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[2017] QSC 72
General information, not legal advice.
Supreme Court of Queensland
2017-05-08
Daubney J
Original judgment source is linked above.
[1] The 316 plaintiffs are farmers who grew sugar cane in the Burdekin region of Queensland during the period known as the "2010 Season" (the period between 1 December 2009 and July 2011).
[2] The plaintiffs, and other growers who are not parties to this proceeding, sold sugar cane to the defendant, which was and is a sugar miller. The defendant processed the sugar cane supplied by the plaintiffs, and the other growers, and produced raw sugar.
[3] Some of the raw sugar produced by the defendant from cane supplied by the plaintiffs was bound for export. Queensland Sugar Ltd ("QSL") was in the 2010 Season the sole export marketer of sugar produced in Queensland. During the 2010 Season, the defendant's obligation to supply sugar to QSL for export, and its entitlement to be paid, was governed by a Raw Sugar Supply Agreement ("RSSA"). Each of the other millers in Queensland had similar agreements with QSL.
[4] In undertaking its function of marketing and selling Queensland sugar in the international market, QSL entered into a range of futures contracts for the sale of raw sugar. It entered into those futures contracts on the basis of forward estimates of the amount of sugar which it was anticipated would be available for export during a particular season.
[5] In simple terms, as will be explained in more detail below, the export structure was such that net profits derived by QSL from the export of Queensland sugar would be passed back to the millers, and an agreed portion of those net profits would then, in turn, be funnelled back to the growers by the millers.
[6] Heavy and widespread rains during the 2010 Season wreaked havoc on the sugar industry in Queensland. It was described in evidence before me as a "horrible season" and "one of the wettest harvest seasons" ever seen in the Queensland sugar industry.[1] The wet conditions meant that machinery could not go into the fields to harvest cane. Much less cane than anticipated was supplied by growers to millers, including the defendant, and consequently much less sugar was available to be supplied to QSL for export than had been anticipated. QSL then found itself in the position of not having the sugar to fulfil the futures contracts it had entered into. To extricate itself, QSL had to "close out" a number of the futures contracts it had entered into, i.e. it effectively had to buy its way out of those contracts. To fulfil the futures contracts which it could not close out, QSL had to purchase sugar from other countries to meet its supply commitments. All up, the net cost to QSL of exiting these futures contracts and otherwise purchasing sugar to fulfil its commitments was some $105.5 million. This was described by the plaintiffs as the "QSL Trading Losses".
[7] Each plaintiff's entitlement to be paid for the cane supplied to the defendant in the 2010 Season was regulated by the terms of a Cane Supply Agreement ("CSA") with the defendant. All of the CSA's were in materially identical terms.
[8] When the scale of these costs became apparent, QSL and the Queensland millers (including the defendant) reached agreement as to the way in which these costs would be apportioned between the millers under the RSSAs. The amount apportioned to the defendant was some $60.9 million. Using the industry standard metric of "tonnes of IPS sugar"[2], based on the total tonnes of IPS sugar supplied by the defendant to QSL, the $60.9 million equated to $47.69 per tonne IPS sugar.
[9] The defendant then effectively passed some two thirds of that $60.9 million on to its growers, including the plaintiffs. The defendant adjusted the final values of each of the "pools" in which the plaintiffs participated down by $42.50 per tonne IPS sugar (that being the $47.69 figure less a rebate of $5.19 volunteered by the defendant). The practical outcome was each of the plaintiffs thereby received less under its CSA for the 2010 Season than would have been the case if the defendant had not made this downwards adjustment.
[10] In this proceeding, each plaintiff contends that the defendant's conduct in applying this downwards adjustment was:
- (a) In breach of the express terms of the CSA;
- (b) In breach of implied terms in the CSA;
- (c) Unconscionable conduct, in contravention of the Competition and Consumer Act 2010 (Cth) ("CCA") or the Trade Practices Act 1974 (Cth) ("TPA").
[11] QSL is a company limited by guarantee. It is an "industry owned" corporation. During the 2010 Season, it had 35 members representing the sugar industry[3]:
- - 10 mill owner members;
- - 25 grower representatives, comprising 23 members elected to represent the 23 sugar growing regions in Queensland and one representative from each of the Australian Cane Farmers Association Limited and the Queensland Cane Growers Organisation Limited.
[12] QSL's constitution provided that its principal object was to promote the development of the sugar industry and nominated other objects, including enhancement of the efficiency and competitiveness of the Queensland sugar industry, providing timely and relevant sugar market information to growers and mill owners, and marketing raw sugar in the best interests of growers and mill owners.
[13] QSL's charter, as set out in the schedule to its constitution, prescribed that QSL "will seek to maximise the net return in dollars per tonne of sugar to milling companies supplying it with sugar for export, and through such milling companies to their growers".
[14] The relevant RSSA between QSL and the defendant was in evidence before me, and its terms were not in issue. The recitals to the RSSA recorded, amongst other things, that:
"(f) Queensland Sugar will manage the export of raw sugar under a pooling arrangement where sales revenues, and the associated costs and risks, are allocated on a shared basis between all Participants which have entered Supply Contracts ..."
[15] Those "Participants" were, in effect, all of the sugar millers in Queensland.
[16] By cl 6.1 of the RSSA, the defendant agreed to supply to QSL "100% of its production ... intended for bulk export". Clauses 12 and 13 provided as follows:
12.1 The Supplier's production supplied under this Agreement will be allocated to Pools for the purposes of pricing in accordance with Schedule 2.
13.1 Queensland Sugar will determine a scheme for advance payments under this Agreement, which will be communicated in the format set out in Report 2 in Schedule 3. Queensland Sugar will review the advance payments schedule each month.
13.2 The initial advance rate will not exceed 60% of Queensland Sugar's weighted average forecast final price of all pools at the time of setting the initial advance rate.
13.3 The final payment for each Season will be made within 30 days of the completion of that Season."
"22.1 The parties intend that Queensland Sugar is to make no profit or loss in performing its obligations under this Agreement or the other Supply Contracts. To achieve that intention this Agreement enables Queensland Sugar to pass on to all Participants all costs and revenues of any nature that it incurs or receives in performing its obligations under the Supply Contracts, including overhead and administrative costs."
[18] Schedule 2 to the RSSA, headed "Pooling and Payment for Sugar Supplied", commenced with the following informative description:
The Supplier's Tonnes Actual sugar supplied under this Agreement will be allocated sequentially to a number of Pools as described in this Schedule 2 and in the order set out in this Schedule 2.
Tonnes Actual for each Pool is converted to Tonnes IPS by multiplying each Pool Participant's Tonnes Actual by its IPS Conversion Factor.
The returns from the sale of sugar and costs of those sales are allocated to Pools and converted to AUD according to the price risk management policy applying to each Pool. The IPS per tonne price of each Pool will be the AUD returns from the Pool divided by the total Tonnes IPS sugar in the Pool. Each Pool price is then adjusted by a relevant Allocation from the Share Pool to give the net IPS price.
The total payment to the Supplier for sugar supplied (excluding brand and quality payments) will be the sum of the Tonnes IPS sugar the Supplier has allocated to each Pool multiplied by the net IPS price for each pool."
[19] The next part of Schedule 2 contained provisions concerning the various pools, commencing with a notation that the first three pools (US Quota, EU Quota and LTC) were classified as "non ICE 11 pools". These, clearly enough, were pools not governed by the so-called "ICE 11" contract, which was defined earlier in the RSSA to mean "a sugar futures contract (known as a World Sugar No 11) offered for sale or purchase by ICE". "ICE" is the futures trading entity formerly known as the New York Board of Trade.
[20] The non ICE 11 pools were:
- - The US Quota pool, the total tonnage of which was "sales made by [QSL] during the Season under Australia's raw sugar import quota to the United States" (cl 2.1);
- - EU Quota pool, the total tonnage of which was "sales made by [QSL] during the Season under Australia's raw sugar import quota to the European Union" (cl 2.2), and
- - LTC pools, being long term contracts with price protection that did not require hedging on the ICE 11 market (cl 2.3).
[21] Next were "ICE 11 pools" (cl 2.4), which were of two types, namely Pricing Platform Pools and Queensland Seasonal Pools.
[22] In relation to Pricing Platform Pools, cl 2.4.1.1 provided:
The Pricing Platform is a mechanism to provide a simple framework within which Pool Participants can manage a significant portion of their sugar price risk.
The Pricing Platform will consist of a number of Pools which are managed by a Risk Manager whose basic responsibility is to price the ICE 11 price component and the AUD USD exposure represented by that ICE 11 price component committed to the Pool. The Risk manager will be either Queensland Sugar, the Supplier or with the approval of both Queensland Sugar and the Supplier, an external Risk Manager.
Currently the costs and benefits of variations from the Pricing Platform 1:2:2:1 fixed pricing month allocations are for the account of the Seasonal Pool. Should the total tonnage allocated by all Participants to the Pricing Platform pools at the Pricing Declaration Date be greater than 50% of the total tonnage allocated to all ICE 11 pools, Queensland Sugar and Participants will determine whether it would be fairer to distribute these costs and benefits to the Shared Pool.
In the interim, to mitigate any conflict in marketing strategy between Seasonal Pool and Pricing Platform pool tonnages, in the event that the total long futures position generated from Queensland Sugar sales is less than the total short futures position arising from all Pricing Platform pools for any pricing month, the identifiable cost or benefit in remedying this situation will be distributed equally, based on tonnage, to the Pricing Platform pools."
[23] There then followed provisions relating to the setting up and administration of Pricing Platform Pools. Those included placing limits on the amount of sugar which a supplier (i.e. a miller) could commit to a Pricing Platform, and also the consequences of a supplier failing to supply committed amounts of sugar:
"Queensland Sugar will develop a procedure for determining the financial effect of a failure to supply Committed Sugar in consultation with the Participants. This procedure will be developed by 30 November 2008. The financial effect will be for the Supplier's account. The procedure to be developed will seek to ensure that Queensland Sugar is placed in a financial position that is no better or worse than the one that would have applied if the failure to supply Committed Sugar had not occurred."
[24] The Queensland Seasonal Pool was described in cl 2.6 of Schedule 2 as follows:
The total tonnage of sugar allocated to this Pool will be the total of all Participants sugar less the total of all Participants sugar allocated to all other Pools.
The Supplier's tonnage allocated to this Pool will be the Supplier's total tonnage less the total of the Supplier's sugar allocated to all other Pools.
The Supplier's Tonnes IPS sugar allocated to this Pool will be the Supplier's total Tonnes IPS sugar less Tonnes IPS sugar allocated to all other Pools."
[25] The "Queensland Seasonal Pool Price" was relevantly specified to be calculated as follows:
"The Queensland Seasonal Pool will be allocated with the balance of returns of all ICE 11 sales not allocated to other Pricing Platform Pools. The futures gain or loss will be based on the residual ICE 11 exposure which is Queensland Sugar's bought futures from all ICE 11 sales less the exposure managed by Platform Pricing Pools. Seasonal Pool pricing will not commenced until the day after the Pricing Declaration Date."
[26] The last pool provided for under Schedule 2 was the "Shared Pool". Clause 2.7 provided:
To provide for greater transparency in pricing outcomes Queensland Sugar will operate a Shared Pool each Season. The items allocated to this Pool will include but will not be limited to:
[27] The mode of allocation of the shared pool was then described:
The total value of the Shared Pool will be apportioned to each Non ICE 11 Pool and each ICE 11 Pool by the following procedure:
Pool A's Interest and Finance Cost = Total net Interest and Finance Cost x Pool A's average
daily AUD equivalent cash balance_______________
Total of all Pools average daily AUD equivalent cash
The price of each Allocation from the Share Pool in AUD/tonne of IPS sugar will be determined by dividing the net apportionment to each Pool as described above by the total Tonnes IPS sugar in each Pool. This calculation will be shown as an adjustment to the relevant Pool price in the Whole of Season Forecast Report to give the net IPS price of each Pool for payment purposes."
[28] Each of the plaintiffs had a CSA with the defendant for the 2010 season, and all of the CSA's were in materially identical terms.[4] The Background to the CSA included:
"A The Grower wishes to supply Cane to Sucrogen and Sucrogen wishes to purchase that Cane on the terms and conditions set out in this Agreement.
[29] By cl 4.1 of the CSA, each plaintiff's obligations under the CSA (in general terms) were:
- (a) to grow cane for supply to the defendant on a prescribed minimum area of the plaintiff's cane farm;
- (b) to supply that cane to the "Delivery Point" (i.e. the specified cane railway siding for the defendant);
- (c) to grow only certain varieties of cane; and
- (d) to utilise sustainable agronomic practices.
[30] For its part, the defendant agreed to accept all cane delivered to the Delivery Point (cl 6.1), subject to a right to refuse to accept cane which was not fit for the manufacture of raw sugar of acceptable quality. Risk in the cane passed immediately to the defendant upon delivery (cl 6.3).
[31] Payment for the cane was governed by cl 7 and Schedule 5 to the CSA. Clause 7 contained the following provisions:
(a) This clause 7 operates to provide the Grower with regular payments for Cane supplied to Sucrogen and will be read in conjunction with the CCS relativity scheme in Schedule 5. The Grower will also be entitled to adjustment payments provided at various times based on sugar advances received by Sucrogen.
(b) The Parties acknowledge that where the Grower has elected to enter into a Forward Price Agreement in relation to a proportion of the Grower's Cane to be supplied under this Agreement, the amount of Cane to be subject to forward pricing mechanisms and the terms of that arrangement and its impact on payments due to the Grower are specified in the Forward Price Agreement between the Grower and Sucrogen.
(c) In respect of the quantity of Cane that is subject to the Forward Price Agreement, the Forward Price Agreement shall prevail to the extent of any inconsistency between the payment provisions of the Forward Price Agreement and this Agreement.
(a) The Grower will be entitled to receive payments for Cane on the basis of and in accordance with the provisions of Schedule 5.
Sucrogen shall pay the Grower on a weekly basis for Cane delivered for each weekly period based on Cane harvested in the calendar week from Sunday to Saturday inclusive. Payment to the Grower is to be made available for release via EFT within 1 Business Day of receipt by Sucrogen of proceeds from QSL for sugar produced from the relevant week's Cane Deliveries.
Should a payment entitlement to the Grower arise as provided for under Schedule 5 from the determination of the weighted seasonal average CCS of Collective Cane for the appropriate relative payment scheme, then this payment shall be made available for release via EFT within 10 Business Days after the Crushing Season has ceased.
(c) Payment Following Increases in Sugar Value Advances
When a sugar value increase is paid by QSL to Sucrogen at any time, the adjustment Cane payment is to be made available for release via EFT within 1 Business Day of receipt by Sucrogen of such sugar proceeds. This clause 7.6(c) will not apply to final payments. Final payments will be governed by clause 7.6(d).
When the final Seasonal Pool Value, US Quota Value, EU Quota Value and Long Term Contract Value payments are made by QSL to Sucrogen for the Relevant Season's sugar the adjustment Cane payment shall be made available for release via EFT within 2 Business Days of receipt by Sucrogen of the final sugar proceeds.
(a) In addition to the payments based on Cane supplied, the Grower is also eligible for and shall receive payment of, the allowances referred to in Schedule 5.
(b) Schedule 5 sets out deductions, if any, which may be made by Sucrogen from payments otherwise due to the Grower. The Grower agrees that such deductions may be made from payments otherwise due to the Grower under this Agreement and the Forward Price Agreement.
Where the Grower has been inadvertently overpaid, Sucrogen may make the appropriate adjustment to subsequent payments, or take other action for the recovery of sums overpaid as considered necessary. Where the overpayment was not a result of an error on Sucrogen's part, the Grower may be charged interest at the bank rate specified in clause 7.9 for the period of delay on the amount of any payments not made to Sucrogen within 3 Business Days of receipt by the Grower of a written request from Sucrogen for payment of the overpaid amount."
[32] Schedule 5 was headed "Cane Payment". It commenced by providing that it was for the defendant to determine, in respect of each delivery of cane by a plaintiff, the tonnes of cane delivered and the "CCS (Relative)" for that cane. It very general terms, CCS (commercial cane sugar) is a factor representing the anticipated commercial yield from particular cane. The yield from sugar cane is affected by a number of matters, including the location in which particular cane is grown - in this case, either the North or South Bank of the Burdekin River. It is not necessary for present purposes to descend into further detail. Suffice it to say that Schedule 5 contained quite extensive provisions to enable the calculation of what was described as the particular grower's "CCS (Relative)", i.e. the CCS factor relevant to that particular grower for that particular cane.
[33] Clauses 5, 6 and 7 of Schedule 5 set out the means of calculating the amounts to be paid to a plaintiff for cane delivered to the defendant.
[34] Clause 5 provided:
(a) Each Grower will be entitled to receive payment for each Delivery of Cane which has been accepted by Sucrogen according to the value derived by the following formula separately for each of the relativity schemes:
Sugar Value = the value applicable to the Cane tonnage as determined initially under clause 6, then under clause 7 of this Schedule 5."
[35] Clauses 6 and 7 then differentiated between "Crushing Season Payments" and "Post Season Payments". "Crushing Season" was the period during which the defendant crushed cane at its mills in the Burdekin district - CSA cl 1.1 and Schedule 1.
[36] Clause 6 of Schedule 5 provided:
"6 Cane Value Determination for Crushing Season Payments
The Grower will be entitled to receive payment for each Delivery of Cane which has been accepted by Sucrogen according to the value derived by the formula in clause 5 of this Schedule 5 where:
Sugar Value = the value per tonne IPS sugar received by Sucrogen from QSL during the Crushing Season."
[37] In relation to "Post Season Payments", cl 7 of Schedule 5 commenced by providing:
(a) After the Crushing Season, the Grower's Cane tonnage allocation to the various pricing methods (US Quota, EU Quota, Long Term contracts, Seasonal Pool and, where applicable, Forward Price Agreement mechanisms) will be determined on an interim basis.
(b) These interim allocations will be adjusted in the final Cane payment for the Relevant Season after Sucrogen is advised of the final tonnage and sugar proceeds for the various pricing methods.
(c) Should a Grower who has participated in a Forward Price Agreement have insufficient Cane tonnage to cover variable tonnage entitlements (US Quota, Long Term Contracts, EU Quota) in the 2010 Crushing Season under clauses 7.2, 7.3 & 7.4 of this Schedule 5, any such entitlement shortfall shall be reallocated to all other suppliers across Sucrogen including suppliers in other regions outside the District.
(d) The Grower will be entitled to receive payment for the Cane tonnage allocated to each pricing method according to the value derived by the formula in clause 5 of this Schedule where:
Sugar Value = the value per tonne IPS sugar received by Sucrogen for the relevant pricing method; that is, the US Quota Value, EU Quota Value, Long Term Contract Value, Seasonal Pool Value or the Forward Price Agreement relevant to the Grower."
[38] The terms "US Quota Value", "EU Quota Value", "Long Term Contract Value" and "Seasonal Pool Value" were defined in cl 1.1 of the CSA, as was "Seasonal Pool":
"EU Quota Value means the value expressed in AUD per Tonne IPS sugar (exclusive of GST), as advised by Sucrogen from time to time, specifically derived from the sale of raw sugar supplied by Sucrogen during the Relevant Season and managed, marketed and priced by QSL under any European Union Quota secured on Sucrogen's behalf. The value will be determined by QSL net of all marketing (including shipping and handling) and financing costs incurred in executing sales to the European Union Quota market.
Long Term Contract Value means the value expressed in AUD per Tonne IPS sugar (exclusive of GST), as advised by Sucrogen from time to time, specifically derived from the sale of raw sugar supplied by Sucrogen during the Relevant Season and managed, marketed and priced by QSL under the Malaysian long term supply contract (2009 - 2011). The value will be determined by QSL net of all marketing (including shipping and handling) and financing costs incurred in executing sales to that market.
Seasonal Pool means a pool of raw sugar which is produced by Sucrogen during the Relevant Season and marketed through QSL, and in respect of which the pricing and foreign currency transactions are managed by QSL in its discretion during the period commencing immediately after the pricing declaration date (30th November prior to the Relevant Season, or as otherwise advised in writing by Sucrogen) and ending on 30 June following the Relevant Season and taking into account the variability of Sucrogen's supply estimates and QSL's other suppliers' estimates across that period according to variations in seasonal conditions, Cane yields and processed tonnage for the Relevant Season.
Seasonal Pool Value means the value expressed in AUD per Tonne IPS sugar (exclusive of GST), in respect of sugar allocated by Sucrogen to the Seasonal Pool, as advised by Sucrogen from time to time.
US Quota Value means the value expressed in AUD per Tonne IPS sugar (exclusive of GST), as advised by Sucrogen from time to time, specifically derived from the sale of raw sugar supplied by Sucrogen during the Relevant Season, and managed and marketed under specific US Quota entitlements issued to Sucrogen by the Australian Government, and in respect of which the pricing and foreign currency transactions are managed by QSL in its discretion. The value will be determined by QSL net of all marketing (including shipping and handling) and financing costs incurred in executing sales to this market."
[39] Clauses 7.2, 7.3, 7.4 and 7.5 of Schedule 5 then prescribed:
(a) A portion of the Grower's Cane which is supplied to Sucrogen during the Relevant Season will be priced and paid for by reference to the US Quota Value for the Relevant Season.
(b) For the purpose of clause 7.1(a) of this Schedule 5 Sucrogen shall determine the share of the Grower's Cane to be priced by reference to the US Quota Value as a function of the Grower's Cane and CCS (Relative) units as a proportion of all tonnes of Cane and CCS (Relative) units delivered by Suppliers to Sucrogen during the Relevant Season and by applying that proportion to Sucrogen's US Quota sugar tonnage for the Relevant Season.
(a) A portion of the Grower's Cane supplied to Sucrogen during the Relevant Season will be priced and paid for by reference to the Long Term Contract Value for the Relevant Season.
(b) For the purpose of clause 7.1(a) of this Schedule 5, Sucrogen shall determine the share of the Grower's Cane to be priced by reference to the Long Term Contract Value as a function of the Grower's Cane and CCS (Relative) units as a proportion of all tonnes of Cane and CCS (Relative) units delivered by Suppliers to Sucrogen during the Relevant Season and by applying that proportion to Sucrogen's Long Term Contract sugar tonnage for the Relevant Season.
(a) A portion of the Grower's Cane supplied to Sucrogen during the Relevant Season will be priced and paid for by reference to the EU Quota Value for the Relevant Season.
(b) For the purpose of clause 7.1(a) of this Schedule 5, Sucrogen shall determine the share of the Grower's Cane to be priced by reference to the EU Quota Value as a function of the Grower's Cane and CCS (Relative) units as a proportion of all tonnes of Cane and CCS (Relative) units delivered by Suppliers to Sucrogen during the Relevant Season and by applying that proportion to Sucrogen's EU Quota sugar tonnage for the Relevant Season.
The balance of the Grower's Cane remaining after allowing for allocations of US Quota, EU Quota and Long Term Contract proceeds (and, where applicable, Forward Price Agreement mechanisms) will be priced and paid for by reference to the Seasonal Pool Value for the Relevant Season."
[40] Some plaintiffs, in addition to their respective CSA's, had also entered into a "Forward Price Agreement" ("FPA") with the defendant. The FPA, on the one hand, committed the particular grower to supplying particular minimum quantities of cane to the defendant, but on the other hand provided mechanisms for forward fixing of the price to be paid for that cane. Clause 2 of the standard form FPA provided:
(a) CSR and the Grower agree that the provisions of this agreement shall be incorporated in, and considered to form part of, the Cane Supply Agreement, and references to the Cane Supply Agreement shall be construed accordingly.
(b) CSR and the Grower ratify and confirm the terms of the Cane Supply Agreement as modified by this agreement and agreed to be bound by same."
Information provided by QSL about sugar pricing
[41] QSL issued various monthly reports and tax invoices to its supplying mills throughout a season. Apart from monthly Supply Customer Reports and Recipient Created Tax Invoices ("RCTI"), these reports were the only source of information available to the defendant (and other millers, for that matter) for preparation of calculations of the "Sugar Value" under the CSA.
[42] "Pool Reports" published by QSL for each individual pool showed the revenues and costs incurred by QSL for that particular pool and a net price or outcome. A report was also published for the Shared Pool, showing additional items of cost or revenue for each of the pricing pools.
[43] The "Whole of Season Forecast Reports" issued by QSL accumulated the data in the Pool Reports on one page and showed the net price (calculated by adjusting the sugar pool price by the Shared Pool amount) to be paid for each pool as well as a total cash sum to be advanced by QSL to the miller (based on the total tonnes of sugar delivered to each pool of sugar).
[44] The RCTI's issued by QSL also set out the total tonnes supplied to each pool, the net price per tonne for each pool, and the dollar amount payable in respect of each pool.
[45] These reports provided the information necessary for the defendant, from time to time, to calculate the value to be paid to each grower in respect of each respective pool of sugar.
[46] Most of the documents tendered in this case were contained in an agreed Trial Book.
[47] The plaintiffs called the following witnesses:
- - Mr Christaudo, who in 2010 and 2011 was chair of the Queensland Canegrowers Organisation Limited ("Queensland Canegrowers"), which was the peak industry body in Queensland representing the interests of canegrowers. Mr Christaudo, in his capacity as chair of Queensland Canegrowers, was involved in discussions and correspondence, particularly with the defendant, in relation to the apportionment of the QSL Trading Losses" amongst the millers and the canegrowers.
- - Mr Wedmaier, who held a senior position with Virgin Australia while giving evidence before me, but was the Chief Financial Officer of QSL for three years from April 2010. Mr Wedmaier gave evidence about the nature of QSL's operations and trading activities, including in futures contracts, the nature of the various pools and how they operated, and the detail of the various reports issued by QSL to the millers. His evidence included describing the way in which the "QSL Trading Losses" had been dealt with in the various reports provided to millers.
- - Mr Collins who, from 2006 to 2012, was the district manager of Canegrowers Burdekin Limited ("CBL"), and has since then been employed in management in the aged care sector. CBL was a growers' representative group, the primary purpose of which was to assist growers in negotiating their contracts with the defendant. Mr Collins described some of the particular features of the CSA, and gave evidence about his involvement in discussions and negotiations about the "QSL Trading Losses" with Mr Christaudo and various officers of the defendant and QSL.
- - Mr Lando, himself a canegrower, who in 2010 and 2011 was the chair of CBL and a director of Queensland Canegrowers. Mr Lando's relatively brief evidence was directed to the extent of his knowledge at that time of the discussions concerning the proposed allocation of the "QSL Trading Losses".
[48] The defendant's witnesses were:
- - Mr Burgess, who was and is the defendant's General Manager, Marketing. Mr Burgess gave extensive evidence about the defendant's involvement in the discussions and negotiations about the allocation of the "QSL Trading Losses", the outcome reached as a consequence of the agreement between QSL and the millers as to how those costs were to be apportioned under the RSSA's, and communications with growers.
[51] In December 2009, the defendant and other millers provided QSL with a forecast of the tonnes of raw sugar they expected to deliver for export in the 2010 season. QSL then started marketing and pricing the sugar in the various pricing pools, including the Seasonal Pool. QSL's initial production forecast for the 2010 season was just over 2.9 million tonnes of sugar. These forecasts were updated by millers on a monthly basis. As at 31 July 2010, the aggregate of the forecast export tonnage for the 2010 season was some 2.882 million tonnes. Of this, 2.006 million tonnes was allocated to the various pools with the balance of 876,000 tonnes allocated to the Seasonal Pool by QSL. Of the 876,000 forecast tonnes allocated to the Seasonal Pool, QSL had, by 30 July 2010, priced about 783,000 tonnes (actual) against forward contracts on the ICE (i.e., QSL had sought to lock in an anticipated price for the sugar in that pool).
[52] As noted in the introduction, the 2010 season was seriously affected by prolonged wet weather which impaired the ability of growers to harvest their crops.
[53] Consequently, the updated forecasts delivered to QSL throughout the 2010 season after 30 July 2010 revealed that significantly fewer tonnes of sugar would be able to be supplied by millers to QSL for export. The total amount eventually supplied to the Seasonal Pool was only 235,039 tonnes of actual raw sugar.
[54] By the end of 2010 it was clear to the industry as a whole that the inability to supply such significant quantities of raw sugar for export was going to have a significant economic impact on QSL, and thereby millers and growers. There were ongoing discussions and correspondence involving various representatives of QSL, the millers (including the defendant) and representatives from grower organisations in which various options were canvassed as to how the adverse economic impact should be spread across the industry stakeholders.
[55] For QSL, the practical consequence of the shortfall in available raw sugar for export was that it was unable to meet its sugar supply commitments under the futures contracts it had entered into. This, in turn, meant that QSL, where possible, had to "close out" contracts it had entered into for the sale of sugar (i.e. buy its way out of those contracts), and also enter into contracts to acquire sugar from other foreign suppliers in order to meet the balance of its supply commitments. Obviously, QSL had to pay money to achieve both of those outcomes. On the other hand, somewhat fortuitously, it was able to take advantage of depreciating currency exchange rates and make a profit on some of the currency hedging positions it had taken.
"a. The volume estimates at each date were agreed to the forecast supply reports which detail the tonnage the mills estimated to supply as noted below.
Forecast supply reports at 30 November 2009, 24 September 2010, 27 October 2010 and 25 November 2010 were agreed to estimates sent by suppliers to QSL for each of the four largest suppliers.
Actual tonnage received as at 12 January 2011 was agreed from the Supply Report to tonnage received to midnight 16 January on the remittance advice for the four largest suppliers and to signed commitments to the pricing platform for the two largest suppliers with no errors noted.
Movement from Initial 2010 Season Estimate ('000 tonnes)
ICE No.11 Pricing - Close March 2011 & May 2011 futures positions
Foreign Exchange - Close USD currency hedging positions
[57] Initially, and before the full magnitude of the shortfall was known, QSL had determined that the financial impact of the reduction in deliveries would be borne by the Seasonal Pool. When the magnitude of the shortfall became apparent, however, it was clear that the Seasonal Pool did not have the capacity to absorb the reduction, and accordingly QSL determined to proceed in reliance on cl 2.4.1.1 of Schedule 2 to the RSSA. The situation as at the end of November 2010 was summarised by QSL in its November 2010 Monthly Supplier Customer report as follows[6]:
"As noted in the previous months Supplier Report and the Supplier Meeting of 25 November 2010, the forecast of the size of the 2010 Season export deliveries have reduced dramatically as the following table illustrates:
As at the end of November 2010, QSL had received 2,130,000 tonnes leaving 188,000 tonnes to be delivered in order to meet the latest forecast production of 2,318,000. Further wet weather will likely result in a further downgrade in the size of deliveries.
Impact of the reduction in deliveries from 2,936,000 tonnes to 2,718,000 tonnes
The revised forecast of 29 October 2010 of 2,718,000 tonnes represented a reduction of 218,000 tonnes. As per the RSSA, a drop of this magnitude is for the account of the Seasonal Pool and this resulted in the gross IPS return per tonne declining from $468 to its current value of $447.
Impact of the reduction in deliveries from 2,718,000 tonnes to 2,318,000 tonnes
The revised forecast of 25 November 2010 of 2,318,000 tonnes represented a reduction of a further 400,000 tonnes from the forecast of 29 October 2010.
This resulted in the extreme situation that QSL no longer had enough sugar to support sales required under the 1:2:2:1 pricing platform.
As per the RSSA, this further decrease in the season meant that there will now be insufficient physical sales to support known pricing platform close-outs. Schedule 2, Clause 2.4.1.1 of the RSSA notes that the financial consequences in this instance are to be distributed across all pricing platforms.
Assuming no further downgrade to export deliveries and a consistent March 11 ICE price, QSL has calculated that the cost of unwinding the March 11 and May 11 ICE 11 positions to be $69 million which equates to a value of approximately $44 per tonne IPS to be allocated evenly across tonnage in the Supplier Pricing Scheme, Long Term Target and in-Season Fixed Price Pools."
[58] There then followed a period during which QSL, the millers, and the growers' representatives engaged in discussion, both in person and in correspondence, in which various potential solutions were canvassed. On 22 December 2010, Mr Wedmaier sent an email to the millers, referring to the "default provision" under the RSSA and continuing[7]:
"In the event that the crop reduction causes total long futures position generated from QSL sales to be less than the total short futures position arising from all Pricing Platform Pools for any pricing month, the costs involved in remedying that situation will be allocated equally to Suppliers based on tonnage in the Pricing Platform Pools.
The RSSA does however contain the option that a different allocation methodology can be adopted should all Suppliers and QSL agree.
To date, QSL has received two suggestions from Suppliers in regards to an alternative basis of cost allocation:
Could you please let me know whether you are in agreement with either of the two methodologies noted above.
As noted, all Suppliers must be in agreement with either of the two suggested methodologies in order for them to be applied.
If consensus is not reached, then the allocation will remain the default provision noted in the RSSA."
[59] In an email response of 24 December 2010, Mr Burgess of the defendant, said[8]:
"As we understand it, your email is intended to discharge any obligations QSL might have in relation to paragraph 3 Clause 2.4.1.1 of Schedule 2 of the RSSA, which states:-
'........Should the total tonnage allocated by all participants to the Pricing Platform pools at the Pricing Declaration Date be greater than 50% of the total tonnage allocated to all ICE 11 pools, Queensland Sugar and Participants will determine whether it would be fairer to distribute these costs and benefits to the Shared Pool.'
In other words, QSL is seeking to 'determine' whether there is a 'fairer' alternative than that contained in paragraph 4 of the clause 2.4.1.1, if we understand it correctly.
From a Sucrogen perspective, we are of the view that it will be hard to find consensus on an alternative to the one stipulated under paragraph 4 of clause 2.4.1.1. Nevertheless, for what it is worth:-
Instead of either of the above options, Sucrogen would favour that the Crop Reduction Costs be allocated on the basis of a Supplier's share of total QSL export tonnage. Given the magnitude of this cost, we would contend that no one category of producers or pool can be expected to bear the burden. As a matter of principle, sharing the cost across all tonnes in all pools could be viewed as the 'fairest' way to do this. Furthermore, ideally the allocation method from a) QSL to mill supplier, and then from b) mill supplier to grower, would be according to the same method. As you realise, at this stage Sucrogen favours the notion of costs being distributed across all pools' tonnes when we pass the growers' share back to them, so a similar allocation from QSL to mill suppliers would be consistent with this."
[60] I note in passing that QSL obtained advice from its solicitors in relation to the allocation of the costs arising from the shortfall across the Pricing Platform Pools pursuant to
cl 2.4.1.1 of the RSSA.
[61] In the meantime, on 23 December 2010 Mr Burgess wrote a letter to the defendant's growers which set out the following[9]:
[62] The letter then referred to a proposal which QSL had been floating concerning the spreading of the losses over a number of seasons. It also attached a document headed: "2010 season costs Frequently asked questions", which set out a number of questions and answers, including:
"1. Why would these QSL costs be shared across all pricing methods (forward pricing & QSL products)? Production variation costs should be in the Seasonal Pool.
The financial impact experienced in 2010 has come about largely as a consequence of marketing and pricing sugar early in the season, to capture the backwardation in the market (i.e. the stronger prompt ICE#11 futures positions versus weaker further-forward positions) and strong premiums for physical sugar. While a share of these benefits might have accrued to the Seasonal Pool, the activities which have led to QSL's pools being over-priced and over-sold were undertaken with the purpose of enhancing value across all pools. As a consequence of the crop decline, the Seasonal Pool has already borne some of the risk associated with 'typical' crop fluctuations, however it is not fair or reasonable, nor practical, for the Seasonal Pool to bear the full brunt of this imposition.
Under the concept current being discussed, there will not be any extraordinary costs allocated against the 2010 Season (other than what has already been allocated to the Seasonal Pool). Every tonne of sugar in every pool over the next three seasons will be allocated its share of the 2010 Season's extraordinary marketing and finance costs.
QSL is an industry-owned, non-profit company, and in that sense all industry producers share in the export marketing and pricing outcomes achieved by QSL.
Yes. Sucrogen will be bearing costs in proportion to its share of the sugar produced in Sucrogen districts."
[63] Indicative of the negotiations which were being carried on was a letter[10] dated 21 February 2011 from Mr Pratt (the defendant's General Manager, Grower and Community Relations) and Mr Burgess to three of the grower organisations, including CBL. This letter said:
"Given the common interest we all have in the QSL extraordinary marketing costs issue, we are responding to the similar letters from CANEGROWERS Herbert River, Plane Creek and Burdekin, dated 8th February, 14th February and 17th February respectively.
Seeking resolution as to how those costs are distributed through the industry has been a painstaking and relatively slow process, exacerbated by:-
Nevertheless, Sucrogen recommends adopting the simple and equitable solution such as has been adopted elsewhere in the industry, whereby the QSL costs are simply evenly allocated across all export tonnes supplied. It would work as follows:-
We believe this to be the most equitable outcome, given that the apportionment of the cost to any specific pools seems to create inequitable outcomes. For example, if the $60.9M cost was allocated across all remaining Sucrogen grower and miller Seasonal Pool tonnage the net cost per tonne would be over $2,000/tonne. Furthermore, in many cases those that remain with tonnage in the Seasonal Pool are the growers that came close to meeting their originally-forecast production.
On the other hand, there is no rationale to allocate according to Pricing Platform tonnage, and to do so would be very damaging to the forward pricing initiative.
The fair and equitable way, an equal $/tonne charge across all tonnes in all pools, approximates to $49/tonne of sugar. We understand that other milling companies are taking a similar or the same approach, notwithstanding the fact that their grower pricing mechanisms and arrangements differ. For example, the Mackay region is allocating across all growers.
As part of Sucrogen's preferred sharing proposal, Sucrogen would calculate every individual grower's liability under the cost sharing, and then look to offer an optional deferred payment scheme. Sucrogen would aggregate the total grower demand for deferred payments, and fund that via QSL. Further details will be forthcoming once we've worked with you on the best method to do this.
This solution relies on all growers agreeing to the equitable allocation. Sucrogen would reserve the right, in the event of legal action from growers against this mechanism, to move to the alternative of allocating only to the Pricing Platform pools.
At the grower meetings scheduled for 22nd-24th February 2011, our intent is to explain the background behind how and why the extraordinary marketing costs arose, and to table for discussion Sucrogen's preferred approach as detailed above."
[64] According to the calculations contained in the Ernst & Young report, the amount of the $105.5 million shortfall allocated to the defendant in accordance with the "default position" under cl 2.4.1.1 of the RSSA was some $60.86 million.
[65] While the negotiations and discussions to which I have referred were ongoing, QSL in fact implemented the "default position". So much is clear from the pool report provided by QSL to the defendant as at 25 February 2011, in which the "2010 season delivery shortfall" of $60.86 million was adjusted against the RSSA pools in which the defendant participated. Despite that, the parties continued to negotiate, and indeed the defendant sought, and QSL agreed, not to make any advance payment to the defendant in March 2011. Mr Burgess and Mr Wedmaier explained in evidence that the reason for seeking this non-payment was that, on the basis of the February pool report, which for the first time made an accounting of the $60.9 million adjustment, the defendant became aware that any further payment to it by QSL would be an overpayment. The defendant was aware of its obligation to pass money on to the growers when money was received by the defendant from QSL, and in order to avoid a situation of seeking repayment from growers of overpayments which the defendant would then need to pass back to QSL, a hold was put on payment by QSL to the defendant for March. On 11 March 2011, Mr Burgess wrote to growers saying[11]:
"As growers will be aware, the next advance payment from QSL was scheduled for next Thursday 17 March.
QSL has advised that it intends to deduct the extraordinary marketing costs incurred during the 2010 Season - which in Sucrogen's case amounts to $60.9 million - from the proceeds that would otherwise be payable. Accordingly, Sucrogen will not receive an advance from QSL during March.
The basis of the optional deferral scheme suggested by QSL has yet to be established, either between QSL and Sucrogen or Sucrogen and those growers who may wish to avail themselves of this facility. As a consequence of this situation, there will be no cane payment to growers next week.
Discussions continue among industry sectors to determine the fairest and most equitable method to distribute the extraordinary marketing costs to millers and growers. In this respect, Sucrogen continues to believe that the optimal outcome is to share the costs across the industry, based upon millers and growers' respective shares of all tonnes contributed to QSL for export.
Pending clarity of that issue, Sucrogen will also seek to offer a voluntary scheme for growers to be able to defer payment of their allocated portion of 2010 costs over a three year period.
Sucrogen hopes that it is possible to resolve the cost allocation issue and develop an optional deferred payment scheme so that a cane pay can be made in April."
[66] Ultimately, an agreement was reached between QSL and the millers. On 28 March 2011, Mr Glasson wrote to the Chief Executive of QSL[12]:
"Sucrogen Limited advised QSL that QSL's seven supplier mills, have reached a unanimous agreement in relation to the costs from the 2010 season, namely:
and request that QSL notifies us of its agreement to this request."
[67] The Chief Executive of QSL responded on the same day in the following terms[13]:
"Queensland Sugar Limited (QSL) has now received letters in identical form from each of Bundaberg Sugar Limited, Isis Central Sugar Mill Company Limited, Mackay Sugar Limited, Mossman Central Mill Company Limited, Proserpine Co-operative Sugar Milling Association Limited, Sucrogen Limited and Tully Sugar Limited (the Suppliers) indicating that the Suppliers have unanimously agreed, for the purposes of the raw sugar supply agreements which the Suppliers have entered with QSL, to the method of allocation of certain costs in respect of the 2010 Season as set out in those letters (the Allocation Method).
Each of those letters requests that QSL notifies the relevant Supplier of its agreement to the Allocation Method.
QSL hereby confirms that it agrees with each of the Suppliers and consequently, as all parties to the raw sugar supply agreements who would ordinarily be liable for any portion of the relevant costs have agreed, the Allocation Method will be the method of allocation of those costs in respect of the 2010 Season for the purposes of the raw sugar supply agreements each Supplier has entered with QSL.
How such costs should be treated, to the extent they are incurred, in respect of future Seasons will be determined in accordance with the terms of the raw sugar supply agreements (as amended from time to time), and will be the subject of further discussions between QSL and the Suppliers."
[68] It is sufficient to note, without descending into detail, that in all subsequent reports from QSL to the defendant, the $60.9 million "delivery shortfall costs" were allocated across the defendant's Shared Pool in accordance with that agreed position.
[69] On 12 April 2011, the defendant wrote to all of its growers, including the plaintiffs, relevantly advising as follows[14]:
We advised on 29th March that the $105.5M extraordinary marketing costs would be distributed as a Shared Pool cost across all tonnes in the export pools. Sucrogen believes it is a much fairer and more equitable outcome to allocate these costs across all export pools, including US Quota, MITI long-term contract, Pricing Platform pools and the QLD Seasonal Pool.
Of the $105.5M total, $60.86M will be allocated to Sucrogen. By levying a total cost of $60.86M via its Shared Pool across all tonnes in all Sucrogen export pools (comprising 1.276 million tonnes IPS) this equates to an impact of $47.69/tonne IPS. If nothing else was to occur, this cost would flow through in the net pool prices reported by QSL to Sucrogen and would be reflected in QSL's Advances.
However, in a genuine attempt to cushion the financial impact upon growers, Sucrogen will provide a rebate, at its costs, to reduce the cost to growers. The rebate will be $5.19/tonne IPS, thereby reducing the impact to growers from the QSL Shared Pool cost to $42.50/tonne IPS (i.e. $47.69 minus $51.19).
This rebate is provided after taking into account the grower/miller split applicable to Sucrogen's total sugar production (which includes production sold domestically), even though the costs do not relate in any way to the quantity of sugar which Sucrogen provided to the domestic market in 2010. This improves the situation for growers and results in the rebate to growers referred to above, of $5.19/tonne IPS.
Sucrogen's contribution enables an outcome where growers and Sucrogen share the $60.86M in a ratio of 62.8% and 37.2%, respectively. The total value of Sucrogen's $5.19/tonne rebate is $4.67M."
[70] It was not in issue that the amounts due from the defendant to each plaintiff under the individual CSA's were then adjusted by application of these figures, i.e. an allocation of $47.69 per tonne IPS, with a rebate from the defendant of $5.19 per tonne IPS, yielding a net adjustment of $42.50 per tonne IPS.
[71] The RCTI which was the statement of the 2010 final season payment issued by QSL to the defendant relevantly recorded[15]:
FPF - Fixed Price Forward Contract 361,585.73 416.30
Total IPS tonnes and proceeds before 1,276,066.06
[72] The "$/tonne" figure for each pool was the value applied by the defendant when calculating payments to growers, but before taking account of the ex gratia credit of $5.19 per tonne IPS. (These same figures appear in QSL's whole of season forecast report for the 2010 Season as at 30 June 2011).
[73] Under the Advances Payment System operated by QSL (under which a set percentage of expected final values was paid incrementally throughout the season to assist cash flow), the defendant did not in fact receive a payment from QSL after 16 February 2011 for the 2010 Season as a consequence of the accounting for the shortfall amounts. Indeed, at the end of the season, the defendant was required to repay some $8.1 million to QSL.
[74] It was submitted for the plaintiffs that the express terms of the CSA did not authorise the defendant to "withhold or deduct $42.50/tonne IPS sugar" and that, as a matter of construction of the CSA, the so-called "QSL Trading Losses" were not costs which could be deducted under the CSA in reduction of payments due to the plaintiffs for the cane which each had sold and delivered to the defendant.
[75] The principles to be applied when construing a written contract were recently restated in Mt Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd[16]:
"[46] The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.
[47] In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
[48] Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
[49] However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose of objects of the contract where that task is facilitated by an understanding 'of the genesis of the transaction, the background, the context [and] the market in which the parties are operating'. It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.
[50] Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is admissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations.
[51] Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption 'that the parties ... intended to produce a commercial result'. Put another way, a commercial contract should be construed so as to avoid it 'making commercial nonsense or working commercial inconvenience'."
[76] It is clear that one of the fundamental purposes of the CSA was to specify the formulae for determining how much growers were to be paid for the cane they supplied to the defendant and when they were to be paid. But it is also clear that those formulae were not self-contained:
- - The formulae themselves called up integers which were external to the CSA;
- - Each CSA operated in the wider context of a sugar export industry in which, relevantly, QSL was the sole exporter, and in which it was QSL, not the defendant (or any other miller), which effectively set the price of the sugar derived from cane supplied by the growers, and that in turn governed the price to be paid for the cane from which that export sugar was derived.
[77] Consistent with that purpose, and concordant with that context, the formulae contained in the CSA made the amount payable by the defendant for cane dependent upon the amount received by the defendant from QSL for the export sugar derived from that cane.
[78] So, to take it step by step:
- (a) The payments which a grower was entitled to receive for cane supplied to the defendant were to be calculated "on the basis of and in accordance with the provisions of Schedule 5" of the CSA - cl 7.5(a);
- (b) The payment for each delivery of cane was to be calculated according to the "value" derived by applying the formula in Schedule 5 cl 5(a). That was nominated in the formula as "Cane Value ($/tonne)". Despite the potentially confusing use in the context of the word "value", it is clear that what was being nominated was the dollar price per tonne of cane to be paid by the defendant;
- (c) The specified formula for working out that price per tonne of cane then required the application of several variables. One was the particular grower's CCS (Relative). The other was the variable called "Sugar Value", which was "the value applicable to the Cane tonnage as determined initially under clause 6, then under clause 7 of the Schedule 5";
- (d) Clause 6 of Schedule 5 related to payments received during the Crushing Season by providing:
"Sugar Value = the value per tonne IPS sugar received by [the defendant] from QSL during the Crushing Season";
(e) I pause here to note that reading Schedule 5 cl 5 and cl 6 together exemplifies the nature of the cane payment calculation. The "Sugar Value" variable in the formula is central to the conversion of a price paid for one commodity (i.e. the money paid by QSL to the defendant for raw sugar) into the price to be paid for another commodity (i.e. the money to be paid by the defendant to the grower for cane delivered). It is clear that "Sugar Value" needs to be a dollar figure, because what has been calculated under the formula is the price for cane expressed as "$/tonne". It is also clear that the price for the cane is, by the application of this formula, derived from what the defendant received from QSL as the "value per tonne IPS sugar" for the sugar supplied by the defendant to QSL. Again, the use of the word "value" in this context may be less that felicitous, but it is clear enough that in each instance the defendant was paid by QSL on the basis of a dollar price per tonne IPS sugar (which in turn was a function of each pool in which the sugar was allocated) - see above at [18] - and this is the integer described in the "Sugar Value" definition as "value per tonne IPS sugar received by [the defendant] from QSL";
(f) Schedule 5 cl 7, headed "Cane Value Determination for Post Season Payments" is directly relevant to the present case. It commenced by providing, in cl 7.1(a) and (b), that after the Crushing Season, a grower's allocation to the various pricing methods was determined on an interim basis, and those interim allocations were then adjusted in the final payment "after [the defendant] is advised of the final tonnage and sugar proceeds for the various pricing methods";
(g) Clause 7.1(d) confirmed the grower's entitlement to be paid for cane tonnage allocated to each of the pricing methods. For payment for that cane, the "Sugar Value" variable was specified to be:
"Sugar Value = the value per tonne IPS sugar received by [the defendant] for the relevant pricing method; ..."
(h) Each of cl 7.2, cl 7.3 and cl 7.4 provided mechanisms for working out how much of each grower's cane supplied to the defendant would be allocated to each of the US Quota, Long-Term Contract and EU Quota pricing methods. (In fact, during the season in question there were no allocations to the EU Quota, and henceforth it is not necessary to refer to that pool or pricing method.) Clause 7.5 then provided, relevantly, that the balance of a grower's cane, after allowing for allocations to the US Quota and the Long-Term Contracts and, where applicable, Forward Price Agreements to which the individual grower was committed, would be "priced and paid for [by the defendant] by reference to the Seasonal Pool Value" for the season;
(i) Again, it is clear enough that the "Sugar Value" variable prescribed by
cl 7.1(d) operated to enable conversion of a payment received by the defendant for one commodity (the sugar) into payment the defendant was required to make for another commodity (the cane supplied and allocated to each pricing method). Relevantly, the "Sugar Value" variable was fixed by "the value per IPS tonne sugar" received by the defendant under, respectively, each of the pricing methods described as "US Quota Value", "Long-Term Contract Value" and "Seasonal Pool Value". Each of those terms was defined in the CSA (see above at [38]). Each of the "US Quota Value" and "Long-Term Contract Value" was the value "determined by QSL net of all marketing (including shipping and handling) and financing costs incurred in executing sales to" the respective market. The "Seasonal Pool Value", according to its definition, was "the value expressed in AUD per tonne IPS sugar (exclusive of GST), in respect of sugar allocated by [the defendant] to the Seasonal Pool, as advised by [the defendant] from time to time".
[79] In summary, then, it can be seen that the CSA provided for the following:
- (a) The amount to be paid to each grower for cane supplied to the defendant was determined by a formula which had the effect of providing that a calculated portion of the money received by the defendant for the sugar it supplied to QSL would be passed through to the grower as payment for cane;
- (b) Payments made during the course of the season were interim, and subject to final adjustment;
- (c) In relation to post-crushing season payments, those payments were calculated by using a "Sugar Value" which in turn was calculated by reference to "Values" which were advised to the grower by the defendant and which, in the case of the US Quota Value and the Long-Term Contract Value, were "values" determined by QSL.
"Shared Pool will be allocated back to all other pricing pools to result in an equal sharing of all premiums and costs on a per tonne of sugar basis to all suppliers to QSL."
[86] An understanding of the commercial context is also informed by reference to the RSSA - an agreement which expressed the intention that QSL would not make either a profit or a loss, and to that end QSL was entitled to pass on to millers "all costs and revenues of any nature" (cl 22.1).
[87] In this context, it is necessary to say something about the so-called "QSL Trading Losses", which was the term used in the plaintiffs' pleading to describe what were, in fact, the net costs incurred by QSL in "closing out" futures contracts it was unable to fulfil and in purchasing sugar to fulfil the contracts it was unable to "close out". Sufficient detail of this appears in the Ernst & Young report to which I have already referred. Characterising these as simply "trading losses" is, however, apt to obscure the true nature of these expenses. It is clear enough that a core element of QSL's business as a sugar exporter was to enter into futures contracts for the sale of sugar it anticipated receiving under the various RSSA's. As I have just mentioned, it was well known in the industry that this was a central component of the way QSL conducted its operations. It is also clear that, when the magnitude of the sugar shortfall became apparent, QSL incurred significant costs in both closing out contracts and sourcing sugar from other markets. These costs were recorded in QSL's annual report as an expense from its continuing activities and, as noted above, were detailed in QSL's monthly reports to millers (including the defendant) as "delivery shortfall costs".
[88] In the course of their submissions, counsel for the plaintiffs argued that the "QSL Trading Losses" were neither "marketing costs" nor "financing costs" for the purposes of the definitions of "US Quota Value" and "Long-Term Contract Value". Reference was made to Woodside Energy Ltd v Commissioner of Taxation[22]. That case, however, was concerned with a completely different situation, namely whether hedging losses incurred by Woodside were able to be used to reduce the "taxable profit" on which the petroleum resource rent tax payable by Woodside was calculated. This involved consideration of particular provisions of the Petroleum Resource Rent Tax Assessment Act (Cth), including whether hedging losses were "expenses payable ... in relation to the sale" of hedged petroleum. Those considerations simply have nothing to do with the present case.
"QSL has advised that it intends to deduct the extraordinary marketing costs incurred during the 2010 Season - which in [the defendant's] case amounts to $60.9 million - from the proceeds that would otherwise be payable. Accordingly, Sucrogen will not receive an advance from QSL during March."
The background to this letter being written is explained above at [65].
[97] On 15 March 2011, Mr Collins of CBL wrote to the defendant in reference to, amongst other things, the letter of 11 March 2011, and queried the basis on which payment could be withheld under the CSA. A response letter dated 28 March 2011 from Mr Burgess included the following[25]:
"Under the Cane Supply Agreements which relate to the current season, clause 7.6(c) says that [the defendant], once it receives a payment is obliged to distribute that payment. If there is no payment then there is nothing to distribute."
[98] In fact, that is not quite what cl 7.6(c) provided for. Clause 7.1(a) provided, amongst other things, that a grower would be "entitled to adjustment payment provided at various times based on sugar advances received by Sucrogen". Clause 7.1(c) then provided, in effect, that where a sugar value increase was paid by QSL to the defendant, an "adjustment Cane payment" was to be made to the grower within one day "of receipt by Sucrogen of such sugar proceeds".
[99] Be that as it may, it was nevertheless clear that the obligation on the defendant to make such an "adjustment Cane payment" under cl 7.6(c) depended on the defendant itself having received payment from QSL. To that extent, Mr Burgess' statement that if "there is no payment [by QSL] then there is nothing to distribute [to the growers]" was correct.
[100] The plaintiffs, however, made the following submission[26]:
"[124] Clause 7.6 of the CSA does not provide a contractual basis for Sucrogen to withhold payment to the Growers in circumstances where QSL had 'set off' amounts which were claimed to be owing by Sucrogen to QSL under the RSSA against amounts 'otherwise payable' in respect of sugar which has been produced from Cane sold and delivered by Growers and which had been sold by Sucrogen to QSL. It is a fortiori where the amounts 'set off' by QSL arise from transactions unrelated to sugar which has been produced from the Cane delivered by the Growers."
[101] It would seem, however, that this submission is based on a literal interpretation of the advice contained in Mr Burgess' letter of 11 March 2011. Despite his reference in that letter to QSL "deducting" what he described as the "extraordinary marketing costs", what actually occurred was that QSL implemented the "default" position under RSSA, Schedule 2 cl 2.4.1.1. It did so with the publication of the February Pool Report.[27] That Pool Report accounted for what it described as "2010 Season Delivery Shortfall" in the amount of $60.86 million, and specifically referred to the RSSA in relation to that amount, saying:
Once adjustments are made to individual supplier [sic] to account for their failure to deliver committed sugar, the identifiable cost or benefit in remedying this situation will be distributed equally, based on tonnage, to the Pricing Platform Pools pursuant to clause 2.4.1.1 of Schedule 2".
[102] There was, therefore, no "set off" by QSL of this amount against amounts "otherwise payable" to the defendant. Rather, in accordance with the "default" position under the RSSA, the "2010 Season Delivery Shortfall" amount was factored into ascertaining whether there otherwise would be any amounts payable by QSL to the defendant. As a consequence of the calculations which flowed from this amount being factored into the February Pool Report, there was no payment by QSL to the defendant in March 2011 - the reasons for this are explained above.
[103] In any event, in my view, none of this detracts from the general proposition which was confirmed repeatedly in the CSA, including in the clauses to which I have referred above, namely that the defendant's obligation to pay growers only arose when the defendant itself actually received payment from QSL.
[104] In short, then, my conclusion is that the plaintiffs have not established that, on a proper construction of the CSA, the defendant breached the CSA by failing "to pay a further amount of $42.50 per tonne IPS sugar for Cane supplied by the Growers to the Defendant in the 2010 Season".[28]
[105] The plaintiffs' alternative cases were that the defendant had engaged in conduct which:
- (a) was in breach of terms implied in the CSA, namely:
- (i) to do all things necessary on the part of the defendant to enable the plaintiffs to have the benefit of the CSA;
- (ii) to act in good faith;
- (iii) to act in good faith towards the plaintiffs and the defendant's dealings with QSL with respect to the receipt of the value for sugar during the Crushing Season;
- (b) was unconscionable, in contravention of the CCA or the TPA.
[106] The same conduct was relied upon by the plaintiffs as constituting breaches of the alleged implied terms and as statutorily unconscionable conduct.[29] In general terms, it was submitted that[30]:
"Sucrogen's conduct in seeking between December 2010 and March 2011 to have the QSL trading losses notionally and retrospectively characterised as costs in the 'Shared Pool' under the RSSA for the purpose of representing to the growers that the $42.50 was to be allocated across all export tonnes and purporting to deduct that amount was both in breach of the implied terms ... and [was] unconscionable conduct in contravention of the provisions of the Competition and Consumer Act 2010 and further or alternatively the Trade Practices Act 1974."
[107] Extensive submissions were made, particularly by the defendant, in relation to the principles relating to the implication of terms in written commercial contracts. The defendant contended that none of the alleged terms ought be implied in the CSA, either as a matter of law or because the conventional tests for the implication of terms were not satisfied in this case. If the terms, or any of them, were to be implied, the defendants then argued that there had been no breach. The authorities referred to included the recent consideration of the topic of implied contractual terms by the High Court in Commonwealth Bank of Australia v Barker[31], and the somewhat vexed topic of whether the current law of Australia admits of the general implication of a term of good faith in commercial contracts. The authorities on that point were referred to by Jackson J, with whom McMurdo P and Holmes JA agreed, in Gramotnev v Queensland University of Technology[32]. Like his Honour in that case, however, it is unnecessary, in order to decide this case, for me to fix on a position concerning the existence or scope of a generally expressed implied term of good faith.
[108] Similarly, extensive submissions were addressed to the tests applicable to statutory unconscionability, with the defendants contending that nothing in the defendant's conduct contravened the relevant provisions.
[109] In my view, however, even if it were to be accepted that each of the terms contended for were able to be implied, the factual substratum for the assertion of breach of those terms, and for the alleged unconscionability, is not made out in this case.
[110] In the plaintiffs' closing submissions, the impugned conduct was said to be found in the following circumstances:
'As growers will be aware, the next advance payment from QSL was scheduled for next Thursday, 17 March.
QSL has advised that it intends to deduct the extraordinary marketing costs incurred during the 2010 season - which in Sucrogen's case amounts to $60.9 million - from the proceeds that would otherwise be payable. Accordingly, Sucrogen will not receive an advance from QSL during March.
The basis of the optional deferral scheme suggested by QSL has yet to be established, either between QSL and Sucrogen or Sucrogen and those growers who may wish to avail themselves of this facility. As a consequence of this situation, there will be no cane payment to growers next week.'
[111] Central to this depiction of the impugned conduct is the contention that the "QSL trading losses" allocated under the "default position" pursuant to cl 2.4.1.1 had been "set off" against money otherwise payable by QSL to the defendant before the "Shared Pool" agreement was reached on 28 March 2011. For the reasons given above, I do not accept this characterisation. There was no such "set off" by QSL as is asserted by the plaintiffs. The effect of QSL implementing the "default position" under cl 2.4.1.1 by issuing the February 2011 Pool Report was that the defendant's contractual entitlement to be paid by QSL was reduced. There was no question of the "QSL trading losses" being "set off" against moneys otherwise payable by QSL to the defendant. Nor did the defendant, either actually or effectively, receive a "sugar value increase" for which it was liable to account to the plaintiffs under cl 7.6(c) of the CSA.
[112] It follows, therefore, that I do not accept the factual underpinning for the plaintiffs' alternative claims.
[113] Further, I do not accept the plaintiffs' submission that the objective likelihood was that the defendant wanted the "QSL trading losses" to be allocated across all export sugar "for reasons personal to it".
[114] On the plaintiffs' argument, these reasons would have been indicative of the defendant's lack of good faith and hindrance of the plaintiffs' benefits in connection with the asserted implied terms, and of the necessary lack of moral rectitude which would have characterised the statutorily unconscionable conduct.
[115] The reasons were identified in the plaintiffs' primary submissions as follows:
"43. It is objectively likely that Sucrogen wanted the losses to be treated as allocated across all export sugar for several reasons:
(a) First, because if the losses were allocated to the Pricing Platform pools, a 'major issue' was that 'forward pricing millers and growers would bear the full cost of the losses', and that would be 'a severe dampner on forward pricing initiatives' and 'very damaging to the forward pricing initiative'. Sucrogen had spent a lot of effort in promoting forward pricing to growers and had achieved some success. The forward pricing 'initiatives' delivered committed future Cane supply to Sucrogen and shifted part of the supply risk to Growers. Mr Burgess conceded that Growers would likely have not entered into FPAs again if it had attempted to pass the losses on to Growers under the FPA.
(b) Secondly, at least Mr Day (if not Mr Burgess) expressed his reservation about whether, if the QSL trading losses were allocated to the Pricing Platform pools, Sucrogen may have trouble trying to pass those losses back to Growers under the FPA because of the provisions of the FPA which enable the grower to 'fix' the price by 'Price Fixation Orders'. Mr Burgess accepted that Mr Day had expressed reservation about passing the losses back to Growers under the FPA. Mr Day had observed 'hard to find anywhere to hide in this one'. Mr Burgess sought to explain the comment away, but his evidence was not convincing. As a matter of construction of the FPA (clauses 12(a) and (d)) and the explanatory documents promoting the FPA initiative (See particularly, TB 2 (last page); TB 14 answers to the questions: 'What are the risks of forward pricing?' and 'What happens if I fall short on my fixed price tonnage commitments?'), the QSL trading losses were objectively unlikely to satisfy the 'Marketing Charge' definition in clause 1.1 of the FPA.
(c) Thirdly, if the costs stayed in the Pricing Platform pools, Sucrogen would have been obliged to pay the Growers advances due under other 'non ICE 11 pools' - US Quota; LTC and Seasonal pools."
[116] As to the first of these matters, I accept that the evidence demonstrates that the defendant, through Mr Burgess, knew and appreciated that allocation of the QSL trading losses under the Pricing Platform pools would likely have had an adverse impact on the forward pricing scheme for growers - a scheme which the defendant had actively been promoting and encouraging amongst the growers. So much is clear from the following passage of Mr Burgess' evidence:
And that was a major issue for several reasons I suggest. One was that it would be a very severe dampener on the forward pricing initiatives which had been advanced by Sucrogen over the last several years?--- Yes. That's correct.
And it would mean that the more proactive growers who were prepared to take on forward pricing platform sales, if we call it that or forward pricing platform prices - would be penalised for it?--- Yes. That's correct.
And the implications for Sucrogen would be that none of its growers would ever want to look at a forward pricing agreement again if it involved them being exposed to these kinds of losses. Isn't that right?--- I - well, I couldn't speculate for how growers might think, but perhaps that might be the case. Yes.
That was very likely, wasn't it, Mr Burgess? No---?--- I think it was quite likely. Yes.
Yes. And that would have the consequence that Sucrogen would lost volume in the forward pricing platforms?--- Yes. That's correct.
And that would impact upon the assurance that Sucrogen got in relation to ongoing cane delivery commitments, in terms of tonnage commitments?--- In a contractual sense, yes, but in a practical sense, no.
That's because Sucrogen could itself price into the forward platforms without its growers doing so?--- No. It would be because growers - we expect it would be growing cane in any case and delivering cane to us whether they were choosing forward pricing pools or seasonal pool or other QSL fixed tonnage pools in that sense was immaterial to us.
So you didn't care whether it was priced against the forward pricing platform pools or not. Is that your evidence?--- Yes, we did care.
Yes. For the reasons we've mentioned, that is, that no grower would enter into one of these agreements again?--- No. That's not correct.
So why did you care?--- We cared because we introduced the forward pricing initiative to enable growers to have the ability to manage sugar price risks themselves as opposed to a centralised government body running a single pool and simply telling growers at the end of the season what that price was. We felt it was important for growers with different risk profiles, different financial situations, different costs of production to have the ability to determine - to better determine their price outcomes and forward pricing pools were one way of enabling growers to do that. So we felt it was important ultimately to improve the risk management possibilities available to growers and ultimately in the hope that it improved their financial situation which would encourage them to continue to grow cane and more cane.
Wasn't it the case that you took the view, in fact, that it would be very damaging to your forward pricing initiative if these costs remained in the pricing platform pools?--- Yes. That's correct.
And one of the consequences of growers being put off selling cane under forward pricing agreements would have been that you no longer passed a risk in terms of production back to the growers?--- Given that we didn't - given that we, if you like, set some pricing exposure limits, the purpose of those limits was to ensure as best as possible that growers didn't put themselves in a position of overpricing under the forward pricing platform pools. So we had tried to, if you like, limit that risk to protect the growers from that possibility."
"Sucrogen, as with Mackay, is of the view that the most equitable way of allocating these costs is to spread them widely over all tonnage supplied to QSL, thus recognising that this is truly a whole of industry issue. This will require some 'offset' for those producers who see themselves disadvantaged versus the currently proposed allocation. Sucrogen is willing to participate in a unified industry arrangement where we work to offset the approximately 6-7 million dollar 'downside' for those who prefer the current arrangement."
[118] Mr Burgess' email concluded with a suggestion that QSL not allocate costs to the Pricing Platform pools pending resolution of the final distributions. In fact, as has already been noted, the distribution to the Pricing Platform pools was recorded in the February 2011 Pool Report. Mr Burgess, when being cross-examined on that exchange of correspondence with Mr Taylor, gave the following evidence:
"And you got a response from Mr Taylor later on the 9th of March in which he told you that the mills that QSL still owe money to on a net basis will receive advances next week?--- That's correct.
Yes. So he wasn't accepting your suggestion on that there be no further payments because some mills are entitled to payment?--- And - yes, that's correct. But, you know, perhaps I should qualify that. That is correct; however, it wasn't that we were trying to stop QSL make payments to other mills. What we were concerned about was QSL deducting these costs from relevant pool - or pools, pricing platform pools, and causing further confusion and anxiety, particularly for those growers in the pricing platform pools.
So it was all about looking after the growers?--- Yes.
I see?--- Well, I go back to the point I made either Thursday or Friday last week: the only reason we started having the conversation with QSL and the other millers in the first place was because of the interests we had in our growers.
Interest you had, Mr Burgess, in trying to protect the pricing platform initiative - the forward pricing initiative, I suggest, which you had worked very hard over the last two years to put in place? --- No. The motivation was more about ensuring that the full cost impost as a result of the 60.9 million didn't reside with a - a portion of the growers when there was no - absolutely no commercial logic, in my view and my - my colleagues' view for that to occur.
And if it was ---?--- It - it had really nothing to do with - with the forward pricing initiative. We could see a lot of damage being done to the forward price initiative but - but that wasn't particularly our motivation. Our motivation was because we didn't think this cost should be living with that particular group of growers.
You recognised that it would be very, very difficult for Sucrogen to justify trying to pass on part of these losses to growers under the forward pricing agreements, I suspect?--- That - that wasn't the motivation where - that we - that we had ---
I see?--- - - - for the purpose we pursued the way - pursued the issue the way we did."
[119] In relation to evidence that he had given to the effect that the defendant had a "significant investment" in promoting the forward pricing scheme, Mr Burgess gave the following further evidence[36]:
"Can you explain to us in what respect or respects Sucrogen had a significant investment, as that term was put to you, in promoting the adoption by growers of forward pricing platforms?--- Yes. Our investment was purely and simply to enable growers to have more flexibility with respect to the risk management options available to them. I reiterate what I said last week - - -
I see?--- - - - prior to 2006 everybody operated in one big single pool. So when forward pricing was introduced post deregulation what Sucrogen wanted to do was to give growers different alternative ways of managing their risk. So our investment was really about saying if our growers can be more profitable through - through having individual opportunities to manage that risk, then that's ultimately got to be better for them."
[120] As to the second of the matters raised on the plaintiffs' argument, I also accept that there was at least internal discussion between members of the defendant's management about the allocation (or proposed allocation) by QSL to the Pricing Platform pools, the detrimental impact of such an allocation on the forward pricing initiative, and queries as to whether those losses could be passed through to growers under the terms of the FPA's. Those matters were canvassed explicitly in an exchange of emails between members of the defendant's management team, including Mr Burgess, on 8 December 2010.[37]
[121] The third matter raised by the plaintiffs is simply a statement of one of the inevitable consequences of the "QSL Trading Losses" being allocated across the Pricing Platform pools rather than, as was ultimately done, being spread across the Shared Pool.
[122] But in my view these matters, of themselves, do not necessarily lead to a conclusion that the defendant's conduct in promoting, and ultimately achieving, the agreement with QSL and the other millers about the allocation of the "QSL Trading Losses" to the Shared Pool was fatally infected by a lack of good faith or a hindrance of the plaintiffs' benefits, or was so morally dubious as to be statutorily unconscionable. Commercial decisions are almost invariably informed by a variety of factors, and those factors almost invariably include consideration of matters of direct concern to the decision maker, such as the accrual of benefits and the avoidance of detriments.
[123] In Macquarie International Health Clinic Pty Ltd v Sydney Southwest Area Health Service[38], Allsop P (as he then was) said[39]:
"[11] The notion of good faith in the performance of contracts is one established by a number of cases in this court and is well-known to the law in both common law and civilian systems. It was part of the law merchant. It finds its place in international conventions. I repeat what I said in United Group Rail Services Ltd v Rail Corporation of New South Wales [2009] NSWCA 177; (2009) 75 NSWLR 618 at 634 [58]:
'... [G]ood faith is not a concept foreign to the common law, the law merchant or businessmen and women. It has been an underlying concept in the law merchant for centuries: L Trakman, The Law Merchant: The Evolution of Commercial Law (Rothman 1983) at p 1; W Mitchell, An Essay on the Early History of the Law Merchant (CUP 1904) at pp 102 ff. It is recognised as part of the law of performance of contracts in numerous sophisticated commercial jurisdictions: for example Uniform Commercial Code s 1-201 and s 1-203 (1977); Wigand v Bachmann-Bechtel Brewing Co 118 NE 618 at 619 (1918); E A Farnsworth, Farnsworth on Contracts (Aspen 3rd Ed 2004) Vol 1 at pp 391-417 s 3.26b; International Institute for the Unification of Private Law, UNIDROIT Principles of International Commercial Contracts 2004, Rome, Art 1.7 (www.unidroit.org [ED 3 May 2010]); R Zimmerman and S Whittaker (Eds) Good Faith in European Contract Law (CUP 2000). It has been recognised by this Court to be part of the law of performance of contracts; Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 263-270; Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (1993) 31 NSWLR 91; Burger King Corporation v Hungry Jack's Pty Ltd at 565-574 [141]-[187]; and Alcatel Australia Ltd v Scarcella at 363-369 ...'
[12] The usual content of the obligation of good faith that can be extracted from Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (1993) 31 NSWLR 91, Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187; (2001) 69 NSWLR 558; Alcatel Australia Ltd v Scarcella [1998] NSWSC 483; (1998) 44 NSWLR 349 and United Group Rail Services Ltd v Rail Corporation New South is as follows:
(a) obligations to act honesty and with a fidelity to the bargain;
(b) obligations not to act dishonestly and not to act to undermine the bargain entered or the substance of the contractual benefit bargained for;
(c) an obligation to act reasonably and with fair dealing having regard to the interests of the parties (which will, inevitably, at times conflict) and to the provisions, aims and purposes of the contract, objectively ascertained.
[13] None of these obligations requires the interests of a party to be subordinated to those of the other. It is good faith or fair dealing between arm's length commercial parties by reference to the bargain and its terms that is called for."
[124] A finding of statutory unconscionability requires there to be a "pejorative moral judgment". As was said by the Full Federal Court in Hurley v McDonald's Australia Ltd[40]:
"22. For conduct to be regarded as unconscionable, serious misconduct or something clearly unfair or unreasonable, must be demonstrated - Cameron v Qantas Airways Ltd [1995] FCA 1304; (1995) ATPR 41-417 at 40,633; [1995] FCA 1304; (1994) 55 FCR 147 at 179. Whatever 'unconscionable' means in sections 51AB and 51AC, the term carries the meaning given by the Shorter Oxford English Dictionary, namely, actions showing no regard for conscience, or that are irreconcilable with what is right or reasonable - Qantas Airways Ltd v Cameron [1996] FCA 1483; (1996) ATPR 41-487 at 42,068; [1996] FCA 1483; (1996) 66 FCR 246 at 262. The various synonyms used in relation to the term 'unconscionable' import a pejorative moral judgment - Qantas Airways Ltd v Cameron [1996] FCA 1483; (1996) ATPR 41-487 at 42,085 and 42,096; [1996] FCA 1483; (1996) 66 FCR 246 at 283-4 and 298."
[125] A "high level of moral obliquy" on the part of the person alleged to have engaged in statutorily unconscionable conduct must be demonstrated.[41]
[126] An assessment of whether these respective criteria were satisfied such as to impugn the conduct of the defendant requires, in the circumstances of this case, more than simply considering what might be described as the defendant's "selfish" reasons for pursuing the "Shared Pool" solution.
[127] The financial fallout from the devastating 2010 Season was obviously going to have an impact on all levels of the sugar industry in Queensland. So much was recognised in the protracted discussions and negotiations between QSL, the millers, and the cane grower representative organisations. The way in which that impact would be managed and distributed was also, pragmatically, an issue which was broader than the interests of individual millers or growers. It will be recalled, in that regard, that the decision to implement the "Shared Pool" solution was not one made individually or unilaterally by the defendant, but was an outcome agreed to by all of the millers with QSL.
[128] Moreover, it was obvious that there were going to be different "winners and losers" amongst the growers, i.e. all of the Queensland cane growers who had supplied cane to the relevant millers, and not just the plaintiffs in this proceeding, depending on whether the "default position" was applied or the "Shared Pool" solution was implemented. This is exemplified in the following submissions made by counsel for the defendant, which I accept[42]:
"269. Individual growers may have either financially benefitted or been disadvantaged by the negotiated outcome, depending on the quantity of IPS sugar supplied to each pool. To use some of the plaintiffs as examples:
(a) under the agreed allocation, A Pierotti & Son Pty Ltd has (presently) been allocated $89,118.25 of the 'QSL trading losses'. Under the default allocation to only the Pricing Platform pools, its share of the losses would have been $136,620.57. Because it had heavily supplied the Pricing Platform pools, it was $47,502.32 better off under the agreed allocation than under QSL's default allocation;
(b) under the agreed allocation, Mr & Mrs Pappalardo have been allocated $69,690.23 of the 'QSL trading losses'. Under the default allocation, because they supplied no tonnes to the Pricing Platform pools, their share would have been $0. They are $69,690.23 worse off under the agreed allocation than under QSL's default allocation.
[129] Mr Burgess explained his underlying motivation for pursuing the "Shared Pool" solution in the following passage of evidence[43]:
"Now, can I ask you, then, if I understand the position from what you've said, if the trading losses were allocated to the pricing platform pools as per the QSL intended course and it would, as you saw it - how would that, as you saw it, affect growers who's supplied sugar to those pricing platform pools?
--- Well, rather than as - you know, the principle I feel was correct would have been to see this cost to go to the seasonal pool. So in the costs going to the pricing platform pools - I just thought it was commercially unrealistic and I thought it was unfair on those particular growers to be bearing that cost.
HIS HONOUR: That is on the growers who had supplied the sugar in fulfilment of their contracts?--- Yes, your Honour.
MR GIBSON: All right. Thank you. Now, was the question of an allocation of these costs across all tonnages and all pools considered by you?--- Yes. It was.
And was it discussed between you and the other members of the management team?--- Yes. It was.
What was your view about that?--- I felt it was the only reasonably commercially sensible and fairest way to allocate this cost.
Now, why was that?--- Well, it wasn't - it wasn't for Sucrogen's specific purpose. To be quite honest, if - you know, if we'd borne - well, we ultimately knew the cost to be $105 million, and our share of it was $60 million. We knew that we were going to bear something in the order of one-third of that. Which pools it came through to affect the company didn't really matter. So when we started thinking about how this cost should be allocated and to which pools our decision was completely motivated by the impact on our growers, because it was really of no relevance to us as a company as to how the costs came through and to which pools it was allocated to.
And why did that make it more - a fairer outcome to allocate these losses across all pools rather than, for example, the seasonal pool?--- Yes. Well, I've explained why I thought the pricing platform pools concept was not workable. Had we spread the costs across only the seasonal pool we would have seen some very, very dysfunctional outcomes. From memory, the cost would have been something like $460-something per tonne against the pool price that was barely only - I think $480. So the pool price for the seasonal pool growers would have been extremely low. And there are a number of growers, not just within the Sucrogen company, but across the industry, who only had sugar, effectively, in the seasonal pool, apart from perhaps small volumes in the US quota and MITI LTC. So we saw a very dysfunctional outcome had it been spread just to the seasonal pool, and furthermore, we could - although we didn't have the numbers and we hadn't been shown what's turned in the evidence as consequences analysis at that point, we knew that some very dysfunctional outcomes were going to occur with other suppliers, and in that regard, Bundaberg was a good example. Bundaberg produced virtually all of the sugar that it said it would as at December 2009. Had - so they had quite a lot of seasonable pool tonnage. Had the seasonal pool tonnage been given this cost, it would have levied something like $71 million onto Bundaberg, which again would have been an extremely dysfunctional and unreasonable outcome."
[130] A little later in his evidence, Mr Burgess said[44]:
"What was that?--- Well, I mentioned earlier how we - leaving aside the seasonal pool columns which, you know, we argued from the very - we or me, my colleagues argued from the very beginning it was not an equitable way to allocate this cost. Any other method was going to see Sucrogen bearing approximately one-third of the cost. So as a miller it absolutely made very little consequence to us as to which of these methods got adopted. But the impact on our growers we saw as being very significant. So our motivation from the very beginning was to look for something that we thought was fairest and best and most equitable when we looked across our grower profile, if you like."
[131] Under cross-examination, Mr Burgess was directly challenged on his explanation of his motivation for pursuing the "Shared Pool" solution. Whilst acknowledging the concern harboured by the defendant about potential adverse consequences on the forward pricing initiative, Mr Burgess remained steadfast in his evidence to the effect that this had not been the driving factor in the defendant's promotion and pursuit of the "Shared Pool" solution.[45]
[132] When it was put to him that spreading the QSL trading losses across all export tonnes would be a "more palatable way" of passing the QSL trading losses back to growers, Mr Burgess disagreed with the word "palatable", and said that he thought it was a "fairer, more equitable way of distributing the cost". Mr Burgess said[46]:
"It wasn't about palatability; it was about - about fairness. We couldn't see any sense in why this group of forward pricing growers should bear the cost; we couldn't see any sense in putting it into the seasonal pool; and, beyond that, across all tonnes in all pools seemed to be commercially the only logical thing to do."
[133] I accept this evidence of Mr Burgess as demonstrative of the defendant's underlying motivation for pursuing the "Shared Pool" solution.
[134] It is relevant also to acknowledge in this broader context that it was not only the defendant which regarded the "Shared Pool" solution as the most appropriate in the difficult circumstances being faced in the industry. Mr Collins confirmed in evidence that he had regarded the allocation of the costs across all tonnes of sugar in all pools as equitable or reasonable.[47] Mr Christaudo, who was extensively involved in negotiations and discussions with the millers during the relevant period, was also of the view from at least 12 December 2010 that the fairest allocation by QSL of the costs was across all tonnes of sugar. So much was confirmed by him in the following passage of evidence, which also contains what I accept to be apposite commentary by an active industry participant about the reality of the difficulties faced by all participants in finding a solution to the problem which confronted the industry at that time[48]:
"All right. But you knew that different millers, and, therefore, in consequence, different groups of growers, would be directly affected depending on which of the allocation outcomes was adopted?--- I wasn't aware of exactly the way the growers would be affected by that, but it stood to reason that it could be. All I was interested in at the time was getting an agreement, and the - that the allocations were on a fair basis.
Well, your - when you said that you were wanting to get Bundy over the line - - -?--- No, I wasn't wanting to get Bundy over the line. The millers - the other millers, and Sucrogen in particular, were wanting to get Bundy over the line.
Because Sucrogen's consistently stated view, right from the word go, of which you were fully informed, was that the trading losses should be allocated across all tonnages in all pools?--- Yep.
And that accorded with your view as to the fairest outcome in terms of the allocation of these losses?--- Yes.
And whichever alternative was adopted, even without knowledge of these specific figures, you were aware that, inevitably, there would be some winners and some losers among the millers?--- I don't know that anybody was a winner out of this, sir.
Well, if we compare the pricing platform pool allocation which was QSL's primary position and we look at the outcomes of the alternative allocations, there certainly would be winners and losers, wouldn't there?--- There was going to be people who were better off and worse off according to the allocations.
Well, I'll take your language. Worse off and more worse off, perhaps?--- Yeah.
Yep. That's fair enough. But, certainly, there would be material differences, as we've just seen with the Bundaberg illustration?--- There was never going to be a perfect solution to this.
But your opinion was that notwithstanding that a perfect solution was, at best, elusive and quite possibly impossible, nevertheless, a solution had to be reached, in everyone's interest?--- Absolutely." (emphasis added)
[135] Another relevant factor in the assessment of the defendant's conduct is the fact that the defendant applied the ameliorating rebate.
[136] In general terms, the formulae under the CSA were structured to achieve an outcome that the money paid to the defendant by QSL would be split between the defendant and its growers in approximately the proportions of one third for the defendant and two thirds for the growers. More precise calculations depended on the application of the numerous variables under the different formulae contained in the CSA, including the particular formulae for the particular pools in respect of which the payments were being made.
[137] As has already been noted, and as was confirmed by the Ernst & Young report, the proportion of the $105 million "delivery shortfall costs" which was allocated to the defendant (based on its proportion of the tonnage of sugar applied under the Pricing Platform to QSL over the season) was some $60.9 million. Had this figure been calculated on the basis of a proportion of QSL's total export sugar, the defendant's share would have been reduced to some $59 million. In the event, however, the agreement reached between the defendant, the other millers and QSL involved the defendant's acceptance of the $60.9 million exposure.
[138] If this $60.9 million had been split in accordance with the CSA formulae relevant to the "default position" under the RSSA, i.e. against "Pricing Platform" tonnes, the apportionment would have seen the growers collectively bearing $40.3 million and the defendant bearing $20.6 million. However, a split in accordance with the CSA formulae relevant to the "Shared Pool" solution would have, without anything else, resulted in the growers collectively bearing a higher proportion. In those formulae, the overall split of the $60.9 million would have been $42.9 million against the growers and $18 million against the defendant.
[139] I accept, as was explained to me in evidence[49], that the purpose for the defendant giving the rebate was to seek to ensure that the growers in aggregate would not be worse off than they would have been if the "default position" had prevailed. The practical collective result of the application of the rebate was that (in round figures) the $60.9 million was split on the basis of $22.6 million against the defendant and $38.3 million against the growers. The application of the rebate of $5.19 per tonne IPS sugar actually resulted in a collective outcome for the growers that was better than would have been the case if the "default" position had applied, and this was due, as Mr Burgess acknowledged to Mr Christaudo's advocacy. Mr Christaudo successfully lobbied the defendant to calculate a rebate based on both export and domestic tonnages of sugar. Mr Burgess conceded that, but for the defendant's acceptance of the position advanced by Mr Christaudo, the amount of the rebate would have been limited to an amount which would have brought the growers' collective exposure back to the $40.3 million figure. In other words, Mr Christaudo's successful lobbying achieved a better outcome for the growers collectively than would otherwise have been the case.
[143] The counterclaim brought by the defendant in this proceeding against a number of the growers depended upon me having made a finding in favour of the plaintiffs that the price for sugar nominally supplied to only the US Quota and Long-Term Contract pools should not be affected by a $42.50 per tonne IPS reduction on account of the "QSL trading losses". As I have not made that finding, and for the reasons given above propose dismissing the plaintiffs' claims, it is clearly not necessary for me to address the counterclaim.
[144] Accordingly, for these reasons there will be the following orders:
- The plaintiffs' claims are dismissed;
- The counterclaim is dismissed;
- I will hear the parties as to costs.
[2] "IPS sugar" refers to a purity scale prescribed by the Sugar Association of London.
[4] For this judgment, I will be referring to the CSA between the defendant and Colevale Farming Co.
[16] [2015] HCA 37; (2015) 256 CLR 104, per French CJ, Nettle and Gordon JJ at [46] - [51], omitting citations and references.
[17] Mt Bruce Mining v Wright Prospecting (supra) at [50].
[18] United Petroleum Pty Ltd v Seven-Eleven Stores Pty Ltd [2013] 1 Qd R 272 at [14].
[19] Elderslie Property Investments (No 2) Pty Ltd v Dunn [2008] QCA 158, per Muir JA at [20].
[23] Plaintiffs' primary submissions, para 137.
[28] That being the crux of the plaintiffs' case as articulated in para 13 of the seventh amended statement of claim.
[29] Plaintiffs' primary submissions, paras 158-165, 169 and 178.
[30] Plaintiffs' response submissions, para 2.
[32] [2015] QCA 127 at [158] ff.
[41] Stacks Managed Investments Ltd v Tolteca Pty Ltd [2015] QSC 276 at [80], and the authorities cited there by Ann Lyons J.
[45] See, for example, his cross-examination at T 6-14 - 6-15.
[49] See, for example, Mr Burgess at T 5-10.
Papale & Ors
Wilmar Sugar Australia Ltd [2017] QSC 72
(2014) 253 CLR 169
(2009) 75 NSWLR 618
(1992) 26 NSWLR 234
(1993) 31 NSWLR 91
(2001) 69 NSWLR 558
(1998) 44 NSWLR 349
(1994) 55 FCR 147
(1996) 66 FCR 246
(2015) 256 CLR 104
(2009) 174 FCR 91
[49] It is not necessary, at this stage, for me to descend further into the detail of the evidence given by each witness. Quite a deal of the oral evidence was directed to elucidating particular aspects of the industry and to explaining particular aspects of the documents and reports which were in evidence before me. A fair part of the oral evidence was also directed to an estoppel case which had been pleaded by the defendant but not ultimately pursued. It will be sufficient if I refer to relevant parts of the evidence when discussing particular aspects of the case.
[50] I should record, however, that I was satisfied as to the credit and creditworthiness of each of the witnesses, each of whom gave their evidence honestly. Indeed, most of their evidence overlapped, and was consistent with the documents contained in the agreed Trial Book.
[56] It was not in issue before me that a report from Ernst & Young dated 7 March 2011 accurately records the net costs incurred by QSL as a consequence of the sugar delivery shortfall[5]:
[80] The plaintiffs advanced eight arguments with respect to the proper construction of the CSA:
[81] In my view, however, the premises on which these submissions are based cannot be sustained.
[82] First, and fundamentally, the defendant did not "withhold or deduct" $42.50 per tonne IPS sugar from the plaintiffs. As noted above in [71], the "$/tonne IPS sugar" figures applied by the defendant in calculating the total to be paid to each plaintiff for the cane supplied to the defendant utilised the same "$/tonne IPS" figures as had applied to the calculation of the total amounts to be paid in each pool for the sugar supplied by the defendant to QSL. As a consequence of the agreement reached between the defendant and the other millers and QSL, these "$/tonne IPS" figures incorporated the downwards adjustment of $47.69 per tonne IPS. The defendant then allowed, in each of the calculations for each of the growers, a rebate of $5.19 per tonne IPS. The effect of applying this rebate, obviously, was that each grower ultimately was paid more for the cane supplied to the defendant during the season than the grower would have received if the defendant had not applied the rebate. The defendant did not "deduct" anything from the moneys which were otherwise payable to the plaintiffs under the CSA. Nor did it "withhold" moneys which ought to have been paid. What it did, in accordance with the CSA formulae, was to utilise the same "$/tonne IPS" figures as had been used by QSL in calculating the amounts payable to the defendant by QSL, and then it ameliorated the impact of those figures by applying the rebate of $5.19 per tonne IPS.
[83] Secondly, much of the tightly-focused argument advanced by the plaintiffs with respect to the proper construction of words and phrases within particular clauses of the CSA fails to have regard to the reality of the commercial context in which the CSA operated, and sought to construe its terms as if the CSA was hermetically sealed. It is clear, however, that recourse may be had to matters external to the CSA to assist in identifying the purpose or object of the transaction in question.[17] The proper construction of the CSA "is to be determined by what a reasonable person in the parties' position would have understood it to mean having regard to its text, the surrounding circumstances known to them, and the purpose and object of the transaction it embodies".[18] Moreover, the CSA was a commercial contract, which must be construed with a view to making commercial sense of it.[19]
[84] The relevant broader commercial context in which the CSA falls to be construed is that of the production and export of Queensland sugar. Each of the plaintiffs must be taken to have known of the role of QSL in this context - indeed, so much is plain from the references to QSL in the CSA itself. Moreover, while the precise terms of the RSSA were not disclosed to growers, it is clear that the way in which QSL conducted its export and marketing operations and the general effect of the way in which the RSSA operated was well known in the industry, including by growers. So, for example, one of the documents disclosed by the plaintiffs in this proceeding was a PowerPoint presentation given to growers by CSR (the defendant's predecessor) on 27 February 2008.[20] Slides in that presentation recorded:
[85] Also in evidence were the slides of another PowerPoint presentation given to growers by CSR in October 2008.[21] Amongst other things, this presentation explained how the "Shared Pool" operated, stating relevantly:
[89] Under the RSSA's, QSL was entitled to pass the "delivery shortfall costs" back to the millers, and for it to do so was completely consistent with the stated intent of each RSSA. Moreover, the effective distribution of these "delivery shortfall costs" was accommodated within the provisions of Schedule 2 cl 2.4.1.1 of the RSSA. In such a situation, the "default" position under cl 2.4.1.1 was for these costs to be distributed equally, based on tonnage, to the Pricing Platform Pools. Notably, this "default" position was also expressed to be an "interim" measure, pending a determination by QSL and the millers as to whether it would be fairer to distribute those costs to the Shared Pool. As has already been noted, QSL in fact implemented this "default" position. But it was also the case that this "default" position, as an interim measure, could be supplanted by a determination subsequently agreed upon by QSL and the millers. And this is precisely what happened.
[90] QSL and the millers did, in fact, agree on the method of allocation of the "delivery shortfall costs" by determining to allocate the costs across all tonnes of sugar in all pools, via the Shared Pool. The consequence of this was a reduction in the value on a "$/tonne IPS sugar" basis in each of the various pools in the Shared Pool. The amount of that reduction in the defendant's case was, in each pool, $47.69 per tonne IPS sugar. That QSL determined the "$/tonne IPS sugar" value for each pool after making that deduction is evident from each of the pool reports published by QSL to the defendant after March 2011. These determinations by QSL as to the "$/tonne IPS sugar" then informed the amounts paid by QSL to the defendant for the sugar it had actually supplied to each of the pools. And, as already noted, those same "$/tonne IPS sugar" values were applied by the defendant in calculating the final amounts to be paid to the plaintiffs under their respects CSA's (albeit at the same time providing the ameliorating rebate).
[91] Otherwise, insofar as the plaintiffs' arguments turned on specific references in the definitions of "US Quota Value" and "Long-Term Contract Value", on the construction of the CSA in this context which I favour:
[92] Lest it be thought otherwise, I should state clearly that I am not here construing the CSA by reference to the words of the RSSA. My construction of the CSA, rather, necessarily involves application of consequences which flowed from the operation of the RSSA. It was not, and could not be, suggested that QSL and the millers, including the defendant, were not entitled to agree, as they did, to allocation of the "delivery shortfall costs" across the Shared Pool.
[93] In my view, the subsequent adoption by the defendant of a "Sugar Value" which, as an ultimate consequence of the agreement reached under the RSSA, was reduced by $47.69 per tonne IPS sugar and then rebated by the defendant to a net reduction of $42.50 per tonne IPS sugar, was not, as the plaintiffs asserted in this proceeding contrary to the express terms of the CSA.
[94] The plaintiffs also sought in their submissions to bolster their arguments concerning the proper construction of the CSA by reference to specific terms of the FPA's which some, but not all, of the plaintiffs had also entered into with the defendant. The defendant objected to this argument, saying both that it was not properly raised on the pleadings and that senior counsel for the plaintiffs, when opening the case, had effectively disclaimed reliance on the terms of the FPA.
[95] The highest the plaintiffs' submissions on this point went was to point to two provisions of the FPA - cl 6.3, which specified the relevant grower's obligation to deliver specified tonnages of cane (described as "the Committed Cane Tonnage" and "the Priority Priced Cane") and cl 12, which set out the consequences for the grower if the grower delivered less than the aggregate quantity of the Committed Cane Tonnage and Priority Priced Cane for a particular season. For a grower who had entered into an FPA, the terms of the FPA were incorporated in, and formed part of, that grower's CSA. In those circumstances, it was contended that the incorporation of cl 6.3 and cl 12 of the FPA into the CSA presented "a powerful argument against construing other provisions of [the FPA] as involving Growers assuming a liability to meet part of the futures trading losses incurred by QSL".[23] I respectfully disagree for a number of reasons:
[96] In relation to the proper construction of the CSA, it is necessary also to mention an argument which was addressed on behalf of the plaintiffs concerning the defendant's assertion to the effect that the defendant was not obliged to make payment to growers unless and until QSL made a payment to the defendant. In this regard, it will be recalled that on 11 March 2011, Mr Burgess had written to growers advising, amongst other things[24]:
[140] It will be clear from what I have said above that I accept that it would have suited the defendant to achieve the "Shared Pool" solution for the "selfish" reasons identified by the plaintiffs. But an assessment of whether, in seeking that outcome the defendant engaged in conduct characterised by a lack of good faith, or a lack of regard for the defendant's interests, or a lack or moral foundation, calls for consideration of the defendant's principal motivation in seeking the outcome and its conduct in seeking to balance, in the particular circumstances of this case, the competing interests of the various stakeholders in the Queensland export sugar market who were adversely affected by the disastrous 2010 Season.
[141] Having regard to the broader issues to which I have referred, I am not satisfied that the defendant's conduct was infected by a lack of good faith or lack of regard for the plaintiffs' interests, nor was it such as to have rendered it statutorily unconscionable.
[142] Accordingly, I do not accept the plaintiffs' alternative claims.