Vok Beverages Pty Ltd v Diageo Brands BV

Judgment 1THE COURT: These are our reasons for granting leave, allowing an appeal, setting aside the orders of the primary judge and permitting the appellant to amend its Commercial List Statement, immediately following the conclusion of the hearing. 2The appellant (Vok) and the respondents (collectively, Diageo) entered into a Distribution Agreement dated 27 June 2006, pursuant to which Vok was appointed the sole distributor in Australia of alcoholic products supplied by Diageo. That Agreement has come to an end. Since 2012, Vok has prosecuted litigation alleging various breaches of it. The proceedings were commenced in the Supreme Court of South Australia and were transferred to the Commercial List of this Court. In late 2013 and the first half of 2014, Vok repeatedly sought to amend its claim in a variety of ways which need not be summarised. There were also disputes about discovery and particulars. 3On 16 June 2014, in response to aspects of those disputes, Diageo filed and served an affidavit of Ms Edina Szaszik, who was employed within the Diageo group of companies. It was common ground at first instance and on appeal that the material annexed to that affidavit disclosed, for the first time, that the price charged by Vok included a component of overhead and indirect costs, including those of the parent company. The affidavit also disclosed the amounts of freight which had contributed to the cost paid by Vok when the products were delivered to it, on an FOB basis, at the port nearest to the place of manufacture, throughout the life of the Distribution Agreement, and immediately before it commenced and after it came to an end. 4One example of the inclusion of such an overheads charge was in the calculation of the cost for J&B Rare Scotch Whisky which included the following components of a total cost of some GBP 8.60: Total spirit: 4.55 Total packaging material: 2.36 Total overheads: 0.75 Total GSS applied overhead: 0.93 5Vok's complaint focused upon the last entry of GBP 0.93, which was described as including "central overhead" of 0.57, "order capture" of 0.65 and "brand adjustment" of 0.18, and a negative adjustment. Vok claimed that the inclusion of those general overheads breached the Distribution Agreement because it was not within the "Transfer Price" to be charged. 6The same affidavit also appeared to disclose that the freight charged (for a case of 12 x 700mL bottles from place of manufacture to port) ranged between GBP 80 - GBP 118.80 over the six year duration of the Distribution Agreement, but had been GBP 40 before it commenced and then, when Vok ceased to be the sole distributor, fell to GBP 57.06. Vok's Chief Financial Officer, Mr Crichton, gave unchallenged evidence in relation to that material as follows: "The freight charges are related to the transporting of the relevant products from the factory where the product is manufactured to the port nearest to that factory in the country. In the case of any one product, the distance covered would not change unless the factory was shifted. Despite this, I note ... that the 'primary freight' charged per case... increased significantly in the year of commencement of the Distribution Agreement (in FY2006), and then decreased significantly in the year following termination of the Distribution Agreement (FY2013)." 7Mr Crichton observed that the freight charged doubled in the year the Distribution Agreement commenced, and approximately halved in the financial year after it terminated. 8On 26 June 2014, 10 days after receipt of Ms Szaszik's affidavit, Vok served a proposed amended Commercial List Statement. It alleged that it was a term of the Distribution Agreement that the price to be charged to Vok (the Transfer Price) would not include overhead and indirect costs, and it alleged that the amounts charged for primary freight were excessive. It was common ground that these were essentially new claims in the proceedings. Diageo opposed the amendments. 9Vok's application was heard before the primary judge on 31 July 2014. Diageo had served no evidence responding to Mr Crichton's concerns about excessive freight charges. Nor had it served evidence about the extent to which additional discovery would be required by reason of the proposed amendments. Pragmatically, the parties jointly invited the Court to determine whether the amendments ought be allowed, following which the extent of further discovery could be indicated. Senior counsel for Diageo said: "We would respectfully urge that if your Honour determines the amendment question we can very quickly say what our response to any amendment your Honour may consider permitting would be, and that would then throw up for consideration whether and to what extent any discovery is in fact required." 10By reserved judgment delivered 13 August 2014, the primary judge refused leave to amend the Commercial List Statement. His Honour said (at [31]) that the claim sought to be advanced by Vok was not arguable in accordance with General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125. His Honour also said that even if the claim were arguable, he would not grant leave having regard to case management principles. He was concerned at the likely extent of additional discovery, and that the date for hearing commencing on 29 September 2014 would be lost. 11Vok sought an expedited concurrent hearing of its application for leave to appeal. It raised a series of complaints, not all of which need be considered in what follows. 12Primarily, Vok said that his Honour erred in concluding that the two new claims were not arguable. In order to consider the submission, it is necessary to return to the Distribution Agreement. 13The Distribution Agreement defined "Diageo" to mean "all or any one (as applicable) of Diageo Australia, Diageo Scotland, Diageo Brands, Diageo NA, Ursus and Old Bushmills". The Agreement required Vok to pay to Diageo 50% of the Gross Profit made on all Products. The contract specified how "Gross Profit" was to be calculated, and there was no dispute that expressly excluded from those calculations were "any overhead costs of Vok ... which are not Direct Costs" and "any profit margin". 14The Distribution Agreement required Vok to pay the "Transfer Price" for the goods, which was defined to mean "the price paid by Diageo for the Products but excluding any profit margin, which price Diageo shall pass on to Vok". Clause 8.2 provided that: "Diageo may adjust the Transfer Prices referred to in Clause 8.1 only when the price paid by Diageo to Affiliates for the Products is adjusted." 15The "price paid by Diageo" was not defined in the Agreement, and it was common ground before his Honour, and on appeal, that there was ambiguity (not least because of the definition of "Diageo"). His Honour noted, with respect correctly, that difficulties arose because the definition includes both the seller and the manufacturer of the Product. His Honour said: "[32] ... The definition is perhaps not as clear as it might have been because of the ambiguity in the meaning of 'Diageo'. It is tempting to read 'Diageo' as the company that supplies a particular product. However, if that company is also the manufacturer of the product, it is difficult to make sense of a requirement that fixes the price payable by Vok by reference to the price paid by that company for the product. That company sells the product it manufactures. It does not buy it. It seems clear, however, that the expression 'Diageo' is used more loosely in the definition of 'Transfer Price' and that what is intended is that Vok should pay the same price for a particular product as companies in the Diageo group less any profit margin. That conclusion is reinforced by cl 8.2, which provides that Diageo may only adjust the Transfer Price when it adjusts the price it charges its Affiliates for that product. The amendments sought to be made by Vok over a number of months up until 26 June 2014 proceeded on that basis. [33] The most recent amendments sought to be made by Vok allege that it was a term of the agreement that the Transfer Price would not include overhead and indirect costs in respect of the relevant products other than plant and line overheads. However, the alleged term is inconsistent with the express definition given to the expression 'Transfer Price' by the agreement. The express definition says that the Transfer Price is the price charged to other companies in the group less any profit margin. If the Transfer Price is, in fact, some price that excludes costs of various types, it is clearly not the price charged to other companies in the group less any profit margin." 16His Honour considered that the construction for which Vok contended was doomed to fail, and placed particular reliance upon cl 8.2. 17In each of [32] and [33], Vok submitted that his Honour had misstated cl 8.2, which refers to the price paid by Diageo to affiliates, not the price charged by it (it is the Diageo affiliates which are selling product). Moreover, although his Honour recognised that the Transfer Price excluded any profit margin, it is less than clear what "profit margin" means in this context, where one Diageo company manufactures a Product and sells it to another Diageo company which sells to Vok. One possibility is that the definition means that whatever price happened to be paid between the two related companies, whether or not general or indirect costs had been included, is what determines the Transfer Price. Although Diageo contends that is the true construction, it is far from plain that that is the only possible construction. As Vok submitted, there is difficulty in a construction where Diageo in addition to receiving half of the gross profit made by Vok, could adopt a manner of internal accounting entitling it to recover its central overhead across all operations as part of the price paid by Vok. 18It being common ground that the contract was ambiguous, regard needed to be had to the surrounding circumstances and the commercial purpose or objects to be secured by the contract. That included the parties' acknowledgment (by cl 14.5) "that the commercial arrangements between them are in a spirit of openness and following a principle of equitable profit-sharing". That supported Vok's construction. Otherwise, the surrounding circumstances and commercial purpose and objects of the Distribution Agreement were not considered by the primary judge, nor were they disclosed by the material available to this Court on appeal. 19Accordingly, on the material available to the primary judge, we would not conclude that the proposed amendment is "so clearly untenable that it cannot possibly succeed": General Steel at 130. 20The primary judge dealt with the freight claim separately. He accepted that if Diageo charged an excessive amount for primary freight, it was earning a profit, contrary to the definition of "Transfer Price". However, his Honour rejected the amendment on the basis that there was no factual basis for it: at [48]. His Honour said that: "[50] In my opinion, it is simply speculation on the part of Vok that the different prices demonstrate that the prices it was charged were excessive. It has been driven to that speculation because it became evident that the case it wanted to mount was not supported by the facts. In my opinion, the case that it seeks to advance is not supported by the facts on which it relies." 21We respectfully disagree. There were on the face of the material extracted from Ms Szaszik's affidavit significant changes in freight charges imposed on Vok both immediately before the Distribution Agreement commenced, and immediately after it ended. In contrast, the freight rates were relatively stable when the Agreement was in force. No explanation was proffered by Diageo in response to what Mr Crichton inferred from the information (and which is apparent on its face). 22Diageo's response in oral argument was to observe that the affidavit had been provided for a different purpose (to rebut matter raised, but not ultimately pressed, by Vok). That is so, but it is no answer to the inference which the material is capable of sustaining. 23Again, this aspect of the proposed amendments should not have been refused on the basis that it was mere speculation, and without any factual basis whatsoever. 24For those reasons, his Honour's application of the General Steel test miscarried. It further followed that his Honour's application of case management principles also miscarried, because that exercise of discretion expressly turned upon his assessment of the strength of the proposed case (his Honour proceeded on the basis that even if he were wrong and the proposed amendments were not so hopeless that they could not possibly succeed, they were "weak"). 25Vok should be given leave to amend. It suffices to say that where, as here, an amendment was proposed some months in advance of a hearing which had been tentatively fixed, and where there was an unchallenged explanation for the delay in its being raised (namely, the provision of Ms Szaszik's affidavit shortly before hand), there was error in refusing the amendment on case management principles. 26For those reasons we made the orders referred to above immediately after the conclusion of the hearing on 11 September 2014.