Victorian Alps Wine Company Pty Ltd v All Saints Estate Pty Ltd & Ors; Victorian Alps Wine Company Pty Ltd v Vallunga Pty Ltd & Ors [2012] VSCA 81

1 I have had the benefit of reading in draft form the reasons for judgment of Hansen JA. I agree with his Honour, for the reasons that he gives, that the appeal should be dismissed.

2 This is an appeal from a judgment given on the joint trial of two proceedings in the Commercial and Equity Division.[1] In each proceeding the appellant, Victorian Alps Wine Company Pty Ltd, brought a third party claim against the respondent, Redox Pty Ltd. The judge dismissed the claims.

3 The respective plaintiffs were All Saints Estate Pty Ltd and Vallunga Pty Ltd. The appellant was the sole defendant and the respondent was the sole third party. The respondent joined Pahi SL, a Spanish company, as a fourth party. Pahi never took any part in the proceedings, and Redox did not press its claim.

4 All Saints and Vallunga produced wine for sale. All Saints engaged the appellant to process some of its grapes. In that process the appellant used tartaric acid which it had purchased from the respondent. For the same purpose of use in processing grapes, Vallunga purchased a quantity of tartaric acid from the appellant which had purchased the acid from the respondent. The respondent had purchased the tartaric acid from Pahi.

5 Following its use it was discovered that the tartaric acid was defective. In consequence, the wine produced with it was tainted and unsaleable.

6 All Saints and Vallunga sued the appellant to recover their losses relying, among other things, on a breach of the conditions of fitness for purpose and merchantable quality implied by s 19(a) and (b) of the Goods Act 1958 (Vic).

7 The appellant's third party notices alleged that the claimed loss and damage was caused or contributed to by the respondent's breach of the implied conditions, and sought indemnity in respect of the claims. The third party claims were virtually identical.

8 In its defence in each case,[2] the respondent alleged, among other things:

Contractual defence

27. Further and alternatively, in answer to the entire Third Party Notice, Redox says any liability it may otherwise have had is excluded by contract.

Particulars

Clause 8, Terms and conditions of sale between Redox and the Defendant signed on behalf of the Defendant on or about 9 March 1998.

In a reply to this pleading the appellant made no positive averment in relation to this plea. The reply merely joined issue.

9 Clause 8, referred to in the above particulars, provided:

8. EXCLUSIONS OF LIABILITY

(a) Unless otherwise agreed in writing the only warranty provided by the company in respect of the goods is that if any provided by the manufacturer of the goods and the liability of the company pursuant to such warranty is limited to an amount receivable by the company from the manufacturer.

(b) To the full extent permitted by law:

(i) The company gives no condition or warranty whatsoever as to the suitability or fitness of the goods for their ordinary or any special use or purpose, and the description of the goods in any contract or any other document shall not import any such conditional warranty on the part of the company.

(ii) All statutory and implied conditions and warranties except as to title are excluded, and

(iii) It is the responsibility of the purchaser to satisfy himself as to the condition, quality, suitability and fitness of the goods for this purpose and the purchaser accepts the goods as they are within the faults or defects (if any).

10 The proceedings and third party claims came on for trial in December 2010. Immediately prior to the trial the appellant sought leave to file an amended reply to the respondent's defence to contend that:

(a) by contract, the respondent had provided to it a warranty the same as the warranty provided to the respondent by Pahi; and

(b) Pahi had warranted to the respondent that the tartaric acid was of merchantable quality, and fit for purpose.

For reasons not provided to this Court, the application was refused. No challenge is made to that refusal.

11 At the beginning of the trial All Saints and Vallunga settled their claims with the appellant for $850,000 and $310,000 respectively. The appellant amended the third party notices to allege the settlement and the respondent agreed that each settlement was reasonable.

12 These settlements having been reached, the only issue remaining for determination was the liability, if any, of the respondent to the appellant, and the trial thus proceeded between those parties. For the purpose of the trial of the third party proceedings the appellant and the respondent agreed as follows:

(a) The [appellant] expressly or by implication made known to [the respondent] the particular purpose for which the tartaric acid supplied by [the respondent] to the [appellant] was required, namely for use by the [appellant] as an additive in the making of wines, for human consumption, for itself and for others, which wines were to be sold for profit.

(b) The tartaric acid supplied by [the respondent] was not reasonably fit for use by the [appellant] as an additive in the making of wines, for human consumption, for itself and for others, which wines were to be sold for profit.

(c) The tartaric acid supplied by [the respondent] to the [appellant] was not of merchantable quality.

13 In a reserved decision the judge held that clause 8 was a term of each contract for the supply of the tartaric acid and operated to exclude liability for the claims each of which was dismissed with costs.

14 It is from this decision that the appellant appeals. For reasons which appear below, the appeal should be dismissed.

15 The grounds of appeal are the same in each case. As further amended the grounds fall into two groups.

16 Grounds 1-4 challenge the conclusion of the judge that a 1998 credit application form with attached terms and conditions of sale (which included clause 8) applied to the subject sales of the tartaric acid; the application for credit having been made by the appellant to the respondent for the purpose of the future supply of goods. This was the primary issue for determination at the trial; that is, whether the respondent's terms and conditions were incorporated as terms of the supply contracts.[3] However, counsel abandoned grounds 1-4. It is therefore unnecessary to deal with these grounds.

17 The second group is grounds 5-7. These grounds are best expressed in the added ground 6 which states that:

The learned judge should have concluded (and erred in not so concluding) that, for the purposes of s 61 of the Goods Act 1958 (Vic), statutory rights which had arisen under the contract of sale (as found) were neither negatived nor varied by express agreement.

18 The premise of this ground is that the agreed facts established that the statutory terms of fitness for purpose and merchantable quality were implied by law into the supply contracts. In this situation one turns to s 61 of the Goods Act which provides that:

61 Exclusion of implied terms and conditions

Where any right duty or liability would arise under a contract of sale by implication of law it may be negatived or varied by express agreement ...

The appellant contends that the judge should have concluded that the implied terms had not been negatived or varied by express agreement of the parties. This is the issue for determination.

19 As mentioned, the appellant's primary case at trial was that the respondent's terms and conditions, in particular clause 8, were not terms of the supply contracts. That was because, for one or another reason argued by the appellant, those terms -but in particular clause 8 - were not incorporated into the supply contracts. The case rested on contentions such as a lack of notice to the appellants of the terms, and a lack of awareness that clause 8 be incorporated into the supply contracts. The various bases on which the appellants argued the point before the trial judge do not matter now in view of the abandonment of the grounds which attack the judge's conclusion on that aspect.

20 What is necessary to discern is what was contended concerning clause 8. For this purpose we have been provided with counsel's written outline of submissions at trial and the transcript of counsel's final addresses.

21 Regarding first the appellant's outline the relevant section is paragraphs 15-18 - The Content of the Exemption. It is immediately seen from paragraph 15 that these paragraphs were concerned with the question whether the appellant had 'reasonable notice' of the existence of the terms, that concept incorporating 'the need to ensure that the extent of the exemption as well as the fact of exemption can be assessed properly by the contracting parties'. It was then said, in paragraph 16, that clause 8 must be read in its entirety and that clause 8(b) was subject to clause 8(a). But, paragraph 17 stated, the respondent had refused to provide details of the arrangement with its supplier. It was submitted that 'notice of those arrangements must be given so that Vic Alps can ascertain the true content and effect of the terms'. Then, in paragraph 18, it was submitted that:

1. Redox relies upon the terms to deny any liability it has under the Goods Act. The exemption can only be available to it if the Fourth Party has no such liability under that Act. Redox carries the burden of establishing that all the requirements of the exemption clause have been satisfied. It has not discharged that burden.

22 When, in the course of his final address, counsel came to this part of his written outline, he noted that clause 8(a) provided for a warranty that mirrored that provided to the respondent, and stated:

So that, for example, if Redox purchased this product from an Australian supplier, that sale would be subject to the terms and conditions in the Goods Act. Redox specifically gave that warranty in 8(a).

Then to interpret 8(b) as excluding that warranty would be negating the whole purpose of 8(a). So it is a confusing situation. But, in order for the buyer in any instant to understand and comprehend the full extent of the exclusion right, that buyer must also be able to comprehend the right which Redox has in relation to the supply to Redox. We have pointed out that Redox refused to provide any details of the supplier to Mr Cunningham. We would say that in the circumstances if we had asked in November 2004, "Who is your supplier", the answer would be, "We are not telling you." We cannot in fact comprehend or understand the full extent of the exemption.

23 In their written outline counsel referred to the provisions of clause 8(b)(i), (ii) and (iii) as being terms of the supply contracts and submitted that clause 8(b)(ii) was perfectly clear and precluded the implication of the terms on which the appellant relied.

24 At the outset of his final address, counsel referred to s 61, and proceeded to submit why the terms and conditions of the credit application were incorporated in each supply contract. He referred to clause 8(b), and then to other clauses in the terms and conditions which sought to limit the respondent's liability but said that it was sufficient to rely on clause 8(b)(ii) the words of which were plain and yielded of no doubt. He then referred to the approach to be taken to the construction of exclusion clauses which was to accord to them their ordinary and natural meaning, and in that respect to the well known statement of the High Court in Darlington Futures Ltd v Delco Australia Pty Ltd[4] that:

... the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in the case of ambiguity.

25 At the outset the judge identified as the main issue whether the contract for the supply of tartaric acid included terms which had been sent by the respondent on 10 March 1998 as part of a credit application to be completed by the appellant. The appellant submitted that the terms were not so included. This submission was put on several bases. The judge rejected them all, finding, as the respondent had submitted, that the terms were so included. It is only necessary to refer to his Honour's reasons in dealing with the last basis on which the appellant relied in submitting that the terms were not included in the supply contracts. His Honour said:

1. An additional argument was raised by Vic Alps that the notice of the existence of the terms was not reasonably capable of being understood. The basis of the argument lay in the relationship between clause 8(a) and (b). Clause 8(a) provided that Redox did extend the warranty provided by the manufacturer of the goods. There was some evidence to the effect that Redox had initially refused to provide details of the supply arrangement that it had with the supplier in Spain. The information was subsequently provided to Vic Alps and, in any event, the request by Vic Alps was only made, it seems, after November 2004. In any event, there is nothing incapable of being understood by the interaction between clauses 8(a) and (b). It was intended that any warranty provided by a manufacturer be capable of being relied upon also against Redox as the supplier. It is unnecessary for Redox to establish that the Spanish manufacturer did not have a liability under the Goods Act for the purpose of the exclusion clause to be capable of being understood. The issue was not whether the exclusion in clause 8(b) extended to Redox but, rather whether "the content and effect of the terms [were] reasonably capable of being understood". The argument for Vic Alps was put in the context of the concept of "reasonable notice" incorporating the need to ensure that the extent of the exemption, as well as the fact of exemption, be capable of proper assessment by the contracting parties. It may, or may not, have been the case that the Spanish supplier had provided warranties that were actionable under the Goods Act and, if it had, clause 8(b) might not have been available to Redox to the extent of any such concurrent warranties. That, however, is not for present purposes the relevant issue. The relevant issue is the contention that the content of the clause meant that there had been a failure to provide reasonable notice of the exclusion. In my view there cannot have been any such failure by Redox on the evidence before me. Furthermore, if it be relevant, I do not accept that Redox carried "the burden of establishing that all the requirements of the exemption clause" had been established where the requirement is that the manufacturer had warranties imposed by operation of the Goods Act. If it be relevant I would have thought that any such burden would have fallen upon Vic Alps.[5]

26 It is evident that in this paragraph his Honour was addressing paragraphs 15-18 of the appellant's written outline.

27 His Honour then observed that in light of the conclusions reached it was not strictly necessary to consider issues that would otherwise have required determination. Nevertheless he expressed a view upon them. First, the appellant had established a breach of the conditions implied by s 19(a) and (b) of the Goods Act. Secondly, the appellant had not failed to mitigate its loss. With that, it followed that the third party notices would be dismissed.

28 Counsel for the appellant based his argument in support of ground 6 on what he contended was the proper construction of clause 8(a) and (b) understood as a whole. This construction had been neither pleaded nor put at trial. But, counsel said, it was a pure construction argument and as such a question of law that could properly be made for the first time on appeal. The respondent's counsel accepted that that was so. Nevertheless, as appears below, it is not as simple as that.

29 The submission proceeds through the eye of s 61 of the Goods Act. Although, as counsel noted, the respondent had not so pleaded the matter, at least inferentially what the respondent alleged was that clause 8 constituted an express agreement within the meaning of s 61 that negatived the s 19 implied conditions. That may have been taken as implicit, but in any event the respondent's counsel expressly recognised the role of s 61 at the outset of his final address.

30 Hence the question, as counsel said, was whether, as s 61 allowed, clause 8 had the effect of expressly negativing or varying the implied conditions of sale.

31 This turned on the proper construction of clause 8. Counsel submitted, and the respondent's counsel did not demur, that in the construction process no aid was to be gained from the wider context constituted by the other terms and conditions. Clause 8 was to be considered on its own terms.

32 The question, counsel submitted, was how sub-clauses (a) and (b) operated together; or, as counsel put it, how did they 'intersect'? Before moving to his analysis of the text, counsel referred to authorities dealing with the construction of exclusion clauses, Darlington Futures Ltd v Delco Australia Pty Ltd;[6] Selected Seeds Pty Ltd v QBEMM Pty Ltd;[7] Trickett v Queensland Insurance Company Limited;[8] and Major Engineering Pty Ltd v CGU Insurance Limited.[9] Counsel for the respondent accepted that these authorities indicated the approach to be taken to the construction of clause 8.

33 With this background, counsel for the appellant submitted that clause 8 was to be understood as follows. First, the purpose of sub-clause (a) was 'clear enough'. It provided a warranty to the appellant but:

• only insofar as the respondent has received a 'mirror warranty' from the manufacturer; and

• limited in 'value' to an amount 'receivable' from the manufacturer.

This provided a 'curtailed protection' to a purchaser such as the appellant as against a 'middle man' supplier.

34 It was then submitted that there was tension between sub-clause (a) and (b); sub-clause (b) negatived liability to the full extent s 61 allowed, but sub-clause (a) narrowed that carve-out to the extent of the warranty provided by the manufacturer of the goods. The effect of this construction was to limit, rather than to exclude, liability. That is, the submission was that clause 8, by virtue of sub-clause (a), was not an exclusion but a contraction on the scope of the warranties otherwise provided by the respondent.

35 In the light of this construction counsel then turned to 'the critical issue of onus'. He submitted that to satisfy the onus under s 61 the respondent had to provide some evidence in relation to the warranty 'spoken of' in clause 8(a). That was because the question for determination was whether the respondent established its defence under s 61. The connected nature of clause 8(a) and (b) required evidence of the manufacturer's warranty, if any, to identify what was 'carved out'. But the respondent led no evidence as to this, and accordingly had not discharged the onus upon it. Indeed neither party adduced evidence as to the actual terms of any warranty, or any amount receivable thereunder, that existed between the respondent and Pahi in respect of Pahi's supply of the subject acid.

36 In the light of this construction of clause 8 and in the absence of evidence as to the arrangements between the respondent and Pahi, the respondent could not satisfy the court on the scope of the warranty provided under clause 8(a). Accordingly, the respondent had not established an express agreement for the purpose of s 61, and the judge should have so found.

37 In these circumstances it was seen that the judge erred in the final italicised conclusion in the judgment at [11]. That is, he erred on the question of onus. If he had correctly directed himself on this aspect and as to the construction of clause 8, he must have decided to the contrary.

38 On the understanding of the case submitted by the appellant's counsel the appeal should be allowed and in lieu of the orders below there should be judgment for the appellant for the amounts claimed with costs.

39 The appellant is correct that the respondent bore the onus of persuasion under s 61. Accordingly, and unsurprisingly, the respondent's counsel at trial commenced his final address by referring to s 61 and then to clause 8 and submitted that the claim was precluded by clause 8(b)(ii). That is, clause 8(b)(ii) was in itself sufficient to constitute an express agreement for the purpose of s 61. That approach was consistent with the pleadings.

40 But, while not putting s 61 aside, the immediate question is whether counsel's construction argument is correct. In my view it is not.

41 I do not accept counsel's submission as to the construction of clause 8. Clause 8(a) provides that if the manufacturer provides a warranty of the goods then the respondent will extend the like warranty to the appellant, but limited to the amount receivable by the respondent from the manufacturer.

42 Several things may be noticed about this. First, the clause is subject to the parties otherwise agreeing in writing. That is, the parties may exclude or vary sub-clause (a). Further, the clause refers only to a warranty in respect of the goods. Secondly, the reference to a 'warranty' is general in terms and non-specific as to content, which is understandable as the clause may have to comprehend a range of goods, terms and circumstances. Of course what was relevant to the appellant was not any warranty but a warranty of appropriate breadth and expression that equated to the conditions implied by s 19(a) and (b).

43 Then, clause 8(b)(i) and/or (ii) made it clear, together or separately, that the conditions implied by s 19 were excluded. As the judge considered, clause 8(b)(ii) was sufficient in this respect.

44 I reject the appellant's construction of an interconnection between clause 8(a) and (b). Of course clause 8 is to be read as a whole. But it makes perfect sense to read it as first providing that unless otherwise agreed the only warranty in respect of the goods is that, if any, provided by the manufacturer, and then to provide that all statutory and implied conditions and warranties are excluded. If there be no manufacturer's warranty, or other warranty agreed in writing, there is no statutory warranty or condition such as the appellant relied upon. That is, of course, unless the terms of the manufacture's warranty, if any, are apt to include terms of that nature, but that is another matter as the manufacturer's warranty was not pleaded or produced in evidence.

45 The language is clear and the scheme is understandable. The purpose of the scheme is to protect the respondent from one liability to its purchaser with no matching or a lesser (if any) liability in its seller.

46 It was for the appellant as claimant to sue on such warranty or warranties as it was advised. Relevantly, it relied on the terms implied by s 19(a) and (b). That was the case it sought to make, notwithstanding the conditions of clause 8(b)(i) and (ii), or, for that matter, clause 8(a).

47 With respect, it is axiomatic that if the appellant was to allege and rely upon any other warranty it should have pleaded that warranty as part of its claim. That would include reliance on the manufacturer's warranty, if any, pursuant to clause 8(a). But no such pleading was made. In the absence of alleging and relying on the manufacturer's warranty (if any) in the claim, and in answer to the respondent's defence relying on clause 8, the appellant could have alleged such a warranty in its reply. But, again, it did not do so. It then sought to do so by amendment but whether by reason of lateness, prejudice or otherwise, leave to amend was refused and that refusal is not challenged.

48 It is now convenient to return to the judge's reasons at [11]. I do not accept that the two sentences last italicised reflect error. In this respect it is important to recall that the issue the judge was dealing with was the final submission of the appellant on the notice case. The reasons are further to be understood in the light of

the pleaded case that fell to the judge to determine. That was not the case argued before this Court. For the reasons given above, I consider that his Honour correctly answered that case. Further, it was doubtless for the reasons given above relating to the issues pleaded and requiring determination, that his Honour thought, if it be relevant, that the burden of establishing all the requirements of the exemption clause would have fallen on the appellant. This was because the 'burden' referred to in paragraph 18 of the appellant's outline referred to establishing the position as to the manufacturer's warranty, if any. In my view, as the case stood his Honour was correct, but the issue did not arise.

50 I have read the judgment of Hansen JA where the facts of, the background to and the submissions made in this appeal are set out. Having had that considerable advantage, I can go straight to the critical issues concerning the construction of cl 8 of the supply agreement.

51 The construction of that clause raises an issue of law which is now stated in substituted ground 6 of the amended notice of appeal. The case below was not conducted precisely on this basis and the reasons for decision of the learned trial judge have to be understood in that context. However, if the construction for which the appellant contends is correct, the appeal should be allowed.

52 The construction for which the appellant contends is not correct. For the purpose of s 61 of the Goods Act 1958, cl 8(b)(ii) of the supply agreement 'negatived ... by express agreement' the liabilities which would have arisen by implication of law under the warranties in s 19(a) and (b) of that Act.

53 Clause 8(a) of the supply agreement does not detract from or qualify the function and effect of cl 8(b)(ii) of expressly negativing those statutory warranties. Where it applies, cl 8(a) passes on to the buyer, as an express contractual warranty

between the supplier and the buyer, a warranty in such terms and amount as exist between the supplier and the manufacturer. It does not carve out or leave partially intact the statutory warranties which have been wholly negatived by cl 8(b)(ii). Clause 8(a) has nothing to do with statutory warranties. Where it applies, it creates a separate, free-standing contractual warranty as between the supplier and the buyer.

54 The appellant's case is based on the proposition that the manufacturer may owe the supplier a fitness for purpose warranty which cl 8(a) would pass on to the buyer. The presence of this possibility, which I am prepared to accept, does not mean the express negativing of the statutory warranties in cl 8(b)(ii) is any less than entire as between the supplier and the buyer. Any warranty which is owed by the manufacturer to the supplier which is passed on to the buyer by cl 8(a) is enforceable as a contractual warranty and not as a statutory warranty. The appellant's argument conflates and therefore confuses what might be enforceable as an express contractual warranty with what has expressly been negatived as a statutory warranty.

55 To avoid liability to the appellant under the statutory warranties, the respondent only had to prove that they had been expressly negatived, which it did by pointing to cl 8(b)(ii). Any warranty created under cl 8(a) in favour of the buyer was an express contractual warranty, which the appellant bore the onus of proving. It could only have done so by leading evidence of the warranties (if any) owed by the manufacturer to the supplier. As Hansen JA has pointed out, the appellant sought to amend its case very late to include such a claim. The trial judge refused to grant leave and that decision has not been challenged. Therefore the appellant did not lead that evidence.

56 It was common ground in the appeal, as it was before the trial judge, that the governing principles in relation to the interpretation of exclusion clauses were stated in Darlington Futures Ltd v Delco Australia Pty Ltd[10] in the passage in the judgment of the High Court referred to by Hansen JA. The appellant particularly relies on the principle that, in the case of ambiguity, exclusion clauses are construed against those who seek to rely on them (contra proferentem).

57 In that regard, the appellant's strongest argument is that the subject of cl 8 is exclusions of liability, as its heading indicates, and that this general context leads to a particular interpretative result. The argument, which was eloquently articulated by counsel for the appellant, is that, read as a whole, cl 8(a) leaves (potentially) intact a statutory warranty which cl 8(b)(ii) does not (necessarily) entirely take away. The argument was attractively developed by reference to the implications of exclusion clauses for commercial decision-making about insurance with respect to defective goods.

58 I accept the appellant's submissions that it is important for commercial parties to know whether they need to take out insurance with respect to defective goods. I also accept that the exclusion of a statutory warranty must be express and unambiguous and that, if a non-exclusionary construction is reasonably open, the party who would bear the burden of the exclusion should be given the benefit of that construction. Finally I accept that cl 8 must be read as a whole. With those considerations in mind, I am still of the view that cl 8(b)(ii) operates expressly to negative the statutory warranties. It is expressed in very clear words: 'To the full extent permitted by law ... All statutory and implied conditions and warranties except as to title are excluded'. Clause cl 8(a) operates expressly to create a separate contractual warranty in the circumstances to which it refers. In the trial on the allowed pleadings, the respondent had the onus of establishing the exclusion of the statutory warranties, which it did. Had the appellant's case at trial been put on the basis of the contractual warranty, the onus would have been on the appellant to establish the scope of that warranty, as the trial judge correctly stated.

59 I therefore agree with the judgment of Hansen JA that the appeal should be dismissed.

[1] All Saints Estate Pty Ltd v Victorian Alps Wine Company Pty Ltd & Ors; Vallunga Pty Ltd v Victorian Alps Wine Company Pty Ltd & Ors [2010] VSC 599.

[2] In the Victorian Alps proceeding paragraph 27; in the Vallunga proceeding paragraph 20.

[3] Victorian Alps/Vallunga outline of submissions page 1 and transcript 300.

[4] [1986] HCA 82; (1986) 161 CLR 500, 510.

[6] [1986] HCA 82; (1986) 161 CLR 500, 510.

[7] [2010] HCA 37; (2010) 242 CLR 336.

[8] [1936] AC 159, 164.

[9] [2011] VSCA 226, [43] and [47].

[10] [1986] HCA 82; (1986) 161 CLR 500, 510 (Mason, Wilson, Brennan, Deane and Dawson JJ).