resulted in the tender of a number of price lists.
So far as Annexure B is concerned, there was tendered a catalogue entitled "Price List 46". This catalogue is undated but it is agreed between the parties that it was in existence in November 2012 when the Distribution Agreement was entered into. The catalogue contains ten chapters setting out specifications and prices for categories of machinery. Those categories appear to coincide with the categories of machines listed in Annexure A. It also contains an eleventh chapter containing specifications and prices for accessories for those machines. There was also tendered "Price List 47" which is an updated version of Price List 46, bearing the date 1 May 2014. This contains three extra machinery chapters, representing machinery products subsequently developed by Celli.
So far as Annexure C is concerned, there was tendered a separate list also entitled "Price List 47" but headed "Spare Parts Price List 47" and dated March 2012. It consists of a series of product codes and prices. There was also tendered a further version of this list, entitled "Spare Parts Price List 47 bis" and dated May 2014.
On the face of it, the parties went to some trouble, when preparing the Distribution Agreement, to identify the price lists with some precision. It is therefore surprising that the price lists in evidence do not fully match up with the descriptions in the Agreement. So far as the evidence goes, there is no price list, either for machines/accessories or spare parts, which bears the designation "E47". On the evidence, the appropriate candidate for the document referred to in Annexure B as at the date of the Agreement would have been Price List 46. Price List 47, because of its date, can only be an update of the document already in existence in November 2012. It therefore seems strange that the number 47 was used in the Agreement rather than 46. On the evidence, the document referred to in Annexure C is Spare Parts Price List 47 which corresponds reasonably well with the reference in Annexure C, although why the letter "E" was inserted is a mystery.
This evidence does establish that, for the purposes of Celli's price lists at least, a distinction was drawn between machinery and accessories on the one hand and spare parts on the other. However, that distinction was not absolute. I was informed by the parties that they had compared the spare parts price lists with the accessories chapters in the other price lists and found that there were some cases where the same product code appeared both in the accessories chapter and the spare parts price list, although I was given no indication of how many such overlapping product codes there were.
Counsel for Inlon pointed to the presence of the term "Products" elsewhere in the Agreement. The argument was that the term had been used in other provisions in a context which suggested that it applied both to machinery and accessories on the one hand and to spare parts on the other. Apart from clause 2.4(a), which has already been quoted, Inlon relied on clauses 2.5 (conditions of sale) and 2.7 (maintenance of stocks). Clause 2.5 provided: The Distributor must at all times during the Agreement offer for sale and sell the Products as goods supplied by the Supplier and according to the specifications supplied by the Supplier to the Distributor from time to time either generally or in any particular case.
Clause 2.7 provided: The Distributor must maintain a reasonable stock of all Products in good order for display, sample and demonstration purposes, such stock to be provided at the cost of the Distributor.
It should be noted that the term "Product" appears in the heading in both clauses 2.3 and 2.4. This might have been useful, but clause 1.3 of the Agreement requires (one cannot help but suspect, unthinkingly) it to be disregarded and accordingly I cannot take them into account one way or the other.
For its part, Celli pointed to other clauses of the Agreement which, it argued, showed that the parties had used the term "Products" to refer to machinery and accessories only and that spare parts were in a different category. According to Celli, the parties had carefully used different nomenclature in situations where provisions were meant to apply to both categories. Thus, Celli argued, it was significant that the retention of title clause (2.21) referred to "all goods delivered to the Distributor" rather than "all Products". Similarly, Celli argued, it was significant that clause 2.22, which dealt with warranty procedures, referred to "[t]he products" rather than "the Products".
Celli also pointed out that the Agreement contained some provisions which distinguished between machines and spare parts. There were separate clauses which dealt with the return or buying back of machines (clause 2.20) and spare parts (clause 2.19). Clause 2.18 dealt separately with the packaging of machines and spare parts. There were also special payment terms for spare parts (clause 2.14(b)) and a provision for a separate promotional offer for "wearing parts", which I assume are a subset of spare parts (clause 2.15).
Celli also pointed out that the equivalent provisions of the 2007 Distribution Agreement were in relevantly identical terms except that Annexure A to the 2007 Distribution Agreement contained specific reference to spare parts. According to Celli, the deletion of those references from the Distribution Agreement in 2012 showed that the parties had decided that spare parts should not be included in the definition of "Products" and supported the interpretation for which Celli contends.
As can be seen from the provisions which have been quoted already in this Judgment, the parties when referring to products in the Agreement used language which was clumsy and lacked consistency. In particular, one might wonder why the term "Supplier's Products" was used in the first line of clause 2.3(a) rather than "Products" alone. However, counsel for Inlon did not suggest that the word had some different meaning in that clause (or any other clause) from the meaning it had elsewhere in the Agreement.
It seems to me that the Court should start with the ordinary meaning of the term "products". In the ordinary use of language, a product is simply something that is manufactured or otherwise produced. The term "product" would usually apply to any and all machinery, accessories and spare parts supplied by Celli. It is true that in Annexure A, only types of machinery are referred to; there is no express reference to accessories or spare parts. Celli however accepts that the definition extends to accessories used with the machinery in question. That is a perfectly understandable construction to adopt in the circumstances, but once it is adopted I cannot see why one should include accessories but exclude spare parts, especially when, as the evidence shows, there was in fact no absolute division between these two categories of product.
I do not think that much assistance can be gained, one way or the other, from the use of the term "Products", or of other terms, in other provisions of the Agreement. The existence of separate provisions for spare parts, or "wearing parts", is neutral; and even where the Agreement uses the term "Products" in circumstances where one would think there would be no reason to distinguish between machinery and accessories on one hand and spare parts on the other (for example, the obligation on Inlon to place orders for "Products" at the supplier's address set out in Schedule 1 (clause 2.3(a) first sentence)), the Agreement would still be workable if Celli's construction was adopted. On the other hand, I cannot accept Celli's contention that the use of some different term in a provision which would naturally apply to both machinery/accessories and spare parts (for example, in the retention of title clause) must have been the product of careful and deliberate drafting. The Agreement is so unprofessionally drafted that I do not think this sort of consideration counts for anything.
Having said this, I do think that it is implicit in the Agreement that Celli is obliged to supply Inlon with spare parts, at the very least on a non-exclusive basis, and that this is of some assistance. The Agreement contained obligations on Inlon not to distribute non-genuine wearing parts (clause 2.16). It also contained warranty procedures which contemplated that, at least in some circumstances, Inlon would supply and install replacement parts where the customer had warranty claims and would then obtain a credit from Celli (clause 2.22). Neither of these obligations could have been complied with by Inlon unless it had the ability to obtain a supply of spare parts from Celli. Clause 2.19, which provided for a special spare parts buy-back arrangement in favour of Inlon, rests on the same assumption. It therefore was not open for Celli to refuse to supply spare parts to Inlon, or to confer exclusive distribution rights for spare parts to some other supplier. In these circumstances, once it is accepted that Inlon's rights over the machines and accessories were exclusive, it becomes a very short step to conclude that its right to distribute spare parts was also exclusive.
As to Celli's argument based on the deletion of the reference to spare parts in the Distribution Agreement in 2012, in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352-3, Mason J said: There may perhaps be one situation in which evidence of the actual intention of the parties should be allowed to prevail over their presumed intention. If it transpires that the parties have refused to include in the contract a provision which would give effect to the presumed intention of persons in their position it may be proper to receive evidence of that refusal. After all, the court is interpreting the contract which the parties have made and in that exercise the court takes into account what reasonable men in that situation would have intended to convey by the words chosen. But is it right to carry that exercise to the point of placing on the words of the contract a meaning which the parties have united in rejecting? It is possible that evidence of mutual intention, if amounting to concurrence, is receivable so as to negative an inference sought to be drawn from surrounding circumstances.
Celli did not expressly rely on what his Honour said but the mode of reasoning which Celli contends for is similar. However, his Honour's statement was expressed tentatively and the force of such reasoning, if permissible at all, must depend upon the circumstances. In the present case I think it has some, but not very great, force. There is no evidence of how the particular change in the Distribution Agreement in 2012 came to be made, and it is anything but clear that the process of making the changes was a considered one. In fact, the Distribution Agreement in 2012 retained from the 2007 Distribution Agreement a clause dealing with termination if the sale to CAPL was not completed, which was completely inapposite (and indeed had been inapposite in the 2007 Distribution Agreement).
The fundamental difficulty with relying on the change is that it does not unequivocally point to the parties having decided to make a substantive modification to the Agreement. The change may have been made because it was believed that the reference to spare parts was unnecessary. The fact that the operative clauses in the 2007 Distribution Agreement which would have been affected by a changed definition of "Products" were left unchanged gives some support to that supposition.
While I have found this issue to be a difficult one, on balance I am not satisfied that the considerations on which Celli relies, taken as a whole, are sufficient to displace what I regard as the ordinary meaning of the term "Products", which would include both machines and accessories, and spare parts associated with those machines.
I therefore reject Celli's argument. I conclude that Inlon's exclusive rights under clause 2.1 and its minimum order obligations under clause 2.3 both included spare parts as well as machines and accessories.

Level of orders for 2015

On 17 November 2014, the parties entered into a Deed styled "Deed of Settlement". The Deed recited that Inlon had returned to Celli a shipment of goods which had previously been supplied and was claiming approximately €115,000 on account of those goods. The Deed provided for the goods so returned to be valued at an agreed sum of €70,000 and for €35,000 of that amount to be paid by being set off against orders to be placed by Inlon for blades and spare parts. Inlon agreed to order €35,000 in blades and spare parts, and Celli agreed to supply those goods "over the next four months". Out of the goods ordered and delivered pursuant to the Deed, goods to the value of €9,488 were ordered in 2014 but delivered in 2015. Inlon argues that these goods count towards the 2015 orders for the purposes of clause 2.3 of the Agreement.
Inlon pointed out that clause 2.3 refers to orders "for" the years in question. The clause does not expressly state the basis on which orders are to be allocated to a particular year. However, there must be some method of allocation and the obvious one is the date of placement of the order. On this reading, for an order to count towards a particular year, the order must be placed in that year. Ordinarily, therefore, an order placed in 2014 which resulted in delivery in 2015 would count towards 2014 not 2015. Inlon did not suggest any alternative method of allocation.
I see no reason why this method of allocation should change in the case of the orders placed pursuant to the Deed of Settlement. There is nothing in the Deed which shows any intention to treat any orders made pursuant to the Deed as in any way different from orders ordinarily placed. The Deed seems to me to be simply an agreement dealing with a complaint about one particular shipment which formed part of the ordinary flow of dealings between Inlon and Celli. In particular, the Deed left Inlon free to order the goods at a time, or at times, which suited it and there was nothing to require Celli to make delivery in 2015. Had Inlon placed its order early enough, the goods might well have been delivered in 2014. Accordingly, I reject Inlon's argument. This means that Inlon failed (by less than 1%) to meet the 2015 minimum order requirement, and therefore breached its minimum order obligation under clause 2.3 for 2014-2015.

Minimum order for 2016

As already noted, the Distribution Agreement contained no express provision for any minimum level of orders in 2016. Celli's argument for implication starts by fastening on the words "every year" in sub-clause 2.3. Celli argues that this required every year during which the Agreement subsisted to have a minimum order level, and (so Celli argues) in the absence of any express statement for the 2016 year, it can only be assumed that the parties would have contemplated a level at least as high as the 2015 year.
I do not think that the reference to "every year" is of much assistance to Celli. Once the initial term had expired, the Agreement was effectively terminable on a maximum of six months' notice. Given that the initial term of the Agreement was to expire on 31 December 2015, the parties could not have contemplated that the Agreement would necessarily last for the whole of 2016. The words "every year" could instead be read as simply referring to the years specified in sub-clause (b).
Celli's argument also faces the further, and more fundamental, problem that the parties simply did not prescribe any minimum purchase level for 2016. Celli must establish, by necessary implication, that the parties agreed to a minimum order level which is the same as (or at least no less than) the specified level for 2015.
In such circumstances, it is not enough to show that the parties have failed to turn their minds to, and to provide for, a contingency which was possible, or even likely. It must be shown that had the parties had the gap in the contract drawn to their attention at the time it was made, they would both immediately have agreed to the term now propounded to fill the gap; in other words, the term propounded must have been so obvious as to go without saying: BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 283-284.
In the present case, there is in my opinion nothing to show that, had the omission to make any express provision for minimum orders in 2016 been drawn to the parties' attention, they would necessarily have both agreed on a figure of no less than the 2015 amount being specified for 2016. The minimum order levels for 2013, 2014 and 2015 represented a significant risk for Inlon if it was unable to sell a sufficient amount of product in the Australian market. It cannot necessarily be concluded that Inlon would have been prepared to assume a further obligation, and a further risk, for 2016.
Nor, in my opinion, is the term propounded necessary for the operation of the Agreement. Even without a minimum purchase obligation, Inlon was still obliged to maintain a presence in the market for Celli products, which could be expected to generate demand from customers and result in orders from Inlon (as in fact happened in 2016). Of course the Agreement was less favourable from Celli's point of view, but it was far from unworkable, especially when one considers that once the initial term had expired on 31 December 2015, Celli was entitled to bring the Agreement to an end on six months' notice if Celli was dissatisfied with its operation.
I therefore reject Celli's argument. I conclude that there was no minimum order requirement for 2016 and accordingly that there was no further breach of clause 2.3 by Inlon after 2014-2015.

Termination issues

Clause 2.11 of the Distribution Agreement relevantly provided: The Supplier may terminate this Agreement by giving notice in writing to the Distributor immediately if any of the following events occur: (a) On breach - if the Distributor commits a breach of any of the stipulations of this Agreement (that is not rectified to the satisfaction of the Supplier within seven (7) days after the Distributor received notice from the Supplier directing them to rectify that default;
Celli's Notice of Breach, omitting formal parts, stated: We confirm that pursuant to clause 2.3(a), 2.3(b), 3.14, 1.1 "Products", you are required to do the following: [The provisions in question were quoted.] You have failed to comply with these requirements, which constitutes a breach of the distribution agreement. You are hereby required to rectify the breach by 03 January 2017. Should you fail to rectify the breach by this time then we will have no alternative but to consider terminating the agreement. We await your response.
Celli did not in the end pursue the allegation of breach of clause 3.14.
Inlon's position is that, as a matter of construction, termination was only available under clause 2.11(a) if the breach was capable of being rectified. Any breach in complying with the minimum order requirements for 2014-2015 was not capable of being rectified; such a breach was (so Inlon argued) committed as at the end of December 2015 and nothing could be done in December 2016 to rectify it.
Celli's primary position was that the introducing words of clause 2.11(a) applied to all breaches while the parenthetical requirement of seven days' notice only applied to breaches capable of being remedied. On this view, the breach of clause 2.3 was not capable of being remedied, and Celli could rely on that breach to terminate without notice (and, ironically, the Notice of Breach had been unnecessary). Celli also suggested that, if Inlon's view of the clause was correct, the breach could have been rectified, so that the Notice of Breach was effective.
Inlon next contended that, even if a right of termination had arisen under clause 2.11(a), Celli was disentitled from acting on it. First, Inlon contended that Celli had elected to affirm and it waived its rights. Celli disputed that this was so.
In its Reply, Inlon pleaded a further contention that it was not open to Celli to terminate. Inlon's contention was that Celli could not terminate based on a state of affairs it had brought about by its own breach. Inlon alleged that Celli's 2013 conduct in supplying products to Norwood (which was a breach of the exclusive distribution obligation in clause 2.1) had depressed the market and caused any breach Inlon might have committed in complying with its minimum order obligations. Prior to the hearing, Celli made an application to have the hearing adjourned on the ground that it was unable to meet this case. At my invitation Celli amended its application so as to seek, in the alternative, to have the relevant provisions of the Reply struck out or the evidence limited so as to avoid any prejudice from the argument being raised late. In the course of the hearing I heard argument on Celli's application and decided to refuse it. I indicated at the time that I would give my reasons in my judgment. However, in final submissions, counsel for Inlon abandoned the allegation that Inlon had been prevented from complying with its minimum order obligations by Celli's earlier breach of clause 2.1. As the issue has fallen away, I do not now propose to spell out the reasons for my refusal of Celli's application.
However, in abandoning this contention, Inlon did maintain that there was a further reason why Celli was disentitled from acting on its Notice. This was said to be because Celli was not ready, willing and able to perform its side of the Agreement.

Construction of clause 2.11(a)

Inlon relied on the House of Lords decision in Wickman Machine Tool Sales Ltd v Schuler AG [1974] AC 235. That case concerned an attempt by a supplier to terminate a distribution agreement for breach. The agreement contained a clause which permitted termination for breach unless, after notice had been given, the breach was rectified. The distributor had breached its obligations under a clause of the agreement which obliged it to make a certain number of visits to customers at specified intervals. The clause was described as a "condition". Schuler sought to terminate without notice. The House of Lords held that, the breach in question being rectifiable, it was not open to Schuler to terminate merely because there had been a breach of the "condition". Lord Reid said at 251E-H: The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear. … if the parties gave any thought to the matter at all they must have realised the probability that in a few cases out of the 1,400 required visits a visit as stipulated would be impossible. But if Schuler's contention is right, failure to make even one visit entitle them to terminate the contract however blameless Wickman might be. This is so unreasonable that it must make me search for some other possible meaning of the contract. If none can be found then Wickman must suffer the consequences. But only if that is the only possible interpretation.
The decision is not directly on point in the present case, where the issue between Inlon and Celli is whether clause 2.11(a) created a right to terminate without notice in the event of a non-rectifiable breach. However, the decision has consistently been regarded as authoritative by the Australian courts, and I think the approach of the House of Lords is of assistance in the present case. If Inlon is correct, then a non-rectifiable breach gave rise to no right of contractual termination. Counsel for Celli described this as "bizzare" but I cannot agree. Celli would have its common law right of termination for a non-rectifiable breach provided that breach was sufficiently serious. On the other hand, on Celli's construction, it was entitled to terminate without notice for any non-rectifiable breach, no matter how trivial. On the approach in Wickman v Schuler, that is an outcome which is so commercially unreasonable that the Court should not adopt it unless driven to do so by the language of clause 2.11(a). I do not think that the language of the clause necessarily requires such an interpretation. The reference to a breach at the beginning of the clause can readily be read as being confined to a rectifiable breach by the parenthetical reference to rectification which follows. Indeed this seems to me to be the most natural reading; it is also the way the somewhat similar termination clause was read in Wickman v Schuler: see at 249G.
I therefore conclude that the right to terminate under clause 2.11(a) could only be exercised if the breach in question was rectifiable, and notice had been given requiring its rectification.

Rectifiable breach?

In Telchadder v Wickland Holdings Limited [2014] UKSC 57, the UK Supreme Court had to consider the interpretation of a term implied by statute into an agreement between the owner of a site and the occupier of a mobile home stationed on the site. Under the statutory term, the owner was entitled to terminate the agreement if the occupier had breached a term of the agreement and, after service of a notice to remedy the breach, had not complied with it. Lord Wilson said at [24]: The breach by a lessee (or a licensee) most obviously capable of remedy is a breach of a positive obligation. Under the agreement Mr Telchadder [the occupier] had, for example, obligations to pay the pitch fee monthly in advance and to keep his mobile home insured and in a sound state of repair. Any breach of these obligations would ordinarily have been capable of remedy - by belatedly paying the fee (together with interest) and by belatedly insuring or repairing the home (together with damages for any loss caused by his delay in doing so). In Expert Clothing Service and Sales Ltd v Hillgate House Ltd [1986] Ch 340, at p 355, Slade LJ, with whom the other members of the Court of Appeal agreed, accepted that the breach of a positive covenant would ordinarily be capable of remedy. Ordinarily… but not always. Slade LJ noted that, for instance, the burning down of the premises during a period of the tenant's failure to insure would be irremediable. So, no doubt, would be their collapse by reason of a failure to repair.
I raised with the parties the question whether this passage suggests that breach of clause 2.3 (which was a positive covenant) should be treated as being rectifiable. Counsel for Inlon submitted that it did not; counsel for Celli submitted that it did.
On reflection, I do not believe such reasoning can be applied to the provisions of clause 2.3 so as to treat Inlon's breach of that clause in the 2014-2015 years as rectifiable. There is no real analogy with an obligation to pay rent. In the case of a rental payment the substance of the obligation is to pay the rental amount for the period in question. A delayed payment can still be seen as having complied with the obligation in substance, albeit late. In the present case, it was of the essence of the obligation under clause 2.3 that the orders be placed during a particular period of time. In fact, Inlon placed substantial orders in 2016 even though, on the construction of the clause I have adopted, it had no minimum purchase obligation for that year. Are these purchases to be taken as rectifying the earlier breach? Or would only purchases made after the Notice of Breach was sent in December 2016 count for this purpose, and if so, why? This type of conundrum shows the problems which would be created by treating a breach of the clause as being capable of being rectified by the placement of some later order.
I conclude that Celli had no right under clause 2.11(a) to terminate the Agreement because of Inlon's breach of clause 2.3. I will, however, consider the further argument put forward by Inlon that Celli was disentitled from acting on any right of termination which did exist.

Election

The breach by Inlon of its minimum order obligation for the 2014-2015 years took place on 31 December 2015. Thereafter, however, the relationship between the parties continued as normal. Inlon continued to place orders for Celli products, which Celli continued to supply.
At common law, where a right of termination of a contract arises on the grounds of breach, the innocent party is put to an election between exercising that right of termination on the one hand or continuing to press for performance on the other. The innocent party cannot accept the benefit of further performance for a period of time and then exercise the right of termination. That right necessarily vanishes once further performance has been accepted. This is so not only for the common law right of termination on breach, but also for a contractual right of termination (at least unless there is an express contractual term to the contrary): Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 655 (Mason J).
Celli argued that this principle did not apply because continuing to receive and fulfil orders did not involve it accepting a continuation of performance. Celli's submission was that, if there was no minimum order obligation for 2016 (as I have concluded), Inlon had no obligation to make any such purchases and the continued placement of orders by Inlon should be seen as a voluntary act rather than performance of the Agreement.
In fact, Inlon placed substantial orders with Celli (amounting to hundreds of thousands of euros) in 2016. The commercial value of such orders from Inlon was recognised by Celli itself. On 29 November 2016, Ms Celli wrote to Mr Capper: Regarding Jim, I have not replied to his last message yet. We have a container being loaded these days and we do not want Jim to cancel the shipment or any orders, so we just let things go on until your meeting on Thursday.
I am far from persuaded that the placement of orders in 2016 should be ignored. In any event, there were legal as well as commercial benefits for Celli in 2016. Under the terms of the Distribution Agreement, it rolled over on 31 December 2015 and continued to apply, both for Celli's benefit and for Inlon's. All the provisions dealing with pricing, retention of title and the like applied to Inlon's 2016 orders. Furthermore, Celli continued to have the benefit of Inlon's obligations with respect to maintaining a dealer network (clause 3.14), maintenance of stock (clause 2.7) etc.
Celli points to clause 3.5 of the Agreement, which provided: (a) A single or partial exercise or waiver of a right relating to this document will not prevent any other exercise of that right or the exercise of any other right.
In Tele2 International Card Company SA v Post Office Ltd [2009] EWCA Civ 9, the Court of Appeal for England and Wales considered the application of an "anti-waiver" clause in a case of election. At [55]-[56] the Court concluded that the clause did not have the effect of overcoming election as a doctrine of law, and questioned whether such a clause could effectually do so. It is not necessary to go into that question in this case. In my opinion, all that clause 3.5 meant was that the waiver by a party of a breach by the other would not prevent a later breach from being relied upon. The clause was concerned to limit the effect of a waiver, not to undo its effect where it operated.
I reject Celli's submissions concerning election. In my opinion, the requirements of the doctrine are satisfied. Even though I have found Inlon breached its minimum order obligations for the 2014-2015 years, I conclude that Celli was disentitled, by 10 January 2017, from relying on that breach to terminate the Agreement.

Celli's readiness and willingness?

Given my last conclusion it is not necessary to deal with this further argument of Inlon. I should indicate, however, that I find it difficult to sustain. Certainly the law is that if Celli were seeking to obtain damages for loss of the contract, or orders against Inlon for the specific performance of the Distribution Agreement, it would be necessary for Celli to show that it was ready, willing and able to comply with its own obligations. But all Celli is seeking to do is terminate the Agreement and escape from the obligations thereunder. Even in a case of common law termination, I am not sure that Celli would be debarred by a lack of readiness and willingness from doing so. But in a case of contractual termination, the Full Federal Court has held that a lack of readiness and willingness, on its own, does not prevent the contractual right of termination from being exercised: Allphones Retail Pty Ltd v Hoy Mobile Pty Ltd (2009) 178 FCR 57 at 69-72 [55]-[76].

2015-2016 minimum purchase obligation

Even if (contrary to my view) there was a minimum order obligation for 2015-2016 which Inlon breached, Inlon was not in breach of that obligation as at 27 December 2016. Inlon could still have complied with the obligation by placing a sufficient order before 31 December to meet the minimum order level. Accordingly, reliance on the Notice of Breach could not assist Celli for the 2015-2016 years.
Celli contended that the effect of clause 2.11(a) was that it was entitled to terminate for breach without notice in the case of a non-rectifiable breach, but I have rejected that construction. It follows that in order to sustain a termination based on a breach of minimum order obligation for 2015-2016, it would have been necessary for Celli to rely on a common law right of termination. However, Celli did not do so. Accordingly, even if, contrary to my view, there was a minimum order level in 2016, Celli's purported termination on 10 January was not justified on that ground.

Privilege claim

In the course of the preparation of the hearing, Inlon issued a subpoena to Farmgard seeking records of its communications with Celli. Legal professional privilege was claimed for a number of documents caught by the subpoena. Inlon disputed the claim for privilege over some of those documents.
The documents in question were records of, or referred to, advice given by Mr Simon Berry, of Hilliard and Berry Solicitors in December 2016. Mr Berry's firm is now acting for Celli in these proceedings, but at the time the advice in question was given, Mr Berry was apparently acting for Farmgard. However, his advice was also shared with Celli. The specific subject of Mr Berry's advice was the application by Inlon to register the Celli trade mark.
I heard argument on the disputed claim for privilege on 20 April and concluded that all the documents were privileged. I indicated at the time that I would give my reasons as part of the judgment. Those reasons now follow.
It was said that the documents were subject to "common interest privilege" and privilege was claimed by both Farmgard and Celli. The term "common interest privilege" is somewhat unfortunate in that it suggests a separate category of privilege, distinct from legal professional privilege. The position is clarified by the following statement of Barrett JA in Marshall v Prescott [2013] NSWCA 152 at [57], which shows that "common interest privilege" is really an exception to circumstances where legal professional privilege would otherwise be waived: If a document in which legal professional privilege subsists is given to someone else so that the content ceases to be confidential, the privilege is usually lost. This is because the act of giving is, in the particular circumstances, inconsistent with any continuing intention to maintain confidentiality [citation omitted]. An exception operates, however, where the person entitled to the privilege and the person to whom the content of the document is made known have such a commonality of interest in relation to the subject matter of the privilege that sharing of the content is consistent, rather than inconsistent, with an ongoing intention to preserve confidentiality and privilege.
In the light of this, it seems to me that the question to be answered is whether the communication of Mr Berry's advice to Celli (an entity for which, at the time, he was not acting) is sufficient to deprive that advice of the privilege that would ordinarily attach to it in the hands of his client, Farmgard.
It was clear from the evidence before the Court for the purpose of determining the privilege issue that at the time Mr Berry gave his advice, Celli and Farmgard were co-operating very closely with each other. Although Mr Berry was retained by Farmgard at the time, Celli appears to have had no one else acting for it (and, of course, soon afterwards Mr Berry began to do so). The subject matter of the advice presumably centred on Celli's right to the mark and the extent to which Celli could resist Inlon's application. It is easy to see why Farmgard had an interest in that question. For practical purposes any rights that Farmgard would have had to resist registration of the trade mark would have depended upon Celli's rights, rather than Farmgard's status as the expectant Australian distributor.
Inlon argued that there was no privilege because the interests of Farmgard and Celli were not the same. It was said that Farmgard might itself have been entitled to apply for the trade mark. Inlon relied on the statement by Giles CJ Comm D (as his Honour then was) in Ampolex Ltd v Perpetual Trustee Co (Canberra) Ltd (1995) 37 NSWLR 405 at 410 that: [T]wo persons interested in a particular question will not have a common interest for the purposes of common interest privilege if their individual interests in the question are selfish and potentially adverse to each other. In such a case there will not be the necessary identity of interest.
What did his Honour mean by referring to the parties' interests being "potentially" adverse to each other? In the Ampolex case, the agreement between the relevant parties which gave rise to the alleged common interest was confidential and the judgment contains only the most general description of it. I think, however, that his Honour was not referring to the mere possibility that at a later point the parties' commercial interests might come into conflict; rather, I think the reference to "potential" adversity of interest was a reference to an adversity of interest which potentially existed at the time, depending upon the advice that might be given. This is consistent with the approach by Katzmann J in Media Ocean Ltd v Optus Mobile Pty Ltd (No 10) [2010] FCA 1348; see in particular at [69]-[70] and [102]-[103]. I also think it is important to bear in mind, consistently with the statement of the Court of Appeal which I have quoted above, that the ultimate question is whether, at the time the communication is made, there is an express or implied obligation of confidentiality. If the parties' interests are adverse in the relevant sense, then it will not be possible to imply an obligation of confidentiality; but in my view the Court should not refuse to imply such an obligation if the circumstances otherwise justify it, merely on account of the potential for some sort of change in the parties' relationship at a later point.
In the present case, I think it is clear that the circumstances were such as to create an implied obligation of confidence. Celli and Farmgard were co-operating closely with each other to try to replace Inlon with Farmgard. They had a common interest in asserting any rights Celli might have had to resist Inlon's registration of the mark. They were virtually sharing Mr Berry as their lawyer. This might later have caused difficulties for Mr Berry in continuing to act if conflicts had arisen between Celli and Farmgard, but it did not deprive his advice to Farmgard in Celli's hands of its confidential character.

Breach of obligation "to co-operate and act reasonably"

It is not uncommon for a distribution agreement to contain provisions which allow the distributor, while the agreement is current, to make use of the supplier's trade marks and other intellectual property. However the Distribution Agreement between Celli and Inlon contains no such provisions. It does not refer to any intellectual property at all. Of course, by 2012 when the current version of the Distribution Agreement was entered into, there was no Celli trade mark registered in Australia.
In contending that Inlon had an implied obligation which required it not to apply to register the Celli trade mark, Celli relied on the Court of Appeal line of authority commencing with Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234. The Court there held that a principal's power under a building contract to take over work under the contract or cancel the contract had to be exercised reasonably and in good faith. Subsequently, in Alcatel Australia Limited v Scarcella (1998) 44 NSWLR 349 the Court said that the decision in Renard Constructions meant that: [I]n New South Wales a duty of good faith, both in performing obligations and exercising rights, may by implication be imposed upon parties as part of a contract.
The line of authority was confirmed by the Court in Burger King Corporation v Hungry Jack's Pty Ltd (2001) 69 NSWLR 558, another case concerning the exercise of contractual powers.
There is no question in the present case of Inlon being required to exercise contractual powers or discretions reasonably or in good faith. In making its application for registration of the Celli trade mark, Inlon was not exercising any contractual power or right; it was exercising a statutory right under the Trade Marks Act.
What Celli must do is establish a restriction on Inlon exercising powers or rights that it had outside the Agreement. I do not think that the cases concerning implied obligations with respect to the exercise of contractual rights or powers assist in this context; rather, Celli must bring its case within the principles dealing with the implication of terms requiring a party to a contract to take action to enable the other party to have, or to refrain from taking action which would deprive the other party of, the benefit of the contract: Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596.
In Secured Income, Mason J, who gave the leading judgment, stated at 607-608: It is easy to imply a duty to co-operate in the doing of acts which are necessary to the performance by the parties or by one of the parties of fundamental obligations under the contract. It is not quite so easy to make the implication when the acts in question are necessary to entitle the other contracting party to a benefit under the contract but are not essential to the performance of that party's obligations and are not fundamental to the contract. Then the question arises whether the contract imposes a duty to co-operate on the first party or whether it leaves him at liberty to decide for himself whether the acts shall be done, even if the consequence of his decision is to disentitle the other party to a benefit. In such a case, the correct interpretation of the contract depends, as it seems to me, not so much on the application of the general rule of construction as on the intention of the parties as manifested by the contract itself.
Secured Income concerned a contract for the purchase of a commercial property. The contract provided for the purchase price to be paid in two tranches. The first tranche was payable on settlement; a second tranche was payable several months after settlement, but the amount of the balance to be paid was liable to be reduced, or even eliminated, if aggregate rents under leases of premises in the building had not reached a specified figure. The contract provided that prior to settlement the purchaser's consent was required for leases by the vendor, but such consent could not be unreasonably withheld. The contract, however, made no provision with respect to the granting of leases after settlement but before the date for payment of the balance of the purchase price, when the purchaser would be the registered proprietor. The High Court accepted that, during that period, there was an implied obligation on the purchaser to do what was reasonable to allow further leases to be granted.
Secured Income is thus an example of one of the "less easy" cases where the exercise of an extra-contractual right (in this case, the right to grant a lease which the purchaser had as registered proprietor after settlement) was subjected to an implied obligation to allow the other party to the contract to achieve a contractual benefit (in this case, avoiding reduction of the purchase price). Even so, the obligation was a limited one. The purchaser was under no obligation itself to try to find tenants, but only to co-operate by granting leases to tenants found by the vendor, and even then the purchaser retained a right to refuse the proposed lease on reasonable grounds.
Secured Income can be contrasted with the decision of the House of Lords in Luxor (Eastbourne) Ltd v Cooper [1941] AC 108. That case concerned an agency contract between the owner of property as principal and a real estate agent. The agency was non-exclusive and commission was payable only on the sale of the property. The House of Lords held that there was no implied obligation on the owner not to dispose of the property itself or through other channels, or otherwise to act so as to prevent the agent from earning his commission. Lord Romer said at 154: If I employ a man for reward to build a house on my land I subject myself to an implied condition that I will do nothing to prevent him carrying out the work. But I am under no implied obligation to help him earn the reward whether by the supply of building materials or otherwise.
In my opinion, a comparison of these decisions shows that in order for a term to be implied requiring one party to take or refrain from extra-contractual acts so as to permit the other party to obtain a benefit under the contract, the contract must give the first party a high degree of control over the earning of the benefit. In Secured Income, the purchaser became the registered proprietor under the terms of the contract and, as registered proprietor, had exclusive control over whether any further leases would be granted. The vendor could only avoid the reduction in the purchase price by obtaining the grant of such leases. In Luxor, on the other hand, the proprietor's ownership of the property pre-dated its contract with the agent, and, the agency being non-exclusive, the agent could not reasonably expect that, even if he found a buyer, a sale to that buyer, and therefore a commission, would necessarily result. The distinction drawn by Lord Romer underlines the fact that, in general, there is no obligation on one party to conduct itself so as to help the other party to obtain benefits available under the contract.
In the present case, the implication of an obligation on Inlon not to apply for the Celli trade mark was not necessary to allow Celli to perform its obligations under the Distribution Agreement. The only substantial obligations of Celli under the Agreement were to supply, in accordance with the terms of the Agreement, products which were ordered by Inlon (clause 2.3); to respond to warranty claims by customers in the manner prescribed in the Agreement (clause 2.22); and to provide after-sales service to the level specified in the Agreement (clause 2.24). The registration of the Celli trade mark would in no way interfere with Celli's ability to comply with these obligations.
Nor do I think that registration of the trade mark by Inlon would interfere with the benefits available to Celli under the Distribution Agreement. All that the Agreement required Inlon to do was to place the specified minimum level of orders (clause 2.3); to sell the products as products of Celli and with appropriate technical information (clause 2.5); to maintain stocks for display, sample and demonstration purposes (clause 2.7); not to distribute non-genuine wearing parts and to keep Celli informed about any illegal trade of non-genuine blades (clause 2.16); and to maintain a sufficient dealer network (clause 3.14). Although in a general sense it was in the interests of both Celli and Inlon for the sales of Celli products in Australia to be expanded, the Agreement contained no obligation on Inlon to achieve this objective. Provided that Inlon achieved the minimum contractual level of orders and complied with its other obligations, it had no further obligation to foster Celli's sales. I do not think that any such obligation arose by implication. The parties were both aware that Inlon acted as distributor for other competing suppliers and the Agreement left Inlon free to do so. The Agreement also expressly provided that Inlon was not Celli's agent and its dealings with customers were as principal (clause 2.6).
In these circumstances, I think the application for the trade mark falls outside Inlon's duty to co-operate with Celli in the performance of the Agreement.
Even if I had taken a wider view, I would not have accepted that the application for the mark necessarily infringed any legitimate interest of Celli. At first sight, Inlon's application to register the trade mark appears troubling. The mark appears to have been designed by Celli and to have been part of Celli's branding for a long period of time. Celli itself applied to register the mark in Australia in 1989; for reasons unexplained in the evidence, that application was allowed to lapse in 1992. However, it is clear enough that Celli has been manufacturing products under the mark and supplying such products to the Australian market for decades.
The Trade Marks Act, s 27(1), requires that an application for the registration of a trade mark be made by a person claiming to be the "owner" of the mark. Inlon has only ever distributed products manufactured and branded by Celli, and it might be thought that in the circumstances the owner of the mark would be Celli, not Inlon.
However matters are not so simple. Although being the originator of the mark is relevant to ownership, it is not decisive; there are cases in which a party has adopted a foreign mark and used it in Australia despite not being the originator of the mark, and has been held to be proprietor: Intellectual Property in Australia (4th ed, 2010) at [19.18]-[19.20]. On the other hand, the High Court has held, in the context of applications to remove trade marks from the register for non-use, that where the mark is placed on goods overseas and the goods are then imported and distributed, the use in Australia is by the overseas manufacturer, not the importer: Estex Clothing Manufacturers Pty Ltd v Ellis & Goldstein Ltd (1967) 116 CLR 254 at 271. It is not clear whether there is any conflict between these approaches and, if so, how such conflict is to be reconciled. However, at the time the 2002 Distribution Agreement was entered into, the registered proprietor of the mark in Australia was not Celli but CAPL. The fact the mark was registered in the name of a separate Australian company which was apparently concerned only with importing the products does suggest the possibility that the owner of the mark in Australia is the importer, not the manufacturer.
In making these observations I am not of course attempting to make any prediction about how the proceedings for registration, if they are pursued, will end up. All I am saying is that, on the evidence before the Court, Inlon's application to register the mark is not necessarily an attempt to take something to which it has no colour of a claim.
In these circumstances, I do not think that registration of the mark by Inlon would necessarily be illegitimate. In a case where goods are manufactured overseas and imported into Australia by an exclusive distributor, the registration of the mark by the distributor is not necessarily inconsistent with the interests of the supplier. In such a case, the distributor can use the mark to prevent infringing products being distributed in Australia, which is in the interests both of the supplier and the distributor. Of course this does not mean that it would be legitimate for Inlon to use the mark so as to appropriate to itself the Celli brand in Australia; but the mere application for the mark, in my opinion, is not such a step and is not of itself contrary to Celli's legitimate interests. Indeed, on this wider view, questions might arise as to whether Celli would be acting contrary to Inlon's legitimate interests by seeking to block it from registering the mark in order to keep out infringing products.
I conclude that Inlon's conduct in applying to register the mark was not of itself a breach of Inlon's obligations under the Distribution Agreement.

Termination for breach

Professor Carter in Contract Law in Australia (6th ed, 2013) suggested at [30-21] that the circumstances must be rare before a court would conclude that a term which was included in a contract as a matter of implication was a condition, in the sense that the slightest breach of that term would give rise to a right of termination. Celli did not refer me to any case in which an implied obligation of co-operation or reasonableness has been treated as a condition in this sense. It seems to me that usually, if not invariably, for the purposes of termination such an implied obligation will be an intermediate one, so that there will be no right to terminate unless the particular breach is sufficiently serious so as to go to the root of the contract.
If lodging the application were, contrary to my view, a breach of Inlon's obligations, then I do not think it has been established that the breach would be sufficiently serious to justify termination. I suppose that if the lodgement of the application was a breach of contract then Celli's costs in opposing the application might be recoverable by way of damages, but Celli led no evidence as to the quantum of those costs nor did it seek to identify any other category of loss which followed from the breach. Nor am I satisfied that the making of the application, if it was a breach of contract, was in some way a repudiation by Inlon of its obligations under the Distribution Agreement. The timing of the application, and the fact that Inlon gave no prior notice of it to Celli, naturally raised Celli's suspicions. However, although Celli was aware of the application before issuing its Notice of Breach of 27 December 2016, it did not in that Notice, or otherwise, challenge Inlon about the application or inquire what Inlon's purpose was. In those circumstances, I do not think that Celli has established that Inlon's action in applying for the mark, even if it was a breach of its obligations, manifested an intention on Inlon's part not to abide by the terms of the Agreement: see DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423.
Accordingly, I conclude that even if the making of the application was a breach of contract, it cannot be used to sustain Celli's letter of termination on 10 January 2017.

Position of Farmgard

At the interlocutory hearing before White J, Celli appears to have placed significant reliance, in opposing the grant of any interlocutory relief, on the effect that such relief would have on Farmgard as a third party. However, the evidence in the hearing before me showed that in the period leading up to 10 January, Farmgard was well aware that Inlon had contractual rights to distribute Celli's products which would have to be terminated before Farmgard could be sure of any entitlement to distribute those products itself. In an email from Mr Capper to Ms Celli of 6 September 2016, Mr Capper posed a series of questions which included: 3/ Does Inlon have a contractual agreement with Celli regarding the distribution rights in Australia? 4/ If yes, is there a time factor involved?
There was no evidence of any direct response to those questions, but the fact that they were asked clearly confirms (as one would expect in any event) that Farmgard appreciated that Inlon might have contractual rights of distributorship and that those rights might not be immediately terminable. The knowledge that this was so did not dissuade Farmgard from moving to establish its competing business in Australia. In particular, Farmgard leased warehouse premises in Melbourne, hired staff and took other steps in order to have its warehousing operations working. The evidence refers to "numerous hours of strategy and planning meetings" having been conducted between Farmgard and Celli up to 2 November 2016. From 2 November, Farmgard and Celli continued to work very closely together; Celli shared with Farmgard the communications that it was having with Inlon and Farmgard even assisted in drafting Celli's correspondence to Inlon. Farmgard also lodged its initial order for Celli machinery on 30 November and on the same date confirmed an agreement to act as exclusive distributor from February.
The close co-operation between Farmgard and Celli continued after Mr Berry became involved in early December. On 6 December, Ms Celli sent Mr Capper, Mr Dalziel and others an email attaching a copy of the Distribution Agreement. This was in response to a request from Farmgard. On 7 December, Mr Capper emailed Ms Celli: We have taken a lot of legal advice here with a very good lawyer in the middle of Sydney [Mr Berry] … and it all seems quite safe and they basically think Jim is crazy (in my words) Just to be 100% sure they have asked us to forward all correspondence passing between you and Jim relating to the termination of the contract so we can have an understanding as to the basis for the termination. - are you able to send me this?
On 19 December, Ms Celli emailed Mr Capper and Mr Dalziel: Following our phone conversation today, I would like to confirm you that you [sic] will have all our support and together we will win!! In my opinion Jim has no idea of what he is doing. At the Eima Show he told us he would not take any legal action as this would be a waste of money and energy. We are processing your orders as promised and containers are leaving next week.
On the same day, Mr Landi emailed Mr Dalziel a draft letter from Celli to Inlon purporting to terminate the Distribution Agreement pursuant to clause 2.11(a). Mr Landi invited Mr Dalziel to refer the draft for legal advice. A comparison with the Notice of Breach as ultimately issued shows that it was substantially rewritten, presumably by Farmgard executives, or Mr Berry, or both. Celli provided a copy of the Notice to Farmgard as soon as it was sent.
In these circumstances, Farmgard was not a third party in the relevant sense. Farmgard was actively working with Celli to seek to defeat Inlon's rights and cannot complain about losses which it may suffer if those attempts prove to be unsuccessful. Ultimately, in its Amended Defence, filed in the course of the hearing, Celli only sought to rely on prejudice to Farmgard after 10 January 2017, and counsel for Celli conceded in argument that no point could be taken about prejudice that had accrued prior to this date. I will deal with any prejudice to Farmgard after 10 January as part of the more general question of delay, to which I now turn.

Delay

The delay in question is that between the sending of the letter of termination on 10 January 2017 and the commencement of proceedings on 8 March. Failure to commence proceedings as quickly as possible is relevant to the grant of interlocutory relief, but I do not understand that mere delay in the assertion of rights is an answer to final relief; what is required is delay coupled with prejudice.
On 12 January, two days after the letter of termination, Aubrey Brown wrote to Celli disputing the validity of the termination and purporting to affirm the Agreement. Ms Celli passed that email to Mr Capper asking for Mr Berry's assistance. On the same day, Mr Capper responded indicating that he had passed the letter on to Mr Berry and that "[w]e personally don't think we should take too much notice of Jim's disruption and delaying tactics and we are committed to the plan". On 18 January, Mr Dalziel wrote to Mr Landi telling him of the work which was being undertaken to organise the Melbourne warehouse. He added "don't worry about Jim, it is all just disruption tactics which we do not buy into".
On 19 January, Celli responded to Aubrey Brown's letter setting out Celli's assertions about the levels of annual budgets and its calculations of the quantum of orders placed by Inlon. On 31 January, Celli sent a further letter to Inlon demanding that product inquiries be directed to Celli and also that references to Celli products and the Celli logo be removed from the Inlon website.
On 14 February, Mr Landi sent an email to Mr Capper and Mr Dalziel which stated: Stefania has already sent an inquiry to Jim about the termination of the agreement. In our opinion the several spare parts request we have received from INLON are too numerous. The purpose of Jim demonstrated by his silence (he doesn't seem to be responding to any of our messages…) and his actions is to distract CELLLI TEAM. Above all, he wish to demonstrate to the CELLI's dealers what problems they will face in case with the new distribution [sic].
Mr Capper's response was: I truly believe that Jim is working on a "bad" scenario. We have a short space where there may be some light confusion in the market, of only a few weeks, but when Farmgard releases the true story and comes on board with correct spare parts, and 110% service, this "bad" story will strengthen the good story, re-strengthen Celli's place in the market and the successes that we will build on going ahead from there. This is only a few weeks away, when we make our announcement public and we will have a fully staffed warehouse, new building racking and full distribution operating within Australia We have analysed the orders you have already sent us and believe that Jim is attempting to; - 1. Make null-in void [sic] your legal and totally justified termination 2. Delay everybody 3. Confuse everybody 4. Build up his stocks of parts to carry on business for as long as he can to confuse and deceive the market and not comply with the new arrangement If you ae [sic] concerned about supplying dealers or a bad story being put out by Jim in the short space of the next few weeks until we announce, we have all the email addresses of all the dealers in Australia in Australia [sic] on a database (including all Jim's dealers) and we could (if you wish) prepare an email for you to send to all of these dealers, - 1. clarifying the situation 2. reassuring the dealers 3. telling them that there will be a new distributor announced shortly 4. advising that if they have any immediate requirements (especially overnight parts needs or requirements) please advise and you will facilitate delivery for them - you could even give them shared email address (with us) that you could send them, so we could action immediately as we are two hours ahead of Australia and we can deliver parts from here overnight to Australia
Mr Landi responded: I think that your proposal to prepare an e-mail for the CELLI's dealers is a really good idea, but first, we should really get some legal advice to Simon [Berry] and we would not want to waste the element of surprise.
There is no further evidence as to whether this plan was put into effect, but clearly Farmgard and Celli saw themselves as engaged in a continuing commercial struggle with Inlon for control of the Australian market for distribution of Celli's goods.
In the period up to 19 January, the parties were in correspondence with each other concerning the validity of the termination. Inlon had made it clear that it considered the conduct of Celli to be unlawful. Whilst there was no further communication from Inlon after that date, it is clear from the evidence I have recounted that in the circumstances neither Celli nor Farmgard interpreted Inlon's silence as some form of acquiescence or even disinterest. Nor in the circumstances could they reasonably have done so.
There is no evidence of any steps taken by Celli or Farmgard after 19 January which could be relied upon as some form of detriment. Certainly the product has been delivered and Farmgard has paid for the invoices, but this is only a consequence of commitments made prior to 10 January. So far as the evidence goes, all of the crucial steps in establishing Farmgard's Australian business were in fact taken prior to 10 January.
Furthermore, given the dismissive attitude taken by Farmgard and Celli to Inlon's protests, I would not be prepared to accept that if Inlon had acted differently it would have made any difference to them. The simple fact is that they had decided to go ahead with new distribution arrangements in spite of any rights Inlon might have had, and their conduct after 10 January was nothing more than the continuation of a plan to which they had committed themselves long before.
I conclude that any delay on the part of Inlon between 10 January (or, more realistically, 19 January) and 8 March is not a reason to refuse equitable relief.

Adequacy of damages

In its pleadings, Celli contended that equitable relief should be refused for an additional reason, namely that damages are an adequate remedy. In response, Inlon contended (at least formally) that the adequacy of damages was irrelevant because what was sought was enforcement of a negative contractual stipulation. Inlon relied on the well-known statement to that effect by Lord Cairns LC in Doherty v Allman (1878) 3 App Cas 709 at 719-720.
As is well known, the absolutism of Lord Cairns' statement has been repeatedly questioned. In fact, the doubts go back to Doherty v Allman itself; Lord Blackburn, who concurred with the result, expressly contemplated that there could be some circumstances in which a negative covenant would not be enforced (see his Lordship's discussion at 730 of Duke of Bedford v Trustees of the British Museum).
Counsel for Celli relied generally on this subsequent authority. Counsel's ultimate submission was that in the case of a negative covenant, the adequacy of damages is a relevant question, but perhaps not a particularly weighty one.
I have some difficulty in understanding the "compromise" position put forward by counsel for Celli. Equity is an appendix to the common law; if common law rights are adequate, there should be simply no rationale for equity's intervention and no discretion for equity to exercise. There seems no logical room for an approach which would treat the adequacy of damages as a relevant factor, but not decisive.
On the facts of this case I do not need to take this debate further. In Sanderson Motors (Sales) Pty Ltd v Yorkstar Motors Pty Ltd [1983] 1 NSWLR 513, Yeldham J held that an injunction should be granted to restrain the wrongful termination of a dealership agreement, on the basis that damages were not an adequate remedy, and I consider it appropriate to follow that approach.
In Sanderson Motors, Yeldham J did not spell out his reasons for concluding that damages were inadequate. I think that such a conclusion may be supported on at least two bases. First, the assessment of damages in the present case is quite unlike the task of assessing damages in a case involving the sale of goods where damages can readily be assessed on the open market. The assessment of damages here would be anything but simple.
I recognise that Inlon is claiming damages for the period up to the grant of final relief and an assessment of the type I have mentioned will need to be carried out for that period in any event; but that is the result of conduct by Celli which I have found to have been wrongful and I see no reason why the Court should use that as a reason to require the uncertain exercise of determining damages to be any more extensive than it needs to be.
Indeed, the very fact that Inlon would be required to bring another action for breach, this time covering the balance of the term, is a good, and perhaps a more fundamental, reason to grant relief: see Doherty v Allman at 720.
Counsel for Celli also referred me to the decision of Sugerman J (as his Honour then was) in Atlas Steels (Australia) Pty Ltd v Atlas Steels Ltd (1948) 49 SR (NSW) 157, in which his Honour refused an application for an injunction to restrain the breach of an exclusive distributorship and agency agreement. However, as counsel acknowledged, the decision has been criticised by the learned authors of Meagher, Gummow and Lehane's Equity Doctrines and Remedies (5th ed, 2015) at [21-220]. It has subsequently been explained on the basis that equity will not enforce by injunction a negative stipulation which would have the effect of compelling the parties to continue a contract for the supply of personal services, of which performance in specie would not be granted under the rule in Lumley v Wagner: Kurt Keller Pty Ltd v BMW Australia Ltd [1984] 1 NSWLR 353 at 371E-372C (Powell J). However, Celli did not rely upon that principle in this case.
I conclude that damages would be an inadequate remedy and, accordingly, there is no obstacle to the grant of injunctive relief under this head.

Inlon's application for the Celli trade mark

Celli argued that, even if Inlon's conduct in applying for the trade mark was not a breach of its contractual obligations, it should still lead the Court in its discretion to refuse relief. Initially, this was put in terms of "unclean hands" but in final submissions counsel suggested that it was a matter of protecting the legitimate interests of Celli, and perhaps other parties.
I have already explained why I consider that the application for registration was a legitimate step for Inlon to take so as to put it in a position to take action against any unauthorised supply of products into the Australian market. To the extent that Inlon has exclusive rights, "unauthorised" incursions include Farmgard as well as Celli itself. However, the position would be quite different were Inlon to seek to use the mark to frustrate Celli as manufacturer from selling its products into the market once Inlon's rights have expired. The same would be so were Inlon to seek to use the mark to interfere with Farmgard's sale of Celli products in the market once Inlon has ceased to have distribution rights over the market.
I raised this issue with counsel for Inlon. Inlon has now offered the following undertakings: 1. If the defendant's opposition [to Inlon's application] is successful, the plaintiff undertakes not to appeal from the determination of the delegate of the Registrar of Trade Marks. 2. If the plaintiff's trade mark application is successful, the plaintiff undertakes: a. not to enforce against the defendant any rights accrued by the plaintiff in respect of the CELLI & device mark up to the date of its registration; b. to licence the CELLI & device mark to the defendant, or a third party entity nominated by it, at a fee and upon such terms as are agreed between the parties, or failing agreement as determined by an independent arbitrator appointed by the President of the New South Wales Law Society; c. the term of the licence referred to in [b] will be for such period as the defendant requires to enable it to continue marketing its machines, accessories and spare parts in Australia by itself, or a third party entity nominated by it; d. the arbitrator appointed by the President of the New South Wales Law Society shall have the discretion to impose such terms upon the parties as are usual in a licence agreement of this nature.
I do not think that these undertakings are satisfactory in their current form. The undertakings are structured on the assumption that Inlon would remain the owner of the mark, even after the expiry of the Distribution Agreement. Inlon has asserted that it purchased the "goodwill" of CAPL's business for a substantial sum of money. According to Inlon, the consideration for the goodwill was built into payments which Inlon made for CAPL's stock. Celli disputes that these payments should be characterised as a payment for goodwill. It is not necessary to resolve this dispute for present purposes.
In these proceedings the evidence does not allow me to establish whether Inlon is the owner of the mark at all, let alone whether it should be entitled to maintain rights of ownership once it ceases to be a distributor of the product. I do not think that I should accept undertakings which presuppose that Inlon has any such rights. Indeed I do not see how I can properly accept undertakings which would require any continuing consensual relationship between Celli and Inlon; what would happen, for instance, if Celli refused to take up a licence on the terms offered?
I have concluded that Inlon has made out its case for a negative injunction, subject only to the concern which I have raised about the possibility of Inlon obtaining registration of the mark and then using it for purposes other than to keep infringing products out of the Australian market. Of course, for this purpose I would regard infringing products as including products sold by Celli to Farmgard in breach of Celli's obligations under clause 2.1.
Accordingly, I remain prepared to grant injunctive relief as sought by Inlon if Inlon will undertake to restrict its use of the mark, should its application be successful, to that purpose.

Conclusion and orders

I have concluded that Celli's purported termination of the Distribution Agreement was invalid and ineffective. The Distribution Agreement remains on foot and will continue to remain on foot until it expires on 10 September 2017, unless lawfully terminated prior to that date.
It follows that Celli's conduct in repudiating Inlon's exclusive rights, both before and after the 10 January letter of termination, was a breach of Celli's obligations under the Distribution Agreement. On the evidence before me, Celli's repudiatory conduct commenced when it advised Inlon of the purported reassignment of the Distribution Agreement to Farmgard at Eima on or about 11 November 2016.
It also follows that Celli's conduct in accepting orders for Celli products from Farmgard was a breach of Celli's obligations under the Distribution Agreement.
I will make declarations reflecting those conclusions and direct an enquiry for the assessment of damages which Inlon has suffered consequent upon those breaches.
If an undertaking to the effect set out above is proffered by Inlon, I will grant an injunction restraining Celli from supplying its products to any person other than Inlon for the remaining duration of the Distribution Agreement.
My preliminary view is that Inlon has been substantially successful in the proceedings and that costs should follow the event. I will however hear the parties should they wish to contend that some other order would be appropriate.
I direct that the parties confer and bring in short minutes of order to give effect to these reasons.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 11 May 2017

At a glance

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Judgment (23 paragraphs)

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