Plaintiff v Defendant

Plaintiff v Defendant - [2007] VSC 102 - VSC 2007 case summary — Zoe

I INTRODUCTION

1 The plaintiff, Ansett Australia Ltd, operated a commercial airline throughout Australia from 1936 until 14 September 2001. Two days prior, on 12 September 2001, Ansett was placed in voluntary administration under Part 5.3A of the Corporations Act 2001 (Cth). It was hopelessly insolvent at the time and that position continues. There is no chance of any unsecured creditor, other than employees, receiving any payment.

2 From 1991 until its collapse, Ansett operated a frequent flyer program known at material times as the "Global Rewards" program. The Global Rewards program was suspended on 14 September 2001 and has never been reinstated. Under the Global Rewards program, its members could "earn" Global Reward points in, relevantly, two ways. First, by flying with Ansett or one of its "Star Alliance" airline partners. Second, by members making purchases on charge or credit cards issued by two financiers who were, by agreement with Ansett, participants in the Global Rewards program. Diners was one of these financiers.

3 The Global Rewards points were, subject to the terms and conditions of the Global Rewards program, able to be exchanged for travel on Ansett or Star Alliance partner airline flights. In this sense, they can be described as "frequent flyer points", although the Global Rewards program also provided for points to be exchanged for other rewards.

4 The defendant, Diners Club Pty Ltd, was a participant in the Global Rewards program from its inception in 1991. The 1991 participation agreement between Ansett and Diners was re-negotiated in 1998 and became effective on 5 January 1999. It was to operate for a period of five years until 4 January 2004 or until it was terminated in accordance with its terms.

5 By the participation agreement, Ansett agreed to credit Diners cardholders who were also members of its Global Rewards program with 1.5 Global Rewards points for each dollar spent on their Diners card and paid for within Diners' terms of trading. In consideration for Ansett crediting Global Rewards points to Diners cardholders, Diners agreed to pay Ansett an agreed amount for each point credited to a cardholder's Global Rewards account.

6 At all relevant times, no other issuer of charge or credit cards in the Australian market had an arrangement with a major airline under which there was an unqualified entitlement to 1.5 frequent flyer points for every dollar spent on their card.[1] Under these competing arrangements, cardholders of other charge or credit cards were entitled to only one frequent flyer point per dollar spent on their card. In particular, Diners' principal competitor, American Express, had arrangements with Ansett's principal competitor, Qantas, under which its cardholders who were members of the Qantas frequent flyer program received only one point for each dollar spent on their American Express card.

7 The 1.5 point arrangement between Diners and Ansett was beneficial to both of them in building their businesses and client loyalty. Marketing by Diners and Ansett focussed on this advantage over their competitors, American Express and Qantas.

8 In this proceeding, Ansett claims amounts which it alleges are due to it by Diners under the participation agreement and under a separate "Master Merchant Agreement."

9 Under the terms of the participation agreement, Diners was required to pay Ansett for Global Rewards points credited to the accounts of its cardholders within 30 days of invoice by Ansett. Invoices totalling $9,632,793 remain unpaid. The invoices relate to points credited in July, August and September 2001. Ansett claims this amount from Diners, together with interest.

10 Under the Master Merchant Agreement, Ansett agreed to allow Diners cardholders to use their Diners card to purchase airline tickets. The unpaid amounts allegedly owing by Diners to Ansett for these purchases is $20,507,410. Ansett's claim against Diners in this regard has been stayed and an arbitration is proceeding in New York in respect of it.

11 Diners disputes any obligation to pay the moneys claimed by Ansett. In the event that any money is owing by it, Diners contends that it is entitled to set-off against Ansett's claims an amount of at least $46 million in respect of alleged breaches of the participation agreement by Ansett. Further, Diners raises counterclaims for this amount.

12 Diners principal defence is based on the allegation that it was a term of the participation agreement that Ansett would continue to operate the Global Rewards program during the period of the participation agreement. Diners alleges that the suspension of the Global Rewards program was in breach of this alleged term and was a fundamental breach of the participation agreement, entitling it to terminate the participation agreement and claim loss of bargain damages from Ansett.

13 Diners alleges that the collapse of Ansett had a significant effect upon its business. Although Diners entered into arrangements to participate in the Qantas frequent flyer program soon after Ansett's collapse, it was only able to negotiate an arrangement under which its cardholders received one Qantas frequent flyer point for each dollar spent on their Diners card. As a result, Diners lost the competitive advantage which it had previously enjoyed over American Express and other card issuers. Over time, Diners cardholders reduced their expenditure on their Diners cards, or cancelled their Diners cards altogether. Diners alleges that this was caused by Ansett's collapse and consequent suspension of the Global Rewards program.

II FACTS

14 Prior to the collapse of Ansett, Ansett and Qantas were Australia's two major domestic airlines and were direct competitors.

15 Diners and American Express are and were at all relevant times the two major issuers of charge cards in the Australian market, and are and were direct competitors.

16 Charge cards differ from credit cards. There is no option to pay a portion only of the amount charged and to finance the balance, as is the case with credit cards. The holder of a charge card is required to pay the full amount charged to the card within a specified period.

17 Credit cards are more widely issued in the marketplace than charge cards. In general, the holders of charge cards are wealthier and travel more often than the general population, for both business and pleasure.

18 Typically, a charge card holder will also hold one or more credit cards. Many traders will not accept charge cards, as the fees or commissions they are charged by the issuer will usually be significantly higher than those charged by the issuers of credit cards. Further or alternatively, some traders will seek to extract all or part of the fees or commissions from their charge card customers.

19 In 1974, Ansett purchased 50 per cent of the issued shares in Diners. This shareholding was increased in October 1991 to 68.2 per cent. Ansett maintained this shareholding in Diners until 5 January 1999. As a result, Ansett was represented on the board of directors of Diners during this period.

20 In or shortly after January 1991, Ansett launched its initial frequent flyer program.

21 On 14 January 1991, Ansett and Diners entered into a participation agreement under which Diners agreed to participate in the Ansett frequent flyer program.

22 The 1991 participation agreement contains the following recitals:

[6]

23 The 1991 participation agreement does not make express provision for Ansett to credit frequent flyer points to Diners cardholders. The only obligation upon Ansett to credit frequent flyer points in respect of purchases on Diners cards was contained in the rules and conditions of the frequent flyer program. From the inception of the Ansett frequent flyer program, the Ansett frequent flyer program rules and conditions contained specific reference to the circumstances in which Ansett frequent flyers could "earn" frequent flyer points by using their Diners card for purchases.

24 The terms of the 1991 participation agreement reveal that the relationship thereby established between Ansett and Diners was intended to promote their respective businesses. There was to be sharing of confidential information relating to the identities of members of the frequent flyer program and their flying habits, and as to the identity of Diners cardholders and their spending habits. Each party agreed to keep the confidential information of the other confidential at all times. Further, the parties agreed upon joint promotions of their respective businesses, using the confidential information. Finally, it is relevant to note that the 1991 participation agreement imposed an obligation on Ansett that it would not enter into any similar participation agreement with any other charge card issuer in respect of Ansett's frequent flyer program. There was no restriction upon Diners participating in other frequent flyer programs.

25 Further, from inception, the Ansett frequent flyer program rules and conditions gave Ansett an unqualified right, without notice and in Ansett's absolute discretion, to suspend or terminate the program at any time, to cancel a membership at any time, to restrict the availability of awards or to withdraw or change the awards which were available at any time and to vary the program rules and conditions. These rules and conditions, with immaterial variations, continued to apply throughout the period of the 1991 participation agreement and the re-negotiated participation agreement which came into effect on 5 January 1999.

26 The rules and conditions of the Ansett frequent flyer program were re-issued from time to time. Diners admits that it was aware of them, and was also aware of the terms and conditions of the Global Rewards program which replaced the Ansett frequent flyer program, at all relevant times.

27 In 1997 Ansett informed Diners of its decision to sell its 68.2 per cent shareholding in Diners. With this potential sale in prospect, Ansett and Diners commenced negotiations towards concluding a new participation agreement. A new participation agreement was agreed to and executed by Ansett and Diners in October 1998, but was not dated. The executed document was then held in escrow until completion of the sale of Ansett's shares in Diners. As a result, the participation agreement was dated 5 January 1999 and came into effect on that date.

28 At the time of the negotiation and entry into the 1999 participation agreement which is the subject of this proceeding, the terms and conditions of the Global Rewards program contained a number of provisions giving Ansett the ability to vary, suspend or terminate the Global Rewards program at any time in its absolute discretion. For example:

[8]

29 Further, at the time of negotiation and entry into the participation agreement, there had been numerous joint marketing activities conducted by Diners and Ansett. The advertisements were in both print and electronic form. They focussed heavily upon the provision of free Ansett and Star Alliance flights for Diners Club members who used their Diners card for purchases. In marketing and advertising materials provided by Diners to prospective applicants for a Diners card in the period prior to entry into the participation agreement, Diners stated "Global Rewards is a reward program for frequent air travellers... Ansett Australia may vary or terminate the Program at any time, without notice."

30 This proceeding concerns the proper interpretation of the participation agreement. The material terms of the participation agreement are set out below. It is sufficient to note for the purposes of this factual narrative that the participation agreement is more detailed than its 1991 predecessor; is for a fixed period of five years; contains detailed provisions as to the circumstances in which either party may terminate it within that five year period; makes some provision for the consequences of an early termination; and provides that both parties are subject to exclusivity restrictions.

31 In June 2000, Air New Zealand became the sole shareholder in Ansett. On 8 or 9 September 2001, Air New Zealand withdrew a letter of comfort that it had provided to support Ansett and its related companies. This was in circumstances where Ansett had been losing business.

32 The withdrawal by Air New Zealand of its letter of comfort exposed the insolvency of Ansett. On 12 September 2001, Ansett's directors resolved to place it in voluntary administration.

33 At the time administrators were appointed to Ansett, Ansett had issued invoices to Diners for Global Rewards points credited to the Global Rewards accounts of Diners cardholders, in respect of purchases on their Diners cards in the period 1 July 2001 to 25 August 2001. These invoices have not been paid.

34 At 2 am on 14 September 2001, Ansett's administrators suspended Ansett's operations and grounded its aircraft. As part of this general suspension of its operations, Ansett's Global Rewards program was suspended.

35 On 17 September 2001, Ansett's initial administrators resigned and Mark Korda and Mark Mentha were appointed voluntary administrators of Ansett and other companies in the Ansett group in their place.

36 Also on 17 September 2001, Ansett staff processed the final credits of Global Rewards points to the accounts of Diners cardholders. These points related to purchases on Diners cards in the period 25 August to 11 September 2001.

37 Shortly after their appointment, Mr Korda and Mr Mentha decided that the Global Rewards program should remain suspended and not be terminated. They wished to investigate and pursue various options in relation to the Global Rewards program, including the possibility that the Global Rewards program could be reinstated as part of the sale of Ansett's airline business. As a result, the Global Rewards program remained suspended during attempts by the administrators to sell Ansett's airline business. These attempts were ultimately unsuccessful. Notwithstanding this, the Global Rewards program has never been formally terminated. It remains in indefinite suspension.

38 At the time of appointment of the administrators and the suspension of Ansett's operations, including the Global Rewards program, Diners had for some time been considering the possibility of establishing its own rewards program. In this regard, it had already held discussions with Qantas, with a view to a possible participation agreement with it. In the months leading up to the collapse of Ansett, Ansett and Diners had been conducting negotiations with a view to releasing each other from their respective exclusivity obligations under the participation agreement. In these circumstances, Diners was well placed to act quickly when Ansett collapsed. By 23 October 2001 it had reached agreement with Qantas as to the terms upon which it could participate in the Qantas frequent flyer program.

39 By letter dated 23 October 2001, Diners gave notice to Ansett that it terminated the participation agreement with immediate effect. The termination notice was given pursuant to cl. 9(c)(ii) of the participation agreement. That is a provision which entitles either party to terminate the participation agreement upon the occurrence of an insolvency event relating to the other party. No breach of the participation agreement is required as a condition of serving such a notice. At the time it terminated the participation agreement, Diners had made no assertion that Ansett was in breach of the participation agreement in any way, and had not called upon Ansett to continue to operate the Global Rewards program.

40 As I have said, at the time of this termination, and to this day, the Global Rewards program was suspended only. It has never been terminated. Diners recognised this at the time it terminated the participation agreement. For example, it issued a press release the day before it terminated the participation agreement, which stated:

[10]

41 Further, at the time Diners terminated the participation agreement, it was the intention of the administrators to sell Ansett's airline business and to seek to have the purchaser either reinstate the Global Rewards program or accord some recognition to the accumulated Points of Global Rewards members.

42 At the time of termination, there were four parties who had expressed an interest in purchasing Ansett's airline business, including Singapore Airlines (a Star Alliance member) and Tesna Pty Ltd. No agreement, conditional or otherwise had been reached with any of them. In the result, only Tesna made an offer. After acceptance of that offer, there were discussions between the administrators and representatives of Tesna as to the form of the new frequent flyer program to be introduced by Tesna. The form of the frequent flyer program proposed by Tesna did not involve reinstatement of the Global Rewards program or any automatic recognition of accrued Global Rewards Points. The only way in which any recognition was to be afforded to accrued Points was if a Global Rewards member purchased airline tickets and flew with Tesna.

43 The proposed sale of Ansett's airline business to Tesna did not proceed. Accordingly, the administrators closed down all of Ansett's airline operations.

44 It was not until 19 May 2004 that Ansett issued its final invoice to Diners in respect of Global Rewards points credited to Diners cardholders on 17 September 2001, in respect of purchases on their Diners cards in the period 25 August to 11 September 2001.

45 Further, as I have said, Ansett also makes claims of approximately $20 million against Diners under the terms of the Master Merchant Agreement between Ansett and Diners. That aspect of the proceeding has been stayed. There is an arbitration in respect of it in New York. Counsel for the parties informed me that progress in the arbitration is on hold pending the outcome of this proceeding, and that Diners contends that approximately $17 million of the $20 million claim relates to airline tickets purchased by its cardholders using their Diners card which were not honoured by Ansett because it had ceased operations.

III PARTICIPATION AGREEMENT

46 In order to understand the issues in the proceeding it is necessary to refer to the terms of the participation agreement in some detail. In the participation agreement, Diners is referred to throughout as "the Participant."

47 Recital A to the participation agreement states:

[16]

54 Clause 5(a) unambiguously provides that the consideration from Ansett to Diners is the act of crediting points, and the consideration from Diners to Ansett is the payment of the Defined Percentage for each Point credited. Accordingly, the liability of Diners to pay the Defined Percentage arises on the crediting of the Points.

55 Clause 5(c) of the participation agreement contains machinery provisions for payment by Diners of its liability to pay for points which are credited under cl. 5(a). Clause 5(c)(i) provides for the provision by Diners to Ansett of data relating to Qualifying Purchases on a weekly basis. Clause 5(c)(ii) provides for Ansett to invoice Diners monthly for Points credited to Global Rewards accounts of Diners cardholders, and provides that Diners will pay Ansett within 30 days after the date of the invoice.

56 The claim by Ansett is a straightforward one under the terms of cl. 5(a) of the participation agreement. Based on the data provided by Diners up to 11 September 2001, Ansett credited Diners cardholders with Points for Qualifying Purchases in the period 1 July 2001 to 11 September 2001.[3] Ansett then invoiced Diners for the Defined Percentage in respect of these Points. Diners has not paid the amounts due on these invoices, totalling $9,632,793.

57 Clause 6 of the participation agreement provides for cross-indemnities by Ansett and Diners. Relevantly, cl. 6(c)(iii) provides that Ansett will indemnify Diners in respect of "all liability, losses, damages, costs, expenses, actions and claims incurred by or brought against [Diners] which may result from or arise in any manner out of... any changes to GR caused by Ansett." I will refer to cl. 6 in more detail when considering Diners' defence and counterclaim based upon it.

58 By cl. 7 of the participation agreement, Diners acknowledges that it will acquire confidential information relating to the Global Rewards program, including information relating to the identity and spending patterns of Global Reward members. Ansett makes a similar acknowledgement in respect of access by it to confidential information relating to Diners.

59 By cl. 8 of the participation agreement, the parties agreed to consult as to their respective marketing efforts relating to the Global Rewards program. Further, they agreed to exchange relevant management information unless that exchange would be in breach of the law, including privacy legislation.

60 Clause 9 of the participation agreement is central to the principal issues in the proceeding. It is necessary to set it out in full:

[39]

77 In considering whether or not a suggested term should be implied, the Court is "no more confined than it is when it construes the contract"[10] in relation to the matters which it may take into account. Thus, the Court should have regard to the surrounding circumstances, and the purpose or object of the transaction.

78 In determining whether a suggested implied term is so obvious that "it goes without saying", it is not enough that this would have been the position of one of the parties if the matter had been raised. In order to imply a term, the suggested term must be so obvious that both parties would clearly have agreed to its inclusion in the contract had they directed their minds to it at the time they concluded their bargain.[11]

79 Further, in order to satisfy the requirement for the implication of a term that it is "necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it", it is important to keep in mind that it is not sufficient that the suggested term would make the contract work more sensibly, or more beneficially, from the standpoint of the party seeking its implication.[12] If the contract is capable of sensible operation in the absence of a suggested implied term, the implied term is not necessary to give the contract business efficacy.

VI SURROUNDING CIRCUMSTANCES

80 The parties agree that there were surrounding circumstances known to both parties at the time of entry into the participation agreement which the Court may take into account in interpreting the participation agreement, and in determining whether the implied terms relied upon by Diners should be implied into the participation agreement. These circumstances are set out below.

81 First, it is agreed that the Court may have regard to the terms and conditions of the 1991 participation agreement.

82 Second, it is agreed that the Court may have regard to the terms and conditions of the Global Rewards program which was in existence at the time of negotiation and entry into the participation agreement.

83 Third, it is agreed that the Court may have regard to the fact that agreements like the participation agreement were common in the marketplace between issuers of credit and charge cards on the one hand and airlines on the other. In particular, the general nature of the relationship between American Express and Qantas (one Qantas frequent flyer point per dollar spent) was known to both parties. In addition, Diners' counsel submitted that frequent flyer programs had, by the time of the participation agreement, become an indispensable part of the operation of a full service airline, in order to compete in the airline industry. I accept that this was the case and that it must have been known to both Ansett and Diners. Further, both parties should be taken to have known that a relationship with a full service airline was essential for Diners to compete with American Express. Although the evidence may not establish this, it is obviously so.

84 Fourth, it is agreed that the Court may have regard to the fact that the arrangement between Diners and Ansett was unique in the marketplace, because there was no other charge or credit card which had an arrangement with a full service airline to credit 1.5 frequent flyer points for each dollar spent on their card to the cardholder's frequent flyer account. In particular, the arrangement between American Express and Qantas was for the crediting of one point per dollar spent.

85 Fifth, it is agreed that regard may be had to the fact that Ansett had separate participation agreements with other suppliers of goods and services, including a car rental company, hotel chains and a credit card issuer.

86 Sixth, it is agreed that the Court may have regard to some of the marketing activities undertaken by each party which were approved by the other. I have summarised some of these above. Diners relies upon the fact that the focus of these advertisements was to the effect that use of a Diners' charge card would result in the cardholder obtaining a free flight with Ansett or one of its Star Alliance partners. Ansett acknowledged that this was the substance of the advertisements made or approved by it, but emphasised that these advertisements were placed on the basis of Ansett continuing as a going concern. Further, Ansett drew attention to the fact that some of these advertisements expressly refer to the rights of Ansett under the Global Rewards terms and conditions to suspend or cancel the Global Rewards program at any time.

87 In final submissions, Diners' counsel submitted that there were further surrounding circumstances which the Court should take into account in interpreting the participation agreement. However, properly understood, the matters relied upon were not surrounding circumstances known to the parties. They are a mixture of: (1) terms of the Global Rewards program or the participation agreement; (2) submissions as to the effect of the terms of the Global Rewards program and the participation agreement; (3) evidence of uncommunicated subjective intention or understanding; and (4) statements as to the commercial purpose or object of the participation agreement. There is one exception which I will mention.

88 It is not necessary to set out the terms of the Global Rewards program and the participation agreement, or their effect, relied upon as surrounding circumstances.[13] The matters relied upon form part of Diners' submissions and are taken into account in considering those submissions.

89 The evidence of uncommunicated subjective understanding or intention which was relied upon by Diners was to the following effect. It was submitted that the evidence established that the payments made by Diners to Ansett under the participation agreement in respect of frequent flyer points credited by Ansett to the accounts of Diners' cardholders were not just payments for the crediting of those frequent flyer points, but were understood and intended to be payments for "seats on flights" for Diners' cardholders. Reliance was placed upon the following evidence:

[43]

90 This evidence is not admissible as evidence of surrounding circumstances known to both parties. It is evidence of the understanding of persons who were not involved in the negotiation or entry into the participation agreement (Edye, Cobb, Atkins and Korda) or is evidence of the uncommunicated subjective understanding or intention of the only person who was (Ericson). In any event, the evidence is clearly directed towards different circumstances than the events in question. It involves the subjective understanding and intentions of the witnesses that are based on the assumption that Ansett continues in business as a going concern. The beliefs of Global Rewards members at the time of Ansett's collapse are not capable of constituting an admissible surrounding circumstance for the purposes of interpreting the participation agreement.

91 Diners sought to rely upon evidence that the participation agreement was regarded as having "immense value" to both Ansett and Diners. Although there may be no express evidence to this effect, I accept that this was the case. The evidence as a whole, and commercial common sense, shows that the participation agreement was a very important commercial contract upon which both parties placed much reliance in the conduct of their respective businesses.

92 Diners also sought to rely upon evidence of Ms Cobb that it was "inconceivable" that Ansett would ever terminate either the Global Rewards program or its relationship with Diners. However, there is no evidence of these private thoughts being shared with any representative of Diners. The words were suggested to Ms Cobb in cross-examination and do not form part of the admissible surrounding circumstances for the purposes of interpreting the participation agreement. Further, the evidence relied upon should in any event be understood in the context of Ansett continuing as a going concern.

93 The remaining matters relied upon by Diners as surrounding circumstances are better characterised as submissions as to the commercial purpose or object of the participation agreement.

VII COMMERCIAL PURPOSE

94 There is no dispute as to the general nature of the underlying commercial reasons why the parties entered into the participation agreement.

95 For Diners' part, its overriding purpose was to increase the number of people holding its card and to maximise the amount which its cardholders charged to their cards. This would increase the amount of the interchange commissions which it earned. There is no dispute that interchange commissions constitute the principal source of Diners' revenue.

96 For Ansett's part, it was seeking to increase its ticket sales, the major source of its revenue, by making its frequent flyer program (Global Rewards) more attractive than the Qantas frequent flyer program. Of course, it made no commercial sense for Ansett to simply give away Global Rewards points. Accordingly, Diners was required to pay for the points which were credited to the Global Rewards accounts of its cardholders. The purpose of those payments was to assist Ansett to fund the operation of the Global Rewards program.

97 In order to achieve these aims, each party no doubt wished to use the participation agreement, and marketing based upon it, to maintain and build its customer base and promote customer loyalty. As I have said, Ansett and Diners each gained access to the data of the other under the terms of the participation agreement. It was common ground that this data was valuable in their respective marketing campaigns.

98 Although these commercial purposes were acknowledged by Diners, Diners' counsel submitted that it was important not to blur the distinction between why Diners paid Ansett for frequent flyer points and what Diners was paying for under the terms of the participation agreement. In this regard, Diners submitted repeatedly that Diners was paying Ansett "for seats on flights to its members" and was not paying only for the crediting of Points to the Global Rewards accounts of its cardholders.

VIII FIRST ALLEGED TERM: OBLIGATION TO OPERATE GLOBAL REWARDS

99 The first alleged term upon which Diners relies is that Ansett would, subject to its express right to terminate the participation agreement under cl. 9(b), conduct the Global Rewards program throughout the term of the participation agreement. As I have said, Diners contends that this term arises upon a proper construction of the participation agreement, or alternatively as an implied term.

A Express Term

100 Diners concedes that a term in these words is not stated in the participation agreement. However, Diners contends that this term arises upon a proper interpretation of the participation agreement as a whole, and in particular from the terms of Recital A, cl. 3 and cl. 9(b) of the participation agreement.

101 Recital A contains an acknowledgement that Ansett is conducting the Global Rewards program and gives a brief description of it. It is in the following terms:

[45]

102 It was submitted that this acknowledgement should be construed as an agreement by Ansett that it would continue to conduct the Global Rewards program during the term of the participation agreement, subject only to Ansett's right to terminate the Global Rewards program strictly in accordance with cl. 9(b). It was also submitted that Recital A, when read together with the definition of "Awards" in cl. 1, has the effect that, for the purposes of the participation agreement, the Global Rewards program means a program under which members of the program can exchange "Points" for "Awards", not might be able to exchange subject to the terms and conditions of the program.

103 Under cl. 3 of the participation agreement, Diners agreed "to participate in GR in accordance with this agreement."[16] Under cl. 9(b), Ansett had the right to "terminate this agreement by giving one month's notice that it is ceasing to operate or participate in GR."[17] It was submitted on behalf of Diners that the emphasised words in these clauses make it clear that it is the participation agreement, and not the terms and conditions of the Global Rewards program, which govern the relationship between Ansett and Diners. Accordingly, to the extent of any inconsistency, the terms and conditions of the participation agreement prevail over any rights which Ansett has under the Global Rewards program terms and conditions.

104 It was submitted that Ansett's unfettered right to suspend or terminate the Global Rewards program without notice under cl. 1.3 of the program terms and conditions was inconsistent with the terms of the participation agreement in two relevant respects. First, because cl. 9(b) provides, upon its proper interpretation, that Ansett will not terminate the Global Rewards program unless it first gives one month's notice to Diners. Second, because there is no right to suspend the operation of the participation agreement.

105 It was submitted that the result of these inconsistencies is that Ansett's unfettered rights under cl. 1.3 of the Global Rewards program terms and conditions became the subject of a fetter, contained in cl. 9(b) of the participation agreement. It was submitted that the extent and effect of the fetter is that Ansett agreed with Diners that it would not exercise its right to suspend or terminate the Global Rewards program unless it first gave Diners the notice specified in cl. 9(b) of the participation agreement.

106 I accept that the foundation of the participation agreement is the continuation of the Global Rewards program, or a substitute or successor program. After all, that is what Diners agreed to participate in under the terms of the participation agreement. It follows that the parties must have contemplated that continuance of the participation agreement was dependent upon continuance of such a program; because absent a program to which the participation agreement applies there is nothing to participate in.

107 However, I do not accept that it is an express term of the participation agreement that Ansett will conduct the Global Rewards program throughout the five year term of the participation agreement, unless Ansett first gives one month's notice under cl. 9(b). Nor do I accept that the parties agreed that the Global Rewards program referred to in the participation agreement is anything other than the program which in fact exists from time to time.

108 First, the participation agreement does not contain such a term. There is no promissory language used in Recital A, or elsewhere in the participation agreement, which is capable of being interpreted as a promise by Ansett to conduct the Global Rewards program. In contrast, Recital B to the 1991 participation agreement stated expressly that Diners' obligation to pay the Defined Percentage for points credited by Ansett to the frequent flyer accounts of Diners cardholders was in consideration for Ansett conducting the initial frequent flyer program.

[49]

110 When the definition is read as a whole and in the context of the participation agreement, "GR" must mean the Global Rewards program which was operated by Ansett on the date of the participation agreement, or which is thereafter conducted by a holding company or subsidiary of Ansett, or by any entity of the kind described in (b) of the definition which conducts a successor or substitute program.

111 The only way in which the Global Rewards program, or a successor or substitute program, is capable of being conducted is under its own terms and conditions. The program cannot exist independently of those terms and conditions. The Global Rewards terms and conditions included an unfettered right to suspend or terminate the program without notice to members in Ansett's absolute discretion. It was expressly conceded by Diners that it "well knew and understood"[19] the provisions of the Global Rewards terms and conditions at the time the participation agreement was negotiated and concluded.

112 Third, although I accept that the right to suspend or terminate the Global Rewards program at any time appears to be inconsistent with a five year participation agreement in relation to that program, this apparent inconsistency does not support the first alleged term. This is because the parties made express provision in the participation agreement to deal with the circumstance that Ansett ceases to operate or participate in the Global Rewards program.

113 The parties addressed this issue in cll. 9(b), 15 and 16 of the participation agreement. In none of these clauses is any obligation imposed upon Ansett to conduct the Global Rewards program at all times during the continuance of the participation agreement.

114 Clause 9(b) is concerned with Ansett's right to terminate the participation agreement. It is not concerned with Ansett's right to suspend or terminate the GR program. In the event that Ansett wishes to cease to operate or participate in the Global Rewards program, Ansett may, not must, give notice of termination of the participation agreement.

115 The terms of cll. 15 and 16 indicate why Ansett is given an option to terminate the participation agreement in circumstances where it intends to cease to operate or participate in the Global Rewards program. Clauses 15 and 16 show that the parties contemplated a number of different factual scenarios, other than Ansett exercising its right to suspend or terminate the Global Rewards program under cl. 1.3 of the Global Rewards terms and conditions, in which Ansett may intend to cease to conduct or participate in the Global Rewards program.

116 It appears that an assignment or transfer under cl. 15(b) was not intended to be the subject of cl. 9(b), even though it may involve Ansett ceasing to operate the Global Rewards program. In such circumstances, the program would then be conducted by an Ansett holding or subsidiary company, as permitted by cl. 15(b)(i), or by the company or entity described in cl. 15(b)(ii). However, the extended definition of "GR" and cl. 15(b) indicate that the parties intended that such an assignment or transfer would give rise to a novation of the participation agreement on exactly the same terms, with the new operator being substituted for Ansett as a party to the novated participation agreement. In these circumstances, the parties could not have intended that Ansett should have a right to terminate the very agreement which it had "assigned".

117 Clause 9(b) is capable of applying in the circumstances contemplated by cl. 16(a), which are not limited to assignments under cl. 15(b). Instead of Ansett exercising its rights under cl. 15(b), Ansett may wish to enter into another arrangement under which there will be changes to the structure, ownership or operation of the Global Rewards program. These changes may involve Ansett ceasing to operate the Global Rewards program. For example, Ansett could establish an alliance with an airline or airlines other than Air New Zealand and Singapore Airlines, and could commence participating in the frequent flyer program operated by that airline or those airlines. In these circumstances, Ansett may wish to cease operating the Global Rewards program but not wish to terminate the participation agreement, and instead work with Diners to agree upon a new arrangement as contemplated by cl. 16(a).

118 What did the parties intend if Ansett ceased to operate or participate in the Global Rewards program in circumstances where Ansett did not, or did not intend to, commence operating or participating in a different frequent flyer program, as contemplated by cl. 16(a) of the participation agreement? It is likely that, short of the insolvency of Ansett and consequent cessation of its business, as happened here, the parties did not contemplate such a situation occurring. Clause 9(c)(ii) records the intention of the parties in the event that Ansett, or Diners, became insolvent. In such event, either party may terminate the participation agreement.

119 Did the parties intend that cl. 9(b) would govern the rights and obligations of the parties in such a situation? I think not. It is likely that if such an issue arose in negotiations and was considered worthy of providing for, the parties would have agreed some other arrangement than cl. 9(b) to cover the situation, such as a term that the participation agreement would terminate automatically or that either party could terminate it, as in the case of insolvency. Any other arrangement would lead to the uncommercial and obviously unintended result that termination of the participation agreement would depend upon the service by Ansett of a one month notice under cl. 9(b) and the expiry of that notice period. If no notice is served, or until expiry of a notice which is served, each of Ansett and Diners would remain bound by its exclusivity covenant contained in cl. 11 of the participation agreement. The parties could not have intended this. In these circumstances, a term should be implied in the participation agreement. For example, a term that if Ansett ceases to operate or participate in any frequent flyer program, either party may terminate the participation agreement. Such an implied term would satisfy each of the essential conditions to ground the implication of a term.

120 However, no such implied term has been put forward by the parties and it is unnecessary to decide whether such an implied term exists. This is because, in any event, such an implied term would not assist Diners. It would only serve to give Diners another "no fault" basis to terminate the participation agreement, in addition to the right which it in fact exercised under cl. 9(c)(ii) on 23 October 2001. A termination pursuant to such an implied term would give Diners no basis to claim loss of bargain damages.

121 Fourth, I reject the attempt by Diners to support the first alleged term by reference to the decision in Easterby v Sampson.[20] In that case, there were two separate agreements made between the owner of an undivided third part of certain mines and a builder. The first agreement was made between the owner of the undivided third, the owners of the other two thirds and the builder for the demolition of an old smelting mill and the construction of another mill of larger dimensions.

122 The second agreement was a lease agreement between the owner of the undivided third (the lessor) and the builder (the lessee). Under the lease, the lessor agreed to lease an undivided third of the mines to the builder/lessee. The lease contained a covenant for the builder/lessee to keep the new mill in repair and leave it in good condition at the expiration of the term. However, the lease did not contain a covenant to build the new mill.

123 The lease recited that the builder/lessee had taken down the old smelting mill with the permission of the owners of the land and had engaged, under the first agreement, to erect a new smelting mill at the lessee's expense.

124 Following the execution of the lease, the lessor assigned his interest in the undivided third of the mines to another person, who in turn assigned it to the plaintiffs. The plaintiffs, who were not parties to the first agreement, could not sue upon that agreement. The plaintiffs brought proceedings under the lease, alleging that the builder/lessee had impliedly covenanted to them, as assignees of the reversion, to build the new mill.

125 The plaintiffs were successful. At first instance, Lord Tenterden CJ said:

[55]

131 The Roadshow Entertainment case is distinguishable from this case, because the parties made express provision in the participation agreement for the circumstance that Ansett may cease to operate the Global Rewards program. Clause 15(b) of the participation agreement expressly contemplates that Ansett may assign the Global Rewards program in certain circumstances and that, in such event, Ansett will either unconditionally guarantee the performance of the assignee[25] or will be bound by its best endeavours obligations under cll. 16(a) and 16(c).[26] Clause 16(a) recognises that there may be other ways, apart from assignment under cl. 15(b), in which the Global Rewards program may cease and be replaced by a substitute or successor program operated by Ansett, or by another entity where Ansett is a participant in the program. Clause 16(a) makes express provision for such circumstances.

B Implied Term

132 The argument that the first alleged term should be implied was also based upon Recital A, cl. 3 and cl. 9(b) of the participation agreement. Further, it is alleged that the first alleged term is necessary in order to give the participation agreement business efficacy.

133 I reject the argument that the first alleged term should be implied in the participation agreement. It does not satisfy the conditions necessary to ground the implication of a term, as summarised above. In particular, for the reasons given above in rejecting it as an express term, the first alleged term is not necessary to give business efficacy to the participation agreement and is not so obvious that "it goes without saying".

134 The first alleged term is not so obvious that it goes without saying. It is not clear that both parties would have agreed to its inclusion in the participation agreement if asked. There is no reason to suppose that Ansett would have agreed to make its unfettered right under cl. 1.3 of the Global Rewards terms and conditions to suspend or terminate the Global Rewards program subject to the giving of a month's notice to Diners. This is especially so in circumstances where Ansett might expose itself to loss of bargain damages if it failed to give the notice. Furthermore, the parties in fact addressed the situation in cl. 9(b) and provided that Ansett may, not must, serve a notice so as to terminate the participation agreement in the event that it intended to cease operating the Global Rewards program.

135 It is not necessary to imply the first alleged term in order to make the participation agreement effective. The participation agreement is capable of sensible operation without the first alleged term, as set out above.

IX SECOND ALLEGED TERM: CONDITIONAL PAYMENT OBLIGATION

136 The second alleged term upon which Diners relies is that Ansett's right under cl. 5(a) to payment for unexchanged points is, subject to Ansett's right to terminate the participation agreement under cl. 9(b), conditional on Ansett continuing to conduct the Global Rewards program at the time payment is due. Diners contends that this term arises upon a proper construction of the participation agreement, or alternatively as an implied term.

A Express Term

137 Diners contends that the second alleged term arises upon a proper interpretation of the participation agreement, and that such an interpretation is "irresistible". Diners' argument is a straightforward one. It involves the following elements.

138 First, it was submitted that the critical words in cl. 5(a) are "credit" and "Points".

139 Second, it was submitted that these words must be interpreted in the context of two "reciprocal fundamental obligations imposed on the parties." These obligations were articulated in the following terms:

[63]

147 Under cl. 9(b) of the participation agreement, Ansett may terminate the participation agreement in circumstances where Ansett ceases to operate or participate in the Global Rewards program. Accordingly, the first sentence of cl. 9(d) may operate in circumstances where Ansett no longer has any ability to credit points or issue awards. In this situation, the first sentence of cl. 9(d) unambiguously provides for Diners' obligations under the participation agreement to continue. Those obligations must include Diners' obligation under cl. 5(a) to pay for Points which are credited to the Global Rewards accounts of Diners cardholders with respect to transactions effected by them prior to termination of the participation agreement. This obligation arises upon the crediting of Points, with the invoicing procedure under cl. 5(c) providing the means of payment of the liability arising under cl. 5(a). There is nothing in cl. 9(d) to indicate that the parties intended any different regime to apply if the termination of the participation agreement involved a cessation of the Global Rewards program.

148 At first blush, this result may appear harsh to Diners. However, the participation agreement does not expressly state the term alleged and must be interpreted in the light of the surrounding circumstances known to the parties and the commercial purpose of the participation agreement. The surrounding circumstances include the knowledge of the parties that Ansett could, without notice and in Ansett's absolute discretion, suspend or terminate the Global Rewards program at any time, cancel a membership at any time, restrict the availability of awards or withdraw or change the awards which were available at any time and vary the rules and conditions of the Global Rewards program.

149 Further, the parties well knew and understood that Diners' principal source of income was from interchange commissions charged to merchants accepting Diners cards for payment. These commissions were substantial[30] and well exceeded the Defined Percentage of 0.6% for each dollar spent on a Qualifying Purchase which was to be paid by Diners to Ansett under the participation agreement.

150 Fifth, I do not accept the repeated submission on behalf of Diners that, when the participation agreement is looked at as a whole in the context of its surrounding circumstances and commercial purpose, it should be understood as recording an agreement under which Diners was paying Ansett "for seats on flights" for its cardholders. As stated above, the evidence to this effect was inadmissible as evidence of surrounding circumstances. Further and in any event, the participation agreement plainly does not record any such agreement. Diners' payments under cl. 5 are unambiguously in return for Ansett crediting Global Rewards points to the Global Rewards accounts of Diners cardholders. The Points were at all times subject to the Global Rewards terms and conditions.

B Implied Term

151 It was submitted on behalf of Diners that the second alleged term satisfied each of the conditions necessary to ground the implication of a term. I do not accept that this is so.

152 It was submitted that the second alleged term was reasonable and equitable because, in the absence of such a term, "Ansett would be entitled to the benefit of the payment without having to provide anything in return beyond the making of a book entry."[31] This submission was again supported by the assertion that the evidence established that payments made by Diners to Ansett under the participation agreement were payments for seats on the flights. For the reasons given, I do not accept that this is so.

153 Furthermore, the second alleged term is not reasonable and equitable because of the wholly uncommercial results which would flow from it. Under the suggested term, the right of Diners to achieve payment for unexchanged points in circumstances where it ceased to operate the Global Rewards program would depend upon the service of a notice under cl. 9(b). If one month's notice was given prior to cessation, Ansett would be entitled to payment in full for unexchanged points credited in respect of Qualifying Purchases by Diners cardholders whilst the Global Rewards program was operating. If no such notice is given, then Ansett would be entitled to nothing. That is a commercially unreasonable result.

154 It was submitted that the second implied term was necessary to give business efficacy to the participation agreement "so as to make the contract workable in a business sense." Once again, this submission was based upon the assertion, which I do not accept, that the payments "were to fund seats on flights for Diners' members", rather than for the crediting of Points subject to the Global Rewards terms and conditions. I do not accept that this condition for the implication of the suggested term has been established. The participation agreement is capable of sensible operation if cl. 5(a) is given its unambiguous meaning. This result is supported by the first sentence of cl. 9(d) as discussed above.

155 Further, this submission was supported by a resort to the first alleged term, which I have rejected.

156 It was submitted that the second alleged term was so obvious that it goes without saying. Once again, this submission was based upon the assertion that the payments under cl. 5(a) were "to fund the provision of seats on flights for Diners' members". For the reasons given above I do not accept that this was so.

157 The submission that the second alleged term was so obvious that it goes without saying was also supported by the following analogy:

[69]

167 The first part of the third alleged term is to the same effect as the second alleged term, which I have rejected. It is not necessary to consider it further. The only issue is the second aspect of the third alleged term, which would require Ansett to repay all amounts received by it in respect of Points which have not been redeemed. As I have said, Diners conveniently described its counterclaim for this amount as one for the "unredeemable points payment".

168 Diners' contentions in support of the third alleged term are, once again, based principally upon the assertion that such a term satisfies all of the necessary conditions for its implication because the payments which it has made to Ansett under the participation agreement are properly to be characterised as payments "for the provision of seats on flights for its members". For the reasons stated above, I do not accept this characterisation of the payments made by Diners under the participation agreement.

169 Nor do I accept that the third alleged term satisfies all of the conditions necessary for the implication of a term, for the following reasons.

170 First, I reject Diners' submission that, at the time of entry into the participation agreement, it was "inconceivable" that Ansett would ever cease to conduct the Global Rewards program. This submission was based upon evidence which I have found is not admissible in order to construe the participation agreement. Further and in any event, cl. 9(b) is directly inconsistent with such a submission. Clause 9(b) expressly contemplates that Ansett may cease to conduct the Global Rewards program during the term of the participation agreement. As I have said, there are a number of ways in which Ansett could cease to conduct the Global Rewards program, beyond the simple exercise of its rights under cl. 1.3 of the program terms and conditions. The parties have made provision for these circumstances in cll. 15 and 16.

171 Second, I do not accept that the third alleged term is reasonable and equitable. It makes no commercial sense for the obligation of Ansett to make the unredeemable points payment dependent upon the service of a notice under cl. 9(b). If the third alleged term was implied, and Ansett did not give one month's notice, or gave a defective notice,[34] the position would be as follows. Ansett would be unable to recover amounts otherwise due to it under cl. 5(a) but which have been unpaid. Ansett would be required to make the unredeemable points payment. Ansett would have committed a fundamental breach of the participation agreement, exposing it to a claim by Diners for loss of bargain damages. None of these consequences would be visited upon Ansett if it gave a valid notice under cl. 9(b). Such a result could not have been intended. It is arbitrary, unreasonable and makes no commercial sense.

172 In an endeavour to meet the argument that the terms alleged by it, including the third alleged term, would not be in accordance with commercial common sense, Diners submitted that the express terms of cl. 9(d) supported the suggested terms. Indeed, the third alleged term includes an express reference to Ansett "honouring its obligations under cl. 9(d)".

173 It was submitted that, on its proper construction, cl. 9(d) provides that Ansett will "honour" all Points credited by it at the time of termination of the participation agreement by exchanging the Points for Awards, including in circumstances where Ansett has ceased to operate the Global Rewards program. I do not accept that cl. 9(d) so provides.

174 The first sentence of cl. 9(d) relates to the obligations of Ansett and Diners under the participation agreement. It says nothing about the respective rights and obligations of Ansett and Global Rewards members, which remain governed by the program terms and conditions.

175 The second sentence of cl. 9(d) contains an acknowledgement by Diners that assumes the continued operation of the Global Rewards program. It imposes no obligation on Ansett.

176 The third sentence of cl. 9(d) imposes an obligation on Diners in respect of Awards issued by it "in accordance with clause 6". Clause 6(a)(i) contemplates that Diners may supply Awards to members under the Global Rewards program. The Global Rewards program terms and conditions also contemplate this. Accordingly, the third sentence of cl. 9(d) should be understood as imposing an obligation upon Diners to "honour Awards" issued by it. Clause 9(d) imposes no similar obligation upon Ansett in respect of Awards issued by it prior to termination of the participation agreement. Nor does it impose any obligation upon Ansett to issue Awards in respect of unexchanged Points which had been credited by it as at the date of termination of the participation agreement.

177 Further, the submission that any termination under cl. 9(b) of the participation agreement depends upon Ansett honouring its suggested obligations under cl. 9(d) makes no sense. A termination in reliance upon cl. 9(b) could only be in circumstances where Ansett has ceased to operate the Global Rewards program. The operation of the Global Rewards program includes both crediting Points and issuing Awards. In these circumstances, very clear words would be required to impose the suggested obligation on Ansett. There are no such words in cl. 9(d).

178 Furthermore, the effect of the third alleged term would be to treat the payments made by Diners as provisional, or "on account" of the provision of Awards by Ansett to Global Rewards members who were also Diners cardholders. Such a result should not be attributed to parties who well knew of Ansett's rights under cl. 1.3 of the Global Rewards terms and conditions.

179 The third alleged term would operate in a way which would deprive Ansett of any security in respect of the retention by it of payments received under cl. 5(a) of the participation agreement. Under the third alleged term, any such payments would be subject to an on-going contingent repayment obligation which would crystallise in the events stated in the suggested term. Further, this would be so even if the relevant Global Rewards members had been afforded a reasonable opportunity to redeem their Points and the impossibility of redemption arose by reason of Ansett exercising a contractual right which it enjoyed against those members under the program terms and conditions. The parties should not be taken to have intended that these consequences would follow if Ansett exercised such a right.

180 Third, I do not accept that the third alleged term is necessary to give business efficacy to the participation agreement. The participation agreement is capable of sensible operation in accordance with its terms, which do not include a term which even suggests that payments by Diners to Ansett are anything other than payments for Points which are credited. As I have repeatedly stated, those Points are all subject to the terms and conditions of the Global Rewards program. Such a result may not be in accordance with Diners' wishes as to how the participation agreement should work, but that is not the point. As stated above, the business efficacy condition for the implication of a term is not satisfied merely because the suggested term would make the contract work more sensibly, or more beneficially, from the standpoint of the party seeking its implication.[35]

181 Fourth, I do not accept that the third alleged term is so obvious that it goes without saying. I can see no reason why Ansett would have agreed to such a term had it been suggested. For the reasons given above, it would operate unreasonably and inequitably towards Ansett, and this would have been obvious to Ansett had the issue arisen in negotiations.

182 Fifth, the third alleged term contradicts cll. 9(b) and 9(d) of the participation agreement. It is inconsistent with the right to cease operating the Global Rewards program which is contemplated by cl. 9(b). More particularly, it is inconsistent with cl. 9(d), for the reasons stated above.

XI CONCLUSION ON ALLEGED TERMS

183 None of the three terms alleged by Diners has been established. This is principally because the alleged terms depend upon two central contentions. First, that by the participation agreement Ansett agreed that it will not exercise its right to suspend or terminate the Global Rewards program without first giving Diners one month's notice under cl. 9(b). Second, that the payments which Diners is obliged to make under cl. 5(a) should be understood as "payments for the provision of seats on flights to its members", and not merely for Points credited by Ansett to the Global Rewards accounts of Diners cardholders. For the reasons given above, I do not accept either contention. Accordingly, Diners' defences and counterclaims based upon the three alleged terms must fail.

XII ENTITLEMENT TO TERMINATE FOR BREACH

184 Ansett raised an argument designed to meet the result that the Court accepted that the first alleged term formed part of the participation agreement; and that Ansett's conduct in suspending the Global Rewards program, without first giving Diners the notice referred to in cl. 9(b), amounted to a fundamental breach of the participation agreement. Although I have found that the first alleged term did not form part of the participation agreement, this issue was argued fully. I will accordingly express my view on the assumption that the first alleged term forms part of the participation agreement.

185 It was submitted on behalf of Ansett that, in the assumed events, Diners was nevertheless not entitled to terminate the participation agreement for fundamental breach and to recover loss of bargain damages. Ansett submitted that, at the time Diners terminated the participation agreement on 23 October 2001, there was only one available ground on which Diners could terminate. That ground was the fact of appointment of administrators to Ansett, which gave Diners a right to terminate the participation agreement, without any breach on the part of Ansett, under cl. 9(c)(ii). As I have said, this is in fact the only ground relied upon by Diners when it gave notice of termination of the participation agreement on 23 October 2001.

186 However, if Diners can establish that it had good grounds to terminate the participation agreement on that date for fundamental breach by Ansett, Ansett accepts that Diners' express reference in its notice of termination to cl. 9(c)(ii) will not deprive it of a right to claim loss of bargain damages. The termination of a contract in the exercise of a contractual power is not an affirmation of the contract which debars the innocent party from suing for damages for breach on the grounds of repudiation or fundamental breach existing at the time of termination, unless the contract expressly or impliedly so provides.[36] On the other hand, if there is no repudiation or fundamental breach, the exercise of a contractual power to terminate does not give rise to any entitlement to claim damages for loss of bargain.[37]

187 Ansett's contentions in this regard rely upon the provisions of cl. 9(c)(i) of the participation agreement. That clause provides:

[72]

188 Ansett's submits that, on its proper interpretation, cl. 9(c)(i) provides that Diners' right to terminate the participation agreement for a "material" breach depends, in the case of a material breach which is "capable of being remedied", upon the prior service by Diners of a 30 day notice as required by the clause.

189 It is common ground that the breach of the first alleged term which is alleged by Diners is, if established, a material one. Further, it is accepted that such a breach would amount to a fundamental breach which would, in the absence of cl. 9(c)(i) as Ansett would have the Court construe it, entitle Diners to terminate the participation agreement and recover loss of bargain damages. It is also common ground that Diners did not serve on Ansett a notice under cl. 9(c)(i) before terminating the participation agreement under cl. 9(c)(ii) on 23 October 2001.

190 The first issue which arises is whether, on its proper interpretation, cl. 9(c)(i) of the participation agreement provides that a party's right to terminate the participation agreement for material breach is subject to the prior service of a 30 day notice to remedy and the failure of the other party to remedy the breach within that time. Ansett submits that cl. 9(c)(i) should be so interpreted. Diners contends that it should not.

191 The second issue is whether the suggested breach by Ansett, by suspending the Global Rewards program without prior notice under cl. 9(b), was in fact one which was "capable of remedy". Ansett submits that there was no breach or, if there was, such a breach was capable of remedy. Diners contends that there was a breach and that it was incapable of remedy by Ansett.

A Was a notice to remedy required?

192 In Schuler AG v Wickman Machine Tool Sales Ltd[38] the House of Lords considered a long term agency agreement for the sale of panel presses. Clause 7(b)(i) of the agreement provided that it was a "condition" of the agreement that the agent (Wickman) would visit the six largest potential customers for panel presses at least once in every week for the purpose of soliciting orders for panel presses manufactured by Schuler. Wickman did not comply with this condition in the early stages of the agreement. However, these non-compliances were the subject of a waiver by Schuler.

193 Thereafter, there was an improvement but there were still a considerable number of breaches. Schuler then terminated the agreement on the ground that these further breaches of cl. 7(b)(i) entitled it to do so for fundamental breach. Wickman disputed the right to terminate. Wickman relied upon cl. 11(a)(i) of the agreement. Wickman contended that cl. 11(a)(i) governed the right to terminate the agreement in respect of any breach which was capable of remedy.

194 Clause 11(a) of the agreement was in the following terms:

[80]

202 It was submitted on behalf of Diners that the provisions of cl. 11(a)(i) of the agreement considered in Schuler v Wickman Tools are distinguishable from the provisions of cl. 9(c)(i) of the participation agreement. Reliance was placed upon the opening words of cl. 11(a), which provided that the agreement was for a specified duration "unless previously determined as hereinafter provided".[56] Further, it was submitted that the provisions of cl. 15.2 of the development agreement considered in Burger King v Hungry Jack's are distinguishable, because cl. 15.2 stated that Burger King "shall not terminate"[57] the development agreement unless the required notice was given. It was submitted that the words used in these cases spoke of exclusivity of the manner of termination of the agreements there at issue, and that it was for this reason that the common law right to terminate for fundamental breach was held to be excluded. It was submitted that the omission of similar words in cl. 9(c) of the participation agreement demonstrated that the parties did not intend to oust the common law right to terminate the participation agreement for fundamental breach.

203 This submission was supported by reference to authorities to the effect that, although it is open to the parties to a contract to displace or modify their common law rights of termination, and that whether they have done so is a matter of construction of the contract, "clear words are needed to rebut the presumption that a contracting party does not intend to abandon any remedies for breach of contract arising by operation of law".[58]

204 Further, Diners submitted that the participation agreement would be unworkable and commercially unreal if it was required to give notice under cl. 9(c)(i) in circumstances where Ansett had ceased operating the Global Rewards program. It was submitted that such an interpretation would lock Diners into the participation agreement for the 30 day period of the notice, and that this would, because of the exclusivity provisions in cl. 11, prevent Diners from entering into an alternative arrangement to participate in another frequent flyer program during that period. It was submitted that this result could not have been intended by the parties.

205 I do not accept the submissions of Diners on this issue. First, the words used in cl. 9(c)(i) are clear. They modify, but do not oust, the common law rights of each party to terminate the participation agreement for a fundamental breach by the other party. The simple scheme of cl. 9(c)(i) is this:

[90]

215 It was submitted on behalf of Diners that the relevant enquiry is to fix upon "the effect of the default in the given circumstances", as emphasised in the statement by Samuels JA in Tricontinental v HDFI. Accordingly, it was submitted that no notice was required under cl. 9(c)(i) because, upon suspension of the Global Rewards program, Diners there and then suffered irreparable harm to its goodwill. Further, it was submitted that there was, on the evidence, no realistic possibility of Ansett ever remedying the breach by putting things right for the future.

216 I do not accept Diners' contentions. They are inconsistent with the authorities discussed above. The effect of the authorities is that Ansett was entitled to an opportunity to remedy the postulated breach; and that this is so whether or not, on the evidence, there was a realistic possibility of the breach being remedied within the notice period specified in cl. 9(c)(i). As long as the breach was theoretically capable of remedy, the notice was required.

217 The suggested breach was theoretically capable of being remedied. For example, the administrator's efforts to sell Ansett's airline business could have been successful in circumstances where the purchaser, in order to preserve the goodwill of the business, determined to reinstate the Global Rewards program. Alternatively, the purchaser could have determined to allow Global Rewards members to participate in an equivalent program which recognised their accumulated Global Rewards Points, as contemplated by cll. 15 and 16 of the participation agreement.

218 In this regard, it was also submitted by Diners that any sale by Ansett of the Global Rewards program would, of itself, amount to a fresh repudiation of the participation agreement. Reliance was placed upon Roadshow Entertainment Pty Ltd v CEL Home Video Pty Ltd.[72] That decision is of no assistance to Diners. As I have said above, cl. 15(b) of the participation agreement expressly contemplates that Ansett may assign the Global Rewards program in certain circumstances and that, in such event, Ansett will either unconditionally guarantee the performance of the assignee[73] or will be bound by its best endeavours obligations under cll. 16(a) and 16(c).[74] Clause 16(a) recognises that there may be other ways, apart from assignment under cl. 15(b), in which the Global Rewards program may cease and be replaced by a substitute or successor program operated by Ansett, or by another entity where Ansett is a participant in the program. Clause 16(a) makes express provision for such circumstances.

219 Further, the fact that irreparable harm may have been suffered is not to the point. The issue is whether an entitlement to terminate has arisen. If irreparable harm results from the breach, that may form the subject of an action for damages. It does not mean that a right to terminate without notice arises in contradiction of the clear terms of cl. 9(c)(i).

XIII INDEMNITY CLAIM

220 Clause 6 of the participation agreement is in the following terms:

[100]

224 Second, it was submitted that clause 6 was plainly intended to provide for broad indemnities spanning both categories. It was submitted that the inclusion of the emphasised words is only explicable if clause 6 is read as requiring Ansett to indemnify Diners against losses and expenses incurred by Diners as a result of Ansett's own conduct, as specified in cll. 6(c)(i), (ii) and (iii).

225 Third, it was submitted that cl. 6(d) does not assist Ansett in its contention that cl. 6(c) is only concerned with an indemnity against liabilities of Diners resulting from claims against it by third parties. It was submitted that cl. 6(d) is directed to "a subset" of the indemnities provided for by cl. 6(c); that cl. 6(d) is silent as to the direct indemnity provided for by cl. 6(c); and that if it were otherwise the words "all... losses... expenses... incurred by..." would have no work to do in cl. 6(c).

226 As to the final sentence of cl. 6(d), which limits liability "under this clause 6" to liability in respect of third party claims, Diners' contention is that it should be read as if the words "In that event" were inserted at the beginning of the sentence. It was submitted that this was necessary in order to make the final sentence accord with the apparent intention of cl. 6(d) which was only to deal with a "subset" of the broader indemnities provided for in cl. 6(c).

227 Fourth, it was submitted that the decision by Ansett's administrators to suspend the Global Rewards program constituted a change to that program, so as to enliven the indemnity provided for by cl. 6(c)(iii).

228 I do not accept the submissions made on behalf of Diners in this regard. Clause 6 should be understood as providing only for indemnities in respect of third party claims against Diners or Ansett. It should not be understood as providing for Ansett to indemnify Diners against any losses and expenses incurred by Diners as a result of Ansett's conduct. Further and in any event, the suspension of the Global Rewards program did not involve any change to that program, so as to enliven any indemnity provided for by cl. 6(iii).

229 Clause 6(c)(iii) of the participation agreement must not be considered in isolation. It must be read in the context of cl. 6 as a whole. In turn, cl. 6 must be read in the context of the participation agreement as a whole. When this is done, it is clear that cl. 6 does not span both of the possible categories of indemnity referred to in the quoted passage from Lewison. Clause 6 is concerned only with providing for indemnities in respect of claims by third parties. I am of this view for the following reasons.

230 First, the circumstances in which the indemnities apply, as stated in cl. 6(a)(i)-(iv) and cl. 6(c)(i)-(iii), are obviously directed towards claims by third parties arising out of such circumstances. For example, it is obvious how the provision of air services by Ansett "as a result of GR", the subject of cl. 6(c)(i), could give rise to a claim by a disgruntled Global Rewards member against Diners, having regard to Diners' participation in the Global Rewards program. On the other hand, it is difficult to see how Diners could have a direct claim against Ansett arising out of such services to a Global Rewards member. Similarly, with respect to cl. 6(a)(ii), it is easy to see how a claim could be made against Diners arising out of the promotion by Ansett of the Global Rewards program, in circumstances where that promotion relates to the ability of Global Rewards members to earn points by using their Diners card. For example, a statutory claim for false and misleading conduct in respect of such promotional material. On the other hand, it is difficult to see how, in the absence of a third party claim against Diners, promotional activities of Ansett in relation to the Global Rewards program would give rise to a direct liability by Ansett to Diners.

231 The circumstances referred to in cl. 6(c)(iii), relating to changes to the Global Rewards program unrelated to Diners, may obviously give rise to a claim (however hopeless) by a disgruntled Global Rewards member against Ansett or Diners. Further, I accept that changes to the Global Rewards program have the capacity to cause direct loss to Diners. For example, by making the program less attractive in comparison to the Qantas frequent flyer program, thus causing Diners cardholders to cease or reduce expenditure on their Diners cards in favour of spending on cards linked to the Qantas program. However, for the reasons appearing below, I do not accept that any losses incurred by Diners as a result of changes to the Global Rewards program were intended to be the subject matter of the indemnity in cl. 6(c)(iii).

232 Second, this conclusion is reinforced by cll. 6(b) and 6(d) of the participation agreement. Clauses 6(b) and 6(d) expressly concern indemnity against third party claims. The language used in these clauses assumes that an indemnity is only available in respect of third party claims. The first sentence of these clauses refers to "an action or claim ... for which [Ansett or Diners] may be liable under this clause 6".[78] The third sentence provides that the liability of Ansett or Diners "under this clause 6 will not exceed the amount for which it would have been liable had the action or claim been made against it rather than [Ansett or Diners]."[79]

233 Third, the interpretation contended for by Diners makes no commercial sense. In circumstances where the parties contracted in the knowledge that Ansett had an unfettered right, without notice and in its absolute discretion, to suspend or terminate the Global Rewards program at any time, to cancel a membership at any time, to restrict the availability of awards or to withdraw or change the awards which were available at any time, and to vary the rules and conditions of the program, it would require very clear words to attribute such an intention to the parties. This is especially so when regard is had to cl. 9(b) of the participation agreement, which gives Ansett a right to terminate the participation agreement in circumstances where it intends to cease operating the Global Rewards program. The parties cannot have intended that Ansett would expose itself to an indemnity claim under cl. 6(c)(iii) if it exercised this right.

234 Further, and in any event, even if cl. 6(c)(iii) could be interpreted as Diners contends, I do not accept that the suspension of the Global Rewards program constituted a "change" to that program. The program terms and conditions remained the same. Ansett simply exercised one of them. That is not a change to the program. The program remained unaltered.[80]

XIV UNJUST ENRICHMENT

235 Diners raises one final defence and counterclaim. It contends that it is in any event entitled to withhold payment for the amounts claimed, and to recover the amounts paid by it in respect of unredeemable points, on the ground of unjust enrichment.

236 Diners' submissions in support of this contention may be summarised as follows:

[107]

[1] Some special arrangements aside, such as for bonus point issues and the like.

[2] Emphasis added.

[3] The evidence established that the last batch of data transmitted by Diners to Ansett was in respect of Qualifying Purchases in the period 25 August to 11 September 2001. Points were credited for these purchases on 17 September 2001.

[4] There was evidence that some of the points to which the unpaid invoices relate were exchanged for awards which were enjoyed by Diners club members prior to Ansett ceasing operations.

[5] Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451, [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165, [40].

[6] Hillas & Co Ltd v Arcos Ltd [1932] UKHL 2; [1932] All ER 494, 499, 503-4; Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429, 437; Di Dio Nominees Pty Ltd, v Brian Mark Real Estate Pty Ltd [1992] VicRp 99; [1992] 2 VR 732, 740; MLW Technology Pty Ltd v May [2005] VSCA 29, [76]-[81]; Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] UKHL 19; [1997] AC 749, 770-1.

[7] ABC v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99, 109.

[8] [1982] HCA 24; (1982) 149 CLR 337.

[9] Ibid, 347 (citations omitted).

[10] Ibid, 353.

[11] Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd [1986] HCA 14; (1986) 160 CLR 226, 241-2.

[12] Ibid.

[13] See paras 4(d) and 4(e) as to part, 4(f) and 4(g) of Diners' written closing submissions on liability.

[14] Cobb witness statement, para 9.

[15] Transcript 303.

[16] Emphasis added.

[17] Emphasis added.

[18] Emphasis added.

[19] Based on this concession, a number of witnesses who had provided witness statements directed to this issue were not called to give evidence. The case was thereafter conducted on the basis of this admission.

[20] [1830] EngR 668; (1830) 6 Bing 644; 130 ER 1429.

[21] [1829] EngR 488; (1830) 9 B&C 505; 109 ER 188.

[22] [1830] EngR 668; (1830) 6 Bing 644, 650.

[23] [1997] NSWSC 473; (1997) 42 NSWLR 462.

[24] Ibid, 476-7.

[25] Clause 15(b)(i).

[26] Clause 16(b).

[27] Diners' written closing submissions on liability, [16].

[28] Diners' written closing submissions on liability, [17] and [19].

[29] The Macquarie Dictionary, (3rd ed, 1997), "credit", para 25b.

[30] Ansett called unchallenged evidence that the average of Diners' commissions was 2.49 per cent, based on Diners' actual turnover figures in the period 2001 to 2003.

[31] Diners' written closing submissions on liability, [21(a)].

[32] Diners' written closing submissions on liability, [21(c)].

[33] Diners' written closing submissions on liability, [21(e)].

[34] For example, a notice which was a day or two short of one month's notice.

[35] Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd [1986] HCA 14; (1986) 160 CLR 226, 241-2.

[36] Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17, 30-2 (Mason J), 55-6 (Deane J).

[37] Ibid; Shevill v Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620.

[38] [1973] UKHL 2; [1974] AC 235.

[39] Ibid, 248-9.

[40] Ibid, 249.

[41] Ibid, 252.

[42] Ibid, 249.

[43] Ibid.

[44] Ibid, 271.

[45] Ibid, 264.

[46] Ibid, 259.

[47] [2001] NSWCA 187.

[48] Ibid, [71].

[49] Ibid.

[50] Ibid, [95]-[110].

[51] Ibid, [113]-[124].

[52] Ibid, [114]-[118].

[53] Ibid, [116].

[54] Ibid, [117].

[55] Ibid.

[56] [1973] UKHL 2; [1974] AC 235, 248; emphasis added.

[57] [2001] NSWCA 187, [71].

[58] Stocznia Gdanska SA v Latvian Shipping Co [1998] UKHL 9; [1998] 1 WLR 574, 585; Concut Pty Ltd v Worrell [2000] HCA 64, [23]; Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd [2005] FCAFC 49, [62].

[59] [1973] UKHL 2; [1974] AC 235, 249-50.

[60] Ibid, 250-1.

[61] Ibid, 252.

[62] [2001] NSWCA 187, [114]-[118].

[63] Ibid, [117], [120].

[64] (1948) 48 SR (NSW) 417.

[65] Ibid, 427 (citations omitted).

[66] (1990) 21 NSWLR 689.

[67] Ibid, 702 (Samuels JA); 722-3 (Waddell AJA).

[68] Ibid, 723.

[69] Ibid, 702 (emphasis added).

[70] [1916] 1 AC 1, 9.

[71] (1948) 48 SR (NSW) 417, 426-7.

[72] [1997] NSWSC 473; (1997) 42 NSWLR 462.

[73] Clause 15(b)(i).

[74] Clause 16(b).

[75] Emphasis added.

[76] (3rd ed, 2004).

[77] Ibid [12.15].

[78] Emphasis added.

[79] Emphasis added.

[80] It appears that the concept of "changes to GR" refers to any change beyond those contemplated by cl. 15(b), as reflected in the extended definition of "GR" in cl. 1. There is no question of any such change in this case.

[81] Diners' written closing submissions on liability, [38] (emphasis added).

[82] Baltic Shipping Co v Dillon [1993] HCA 4; (1993) 176 CLR 344, 350-1 (Mason CJ), 367 (Brennan J), 379 (Deane and Dawson JJ), 388-9 (McHugh J).

[83] (2001) 208 CLR 516.

[84] Ibid, [16] (emphasis added); see also [104] (Gummow J).

At a glance

Court

Decision date

Before

Source

Judgment (107 paragraphs)

Parties

Cases Cited (12)