- Posted by Doyles Construction Lawyers
- On September 19, 2015
- 0 Comments
- Mackay Sugar Ltd v Sugar Australia Pty Ltd
SUPREME COURT OF QUEENSLAND
CITATION: Mackay Sugar Ltd v Sugar Australia Pty Ltd  QSC 233 PARTIES: MACKAY SUGAR LTD
ACN 057 463 671
SUGAR AUSTRALIA PTY LTD
ACN 081 245 169
FILE NO: BS 120924 of 2012 DIVISION: Trial Division PROCEEDING: Application DELIVERED ON: 5 September 2013 DELIVERED AT: Brisbane HEARING DATE: 18 April 2013 JUDGE: Jackson J ORDER: The order of the court is:
1. leave to appeal from the award is granted.
2. the appeal is dismissed.
3. the applicant pay the respondent’s costs of the application and appeal to be assessed.
CATCHWORDS: ARBITRATION – THE AWARD – APPEAL OR JUDICIAL REVIEW – GROUNDS FOR REMITTING OR SETTING ASIDE – ERROR OF LAW – CONSTRUCTION OF CONTRACT – where a party applied for leave to appeal from an arbitral award, for an award of damages for breach of contract, under the Commercial Arbitration Act 1990 (Qld), s 38 – where the parties contracted to supply and acquire raw sugar beyond the end of the contract – where the arbitrator made a finding that a term of a contract was a term of an implied or “tacit agreement” – whether the arbitrator erred in law – whether the arbitrator failed to give adequate reasons
Commercial Arbitration Act 1990 (Qld), s 29, s 38
Commercial Arbitration Act 2013 (Qld), s 41, s 42
Sale of Goods Act 1896 (Qld), s 29, s 52
Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424;  HCA 28, cited
Brogden v Metropolitan Railway Co (1877) 2 App Cas 666, cited
Byrne v Australian Airlines Limited (1995) 185 CLR 410, cited
Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 47;  HCA 55, cited
Goldsborough, Mort & Co v Carter (1914) 19 CLR 429;  HCA 80, cited
Howell v Coupland (1876) 1 QBD 258, cited
Hyundai Merchant Marine Co Ltd v Dartbrook Coal (Sales) Pty Ltd (2006) 236 CLR 115; HCA 1324, cited
Kriketos v Livschitz  NSWCA 96, cited
Lebeaupin v Richard Crispin & Co  2 KB 714, cited
Sapphire (SA) Pty Ltd v Barry Smith Grains Pty Ltd (in liq)  NSWSC 1451, cited
State of Victoria v Seal Rocks Victoria (Australia) Pty Ltd  VSC 84, cited
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165;  HCA 52, cited
Tuta Products Pty Ltd v Hutcherson Bros Pty Ltd (1972) 127 CLR 253, cited
Westport Insurance Corporation v Gordian Runoff Ltd (2011) 244 CLR 239;  HCA 37, cited
Zurich Bay Holdings Pty Ltd v Iluka Midwest Ltd  WASC 237, cited
- JACKSON J: Mackay Sugar Limited (“MSL”) applies for leave to appeal from an arbitral award.
- The award was made by G A Thompson SC (“the arbitrator”) on 19 November 2012. It was “an award of damages in favour of Sugar Australia Pty Ltd in the amount of $3,154,422.00 together with interest at the rate of 6.55 per annum from 1 June 2011”.
- MSL was the respondent in the arbitration. Sugar Australia Pty Ltd (“SAPL”) was the claimant. The “damages” were damages for breach of contract. The contract was made between MSL, as supplier, and SAPL, as acquirer, of supplies of raw sugar for processing in SAPL’s sugar refinery. The breaches were of MSL’s obligation to supply SAPL’s requirements in May and April of 2011. The damages comprised costs and expenses incurred by SAPL in buying in sugar from third parties. The amount of the claimed damages was agreed. The dispute was whether MSL’s failures to make the relevant supplies were in breach of contract. The issues were as to the terms of the relevant contract or contracts and as to the meaning or operation of particular alleged terms.
- The arbitration was conducted under the Commercial Arbitration Act 1990 (Qld) (“the Act”). By s 42(2) of the Commercial Arbitration Act 2013 (Qld) (“the 2013 Act”) the law governing the arbitration and the arbitration agreement is to be that which would have been applicable as if the 2013 Act had not been enacted. Accordingly, the application for leave is to be decided under s 38(4)(b) of the Act, notwithstanding its repeal by s 41 of the 2013 Act.
- By a consent order for directions, the application for leave and the argument on the appeal itself, if leave be granted, were heard together. That is an unusual procedure in the context of an application under s 38(4)(b). Case law states that ordinarily it should not be done. It was warranted, in this case, by the agreement of the parties and three circumstances: first, because the hearing of the whole of the application and the substantive arguments on the appeal could be dealt with by the parties in less than a day of oral argument upon the affidavit evidence filed in support of the application for leave; secondly, although there was no particular urgency attached to the resolution of the dispute as between the parties, resolution of both the application for leave and the substantive appeal, if leave is granted, might proceed as promptly as may be; and thirdly, that proceedings in the arbitration have already been prolonged to an extent by a prior successful application for leave to appeal and appeal and a consequential remitter to the arbitrator to determine the award afresh.
- Nevertheless, the respondent maintained the position that leave to appeal should not be given. The arguments must therefore be passed through the gateways of the requirements under ss 38(4) and38(5) of the Act. As well, under s 38(2) of the Act an appeal is confined to an appeal on any question of law arising out of the award.
- MSL and SAPL are parties to the Amended and Restated Joint Venture Agreement. (“JVA”). The original JVA was made on 27 February 1998. MSL was one of the parties. Other parties joined with it as adventurers in the joint venture. SAPL was a party, as the joint venture “Manager”, to carry out the “Project”. The Project includes acquisition of raw sugar, refining of raw sugar, and marketing and distributing refined sugar.
- One of the joint venture assets is the Racecourse Refinery. It is adjacent to the Racecourse Mill, which is owned and operated by MSL. The Racecourse Mill supplied raw sugar to the Racecourse Refinery. From 1 July 2007 those supplies were made under a written “Sale Contract” between MSA, as supplier, and SAPL, as acquirer, for a term of three years. The parties to the Sale Contract expressly extended its operation from 1 July 2010 to 30 September 2010 (“the express 3 month extension”).
- Production at the Racecourse Mill and other sugar mills is seasonal. The start of a crushing season crush is determined by a number of factors, including weather. The duration of the season is similarly affected by various events. In broad terms, production begins not long before the middle of the calendar year and lasts until late in the calendar year. Requirements of the Racecourse Refinery for raw sugar are not similarly seasonal. In broad terms, it has consistent periodic requirements over a financial year, approximating 450,000 tonnes in total. The production of MSL’s Fairleigh, Marian and Racecourse Mills over the 2005 to 2009 crushing seasons averaged about 840,000 tonnes per season.
- The supply by MSL to SAPL of raw sugar during the annual period of about 6 months or so when MSL is not producing raw sugar is made from MSL’s “held stocks” at the Mackay Bulk Sugar Terminal (“MBST”). Supplies are made from the MBST to the export market by Queensland Sugar Limited (“QSL”). QSL acquires most of Queensland’s raw sugar production from sugar mills for export sale. QSL acquires sugar for that purpose from MSL. QSL is the operator of the MBST. The evidence did not identify the terms of any relevant contracts for sales by MSL to QSL or for storage by QSL of MSL’s raw sugar that is not sold to QSL.
- A shortfall will occur in MSL’s supplies to the Racecourse Refinery when the amount supplied during a crushing season’s production and MSL’s held stocks at the MBST are insufficient to meet the Racecourse Refinery’s requirements until production begins in the next crushing season.
- In late 2010, the production and sale of raw sugar in areas of coastal Queensland was affected by abnormal rain (“Weather Event”). The Weather Event interfered with harvesting the crop. The outcome was that the season’s crush was reduced significantly, below reasonable expectations. MSL was affected.
- MSL’s supply of the Racecourse Refinery’s requirements was interfered with. In late 2010, MSL informed SAPL that there would be supply shortfalls of about 50,000 tonnes in April and May 2011, starting from mid-April 2011. That was when MSL anticipated that the held stocks for the 2010 season would be consumed. MSL advised SAPL that MSL anticipated that the interruption would last until a time in May 2011, after which supplies would resume for 100% of the Racecourse Refinery’s needs, weather permitting.
- MSL’s advice proved accurate. There were supply shortfalls of about 50,000 tonnes in April and May 2011 (“April and May 2011 shortfalls”).
- At least mostly before the impact of the Weather Event was known, MSL had made supplies of raw sugar produced in that season to QSL, for export sale (“the 2010 QSL supplies”). The amount of the 2010 QSL supplies was about 217,000 tonnes. There was nothing untoward about this, in the course of events of a normal season. However, as previously described, the 2010 season was not a normal season. MSL’s total production for the season was about 605,000 tonnes. The amount 2010 QSL supplies exceeded the April and May 2011 shortfalls. Thus, including the 2010 QSL supplies, the amount of raw sugar produced by MSL from the 2010 season exceeded that which would have been required to meet the Racecourse Refinery’s needs in the 2010 to 2011 financial year, including the April and May 2011 shortfalls.
- Simplifying, SAPL’s contentions in the arbitration can be summarised into three steps. First, MSL was obliged to supply all the Racecourse Refinery’s raw sugar requirements (“Mackay Sugar will supply sufficient raw sugar to meet the raw sugar melt requirements for…[the] Racecourse Refinery” or “Mackay will sell to the Manager sufficient raw sugar to meet the Requirements”), unless a relevant proviso excused the shortfall.
- Secondly, either possible relevant proviso operated only if the requirements were more than MSL’s total seasonal raw sugar production (“provided it is no more than Mackay Sugar’s total annual raw sugar production” or “subject to production limitations”).
- Thirdly, because the 2010 QSL supplies were part of the 2010 seasonal production, it follows that neither of the relevant provisos was engaged to excuse the April and May 2011 shortfalls.
- MSL’s contentions in the arbitration were that it was not obliged to supply the raw sugar requirements of the Racecourse Refinery in April or May 2011, so that its failure to supply the April and May 2011 shortfalls was not a breach of contract. Alternatively, MSL submitted that the April and May 2011 shortfalls were caused by production limitations.
- There were other grounds of defence not relevant to the application for leave to appeal. The grounds of the parties’ contentions, as broadly stated above, varied over the course of the arbitration.
Course of the arbitration
- On 15 September 2011, the arbitrator made an award (“First Award”). The award was that “Sugar Australia has not established a breach of contract which gives rise to an entitlement to damages.”
- The basis for that conclusion was that SAPL had “not established that that clause 2 [of the Sale Agreement] applies to the raw sugar supply agreement that operated in the period 1 July 2010 to 30 September 2010 or to the implied or tacit agreement under which raw sugar was supplied after 30 September 2010.”
 Paragraph 88 of the reasons for the First Award.
- On 8 March 2012, the Supreme Court ordered that the First Award be set aside and that the dispute be remitted to the arbitrator. The reasons for judgment show that the ground on which the award was set aside was the misconduct of the arbitrator in failing to provide natural justice as to whether “cl 2 might have operated within a contract existing in April/May 2011” because MSL “did not challenge the operation of the proviso which was indicated by [SAPL]’s contention” that “SAPL’s requirements was [sic] no more than MSL’s total raw sugar production for the 2010 season.”
- On 19 November 2012, the arbitrator made another award (“Second Award”). On this occasion, he found that cl 2 was a term of the implied or “tacit agreement” for a contract at the time of the April and May 2011 shortfalls, so that MSL was in breach of contract.
Alleged errors of law
- MSL contends that the arbitrator made five separate errors of law arising out of the Second Award.
- First, that (contrary to the First Award) the arbitrator erred by departing from the construction of cl 2 that it required a “comparison… between the quantity… to meet the requirements… and MSL’s… total annual raw sugar production… by looking at both on an annualised basis” and that “mechanism… is not one which can be sensibly applied to an agreement expressed to operate for only a 3 month period.”
- Secondly, that the arbitrator erred in construing cl 2 as permitting a comparison of production and requirements over a period which started before the period of the Sales Agreement or the express 3 month extension because the proper construction of cl 2 requires that the comparison of production and requirements is to be made by reference to production within the period of the contract.
- Thirdly, that the arbitrator erred in finding that cl 2 had become part of the implied or “tacit agreement” for a contract made after September 2010.
- Fourthly, that the arbitrator erred in finding that there was an implied or “tacit agreement” for a contract to continue supply during April and May 2011.
- Fifthly, that the arbitrator erred in failing to give adequate reasons for:
(a) the conclusion that the construction of cl 2 of the Sale Agreement advanced by SAPL is to be preferred;
(b) the conclusion that the post-September 2010 contract or contracts incorporated cl 2; and
(c) not accepting MSL’s contention that no contract for supply could be inferred from conduct after December 2010.
- SAPL dealt with those points in its submissions. However, as well, SAPL advanced a ground for upholding the Second Award not dealt with by the arbitrator, by way of cross-contention on the appeal.
- In short, SAPL submits that even if cl 2 was not part of any contract otherwise made on the terms of the Sale Agreement at April and May 2011, the parties were bound by the provision in Sch 2 of the JVA that “[s]ubject to production limitations, [MSL] will sell to [SAPL] sufficient raw sugar to meet the Requirements…”
- SAPL thus submits that it is entitled to maintain the Second Award on the ground of breach of the contract in Sch 2, because the Requirements were not met in April and May 2011 and that was not because of “production limitations” within the meaning of that provision.
- MSL submits that Sch 2 does not impose a contractual obligation for MSL to supply the Requirements. Alternatively, it submits that the failure to supply was caused by production limitations.
Clause 2 as a term
- If leave to appeal were granted, logically, the first question is whether cl 2 was a term of any relevant contract at April or May 2011. If it was not, the first and second questions do not arise and the fourth question is also moot. Attention could then be turned to the cross-contention.
- That statement begs the question whether leave to appeal should be granted about whether cl 2 was a term of any post-September 2010 contract. The point arises on the question of leave in two ways: either on the third contention as an error of law in finding that cl 2 was a term or on the fifth question as an error of law in failing to give adequate reasons for that conclusion. It is convenient to consider the substantive question first in this case.
- What then is the basis of the contention that the arbitrator erred? MSL submits that it is one thing to find that MSL impliedly agreed that supplies would be on the same terms as before, but another to find that it impliedly agreed to continue to make future supplies to meet the Racecourse Refinery’s requirements. It emphasised the facts that no express agreement was made and that the conduct of continuing to make supplies after 1 October 2010 does not of itself bespeak an obligation to continue to make supplies.
- It seems to me that in finding the terms of any implied agreement operating post-September 2010, attention needs to given to the important facts that the parties had made express agreements governing their relations for the previous periods. For the period from 1 July 2007 to 30 June 2010, that had been done by the Sales Agreement originally made on 29 June 2007. For the period from 1 July 2010 to 30 September 2010, that was done by the express 3 month extension made on 4 June 2010 and reflected in the Minutes of Meeting of that date.
- The express 3 month extension was expressly agreed to on the basis that the parties expected to conclude a further agreement by 30 September 2010. They didn’t. According to their express agreement, there was no longer a period during which the terms of the Sales Agreement were to bind them if they did not reach further agreement by 30 September 2010. On 1 October 2010, the logical conclusion is that neither of the parties agreed to be further bound by its terms. The “tacit agreement” for a contract found by the arbitrator is to the opposite effect. Yet it was reached by no more than continuing to make supplies after 30 September 2010.
- In none of the cases, where a further “tacit agreement” for a contract on the same terms has been said to arise, have the parties expressly agreed to a limited period of extension of the original contract for the purpose of permitting the negotiation of a new contract.
- SAPL submits that the “tacit agreement should be construed as extending indefinitely (subject to termination on reasonable notice).”
- The arbitrator did not make any finding in the reasons for the Second Award whether the “tacit agreement” for a contract was for a term or of indefinite duration. He referred to the question only indirectly in the finding that “[t]he analysis is not impugned by the argument advanced by MSL that applying Brambles Ltd v Wail there may be a series of new three monthly contracts.” In the reasons for the First Award, he had found that after 30 September 2010 “…there may be an implied or tacit agreement that a new contract between the parties was formed, perhaps terminable on reasonable notice… [but] if such an implied or tacit agreement was made, it was interim only.” He did not explain what the “interim” was. Nor did he make any finding about when the “tacit agreement” for a contract was made.
- This reticence to make a particular finding about the “tacit agreement” for a contract was not inadvertent. By referring to the argument that there may be a series of three monthly contracts, the arbitrator acknowledged that the contractual relations of the parties might be the one thing but they may be the other.
- Does that matter? MSL says it does, because it wishes to contend that if there is a 3 month term, the calculation of the “total annual raw sugar production” to be compared to the “raw sugar melt requirements” must start from the commencement of the 3 monthly tacit agreement. But put that point and the cross-contention to one side. The “tacit agreement” for a contract is the foundation of the alleged liability for breach of contract. With what confidence can the conclusion that cl 2 was a term of the “tacit agreement” for a contract be reached if it is not even clear whether there was a three monthly contract term or a contract terminable on reasonable notice, or when the contract was made?
- In my view, the question is not answered by detailed analysis of either Brambles Ltd v Wail or the cases or monographs referred to in it. The question is not whether there can be a “tacit agreement” for a contract. Of course there can be, as a matter of law. It may be doubted, in my view, whether the analysis in Brambles adds much to the exposition of the basis of a finding of implied contract laid down in Brogden v Metropolitan Railway Co. As a matter of precedent, the decision of the Court of Appeal of the Supreme Court of Victoria in Brambles commands no particular authority. The judgment was overturned in the High Court in Andar Transport Pty Ltd v Brambles Ltd, although not on this point. The High Court said that “the extent to which the terms of the Agreement continued in force… [was] unnecessary to determine…”
- I refer to Brogden for the following reason: underlying the question of whether cl 2 is a term of any contract lies what degree of satisfaction is required in law to infer that it is. The line of cognate cases for which Brogden is the seminal authority informs the answer to that question. The civil onus applies. Beyond that, the law was summarised admirably in the New South Wales Court of Appeal in Kriketos v Livschitz as follows:
“McHugh JA (Hope and Mahoney JJA agreeing) discussed the approach to the inference of a contract from conduct in Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110 (at 11,117–11,118) as follows:
…[A] contract may be inferred from the acts and conduct of parties as well as or in the absence of their words… The question in this class of case is whether the conduct of the parties, viewed in the light of the surrounding circumstances, shows a tacit understanding or agreement… The conduct of the parties, however, must be capable of proving all the essential elements of an express contract… Care must also be taken not to infer anterior promises from conduct which represents no more than an adjustment of their relationship in the light of changing circumstances… Moreover, in an ongoing relationship, it is not always easy to point to the precise moment when the legal criteria of a contract have been fulfilled. Agreements concerning terms and conditions which might be too uncertain or too illusory to enforce at a particular time in the relationship may by reason of the parties’ subsequent conduct become sufficiently specific to give rise to legal rights and duties. In a dynamic commercial relationship new terms will be added or will supersede older terms. It is necessary therefore to look at the whole relationship and not only at what was said and done when the relationship was first formed. (emphasis added)
In Integrated Computer Services (at 11,117) McHugh JA approved the statement in W Howarth, ‘Contract, Reliance and Business Transactions’ (1987) Journal of Business Law 122, 127 that it is an error ‘to suppose that merely because something has been done then there is therefore some contract in existence which has thereby been executed’. As the passage I have already cited from Integrated Computer Services demonstrates, his Honour went on to explain the circumstances in which a contract could, nevertheless, be inferred from the acts and conduct of the parties and even from silence. However, for conduct to amount to implied acceptance of an offer, it must be ‘of such a character as necessarily to lead to the inference on the part of the defendants that the agreement had been accepted on the part of the Plaintiffs, and was to be acted upon by them’: Brambles (at ) per Ipp AJA (Mason P agreeing), citing Lord Hatherley in Brogden v Metropolitan Railway Co (1877) 2 App Cas 666 (at 686). Other adjectival phrases used in Brogden as descriptive of the degree of satisfaction which must be attained to lead to a conclusion of contractual formation in the absence of specific assent were collected by Macfarlan JA (Beazley JA agreeing and Handley AJA relevantly agreeing (at ) inLaidlaw (at –): per Lord Cairns LC, ‘no explanation can be given of it unless it refers to the contract in question’ (at 678) and that the conduct was ‘referable in my mind only to the contract …’ (at 680) and Lord Selborne (at 689), ‘it appears to me that every single circumstance points quite unequivocally to this agreement’. (emphasis added) It is necessary that the conduct ‘point to the existence of a contract in the terms alleged in the proceedings’: Laidlaw (at ).”
- The references to Brogden are telling, in my view.
 At -.
- SAPL submitted that part of the context against which the question whether cl 2 was part of the post-September 2010 “tacit agreement” for a contract were the underlying terms of Sch 2 of the JVA, including the provision that “[s]ubject to production limitations, [MSL] will sell to [SAPL] sufficient raw sugar to meet the Requirements…” This point was not dealt with by the arbitrator in the Second Award.
- I have found this a difficult point. Where the parties have expressly agreed that the terms of a written contract which is about to expire will bind them for a limited period while they explore whether they can agree on the terms of a new contract, when the time passes, the logical inference is that neither party is bound by the terms of the written contract. The question becomes what else is there in the facts to repel that inference? Another agreement covering the same subject matter might tend to support the inference that the “tacit agreement” for a contract which may arise when supplies continue is on the terms creating an obligation to supply referred to in the other agreement.
- But there are other potential obstacles. Where parties enter into an earlier contract dealing with a subject matter which is covered explicitly and in different terms in a later contract, it may be that in law they have impliedly rescinded the first agreement. This is common where an anterior oral contract is discharged by a later written contract.
- It does not seem to me that an inference as broad as that follows about the operation of the terms as to supply in Sch 2 of the JVA upon the making of the Sale Contract, including cl 2. The JVA is a source of ongoing rights and obligations. If Sch 2 contains an obligation to supply, that too is a source of ongoing obligation. However, if Sch 2 and cl 2 impose inconsistent obligations of supply, it seems to me that Sch 2 must have been intended to operate subject to cl 2, as the later and more detailed contract expressly contemplated by Sch 2.
 Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 at ;  HCA 55.
- In my view, the terms of cl 2 are not the same as, and are potentially partly inconsistent with, any obligation to supply under Sch 2. In particular, the mechanism under cl 2 for assessing the limit of the obligation to supply by reference to the “total annual raw sugar production” is not a concept picked up from the provisions in Sch 2. Thus, treating the JVA as part of the context in which the tacit agreement was made does not assist me in reaching the conclusion whether the “tacit agreement” for contract was made on terms which include cl 2.
- Stepping back, it seems to me that the submissions backwards and forwards before the arbitrator focussed to a significant on whether cl 2 could be made to work rationally in the context of a “tacit agreement” for a contract either for an indefinite period terminable on reasonable notice or for successive 3 monthly periods after 30 September 2010. Whether a term that refers to “total annual raw sugar production” and “raw sugar melt requirements” can be made to work over those periods does not answer the question whether the inference from the dealings should be that cl 2 was a term of the “tacit agreement” for a contract in the first place. In my view, having answered the question whether cl 2 could work, the arbitrator failed to separately consider whether the facts warranted the inference that cl 2 was a term of any “tacit agreement” for a contract. That question was not answered by whether cl 2 was a term of the express 3 month extension.
- Overall, my firm conclusion is that the course of dealings between MSL and SAPL after 1 October 2010 is not only referable to the terms of the Sales Agreement including the obligations as to quantity in cl 2. They are equally consistent with the view that neither MSL nor SAPL bound themselves to supply or acquire any particular quantity of raw sugar by the supplies that were made (subject to the operation of any contractual obligations under the JVA).
- In particular, there are two important facts which appear on the face of the reasons for the First Award that the arbitrator did not deal with in the reasons for the Second Award, whether his view was that the “tacit agreement” for a contract was for an indefinite period terminable on reasonable notice or for successive 3 monthly terms.
- First, “on 15 November 2010 MSL advised Sugar Australia that adverse weather was hampering its ability to keep the refinery supplied with suitable raw sugar until the start of the next crop. 28 May 2011 was said to be the earliest date that 2011 season sugar could be available to MSL. It was recorded that using the then current known melt forecast data, the refinery would need 222,000 tonnes of raw sugar to get to 28 May 2011, and that as at 14 November 2010 there was 172,000 tonnes of stored sugar available to meet that requirement.”
- Putting Sch 2 of the JVA to one side, let it be accepted that at 1 October 2010 neither party was obliged to supply or acquire raw sugar on the terms of the Sale Agreement as the Sale Agreement and the express 3 month extension had expired. There was no further express extension of the Sale Contract. Supplies of raw sugar continued between 1 October 2010 and 15 November 2010.
- At 15 November 2010, any “tacit agreement” for a contract up to that time was based on no more than the making of those supplies. By 15 November 2010, MSL had said it would not be able to make the last 50,000 tonnes of supply to meet the raw sugar melt requirements of the Racecourse Refinery of 222,000 tonnes over the period from 15 November 2010 to 28 May 2011. Can an inference that cl 2 is a term of any “tacit agreement” for a contract, based purely on the conduct of making supplies before 15 November 2011, and the statement of apparent intention to further supply to the extent of available supplies, stand with that express notice of non-supply after 172,000 further tonnes have been supplied?
- Secondly, “in a letter dated 22 December 2010 MSL advised [SAPL]: ‘… I confirm that based on forecasted refinery melt rates and the planned 3 week refinery shut-down period, Mackay Sugar’s 2010 season held stocks for the Racecourse refinery will be consumed by approximately 16 April 2011. To minimise the raw sugar supply disruption, Mackay Sugar plans to start the 2011 crushing season on 1 May and expects that 5,000 tonnes of refinery supply raw sugar will be available in the week ending Saturday 7 May and thereafter, subject to suitable weather conditions, we expect to be able to supply 100% of the refinery needs with new season raw sugar…” Again, can an inference that cl 2 is a term of any “tacit agreement” for a contract, based purely on the conduct of making supplies before and after 15 November 2011, and in the light of the 15 November 2010 advice, stand with that further express notice of non-supply after 16 April 2011?
 Paragraph 18 of the reasons for the First Award.
- At 31 December 2010, on any view taken by the arbitrator, MSL was not bound to any “tacit agreement” for a contract longer than either for an indefinite term subject to reasonable notice or for a term of 3 months expiring on that day. At that time there had been no breach of any obligation to supply the Racecourse Refinery’s requirements.
- SAPL made a number of additional points about facts against which the question whether cl 2 was a term of the contract should be assessed. They resolve into two contentions. First, SAPL submitted that the “tacit agreement” for a contract was an “arrangement that was terminable by [MSL] on reasonable notice. [MSL] could have terminated the arrangement but did not.” In my view, this contention is illogical because it assumes that cl 2 is a term to start with. There was no reason to terminate a contract in order to get rid of a term of that contract if there was no such term of the contract in the first place.
- Secondly, SAPL relied on the facts that on 7 March 2011 MSL wrote to SAPL relying on force majeure “in accordance with the supply contract” and on 23 June 2011 an email was sent by Mr Snowball of MSL to Mr Walters relying on terms of the Sale Agreement.
- As to the email of 23 June 2011, the terms referred to were about the quality (Floc) of the raw sugar being then supplied. It says nothing acknowledging any obligation to supply under cl 2.
- As to the letter of 7 March 2011, the basis of the “supply contract” is not identified. Further, in considering this letter it ought not be forgotten that the next relevant prior document in the bundle of documents provided to the arbitrator by the parties was SAPL’s letter to MSL dated 24 December 2010. That letter was written in response to MSL’s letter to SAPL dated 22 December 2010 referred to above, by which MSL confirmed the then expected April and May 2011 shortfalls. In its response of 24 December 2010, SAPL said “your inability to supply is in contravention of your obligations in Schedule 2 to the Joint Venture agreement”. It did not say then that the Sale Agreement terms, including cl 2, were on foot. I reject that MSL’s conduct in sending the letter of 7 March 2011 assists in resolving the question whether cl 2 was a term of any contract operating after 31 December 2011, and in the same way I do not consider that SAPL’s reliance on Sch 2 in December 2010 assists much.
- In my view, there is no sufficient basis in the facts mentioned above for the inference that cl 2 was part of any contract made by way of “tacit agreement” operating after 31 December 2010, whenever that contract was formed.
- It is necessary to return to whether there was a relevant error of law so as to justify a grant of leave to appeal.
Erroneous finding that cl 2 was a term as an error of law
- If the arbitrator’s contrary conclusion was an error of law, it was a manifest error of law on the face of the award. That would engage s 38(5)(b)(i) of the Act. The outcome of the appeal on that question could substantially affect the rights of the parties to the arbitration agreement. That would engage s38(5)(a) of the Act. The court would be empowered to give leave to appeal as a matter of discretion under s 38(4)(b) of the Act.
- However, the question remains: even if the arbitrator’s finding that cl 2 was a term of any “tacit agreement” for a contract is wrong, is that an error of law? The arbitrator drew an inference that cl 2 was a term of any relevant contract by a two step process of reasoning: first, he concluded that cl 2 was a term of the express 3 month extension agreement for the period 1 July 2010 to 30 September 2010; secondly, “applying the principles referred to in Brambles Ltd v Wail (discussed in the reasons for the First Award and which are accepted as having application by both parties)” he found that “continuation of supply… can be inferred to be under a new agreement on the same terms…”
 Paragraph 28 and 29 of the reasons for the Second Award.
- What are the relevant “principles referred to in Brambles Ltd v Wail” in the First Award? They include that “where the parties to a fixed term contract for the provision of services… continued to deal with each other on the same basis as prior to the expiry of the term… there could be an implied or tacit agreement… on the same terms as the previous contract except as to the term.” However, the First Award included that “the effect of Brambles is that it is open to a court to draw the relevant inference [of contract on the same terms] but… the question… is… an evidentiary or factual question.”
- That is a potentially complex question. The making of an agreement, and the express terms of the agreement are prima facie matters of fact, yet there are legal requirements for an agreement to constitute a contract as a matter of law. But what of the inference of the terms of a contract from conduct?
- MSL submitted that the finding by inference that cl 2 was a term is an error of law but made no submission developing that contention, apart perhaps from emphasising that the inference was not one drawn on disputed facts.
- SAPL did not specifically submit that it wasn’t a question of law. It treated the point as one where the arbitrator was required to “construe the tacit or implied agreement which all parties accept was made at the end of September when the parties continued to deal with each other as before.” A question of construction of a written contract is a question of law. But what does that say about “construing” a tacit or implied agreement?
- On the question of a contract implied from a course of dealings, the House of Lords in Brogden v Metropolitan Railway Co thought the question of whether a contract had been made was a question of fact. Is the question whether the “tacit agreement” for a contract contained cl 2 a question of fact or law? The passage extracted above from Brambles Ltd v Wail also suggests it might be a question of fact.
- However, in a similar context, Ward J in Sapphire (SA) Pty Ltd v Barry Smith Grains Pty Ltd (in liq)rejected the submission that it was a question of fact, and concluded that there was an error of law under s 38(2).
- Where does an implied term lie on this spectrum? The discussion of McHugh and Gummow JJ in Byrne v Australian Airlines Limited of terms implied as necessary to give business efficacy to the contract refers to a “tacit term”, which seems to be remarkably close to the Brambles Ltd v Wail approach.
- An intermediate approach to whether there is an error of law can also be detected in State of Victoria v Seal Rocks Victoria (Australia) Pty Ltd in the context of a dispute about an implied term.
- In my view, the question whether cl 2 was a term of the “tacit agreement” for contract was a question of fact or a mixed question of fact and law. The arbitrator’s conclusion that cl 2 was a term of the “tacit agreement” for contract was not an error of law within the meaning of s 38(4).
- The next question is whether the arbitrator gave inadequate reasons for concluding that cl 2 was a term. It is unnecessary to explicate the law on the subject. It is comprehensively set out in Westport Insurance Corporation v Gordian Runoff Ltd.
- The context is that whether cl 2 was a term of any post-September 2010 contract was one which was central to the decision embodied in the Second Award and to the arguments of the parties in this hard-fought arbitration.
- The arbitrator reasoned in the First Award that cl 2 was not a term. Simplifying, his reasoning in the First Award turned on the conclusion that cl 2 could not sensibly operate in a contract for 3 months.
 Paragraph 73 of the reasons for the First Award.
- The decision of this court which set aside the First Award did not reach an opposite conclusion. It was based on the proposition that the arbitrator had not given SAPL a sufficient opportunity to meet the point.
- In the reasons for the Second Award, the arbitrator accepted a construction of cl 2 which in his opinion enabled it to operate in the context of a contract for a 3 month period or terminable on reasonable notice. Having reached the opposite conclusion upon the ground on which the First Award was based, he continued:
“…it follows that the reasons expressed in my First Award… can not be sustained… [and] the reference in the minutes of the 4 [sic] June 2010 meeting to the raw supply sugar terms and conditions reminaing unchanged should be construed literally as including the incorporation of clause 2 of the Sale contract into the agreement for the period 1 July 2010 to 30 September 2010.
It also follows, applying the principles referred to in Brambles Ltd v Wail (discussed in the reasons for the first Award… continuation of supply after 30 September 2010 can be inferred to be under a new agreement upon the same terms as the supply from 1 July 2010 to 30 September 2010.
The analysis is not impugned by the argument advanced by MSL that applying Brambles Ltd v Wailthere may be a series of new three monthly contracts. The failure to supply sufficient raw sugar to meet the raw sugar melt requirements for the Racecourse Refinery occurred in April 2011. At that point in time the 2010 crushing season was completed and the total annual raw sugar production for that season was known.”
 Paragraphs 28-30 of the reasons for the Second Award.
- MSL’s final submission in writing to the arbitrator for the purposes of the Second Award contained the following:
“… Mackay Sugar says there are additional reasons that also support the conclusion that [cl 2 was not a term].
First, there is the fact that both parties were aware at least from early November 2011 that due to adverse weather conditions [MSL]’s production had been curtailed, such that it would not be able to provided sufficient sugar to meet all of the refinery’s expected requirements up to the commencement of the next crushing season.
(a) representatives… met on 11 November 2010. Minutes… record…
1. Adverse weather is hampering MSL’s ability to keep the refinery supplied… until the start of the next crop (2011 season).
2. As of 14 November there would be 172,000 tonnes stored sugar at the [MBST]
3. Using current… data, the refinery would need 220,000 tonnes… to get to 28 May 2011. This date is the earliest that 2011 season sugar could be available from MSL.
4. … an additional 50,000 tonnes of raws are needed…
(b) On 15 December 2010, Mr Paul Gregory of [SAPL] sent an email to Mr Aitken of [MSL] requesting formal notification of the raw sugar supply constraints.
(c) On 17 December 2010, Mr Aitken… emailed to Mr Gregory…a file containing the planned raw sugar supply.
(d) By email dated 17 December 2010, Mr Gregory…asked Mr Aitken…to ‘state in a letter [the] quantity of the supply gap in tonnes and why it has materialised’.
(e) By a letter to Mr Gregory dated 22 December 2010, Mr Aitken…stated:
…I confirm that… season held stocks for the Racecourse refinery will be consumed by approximately 16 April 2011.
To minimise the raw sugar supply disruption, [MSL] plans to start the 2011 crushing season on 1 May…
[MSL]’s known inability to meet all of the refinery’s requirements bears on whether the parties (viewed objectively) should be taken to be intending to incorporate clause 2 in their interim arrangement… the making of the agreement was not immediate on 1 October. The agreement is one to be inferred from on-going conduct… over a number of months. In those circumstances, it is submitted that it is appropriate to take into account information that is known to both parties from early November 2011 in inferring what reasonable persons in their positions would be taken to have made as their contractual arrangements.”
- The arbitrator did not deal with this contention. In my view, given the nature of the dispute and the particular circumstances, he was required to do so. The failure to do so amounted to a failure to give reasons as required by s 29(1)(c) of the Act and in this respect there was a manifest error of law on the face of the award (s 38(5)(b)(i)).
Discretion upon the grant of leave
- Notwithstanding the apparent error of law, it cannot be escaped that the grant of leave on the present application will occasion a fourth determination before either the arbitrator or this court as to the content and operation of any post-September 2010 “tacit agreement” for contract.
- So many successive hearings and differing outcomes on the same question are at least arguably inimical to the administration of justice. First, by agreeing to arbitration within the scope of the Act, parties are treated as having intended that their dispute should be resolved before the arbitrator. Outside the context of the Act, the courts have set their face against treating an arbitration as a stopping station on the way to court on the arbitration of a question as to the terms and operation of a contract, at least since The Melbourne Harbour Trust Commissioner v Hancock.
- However, MSL can rightly say that it was not the first of the parties to seek to open up the award. It is only now doing what SAPL did in respect of the First Award.
- Secondly, it must say something of the questions that the parties present for decision in this case that the arbitrator, an experienced and respected senior counsel, has come to opposite conclusions on the same question (although on different evidence to an extent) in the First and Second Awards, and that Judges have differed or potentially differed from him on each occasion. My only comfort in that observation is to be found in the words of Lord Cairns in Brogden:
“My Lords, there are no cases upon which difference of opinion may more readily be entertained, or which are always more embarrassing to dispose of, than cases where the Court has to decide whether or not, having regard to letters and documents which have not assumed the complete and formal shape of executed and solemn agreements, a contract has really been constituted between the parties.”
- Thirdly, it may be said against the grant of leave that if SAPL is entitled to sustain the award on the ground raised by the cross-contention there will be no utility in the grant of leave. I pass by whether leave is required to consider that ground. MSL did not contend that it was.
 At 672.
- Notwithstanding those points, in my view, the questions raised in the present case warrant the grant of leave as an exercise of discretion, on the ground of the error of law of the arbitrator in giving inadequate reasons.
Schedule 2 as an obligation to supply
- It is appropriate to move directly to SAPL’s cross-contention based on Sch 2 of the JVA, which, if successful, would defeat the appeal on any of the grounds raised by MSL.
- The arbitrator did not deal with this contention in the Second Award as it was unnecessary to do so. In the First Award, he dealt with the parties contentions at that time as to the application of Sch 2. It was not necessary for him to deal with the present questions. Curiously, the parties’ respective positions then were generally the opposite to those they take now.
- The most relevant provisions of Sch 2 are that:
“This Schedule sets out the principles under which the Participants of the Joint Venture will purchase their raw sugar requirements for the Racecourse Refinery (‘Requirements’) in the event of Abolition. ‘Abolition’ has the meaning given in clause 2.8.
Because it is not possible to prescribe al the conditions which may exist at the time of Abolition, this schedule is to be used as an indication of intent of the Participants should a dispute arise in the negotiation of raw sugar supply contracts between the Participants, Mackay and CSR
The Participants will each severally appoint [SAPL] to purchase the raw sugar Requirements which will be expected to be of standard of Brand 1 or better.
Obligation to supply raw sugar on abolition
Subject to production limitations, [MSL] will sell to [SAPL] sufficient raw sugar to meet the Requirements.
MSL will at all time [sic] give preference of supply to the Participants…
Though future increases in the Requirements due to refinery expansions are not covered by these principles, it is expected that the parties will negotiate commercially in good faith to meet such Requirements…
Contract terms will include reasonable duration and quantities to allow the Suppliers to plan the marketing of the balance of raw sugar not supplied to the Participants…
Unresolved disputes will proceed to arbitration…
The arbitrator is required to refer to the principles in this schedule in making his/her determination…
While the arbitration is in progress, [MSL] and where relevant CSR will continue, in the interim period, to supply raw sugar on the pricing principles and conditions which reflect as closely as possible the previous contract for such supplies. Prices for raw sugar supplied under such interim contract provisions will be adjusted to reflect the outcome of the arbitration” (italicised bold emphasis added)
- As previously mentioned, SAPL submits that the award is sustainable on the basis that MSL’s failures to sell the Requirements constituted by the April and May 2011 shortfalls were a breach of contract.
- MSL submits that the emphasised part of the provision is not a binding obligation at all. It submits that Sch 2 expresses principles that are to apply in making any concluded sale contract. Alternatively, it submits that the failures to sell were excused as they were caused by “production limitations.”
- I reject the construction that deprives the emphasised part of the provision in Sch 2 of contractual force as an obligation to sell. In my view, the point is clear enough that it is unnecessary to do more than set out my reasons in summary form.
- First, the JVA is undoubtedly a long term contract, and intended to regulate the relationship of the Participants inter-se and vis a vis SAPL over the duration of the adventure comprised by the Project. Clause 2.8 is a specific conditional clause which was engaged in the event that Abolition, as defined, occurred. It is common ground that the de-regulation of the Queensland sugar industry constituted Abolition. In that event, cl 2.8 provided that the provisions of Sch 2 “shall apply.”
- Secondly, cl 26.2(j) of the JVA requires that in the interpretation of the JVA, headings shall be disregarded, so no moment is to be attached to the heading in Sch 2”: “Obligation to supply raw sugar on abolition.”
- Thirdly, there is tension between some parts of the text of Sch 2. Thus, the provisions that “[s]ubject to production limitations, Mackay will sell to the Manager sufficient raw sugar to meet the Requirements using its best endeavours to meet the quality parameters of the Manager. Mackay will at all times give preference of supply to the participants”, are all cast in the language of obligation.
- On the other hand, “[t]his schedule sets out the principles under which the Participants of the Joint Venture will purchase…”, “…this schedule is to be used as an indication of the intent of the Participants should a dispute arise…” and “…future increases in Requirements due to refinery expansions are not covered by these principles…” in context might all point away from construing Sch 2 as creating an obligation to supply in the absence of further agreement.
- Curiously, neither of the parties relied upon the provision that “[c]ontract terms will include reasonable duration and quantities to allow Suppliers to plan the marketing of the balance of raw sugar not supplied to the Participants and to allow the Manager reasonable variations and flexibility in quantity to meet marketing variations.”
 Although Suppliers is not defined in context it appears to include MSL and where relevant CSR.
- Schedule 2 envisages that there will be a contract or contracts of supply of raw sugar to SAPL separate from the JVA. That conclusion is also supported by other provisions of the JVA as to the role of SAPL as the Manager.
- But that does not speak to any obligations before such a contract is made, from the moment of Abolition.
- On that point, importantly, Sch 2 envisages that an arbitrator may be required to determine the terms of a relevant contract in accordance with the principles. And Sch 2 provides that:
“While the arbitration is on progress, [MSL] and where relevant CSR will continue, in the interim period, to supply raw sugar on the pricing principles and conditions which reflect as closely as possible the previous contract for such supplies. Prices for raw sugar supplied under interim contract provisions will be adjusted to reflect the outcome of the arbitration.”
- Thus, where there is an inability to reach agreement, Sch 2 expressly provides for arbitration and an obligation to continue to supply. Also cl 2.7 of the JVA envisages that before Abolition SAPL will procure supplies directly or indirectly from MSL, to an extent. Why would the parties have intended that on Abolition the parties were obliged to negotiate but MSL was not obliged to continue to supply until a dispute about the relevant contract is referred to arbitration?
- In my view, the construction of Sch 2 which is to be preferred is one that obliges MSL to sell the Requirements from the event of Abolition. If there is a dispute about the terms of sale, they are to be settled by the agreed process of arbitration. While the arbitration is in progress, interim terms are to apply. They are to be adjusted after the fact to reflect the outcome of the arbitration. In my view, that scheme is both consistent with the language of Sch 2 overall and is supported by the surrounding circumstances and context that Abolition would occur in the context of the ongoing operations of the Racecourse Refinery and the Racecourse Mill in circumstances where at the time of making the JVA “it is not possible to prescribe all the conditions which may exist at the time of Abolition.”
- The remaining question is whether the failures to sell the April and May 2011 shortfalls were caused by “production limitations”. In my view, they were not. But, as will appear, I reach that conclusion with some hesitation.
- MSL submits that after 1 October 2010 MSL was faced with significant production limitations. That may be accepted. But it says little about the meaning or operation of Sch 2.
- A simple example will illustrate the two sides’ contentions. There is variability from one year to the next in the start date for a crushing season. But let it be assumed that at the commencement of a crushing season MSL’s held stocks of raw sugar are minimal and that from the start of the season, for commercial reasons, it decides to market production so that the Requirements are delivered from the Racecourse Mill month by month or week by week, but all raw sugar in excess of those supplies is sold to QSL, until that last part of the crushing season when MSL intends to produce enough raw sugar to meet the Requirements to be placed in held stocks until commencement of the next crushing season.
- On MSL’s contention, provided there is a departure from its expectations as to production by interruption to production at the end of the crushing season, it is excused from the obligation to supply the Requirements as a production limitation.
- On SAPL’s contention, Sch 2 does not permit MSL to market production in that way. Instead, it requires that the season’s production be compared to the Requirements for the next 12 months or to the commencement of the next season. MSL is required to supply the Requirements for that period from its production from the start of the season, meaning that it can either store those requirements in excess of the Requirements supplied during the crushing season against the future Requirements for that period or, at its own risk, it can sell that amount to others.
 A date which cannot be precisely predicted 12 months in advance.
- Both constructions lack appeal when held up against particular parts of the text of Sch 2. Thus, MSL’s construction depends on expectations at the beginning of the crushing season as to production at the end of the crushing season. Yet Sch 2 provides expressly that “Mackay will at all times give preference of supply to the Participants.” On the other hand, SAPL’s construction requires that MSL store a large quantity of sugar in held stocks in QSL’s bulk sugar terminal at the MBST and to forego the marketing opportunities for that amount of sugar against the risk of an interruption to expected production. Yet Sch 2 provides that terms of the contract to be negotiated as to quantities are “to allow suppliers to plan the marketing of the balance of raw sugar not supplied to the Participants…”
- Nor do I think that the parties’ contentions as to the ordinary meaning of “production limitations”, outside the context of Sch 2 assist much. SAPL’s proposition is that the limitation was not on “production” because enough raw sugar was produced by MSL. The problem would not have occurred if MSL had not sold 50,000 tonnes of the supplies it made to QSL in the 2010 season. MSL’s submission was that a “limitation” was something that prevented MSL from reaching its full production capacity.
- Given the absence of much support from the text or context one way or the other the parties’ submissions naturally enough moved to the causal connection which might be required between a suggested production limitation and any failure to sell the Requirements. SAPL submitted that the cause was MSL’s decision to make the 2007 QSL supplies, not the inability later in the 2010 crushing season to produce raw sugar. MSL submitted that the inability to produce from October 2010 was a cause that was a production limitation to which the obligation to sell was subject.
- It would be an error, in my view, to decide the operation of the provision by reference to causal characterisations. Either the interruption to production caused by the Weather Event was a production limitation or it was not. If it was, there is not another question about whether the April and May 2011 shortfalls were caused by the interruption to production.
- Thus the question is presented whether the interruption to production caused by the Weather Event was a production limitation for the purposes of Sch 2.
- A number of steps lie behind the possible conclusion either way. First, a long term contract for supply of goods is a classical form of a contract of sale of goods, namely an agreement to sell, where the seller take the risk of non-delivery and is responsible in damages for breach of contract for failure to deliver.
- Secondly, that an interruption to the supply is caused by an unforseen event or one which occurs without the fault of the supplier is not an excuse from the obligation to deliver. Sir John Latham expressed it thus in 1943:
“the general rule is applied, viz, that a man who makes a promise is bound to perform it or to pay damages if he fails to do so, and that he cannot excuse himself by relying upon circumstances dehorsthe contract for the purpose of showing that he did not mean what he clearly said, or that he should be excused from performance because the contract did not work out in the manner expected by one or even by both parties.”
- If the seller bears the risk of non-delivery, the contract will not be held to have been frustrated by the risk becoming reality. And short of frustration, the common law does not generally recognise a doctrine of force majeure because “impractability of performance is not generally recognised as a ground of discharge of a party’s obligations.” This explains why commercial contracts commonly contain an express “force majeure” clause by which, at common law, the parties may reallocate the risk of non-performance, according to their agreement.
 Hyundai Merchant Marine Co Ltd v Dartbrook Coal (Sales) Pty Ltd (2006) 236 CLR 115 at-(per Kiefel J);  HCA 1324.
 As did the parties to the JVA in cl 24. It is not necessary to consider that clause. Neither party relied on it in relation to the operation of Sch 2.
- Thirdly, in some contracts for the sale of a natural product not yet produced or precisely ascertained, the proper construction of the seller’s obligation is that it is an obligation to sell what is produced or exists at the time of delivery out of the nominated quantity, so that the seller does not take all the natural risk of production or existence.
- Fourthly, the promise of supply of a product which depends on seasonal production of a natural product is not necessarily excused by a force majeure clause – it depends on the clause. Thus, in Lebeaupin v Richard Crispin & Co, the contractual obligation to supply canned salmon was “the first 2500 cases of ½ lb flat pinks packed by the [cannery]… during the season” but “subject to force majeure.” The obligation applied to two different canneries. Neither of the canneries produced any half pound cans of salmon. One of them would have done so but discovered that the cans were defective at the beginning of the packing process. By the time replacement cans could be obtained the fish had ceased to run. The second cannery could have packed half pound tins but chose to pack one pound tins in preference and by the time it had used them up the fish had ceased to run. It was held that the failure to supply was not due to any “failure of the fish crop”, because the crop was larger than usual. The cause was the omission of the first cannery to have good tins and the choice of the second cannery to pack one pound tins in priority. Neither set of circumstances was a force majeure.
- Against this background, I return to Sch 2. The text “subject to production limitations” is plainly intended to qualify the extent of the obligation to make deliveries of raw sugar that would otherwise exist. The task of construction of that text is undertaken from the viewpoint of “what a reasonable person would have understood [the terms] to mean. That normally requires consideration not only of the text, but also of the surrounding circumstances known to the parties and the purpose and the object of the transaction.”
- In particular, I am edged towards the conclusion that the interruption to production caused by the Weather Event was a production limitation by two factors. First, in the context where MSL’s held stocks are to be stored in the bulk sugar terminal operated by QSL, which is the acquirer of raw sugar for the Queensland export sugar market, it seems uncommercial to expect that MSL must store all its season’s first production to ensure that there is enough to satisfy the Requirements until first production for the next season commences and that process can be repeated. Secondly, the text of Sch 2 at least arguably recognises this, to some extent, in recognising the need “to allow the Suppliers to plan for the marketing of the balance of raw sugar not supplied to Participants.”
- Were those factors not present, I would conclude that the failure of production late in the season was not a sufficient reason to conclude that there was a relevant production limitation, where enough to satisfy the Requirements was otherwise produced. I would have taken the view that the ordinary meaning of “production limitations” and the express obligation that “Mackay will at all time [sic] give preference of supply to the Participants” had the effect that MSL took the risk of supply if it chose not to retain enough raw sugar from the 2010 season’s production to meet the obligation to supply the Requirements for the next 12 months.
- What else is there? SAPL points to the difficulties which attend the conclusion that MSL has the right to “forward-sell” every tonne of sugar that it expects to produce over and above the Requirements of the refinery. It submits that if such right were not absolute, there is no contractual measure as to its extent. It submits that if MSL is not required to deliver all of its seasonal production to SAPL up to the amount of the Requirements before MSL can rely on an interruption to production as a production limitation, MSL can pass on the full risk that weather or other events will affect forecast production to SAPL.
- These are powerful arguments against the background I have set out above. It is the next step at which I baulk, at least a little. SAPL submits that: “If [MSL] chooses to supply third parties without ensuring that it puts aside sufficient product to meet the requirements of the Refinery, then it [must] do so at its own risk.” How does that recognise the need expressed in Sch 2 “to allow the Suppliers to plan for the marketing of the balance of raw sugar not supplied to Participants”?
- That can only be done, on SAPL’s contention, by identifying in advance the extent of the Requirements for the period until the beginning of the next season, so that MSL can put that amount aside.
- On MSL’s side, it could be argued that “production limitations” would not include circumstances where MSL over aggressively forward sold, for a season in prospect, the balance of raw sugar expected to be produced but not expected to be supplied to Participants. After all, the risk of production of raw sugar is something managed every day by millers (and growers) who take futures positions on price against their expectations of future seasons’ production and price. Still, how is the line between the permissible and impermissible to be drawn?
 I note that pricing under the Sale Contract between MSL and SAPL was managed by futures contracts taken out on the New York Board of Trade No 11 contracts.
- It could be done by construing Sch 2 so that the meaning of “subject to production limitations” is informed by the context of the later part of Sch 2 that “…the Suppliers are to be able to [reasonably]plan for the marketing of the balance of raw sugar not [to be] supplied to Participants.” By giving that construction to the later part of Sch 2, the operation of the relevant text could be made to conform with MSL’s submissions.
- However, notwithstanding that possibility, in the end I have come down on the side that to do so requires more work on the text of Sch 2 by the process of construction than should be done. In my view, it strays across the line of what a reasonable person would have understood the terms of Sch 2, as made, to mean. First, it adds the qualification that the permitted planning for marketing should be “reasonable”, which was not expressly agreed. Secondly, it fashions one of the principles expressed to be applicable in settling the terms of a contract or contracts to be made for the future into a directly operating present term.
- Accordingly, I have come to the conclusion that the interruption to production caused by the Weather Event was not a production limitation for the purposes of Sch 2.
- It follows that the appeal should be dismissed.