The Sales Goal for 2007
43 Mr Jackman SC, for Philips, drew our attention to evidence that was admitted about the process of negotiation of the Amending Deed. On 29 May 2006 Mr Chalmers, of Philips, emailed Mr Walstab, of InSight, saying, amongst other things:
"Appendix A is being recalculated and will be submitted to you shortly. Note that Sales Goal shall include a statement that a sale is recognised when Philips issues its invoice to InSight."
44 That was in substance an attempt to have a sale recognised for the purpose of the Sales Goal only at the comparatively late stage, in the progress of a sale from initial negotiation to actual delivery, when Philips issued its invoice to InSight.
45 Mr Walstab replied to Mr Chalmers on 6 June 2006, saying:
"It is not possible to agree to your addition of the sales goal clause, the sales goal has always been based on a customer booking, this represents a material change to our ability to perform our duties of the agreement."
46 There are two reasons why these communications do not enter into construction of the 2007 Sales Goal. The first is that they relate to the Sales Goal that was adopted for 2006, not that adopted for 2007. The second is more fundamental, namely that these communications concerning the negotiation are not admissible as an aid to construction as they are evidence of the subjective intentions of the parties: Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 352.
47 It is clause 4.01 that incorporates the notion of a Sales Goal into the Agreement, and thus clause 4.01 is a sensible place to start in deciding what sales count towards the Sales Goal. But the operation of clause 4.01, as replaced by the Amending Deed, needs to be considered in light of other provisions of the Agreement. Clause 18 makes clear that the relationship between Philips and InSight is that of a vendor and purchaser of goods. The "payment terms" part of Appendix A requires InSight to pay 100% of the price of the goods 75 days from the date of shipment of the system. Clause 26.02 requires InSight to pay interest, at a significant rate, on any overdue payments. Clause 6.09 has the effect that InSight bears the risk of fluctuation in the exchange rate between Australian dollars and US dollars between the date InSight places its order and the date of actual payment. Clause 6.05 provides that title to, and risk of loss of goods, passes to InSight upon delivery. Thus, once InSight has placed an order, it is its problem if any end-user is not ready to take delivery of goods when they are delivered to InSight, does not pay InSight at the time the end-user agreed to pay InSight, or is prepared to purchase from InSight only if it is obliged to pay InSight for the goods on some date that is later than 75 days from shipping of the system. In all these respects, InSight was merely a purchaser of Philips' Products. That, together with it being the US dollar price at which Phillips sells to InSight that is the means by which the Sales Goal is measured, supports the relevant "Sales" that count towards the Sales Goal being sales that Philips makes to InSight.
48 However it must be recognised, in construing the agreement, that InSight has significant obligations to Philips concerning the marketing of Products to end-users. InSight's obligation, under the first sentence of the replacement clause 4.01 "to use its best efforts to sell, or procure sales contracts for, the PRODUCTS in the TERRITORY", (and the similar obligation under clause 5.01) creates an obligation that binds InSight to exercise a "high degree of activity and effort" (Transfield Pty Ltd v Arlo International Ltd (1980) 144 CLR 83 at 93-94 per Stephen J). In Transfield v Arlo at 101 Mason J said:
"A 'best endeavours' clause thus prescribes a standard of endeavour which is measured by what is reasonable in the circumstances, having regard to the nature, capacity, qualifications and responsibilities of the licensee viewed in the light of the particular contract."
49 Wilson J in Transfield v Arlo at 107 said that a company bound by a best endeavours clause:
"… was obliged to do all that could reasonably be expected of it having regard to the circumstances of its business operations".
50 The obligation to use its best efforts bound InSight during the entire time the Distribution Agreement was on foot, and bound it even if in any particular year it had already reached its Sales Goal.
51 InSight had various obligations under provisions of the Agreement that I have not set out above. Under clause 5.05 it was obliged to "have adequate facilities and personnel or agents … to market, distribute, install and support the PRODUCT effectively." Clause 5.05 also obliged InSight to "fully train its sales and service personnel with respect to all pertinent aspects of the PRODUCTS". Under clause 13, Philips agreed to provide "applications training for designated representatives" of InSight "in the theory and operation of the PRODUCTS at PMS headquarters or other mutually agreed location". Philips also agreed that it "will provide applications training at [InSight's] or a customer's site" for a fee of US$6,000 for a five day course. All these obligations related to InSight's activities of on-selling, and providing after sales service for, the Products.
52 Given the technically sophisticated nature of the Products, it is within the reasonable contemplation of people in the position of the parties that best efforts to sell a Product might in some circumstances require a potential customer to be given a demonstration of the Product before the customer decided to purchase, which might in turn require InSight to have, at least so far as the less expensive items were concerned, a sample on hand that could be demonstrated to the customer.
53 That InSight might sometimes purchase Products other than for immediate on-sale to a customer is expressly contemplated by clause 29.03 of the Agreement, giving Philips an option (but not an obligation) to re-purchase all Products owned by InSight at the effective date of termination, excluding only Products needed to fill orders received by InSight prior to the date of the notice of termination.
54 In both these ways, the working through of the terms of the Agreement has the consequence that it could sometimes happen that InSight had ordered, paid for, and received delivery of a Product (thereby becoming the owner of the Product) in circumstances where InSight had not acquired the Product for the purpose of fulfilling an order from a customer. It would be commercially odd if Products that InSight acquired in such circumstances did not count towards the Sales Goal.
55 As well, there are other circumstances where it could be commercially sensible for InSight to place an order with Philips even if InSight did not have any corresponding order from a customer. This could happen if InSight was hopeful, or had reason to believe, that it would enter into a contract to sell the Product to a particular end-user in due course and wished to be in a position to make delivery promptly without the lag time involved in the Product coming from overseas; or if it wished to lock in a price or protect itself from a feared unfavourable exchange rate movement by placing an order with Philips. It is foreseeable that best efforts to sell a Product might sometimes require InSight to take such steps. Again, it would be commercially odd if Products that InSight acquired in such circumstances did not count towards the Sales Goal.
56 The obligation created by the second sentence of the replacement clause 4.01, for InSight "to sell or procure sales contracts for such number of PRODUCTS as enable [InSight] to meet or exceed" the appropriate Sales Goal needs to be considered in the context of the matters I have been discussing. The activity of selling or procuring sales contracts that InSight agrees to carry out is selling to, or procuring sales contracts with, potential end-users. However the Sales Goal is measured by a reference to the "units" involved in sales that Philips makes to InSight. The force of "as enable" in that expression is, as a matter of ordinary language, the same as "as make it possible for", or "as give it the means to". In other words, InSight's obligations to sell or procure sales to end users is one that it is to perform for the purpose of meeting or exceeding its Sales Goal. However, there is nothing in the language that says that InSight's Sales Goal can be achieved by no means other than sales or sales contracts to customers.
57 I conclude that on the proper construction of the agreement, the 31 December 2007 order counted towards achievement of the Sales Goal.
58 It follows from the argument so far that in my view the judge's construction of the Sales Goal for 2007 is mistaken, but the Respondent succeeds in upholding the result at which the trial judge arrived concerning the 2008 notice by virtue of the argument of construction arising under its Notice of Contention.