Plaintiff v Defendant

Plaintiff v Defendant - [2006] VSC 234 - VSC 2006 case summary — Zoe

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27 Both the Base Grape Values, or Variety Prices, and the Grape Value Grade scales increased in every year of the Initial Period. It was submitted on behalf of the plaintiff that the Grape Value Grade scales increased by a rounded amount of 3 per cent in each year of the Initial Term. This is conceded by the defendant.

28 A Grade Premium is to be calculated by reference to the three elements of the Grade Premium formula set out in cl. 6.3. The first element is the Base Grape Value Grade. The definition of this term in cl. 26.1 of the terms and conditions indicates that the same Base Grape Value Grade is to apply in both the Initial Term and the Option Term. This follows from the definition of "Term" in cl. 21.1 of the terms and conditions.

29 The second element of the Grade Premium formula is the Vintage Grape Value Grade of the relevant parcel of grapes, as determined by Southcorp.

30 The third element of the Grade Premium formula is the Grape Value Grade scale. Clause 6.3 of the terms and conditions provides that this element is that "set out in" the Pricing Details schedule.

31 For example, the calculation of a Grade Premium for a parcel of chardonnay grapes supplied in 1998 with a grade of 9 would be as follows:

(9 - 7) x 63 = $126.

This calculation is possible during the Initial Term, because the Pricing Details schedule sets out the Grape Value Grade scales for each variety of grapes in each Vintage Year of the Initial Term.

32 However, the Pricing Details schedule does not set out a Base Grape Value Grade or a Grape Value Grade scale in respect of any variety of grapes for any Vintage Year in the Option Term. All that appears in the Pricing Details schedule for the Option Term is a reference to an "Option Term Minimum Price" per tonne of grapes. Reference to cl. 2.7.1 of the terms and conditions indicates that this is intended to be the Variety Price, or Base Grape Value, for the whole of the Option Period in the absence of contrary agreement.

INTERPRETATION OF THE AGREEMENT

33 The question arises as to whether, on a proper construction of the Agreement, the parties intended that a Grade Premium would be payable during the Option Term. The relevant principles of contractual interpretation are not in doubt. The meaning of a commercial contract is to be determined objectively, by reference to what a reasonable person in the position of the parties would understand the language used in the contract to mean.[5]

34 On behalf of Southcorp, it was submitted that the omission from the Pricing Details schedule of any Grape Value Grade scale for the Option Term indicates that the parties considered whether a Grade Premium would be payable in respect of grapes supplied during the Option Term and decided that no such premium would be payable. If they had intended that such a premium would be payable, it would have been a simple matter to specify in the Pricing Details schedule a Grape Value Grade scale for each year of the Option Term in respect of each grape variety. The fact that the parties have chosen to specify only that the sum of $600 will be payable as the "Option Term Minimum Price" per tonne indicates an unambiguous intention that no Grade Premium is payable during the Option Term.

35 On behalf of the plaintiff, it was submitted that, when the Agreement is construed as a whole, it discloses an objective intention that the quality of the grapes to be supplied by the plaintiff was of critical importance to Southcorp. This obvious intention is discernable from the many terms of the Agreement concerning quality issues. Based upon this objective purpose, it was submitted on behalf of the plaintiff that the Court should give primacy to the intention expressed in cll. 2.7, 5.1 and 6.1 of the terms and conditions, which state that Southcorp will pay a Grade Premium in each Vintage Year of the operation of the Agreement, including during the Option Term. Having regard to the obvious intention expressed in these clauses that a Grade Premium would be payable during the Option Term, it was submitted that the Court should strive to construe the Agreement to make it work. The suggested approach was that the Court should attribute to the parties an intention that the Grape Value Grade scale for the Initial Term should be extrapolated at the rate of 3 per cent per annum throughout the Option Term.

36 It was also submitted on behalf of the plaintiff that this approach should be adopted because the interpretation suggested by the defendant would lead to a result which was capricious, unreasonable, inconvenient or unjust. It was submitted that this result would follow because the clear purpose of the pricing structure in the Agreement was to reward good quality grapes and punish bad quality grapes. An interpretation which involved no Grade Premium being payable during the Option Term would have the effect that any reward for good quality fruit would vanish.

37 I reject the arguments advanced on behalf of the plaintiff. In my view, they involve the Court in re-writing the Pricing Details schedule so as to attribute to the parties an intention for which they have not made any provision.[6] The Grade Premium formula requires, for its operation, a Grape Value Grade scale to be set out in the Pricing Details schedule. It would have been a simple matter for the parties to include a Grape Value Grade scale for the Option Term in the Pricing Details schedule if that was their intention. They have not done so. Instead, there is a simple reference to "Option Term Minimum Price" per tonne for the Option Term. This is to be contrasted with the detailed specification in the Pricing Details schedule of a Grape Value Grade scale for each Vintage Year in the Initial Term.

38 I accept that a less obvious interpretation of the words of an agreement may be adopted where the result is properly characterised as capricious, unreasonable, inconvenient or unjust.[7] However, the result of the interpretation of the Agreement which I prefer in this case is not, in my view, capable of being so characterised. However, even if it were, there are no words or figures in the Pricing Details schedule or in the Agreement which are capable of supplying the Grape Value Grade scale for the Option Term. In short, there is no alternative interpretation open, merely the suggestion that the Court should guess what the parties would likely have agreed if they had chosen to express Grape Value Grade scales for the Option Term. In my view, that is not a proper role for the Court in the interpretation of an agreement. In this regard, I adopt the statement of Lord Mustill in Charter Reinsurance Co Ltd v Fagan[8] concerning the interpretation of commercial agreements where it is suggested that a particular interpretation leads to an unreasonable result:

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43 For the above reasons, the suggested implied term is not established.

SURROUNDING CIRCUMSTANCES

44 My view as to the proper interpretation of the Agreement, and as to the suggested implied term, is confirmed by the extrinsic evidence which was led at the trial as to the surrounding circumstances in which the Agreement was entered into.

45 Other than tendering the Agreement in evidence, the plaintiff called no evidence.

46 The defendant called one witness, Bruce McDougall. At material times, McDougall was the General Manager - Supply and Business Development of the defendant. He was responsible for all external grower-contracted fruit, including the negotiation of and signing of grape supply contracts with growers in Australia and California. He had delegated authority to make decisions on and sign grower contracts on behalf of the defendant. He in fact signed the Agreement on behalf of the defendant.

47 In cross-examination, McDougall accepted that, at the time of entry into the Agreement, "the supply of grapes was short in some areas" of Australia and that Southcorp had targeted certain areas to ensure supply of good quality grapes. However, he did not recall the specifics of the Sunraysia area, in which the Vineyard is located. This was the only evidence of prevailing market conditions at the time of the Agreement. This evidence does not cause me to alter my view on the issues of interpretation or implied terms of the Agreement.

48 McDougall gave evidence as to the specific circumstances in which the Agreement was signed, as appears below.

49 The Vineyard was previously managed by Murray Bend Management Pty Ltd ("Murray Bend"). Murray Bend entered into an agreement with the defendant dated 30 May 1997 ("Murray Bend Agreement"). Insofar as is relevant, the Murray Bend Agreement contains the same terms and conditions as the Agreement. Murray Bend encountered financial difficulties very soon after the execution of the Murray Bend Agreement. Administrators were appointed. In the result, a firm of accountants, Thomsons, and a firm of solicitors formed the plaintiff and promoted a new venture to investors under which investors could invest in the Vineyard under the management of the plaintiff.

50 In November 1997, the plaintiff issued an Information Memorandum ("the Information Memorandum") to potential investors, seeking investment in the Vineyard. Although the plaintiff had not then finalised arrangements with the defendant to enter into the Agreement, it is apparent that there were discussions between Thomsons and the defendant about the "transfer" of the existing Murray Bend contract to the plaintiff.

51 In the Information Memorandum, potential investors were asked to invest on the assumption that the plaintiff would obtain a supply agreement with the defendant. The Information Memorandum states:

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63 It follows that evidence of the Information Memorandum and of Southcorp's concurrence in it is admissible in determining the intention of the parties as to whether a Grade Premium is payable during the Option Term, or as to whether the Court should imply a term to the effect suggested. The Information Memorandum, when read as a whole, makes a number of references to the proposed contractual arrangements with Southcorp. I have set these out above. In my view, these references unambiguously record an understanding by the plaintiff that no Grade Premium was payable during the Option Term. The statement by McDougall in his letter of 23 December 1997, that Southcorp was "comfortable with the Southcorp references" in the Information Memorandum, should be understood as Southcorp's concurrence with the plaintiff's understanding, as recorded in the Information Memorandum, that no Grade Premium was payable during the Option Term.

64 Accordingly, the admissible extrinsic evidence as to the surrounding circumstances in which the Agreement was entered into confirms that no Grade Premium is payable under the Agreement during the Option Term, either expressly or by implication.

65 There was also some evidence which was led and cross-examined about which, upon reflection following full argument, is not admissible on the issues of interpretation or implied term. This evidence has not influenced my decision in any way.

66 In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd[21] Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ voiced their disapproval of inadmissible evidence being received without objection in cases concerning the interpretation of commercial contracts, and referred to the difficulties which may be experienced on appeal in knowing "the extent to which the inadmissible material influenced the judgment at first instance." Accordingly, I will refer briefly to those items of evidence which I have not taken into account in reaching my decision.

67 In his witness statement, McDougall stated the following in respect of the Information Memorandum:

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68 In oral evidence, McDougall said that he had regard to the entirety of the Information Memorandum in forming his opinion that there was nothing in it that was inconsistent with the proposed supply agreement. Further, he stated that he understood the statement in the Information Memorandum that "it would not be unreasonable to assume bonuses throughout the term of the Contract" as referring to the Initial Term.

69 In my view, although this paragraph of McDougall's witness statement was admitted without objection, the evidence contained in that paragraph, and McDougall's oral evidence referred to above, is not admissible in aid of construction of the Agreement or in determining whether any terms should be implied in the Agreement. The evidence is of McDougall's subjective understanding as to the contents of the Information Memorandum in relation to the proposed agreement with the plaintiff.

70 McDougall stated in his witness statement that "the Murray Bend contract was based on one of Southcorp's standard form contracts known as the 'variety price' contract". Although I admitted this statement in evidence, it has played no part in my reasoning. As I have said, the terms and conditions are, on their face, generic in character and obviously designed to operate upon matters which have been specifically agreed in the Memo of Agreement and the Schedules.

71 Some admitted facts were placed in evidence as to the average weighted prices of chardonnay, shiraz and cabernet sauvignon grapes in the Murray Darling and Swan Hill wine regions, in which the Vineyard is situated. The admissions establish that for the 2005 Vintage Year, the district weighted averages per tonne were $377.54 for cabernet sauvignon, $523.79 for shiraz and $651.87 for chardonnay. Although the plaintiff did not object to the admissions being received in evidence, it was submitted on behalf of the plaintiff that the evidence was irrelevant to the task of interpreting the Agreement. It is not evidence of surrounding circumstances in which the Agreement was made and, in any event, the district weighted average price for grapes has no relevance to the payment of a premium for grapes of a higher quality than a base value adopted by the parties. In my view, the plaintiff's submissions in this regard were correct. Accordingly, I have taken no account of this evidence in reaching my conclusions as to the proper interpretation of the Agreement and in rejecting the implied term.

CONCLUSION

72 For the above reasons, the proceeding should be dismissed. I will hear the parties as to costs.

APPENDIX

MEMO OF AGREEMENT - VARIETY PRICE

PRICING DETAILS - ITEM 5

At a glance

Court

Decision date

Before

Source

Judgment (46 paragraphs)

Parties

Cases Cited (7)