CATCHWORDS Trade Practices - s. 46, s. 80 Trade Practices Act, 1974 - refusal by Respondent to grant an allowance under s. 54 (2) (dad) of the Dairy Industry Act, 1984 (Victoria) an exercise of market power - doubt as to Respondent's power to make allowance - interlocutory injunctive relief sought for misuse of market power - mandatory relief refused, absence of requisite high degree of assurance - imposition of condition of trading ~ telief granted as serious question to be tried and balance of convenience in favour of the Applicant. MIDLAND MILK PTY. LIMITED & ORS. v. VICTORIAN DAIRY INDUSTRY AUTHORITY G677 of 1987 CORAM: M. L. FOSTER, J. DATE: THURSDAY, 24 DECEMBER, 1987. PLACE: SYDNEY. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY No. G677 of 1987 GENERAL DIVISION BETWEEN: MIDLAND MILK PTY. LIMITED First Applicant DAVIDS HOLDINGS PTY. LIMITED Second Applicant JEWEL FOOD STORES PTY. LIMITED Third Applicant AND: VICTORIAN DAIRY INDUSTRY AUTHORITY Respondent THURSDAY, 24 DECEMBER, 1987 ' MINUTES OF ORDER CORAM: FOSTER, J. DATE: PLACE: SYDNEY 1. Order that, upon the first applicant, giving the usual undertaking as to damages, the respondent, until the hearing or further order of the Court, be restrained from giving effect to or enforcing compliance with the term and condition imposed by the Authority on supply of milk to the first applicant, Midland, pursuant to the notice dated 26 November, 1987, being part of exhibit GTC 21 to the Affidavit of Grant Thomas Crothers sworn on 30 November, 1987; thatmilk, other than milk previously accepted by the Authority, shall not be delivered to or received at the nominated premises of Midland, where such milk is to be used and is in fact used for manufacture of products other than market milk. Costs reserved. yw ete eee mma ee aooce IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY No. G 677 of 1987 GENERAL DIVISION BETWEEN: MIDLAND MILK PTY. LIMITED First Applicant DAVIDS HOLDINGS PTY. LIMITED Second Applicant JEWEL FOOD STORES PTY. LIMITED Third Applicant AND: VICTORIAN DAIRY INDUSTRY AUTHORITY Respondent CORAM: M. L. FOSTER, J. DATE: THURSDAY, 24 DECEMBER, 1987. REASONS FOR JUDGMENT HIS HONOUR: The First Applicant, Midland Milk Pty. Lamited ("Midland") is a company which is a processor of milk and carries on business in Shepparton, Victoria. It is licensed as a milk processor under the Dairy Industry Act, 1984 (Victoria) ("the Act"). It processes milk unto "market milk" which is defined by the Act, (s. 4), as "milk for human consumption in liquid form". It also produces manufactured milk products. It processes 130,000 to 150,000 litres of milk per day. it supplies market milk for sale in Victoria. It has also supplied its processed market milk in large quantities for many years to outlets in southern New South Wales. In March, 1987 it commenced to supply market milk to the Sydney area. The market in this area is an extremely lucrative one. It entered into agreements with the Third Applicant, Davids Holdings Pty. Limited ("Davids"), a wholesale grocery distribution company in Sydney, and the Second Applicant, Jewel Food Stores Pty. Limited ("Jewel"), a retail grocery distribution company in Sydney, under which those companies sold its milk in the Sydney market on a commission basis. The milk is sold in special two litre containers at a discounted price as against milk produced in New South Wales for that market. The price of the New South Wales market m2z1lk is controlled by the New South Wales Dairy Corporation under the relevant New South Wales legislation. Such controls cannot apply to the applicant's milk coming from Victoria. It has therefore enjoyed a significant business advantage in the Sydney market, which has caused considerable concern to the New South Wales milk producers and vendors and also to the New South Wales Dairy Corporation. The Respondent, the Victorian Dairy Industry Authority ("the Authority") 1s a corporation established under the Act. It corresponds in Victoria to the New South Wales Dairy Corporation in New South Wales. It has the objectives, functions and powers set out in sections 5, 6 and 7 respectively of the Act. It administers the Act. It oversees the dairy industry in Victoria. It controls the manufacture, distribution and sale in Victoria of market milk by purchasing milk from licensed dairy farmers and then selling it to licensed milk processors who convert it into market milk and on-sell it as provided in the Act. It 1s clear that milk producers in Victoria produce more milk than is necessary to supply the Victorian market for market milk. The price paid to dairy farmers for milk intended for manufacture into dairy products and for export is considerably less than for milk intended to be processed into market milk. There has obviously been pressure upon the Authority from producers to arrive at some arrangement with its New South Wales counterpart under which access to the New South Wales markets, especially the Sydney market, can be obtained for Victorian milk under an amicable agreement which will prevent a feared disruption of the industry by retaliatory action in Victoria by New South Wales producers. Efforts, to which I shall refer later, have been made by the Respondent to achieve this end. The Applicants have built up a successful trade in their milk in the Sydney market without regard to the Authority's efforts to achieve some arrangements for orderly marketing of some agreed quantity of Victorian milk in New South Wales. It is perfectly clear that as things now stand the continued abilaty on the part of the Applicant to supply Victorian market milk to the Sydney market at a discounted price constitutes a threat to any such arrangement. we ye en re eee et ne Before considering the interlocutory relief sought in this Application, it 1S necessary to review the relevant history of the matter as disclosed by the evidence at this stage. For many years Midland was an authorized agent of the Authority. This meant that under s. 36 of the Act it could rec@lve, accept and deal with milk from licensed dairy farmers on behalf of the Authority. M11k so received was regarded as milk "accepted" by the Authority. As such 1t could be mixed for processing pruposes with milk acquired by Midland from the Authority itself or from other authorized agents. Midland claims that the Authority was well aware for many years prior to 1987 that it mixed milk in this fashion. It says that no complaint was made by the Authority. The Authority says, as I understand it, that no complaint could be made whilst Midland was an authorized agent. In January, 1987, however, the Authority revoked Midland's agency. This appears to have occurred as a result of dissatisfaction on the part of the Authority with the accounting procedures at Midlands premises. It claims that its procedures do not adequately distinguish between milk acquired from the Authority and milk acquired direct from dairy farmers, with the result that Midlands have not paid the Authority in full for milk supplied to it. It appears that Midland has, in fact, paid an extra $292,000 to the Authority as a result of audit procedures undertaken by the Authority of Midland's records after the termination of the agency. It claims that the auditing process indicates that there may well be a further large amount owing by Midland in respect of milk for which payment has not been made. For its part, Midland contends that problems arose in late 1986 and early 1987 when Midland, as a result of considerable increase in 1ts business was obliged to instal a new computerized system of accounting. As I understand it, it says that accounting problems arose during the installation period, but that now it has a most efficient system which can admit of no problem in identifying and paying for quantities of milk purchased from the Authority as against milk purchased directly from dairy farmers. It says that this. fact is acknowledged by the Authority's auditors, who are still working 1n Midlands premises in relation to identification of milk of the Authority previously supplied to Midlands and allegedly not paid for. Since the revocation of Midland's agency in January, 1987, milk purchased by it directly from dairy farmers is no longer accepted by it on behalf of the Authority. Such milk, by force of s. 38 of the Act, in the form it then had could not be used in the manufacture of milk for | sale or distribution in Victoria. It followed that such milk should not have been permitted to be mixed with milk purchased from the Authority in the process of manufacture of market milk for sale in Victoria. It appears, however, that the mixing continued in the same manner as it had during Midland's authorised agency. Midland asserts that the Authority was aware of this fact and allowed the mixing to continue. It is clear that Midland was able to purchase 5. eee epee ee joor eee Vee ~ qa a ee ee cee Waa, = milk directly from dairy farmers at a significantly cheaper price than that at whach it could purchase Authority accepted milk. This latter price was arrived at in accordance with s. 44 of the Act, under which the Authority made formal determinations of the price to be paid to dairy farmers for milk to be used in the manufacture of market milk and of the price at which such raw milk was to be sold by it to processors (such as Midland) for the purchase of its being converted into market milk. Such determinations were required to be arrived at after consultation with the Victorian State Prices Commission and could not be charged until approved by the Governor in Council. Such price had been formally determined in November 1986. M121k purchased directly by Midland from dairy farmers fell outside this price fixing system but could not be used in the manufacture of market milk. It could be used only for the manufacture of mzik products or for export. Tt 1s clear, of course, that if it were used for the market milk manufacturing process then Midland would obtain a financial advantage. It could produce manufactured market milk at a significantly lower cost than would obtain if it used, as it was required to do, only Authority accepted milk at the determined hagher price. Until s. 38 of the Act was amended in a manner and in circumstances to which I will refer later, Midland was under no obligation to use Authority accepted milk, for which the determined price had to be paid, for the manufacture of market milk for sale in New South Wales. It was free to buy milk products from the dairy farmers 6. mon poe ee at a significantly lower price for this purpose. In respect of market milk sold by 1t into southern New South Wales, it had been following this course for many years. So, it appears, had other milk processors in Victoria who had established a trade in this part of New South Wales. This trade was described in these proceedings as the "traditional" New South Wales trade. Because of the lower cost to them of this milk they could sell milk in these parts of New South Wales at a significantly lower price than the New South Wales producers. This situation appears to have been accepted by the New South Wales Dairy Corporation and the New South Wales producers who, it would appear, had yielded the field to Victorian competition in these traditional areas. Because of the redundant capacity in the Victorian milk industry dairy farmers were obviously happy to sell the milk which they had produced surplus to the demands from the Authority to processors for the interstate trade. The price which they obtained, although significantly lower than the determined price for milk sold to the Authority, was apparently more attractive than the price payable to them when the milk was to be used only for manufacturing milk products by the processing companies. In February, 1987 Midland availed itself of this source of supply of raw milk for the purpose of selling this market milk on the Sydney market. It appears that it encountered some discontinuity of supply which in March 1987 it sought to overcome by entering into an arrangement with the Authority to buy from it Authority accepted milk from which it could manufacture market milk for the Sydney market. 7. tree we cee re ee owen oe eee oe ye ceeee cme re , t te. £ i i ; At this time, the Authority's sale price to processors was fixed by its approved s. 44 determination of November 1986 at 40.27 cents per litre. This price was considerably higher than that at which Midland could purchase directly supplied milk from farmers. In addition it was involved in extra costs in supplying the Sydney market. It was packaging the milk in special two litre plastic cartons for sale in the Jewel supermarkets. There was also the cost of transport from Shepparton to Sydney and other costs. It sought a discount or allowance against the determined price. There were negotiations. The Authority agreed to an allowance of 12 cents per litre "for transport and promotion costs". It is clear that the Authority regarded itself as empowered to make such an allowance against the fixed price by virtue of s. 54(2)(d) of the Act. I shall refer to this section later. A formal agreement was reached. It was set out ina letter of 3 April, 1987 addressed to Mr. W. B. Crothers, Managing Director of Midland, a copy of which is Exhibit GTC1 of the Affidavit of Grant Thomas Crothers of 30 November, 1987. The letter was executed as an agreement by Mr. D. Weir on behalf of the Authority and Mr. W. B. Crothers on behalf of Midland. That document reads as follows:- Sei sete See ete et nee 2 tte fre os "a * "Dear Six, Supply of Raw Milk for the Sydney Market I refer to the recent discussion at the offices of the Authority attended by yourself, Irving Saulwick and myself. At that discussion, you requested the Authority to supply raw milk for processing and packaging unto two litre plastic cartons by Midland Milk Pty. Ltd. (Midland) at its Shepparton Processing Plant, for shipment and ultimate sale or supply to the public in Sydney or the surrounding metropolitan districts ("the Sydney Market"). The Authority hereby agrees to supply raw milk to Midland for that purpose on the following conditions - 1. The Authority agrees to supply, and Midland agrees to purchase, raw milk for the Sydney market at the price determined by the Authority from time to time for the sale of mzlk to Milk Processors (currently 40.27 cpl), less an allowance of 12 cpl for transport and promotion costs. As at 3 April 1987, this translates to a net price of 28.27 cpl. 2. Where Midland uses part of the market milk allocation of it's Victorian farmers for the Sydney market, then Midland will receive Farm to Factory Cartage and Factory Handling Margins totalling 3 cpl for that milk. This clause 1s not operative at present, as Midland is not currently an Authorised Agent of the Authority, and its Victorian farmers market milk allocation is therefore nil. 3. The Authority will have absolute right to determine the allocation of the transport of all raw milk to Midland's Plant, which is destined for the Sydney market. 4. Milk supplied by the Authority to Midland for the Sydney market is not to be sold or supplied to the public in Victoria. 9. we 10. Midland is to maintain records covering all transactions relating to the sale of milk in the Sydney market to the complete satisfaction of the Authority, which will specify the form and content of those records. The Authority may uwnspect and audit those records in the same way and to the same extent as permitted to Authorised Officers under the Act. Midland shall not supply milk from Victoria to the Sydney market unless the milk is purchased from the Authority in accordance with the Clause 1. Based on the volume estamates provided by Midland, and on the net price of 28.27 cpl, Midland will be required to lodge with the Authority within ten working days of signing this agreement, a Bank Guarantee for $221,000, representing the value of 46 days purchases. Thereafter, Midland shall lodge with the Authority within 30 days of receiving notice to do so, such additional security as the Authority requires to cover 46 days purchases of milk for supply to the Sydney market. This agreement shall continue until terminated by either party giving one months notice in writing to the other party. This agreement may be terminated by either party immediately upon notice to the other party in the event of a breach of the conditions of this agreement. Nothing in this agreement precludes either the Authority or Midland taking any action on matters relating to other business relationships between the two parties." It is worthy of note that the Authority clearly contemplates in this document that the milk to be supplied to Midland is to be processed for sale on the Sydney market and that the allowance of 12 cents per litre is to be given to assist this object. It also stipulates for its being the sole source of supply to Midland of milk for this purpose. 10, x eee ee ee ee to wy oom ay a ee es ww Rr we eo Although the agreement provides for termination by either party on one month's notice or ammediately in the event of breach, it would appear that Midland was given no reason to suppose that it was not intended to be other than an ongoing arrangement of indefinite duration. It had obtained an assured source of supply from which to honour its agreement with Davids and Jewel, and it had obtained after a process of bargaining an agreed allowance against the determined price which made the export of the malk into the Sydney market a commercially viable proposition. The evidence, however, strongly suggests that the Authority had a wider and somewhat different view of the transaction. In the Minutes of the Meeting of the Authority of 1 April, 1987, Exhibit A, at which Midland's proposal was considered, and at which it was resolved to adopt the form of agreement entered into two days later, there is clear recognition of "pressure mounting in the Victorian dairy farm community to put Victorian milk into the New South Wales market" and that "the fact that there are no overt moves in that direction is causing frustration in farming circles." Views were expressed that it was desirable for the Authority to be involved "in order to ensure as far -_ as possible the maintenance of orderly marketing and that all Victorian dairy farmers share equitably in the resuits". The expectation was expressed that "this proposed intrusion into the New South Wales market will lead to discussion and negotiation between the Authority and the New South Wales Dairy Corporation". ii. aa Seeceanre teliaiene teaie cee nee The risk was recognized that retaliation might eccur from the New South Wales industry and that the corporation might call for an appropriate meeting to take a vote on the All Milk Levy under the Kerin Plan. Thais Plan was a voluntary plan for some degree of self-regulation of the milk industry on a national basis. If the particular levy were terminated as a result of action on behalf of the New South Wales Dairy Corporation, Victorian dairy farmers could suffer a significant loss of ancome. A reading of these Minutes coupled with the evidence of the Authority's Chairman, Mr. Saulwick, satisfies me at least for the purposes of these interlocutory proceedings, that the Authority saw the entering into of the agreement with Midland as providing the Authority with some degree of control of the situation relating to the supply of Victorian milk in New South Wales and also of bringing the New South Wales Authority to the negotiating table. It was hoping that by using Midland's "intrusion" into the Sydney market, with its apparent blessang, as a stimulus, it could provoke a response from the New South Wales Dairy Corporation which might lead to fruitful negotiations for the obtaining for the Victorian industry of some degree of market share in New South Wales. It was hardly likely that any resulting agreement between the two statutory corporations would countenance continued price cutting by Midland in the Sydney market. Mr. Saulwick, in effect, conceded that Midland was being sent to the Sydney market like "a pig anto a minefield". I am satisfied that the Authority had very much in mind that it might have to terminate the agreement with Midland in the short term in order to achieve its 12. poe ~f objective of reaching a wider agreement with the New South Wales body. In the event it did not have to incur such odium as might have attached from a precipitate termination of the agreement under the notice clause. Midland obligingly failed to lodge a guarantee in the time required by the agreement in circumstances which demonstrated, prima facie, a very reasonable excuse and the Authority was able to terminate the agreement on 30 April for breach by Midland (Exhibit GTC4 to the Affidavit of G.T. Crothers). Events between 3 and 30 April, as disclosed in the evidence at this stage, indicate that the prediction expressed at the Authority's meeting on 1 April were fairly accurate. Mr. Saulwick says "After the sale was effected, New South Wales in fact did come and talk with us". There was discussion to the effect that if the supply of milk to Midland was terminated a percentage of the New South Wales market could be supplied with Victorian milk "within the New South Wales price structure with no discounting", An agreement was reached between the Authority and the New South Wales Dairy Corporation as appears ina letter dated 23 April, 1987, Exhibit GTC2 to the Affidavit of G. T. Crothers. This letter reads as follows:- "On the understanding that the V.D.I.A. will give 30 days notice to Midland of termination of the supply contract and that for a period of 2 years the V.D.I.A. will not make milk available to anyone for sale interstate and that the V.D.I.A. will use its best endeavours to inhibit any producer or processor who offered milk for interstate sale and would argue publicly and politically against breaking down of orderly marketing of market milk, then 13. ~ oe ae wm crepe een pm ny a ene ee ey 1. On notice of termination being served N.S.W. will purchase for 3 months from V.D.I.A. 1% of N.S.W. market milk needs, this 1% to be reduced by the quantity of milk supplied to N.S.W. by Midland or anyone else (apart from traditional sales) during this 3 month period. 2. On the cessation of milk into N.S.W., outside V.D.I.A. to N.S.W. D.C. arrangement, the N.S.W. Minister for Agriculture will be requested to withdraw notice for suspension of the market support levy. 3. Discussions should start immediately, chaired by Pat Rowley, including appropriate representatives of the N.S.W. and Victorian industries, to negotiate all aspects of dairy income distribution including all milk levy arrangements." It was accepted by telex, Exhibit GTC3 to the Affidavit of Grant Thomas Crothers. It is to be observed, of course, that within the space of less than three weeks from entering into the agreement with Midland the Authority entered into another agreement which required it to terminate the Midland agreement. The inference 1s clearly open on the material currently before the Court that the Authority had this prospect well in mind when it entered into the Midland agreement and would have known, presumably, that Midland would regard that agreement as the base upon which it would build what would reasonably be envisaged as an ongoing trading arrangement in the Sydney market and in relation to which it would necessarily spend time, effort and money. The agreement was terminated as indicated above, in circumstances where the Authority, somewhat inappropriately as it currently appears, was able to adopt a high moral stance. Midland's response was to buy milk direct from the 14, ee a ee a rnp - acne renee - + dairy farmers as before. From this source ut continued to supply market milk to the Sydney market. This obviously caused concern in both the Victorian and New South Wales mzik industries and led to the industrial repercussions and court proceedings set out in the Affidavit of Grant Thomas Crothers. On 14 August, 1987 the Authority imposed a new term of supply under s. 39(1) of the Act on Midland which prevented Midland from mixing Authority supplied milk with direct supply milk from its supplying dairy farmers. On 20 August the Authority gave notice to Midland that it proposed to discontinue, suspend or restrict the supply of milk to Midland for breach of this condition. On 28 August 1t gave notice suspending supply. Midland immediately applied for and obtained interim restraining orders from the Supreme Court of Victoria preventing the implementation of this decision. On 4 September 1987, informations were laid under the Act against Midland for alleged offences in respect of which convictions could lead to cancellation of its processing licence. One of the charges was subsequently dismissed on 19 November, 1987. The other was withdrawn. It is submitted on behalf of Midland that these activities on the part of the Authority should be seen as attempted fulfilment of part of its agreement with the New South Wales Dairy Corporation of 23 April that it would "use its best endeavours to inhibit any producer or processor who offered milk for anterstate sale". This is not conceded by the Authority. There is a clear issue of fact. 15. The Authority, by s. 8(1)(a) of the Act is subject to "the general direction and control of Lhe Manister". The agreement of 23 April required the Authority to "argue publicly and politically against breaking down of orderly marketing of market milk". On 13 October, 1987 press reports (Exhibits 9A and 9B to the Affidavit of Grant Thomas Crothers) indicated that agreement had been reached between the relevant New South Wales and Victorian Ministers for entry ina limited way of the Vactorian dairy industry into the New South Wales fresh milk market. The agreement was "an attempt to head off a destabilising price war and a breakdown of the regulation of the dairy industry". The "trade off" was to be that Midland would stop selling discounted milk to New South Wales supermarket Jewel Foodstores. The Vactorian Minister was quoted as saying that the Authority would bring pressure on Midland to persuade it to stop selling discounted milk in New South Wales. Midiand alleges that thereafter Mr. Crothers was summoned to a meeting with the Minister, during which the Minister said "I know what you are doing is legal but if need be I will amend the legislation and bring you into line to maintain orderly marketing and the Kerin Plan". It is further alleged that, inter alia, the Authority would be requested to take every possible step with a view to suspending and terminating Midland's Licence and to make ats business economically unviable. 16. more rv me Or eee we oe Mr. Crothers asserts that later in the day he yielded to this pressure and signed an agreement at the Minister's insistence to the effect that Midland would support orderly marketing and terminate 1ts contract with Jewel. Later he said he took legal advice after which the Minister was advised that Midland was unable to proceed wath the agreement. It has not been submitted before me that this agreement affects any issue in this application. Thereafter, on 27 October, 1987 the Minaster issued a further press release (Exhibit GTC16 to the Affidavit of Grant Thomas Crothers), which was highly ciritical of Midland's action. He is quoted as saying, inter alia, that Midiands were "parasites" and that "they have simply been prepared to use s. 92 of the Constitution as a blunt instrument which could smash the Kerin Plan and the orderly market arrangements it sustains in the industry." On 29 October, 1987 the Minister in Victoria convened an industry meeting in which he advised those present that he had arranged for Victorian producers to supply bulk milk to the Sydney market with an increasing market share from three percent to five percent, with the preservation of orderly marketing and the Kerin Plan. He tabled a proposed amendment to s. 38 of the Act. Section 38(1) of the Act was amended on 17 November, 1987 and it now reads as follows:- "A person who sells or distributes market milk in a milk district or manufactures market milk in a case where the milk used in the manufacture of that market milk has not previously been accepted by the Authority under section 37 shall be guilty of an offence against this Act." 17. anna madame tiendisaaiemers Gaeienmnmedioke) The words added by the amendment were "or manufactures milk" after the words "milk district". Prior to the amendment the Authority had given notice to all milk processors by letter of 5 November, 1987 of proposed amendments to processor licences and to the terms and conditions of sale of milk by it to milk processors who were not authorised agents of the respondent. It had invited submissions in respect of these proposals and Midland, through its solicitors, had furnished lengthy submissions on 18 November 1987. On 26 November, 1987, Midland received a number of documents (Exhibit GTC21 to the Affidavit of Grant Thomas Crothers). One was a notice from the Authority setting out the terms and conditions pursuant to Section 39(1) of the Act under which it would supply milk accepted by it to Midland from 1 December, 1987. Those terms and conditions are as follows:- "TAKE NOTICE that, with effect from 1 December 1987, the terms and conditions under Section 39(1) of the Dairy Industry Act 1984 upon which the Victorian Dairy Industry Authority ("the Authority") shall supply milk accepted by the Authority to Midland Milk Pty. Ltd. ("the processor") shall include, in addition to all other applicable terms and conditions - 1. The processor must nominate one or more premises at which it will manufacture market milk (nominated premises). 2. The processor may from time to time nominate further premises on giving one month notice ian writing to the Authority. 3. Nominated premises must consist of an entire building and its curtilage. 4. Market milk manufactured from milk previously accepted by the Authoraty must only be manufactured at nominated premises. 18. prey cone wwe <r ey a ee apres Ve 5. Nominated premises must not be used for the purpose of manufacturing market milk from milk not previously accepted by the Authority. 6. Milk other than milk previously accepted by the Authority shail not be delivered to or received at the nominated premises. 7. All milk sold by the Authority to the processor shall be deemed to be solid for the purpose of manufacturing into market milk unless and until the processor establishes the contrary to the satisfaction of the Authority. 8. On the written request of an authorised officer of the Authority, for the purposes of being satisfied as to the above, the Authority may require that the processor will, within 14 days, deliver to the Authority a Statutory Delcaration of a registered company auditor that the above conditions have been complied with. The request shall be limited to a period which has not been the subject of any previous request. DATED this 26th day of November, 1987." This notice was accompanied by a letter referring to the amendment to Section 38 and a consequential amendment to the processors' licence. This latter amendment is consequential upon the amendment to Section 38 and is not the subject of this application. Midland was advised of the effect of the amendment of Section 38, the consequential amendment of the licence, steps to be taken to pay allowances to ameliorate the effect of the amendment in respect of market milk sold in traditional interstate and export markets and the application of new terms and conditions of sale. The relevant portion of the letter reads as follows:- "The effect of the amendment of Section 38 of the Act is that all market milk must be manufactured from milk accepted by the Authority, irrespective of whether the market milk is to be sold or distributed in Victoria, interstate or overseas. As you are no doubt aware, market milk is defined in Section 3 of the Act as milk for human consumption as a liquid, including flavoured and UHT milk. Prior to the amendment of Section 38 of the Act, market milk sold or distributed interstate or 19. overseas could be acquired from sources other than the Authority, at less than the determined price. Milk used in the manufacture of this market milk must now be acquired from the Authority at the determined price. The amendment of Condition 2 of Milk Processor's licences is to the same effect as the amendment of Section 38 of the Act. Therefore, the manufacturing un Victoria of market milk (for sale or distribution within or outside Victoria) from milk not accepted by the Authority constitutes both an offence against the Act and a breach of licence conditions. The Authority recognises that the amendment to Section 38 of the Act will have a significant effect on existing interstate and export business. It has therefore resolved to pay an allowance for milk used in the manufacture of market milk sold or daustributed to interstate and export markets which the Authority recognises as established, traditional markets, and which do not prejudice orderly marketing in Victoria. Within the next few days Mr. David Rowe will contact those processors who are operating in those markets to discuss the mechanism for calculating and claiming the allowance. In relation to the terms and conditions of sale of milk by the Authority to milk processors who are not authorised agents of the Authority, the Authority resolved at its meeting on the 19 November 1987 to implement special terms and conditions only for those processors who have not in the past kept complete and accurate records, and submitted complete and accurate returns, to the satisfaction of the Authority, or who do not do so in the future. Any processor to whom such special terms and conditions are to apply will be contacted by the Authority separately." By a separate letter Midland was told that it would be affected by the terms and conditions of supply for the following reasons:- "After many months of constant audit surveillance by Authority officers, at very substantial cost, the Authority is far from satisfied that complete and accurate records have been kept. Whilst the accounting system recently implemented by your company may have the capability to produce complete and accurate information, your company has not demonstrated the capacity to produce, in a timely fashion, complete and accurate returns and supporting documents in the form required by the Authority and produced by other processors." 20. wore ae ee oe eee wy ne, pwr ote The effect of the amendment is, in my opinion, correctly stated in the letter. Midland can no longer buy direct supply milk from diary farmers and it must buy only accepted milk from the Authority. There 18S no dispute that the Authority does not intend to pay any allowance to compensate 1t for the increased cost of supplying market milk for sale in the Sydney market. It is clear on the evidence that the Authority is contemplating paying allowances in respect of market milk being sold by Victorian producers in the traditional markets in southern New South Wales. The effect of condition 6 of the new terms and conditions of supply 1s severe for Midland. I am satisfied that it is the only processor to have these requirements umposed on 1t. Condition 6 prevents it receiving into its factory milk bought from dairy farmers forthe purpose of manufacturing milk products. There is also quite clearly a disputed question of fact as to whether the imposition of this condition on Midland operates to inflict hardship on the dairy farmers who supply Midland with its market milk. It is said they will have difficulty in disposing of it to other processors an the industry who may not need it or indeed may refuse to take it because of the support given by those dairy farmers to Midland. It is put that to bring about a situation where this milk may be wasted would also be contrary to the public interest. 21. wore ey: pecs Be pam eee eg cmprennes peepee cree er me In these proceedings Midland seeks relief in respect of:- (a) the refusal by the Authority to allow it a discount or pay it an allowance in respect of milk purchased by it from the Authority for processing into market milk for sale in the Sydney market; and (b) the zmposition upon it of condition 6 referred to above. It seeks such relief under section 46 and 80 of the Trade Practices Act, 1974. Section 46, so far as is relevant, reads as follows:- "46. (1) A corporation that has a substantial degree of power in a market shall not take advantage of that power for the purpose of - eee (c) deterring or preventing a person from engaging in competitive conduct in that or any other market. 46. (4) In thas section - (a) a reference to power is a reference to market power; (b) a reference to a market is a reference to a market for goods or services; and (c) a reference to power in relation to, or to conduct in, a market is a reference to power, or to conduct, in that market either as a supplier or as an acquirer of goods or services in that market. 22. ~ee ee v fas Re a ee ene eg ee . 46. (7) -.. Without in any way limiting the manner in which the purpose of a person may be established for the purposes of any other provision of this Act, a corporation may be taken to have taken advantage of its power for a purpose referred to in sub-section (1) notwithstanding that, after all the evidence has been considered, the existence of that purpose is ascertainable only by inference from the conduct of the corporation or of any other person or from other relevant circumstances." Reference should be made also to section 4F (b), which reads as follows:- claam, "AF. eee (b) a person shall be deemed to have engaged or to engage in conduct for a particular purpose or a particular reason if - (i) the person engaged or engages in the conduct for purposes that included or include that purpose or for reasons that included or include that reason, as the case may be; and (ii) that purpose or reason was or is a substantial purpose or reason." Ioturn to (a). Specifically in relation to this Madiand seeks interlocutory relief as follows:- 23. "That the respondent be restrained until the hearing of these proceedings or further order of the Court by atself its servants or agents from supplying m21k to the first applicant without making in favour of the applicant:- {i) any allowance made or to be made under s. 54(2) of the Dairy Industry Act, 1984 (Vic) to any processor or processors supplying market milk for sale in the Riverina district of New South Wales from time to time; (ii) in the absence of any such allowance an allowance of 12¢ per litre, PROVIDED that the respondent shall not be required to supply more than 17,280 litres per day to the first applicant on the terms set out above in relation to such milk as is supplied to it by the respondent for its Riverina market." The claim in this form acknowledges that relief zn the nature of a mandatory direction that the Authority determine a special price in favour of Midland under s. 44 of the Act is not sought. Such a price determination would require, apart from consultation with the State Prices Commission, the approval of the Governor in Council of the State of Victoria. A direction from this Court that such a determination be made would obviously raise serious questions of constitutional law, which are not involved ina direction that the Authority pay an allowance under s. 54(2)(d), such payment being solely within the discretion of the Authority if the Authority be empowered to make it. As this current Application is one for iunterlocutory relief, it 1s necessary for me to determine whether there is a serious issue to be tried and whether the balance of convenience favours the granting of relief (Epitoma Pty. Ltd. v. The Australasian Meat Industry Employees Union & Ors. (2) [1984] Vol. 3 F.C.R. 55; Od Transport Pty. Ltd. v. W.A. 24, camry nae Government Railways Commission, [1987] A.T.B.R. 48235). As this first application is, in effect, for a Mandatory injunction, I must also have regard to the principle that:- "l.. on motion, as contrasted with the trial, the court 1s far more reluctant to grant a mandatory injunction than it would be to grant a comparable prohibitory injunction. In a normal case the court must, inter alia, feel a high degree of assurance that at the trial 1t will appear that the injunction was rightly granted; and this is a higher standard than is required for a prohibitory injunction." (Per Megarry, J. in Shepherd Homes Ltd. v. Sandham, [1971] 1 Ch. 340 at 351; approved by Gibbs, C.J. in State of Queensland v. Australian Telecommunications Commission, 59 A.L.J.R. 562 at 563). So far as the application of s. 46 is concerned, there has been no dispute that the Authority is a corporation within the meaning of the section. It obviously has the requisite degree of market power. The effect of the amendment to s. 38 is to give it a monopoly in Vactoria of the sale of milk to be processed anto market milk. It alone can take effective steps to determine the price at which milk can be sold to processors for the manufacture of market milk. Under s. 39 of the Act it can impose terms and conditions upon which it as sole supplier of such milk'will supply it to a producer. If there be power under s. 54(2)(d) to pay allowances against the determined price to particular purchasers, then it is the sole possessor of such power. In submitting that there is no serious question to be tried in relation to the first claim for relief, the Authority has submitted that the facts so far before the 25. comer ope ee ae eee = -p aon "m- oe tee ar ae mn eee Court do not show any relevant utilisation of market power by the Authority. It 21s put that the economic disadvantage now claimed to be suffered by Midland in the Sydney market clearly springs from the amendment to s. 38 which effectively prevents it from purchasing cheap direct supply milk from dairy farmers for processing into market milk for Sydney, and from the price determination made in November, 1987 which 1s much higher than the dairy farmers price and which 1s unalterable by any sole act of the Authority. There is thus, it is sazd, no activaty on the part of the Authority which can amount to a discretionary use of market power. However, if the Authority has power under s. 54(2)(d) to grant allowances, as it clearly envisages that it has in the letter of 26 November, 1987, then in my view, an exercise of that power or a refusal to exercise it on request would clearly affect the ultimate amount payable by the particular processor affected for raw milk destined to be converted into market milk. In these circumstances, I would unhesitatingly characterise a refusal to make such a grant as an exercise of market power. In relation to this claim the Authority also submits that even if there be evidence, as I have just held there is, of use of market power, there is nevertheless no evidence of misuse of that power, this being put as a necessary element of a concept of "taking advantage" of power. It further puts that there is no sufficient evidence of the relevant purpose of the deterring or preventing competitive conduct of Midland in the Sydney market. 26. i ae ay arraren Ne nee e -_ —— ~ These submissions are common to both the first and second claim for injunctive relief. I find it more convenient to deal with them under the second claim as the first claim in my view cannot succeed at this interlocutory stage as a result of another submission made by the Authority relating only to the first claim. Somewhat surprisingly, in view of its assertion of ability to make allowances under s. 54(2)(d), both in the Agreement of 3 April, 1987 and in the letter of 26 November, 1987, the Authoraty has submitted in these proceedings that the section does not, as a matter of construction, provide such a power. The section, so far as relevant, reads as follows:- "(2) The Authority shall from the proceeds of the sale of milk by the Authority make provision for - (d) any other payment required or authorised to be made by this Act or which is for or towards the costs and expenses of or incidental to the performance of the functions or the exercise of the powers of the Authority pursuant to thas Act." The Authority argued that the Agreement of 3 April, 1987 to pay an allowance of 12 cents per litre to Midlands was a valid exercise of power under this section. When read with s. 7 and 5(c) and (e) of the Act, by requiring that Midlands buy milk for conversion into market milk for the Sydney market only from the Authority in consideration of the 27. ma pene ene ee ree ee Authority paying an allowance of 12 cents per litre, 1t was said that the benefit of Midland's purchasing would be spread amongst all dairy farmers and not merely the few with whom Midlands then dealt. The payment of the allowance was thus incidental to the exercise of a power of the Authority yveferred to in s. 7 and 5(c) and (e). After the amendment to s. 38, this justification disappeared, and with 1t the basis for making an allowance aun favour of Midland purely for supply to the Sydney market. There may be some force in this argument but I see far greater force in the more general argument that was also put and which would deny to the Authority any power at all to make allowance for rebates under s. 54{(2)(d) against the market price under s. 44 of the Act. Contrary to the stated intention in the letter of 26 November, 1987, it was submitted on behalf of the Authority that s. 54(2)(d) was never intended as a matter of construction to apply to any expenditure other than that necessarily incurred by the Authority itself in the course of its functioning under the Act. Section 54(1), 12t 18 put, contemplates the sale of milk by the Authority to processors at prices determined under s. 44. The balance of the section provides for the Authority's dealing with the proceeds of such sales. Section 54(2) makes provision for the payment of types of expenditure from the pool of money obtained from the sales. Section 54(2)(d) when read with the balance of the sub-section, 28. wee ee ee ay we ee ee - ans ewe erent Tyy a indicates that the costs and expenses referred to are necessarily the Authority's own costs and expenses and not amounts paid to processors by way of diminution of the prices already arrived at by the elaborate mechanism of s. 44 and which 1s the mandatory price to be charged by virtue of s. S4(1L). The balance of the section provides for the distribution of the remainder of the proceeds of the pool pro rata to the dairy farmers from whom the milk has been purchased by the Authority at the fixed price determined under s. 44. It is submitted that this construction is supported by the fact that s. 44(2) provides that sub-section (1) does not affect the powers and obligations conferred on the Authority under s. 54. Sub-section 1 of s. 44 applies only to the determination by the Authority of the price to be paid by the Authority to dairy farmers for their milk and it 1s put as an indication of the legislative intention that notwithstanding this fixed price, dairy farmers can be, as it were, paid more by dant of receiving distributions from the proceeds pool aun accordance with s. 54(3) and (4). There is no similar provision in respect of s. 44(3), which provides forthe determination of prices to be paid by the processors to the Authority for the milk purchased by the Authority from the dairy farmers. It is therefore submitted that the legislature intended that s. 54 should have no operation in respect of those prices, 29. boos toe oe ope eeeee oT Ve but that "allowances" in respect of such prices or transport costs and the like incurred by processors in servicing distant markets should be provided for under s. 44(4), which specifically empowers the Authority in making its determination to specify different prices to be paid by processors having regard to:- "(a) the place at which the milk is sold by the Authority; (b) the purpose for which the milk 1s to be used; and (c) the market for which the milk is intended." I also note that Hampell, J. has recently held in the Supreme Court of Victoria in Associated Dairies Ltd. & Ors. v. Minister for Agriculture & Rural Affairs and the Victorian Dairy Industry Authority (unreported, 18 December, 1987) that:- "Nothing ins. 54 gives the Authority power to fix or amend determined prices or to pay a distribution allowance." His Honour rejected a submission that:- "Section 54 of the Act provides a separate or distinct basis for the making of price determinations or paying allowances even when that section is read in conjunction with s. 5 and 7 of the Act". I cannot, of course, make any final determination on this crucial matter in these interlocutory proceedings. However, I am satisfied that there are very strong reasons 30. Aye epee ee meer et ee ,c mreige pene See wee eee for holding that s. 54(2)(d) has not empowered the Authority, at least since the enactment of s. 44 in its present torm, to pay the kind of allowance sought by Midlands in these proceedings. If this be the ultimate conclusion at trial then this Court would obviously refuse the relief sought, as to grant it would be to require the Authority to perform an act beyond its statutory power. I apply the test referred to above. I find that I do not feel "a high degree of assurance" that the mandatory relief sought, if given, would at the trial appear to have been rightly granted. I therefore refuse the first claim for interlocutory relief. I turn to the second claim, namely for an interlocutory order prohibiting the enforcement of condition 6 sought to be imposed under s. 39 of the Act. Midland's claim that there is a serious issue to be tried that the imposition of this condition amounts to the taking advantage by the Authority of its monopoly power in the relevant market for the purpose of deterring or preventing Midlands from engaging in competitive conduct in the Sydney market. I have already indicated my prima facie satisfaction thatthe imposition of that condition on the supply of milk is an exercise of market power. There is ample prima facie evidence throughout the course of the transaction which I have set out in some detail an these reasons that the Authority in its bona fide desire to establish an orderly marketing system for Victorian milk in New South Wales and to secure for Victorian producers a guaranteed share of the New South 31. Wales market was intent on preventing Midlands, with the help of the other applicants, from engaging in what it regarded as price cutting activities 1n the Sydney market. The documentary evidence, and the oral evidence, of Mr. Saulwick, makes it perfectly plain that both the respondent Minister and Authority were firmly of the view that 21£ Midlands, Davids and Jewel were not prevented from : engaging in these activities the whole projected scheme, depending upon delicate negotiations with the New South Wales Minister and the New South Wales Dairy Corporation could be completely frustrated. Mr. Saulwick, when asked in evidence whether the Authority's ability to get five per cent of the New South Wales market was dependant upon its stopping Midlands competing in the New South Wales market in terms of price, said "That is precisely the point". I have had some hesitation as to whether Midlands, Davids and Jewel's activities in the Sydney milk market could properly be characterised as "competitive conduct" insofar as they appear to be undercutting a regulated price rather than engaging in a highly competitive activity in which both sides were untrammelled in their efforts to beat the others price with the object of increasing market share. However, evidence was ultimately given that the New South Wales Dairy Corporation was able to, and in fact did, if somewhat cumbersomely, respond to the applicant's price competition by allowing appropriate reductions in the controlled price for New South Wales milk. 32. ameter ep eye eee 2, ~ +p wy sete er et eee Midlands, Davids and Jewel submitted that the imposition of condition 6 was simply a step taken by the Authority to further the purpose of preventing or deterring them from competing against the New South Wales Dairy Corporation in the Sydney market. They point to the whole history of the Authority's actions from the abrupt termination of the April Agreement, through to the (as they claim) discriminatory application of the 26th November terms and conditions on Midlands as indicating that the imposition of condition 6 was bound up with a general plan to force Midlands to cease its competitive activities by, in conformity with the Minister's previous threat, making its business unviable. The Authority responded by asserting that the imposition of condition 6 was no more than a legitimate attempt to prevent Midiands underpaying the Authority by maxing direct supply milk with Authority accepted and supplied milk, in its manufacturing of market milk. Midlands says that for reasons already referred to, this claim is unfounded. This question of fact cannot be decided in an interlocutory hearing. In my view, there is a serious question to be tried as to whether condition 6 has been imposed for the proscribed purpose. Is there a serious issue to be tried as to the Authority's "taking advantage" of its market power in imposing condition 6? I accept, with respect, what Pincus, Jd. said as to this ingredient of s. 46 of the Trade Practices Act in Queensland Wire Industries Pty. Ltd. v. The Broken Hill Proprietary Company Limited & Anor. [1987] A.T.P.R. 48,806 at 48,819, where his Honour, after a full review of earlier cases on the subject, said:- 33. "What all the cases referred to above have ain common, 1n my opinion, is that they are consistent with a reading ot "take advantage of" which is pejorative and not neutral. While I cannot (with vespect) accept that characterising the acts complained of as merely an exercise of legal rights, whether contractual or otherwise, can be an answer to a claim based on sec. 46, 1t appears to me that the Australian cases tend to support the view that there is no taking advantage unless there is a misuse of power." An earlier case, Trade Practices Commission v. C.S.B.P. & Farmers Ltd. [1980] A.T.P.R. 40,151, spoke of the concept of "taking advantage" as entailing an element of conscious predatory behaviour. Clearly, in my view, notions of this kind are involved in this angredient of the section. The Authority maintains that in imposing a condition it did no more than exercise a right given to 1t by statute. It says it did so for the extremely laudable reason of protecting its revenue from deficient and questionable accounting practices of Midlands. If this be the ultimate finding of the Court, then clearly no case of "taking advantage" will have been made out. What, however, if the ultimate finding be, as Midland claims, that the expressed basis for the imposition of the condition was to the knowledge of the Authority no longer a significant problem, and the real reason was the bringing of pressure to bear on Midland to cease its competitive conduct in the Sydney market? In those circumstances there would surely be a compelling case of "taking advantage" of monopolistic market power. The close relationship between the market activity of ' ron + imposing a condition upon supply and the proscribed anti- competitive purpose would most arguably endow this use of market power with the necessary predatory character (see per Bowen, C.J. Victorzran Egg Marketing Board v. Parkwood Eggs Pty. Ltd. [1978] 20 A.L.R. 129 at 138). I am therefore of the view that the applicants have demonstrated that there is a serious question to be tried as to the imposition of condition 6 constituting a breach of s. 46 of the Trade Practices Act. In forming this view, I have not overlooked the submission made by the Authority that its actions fall within the exception provided by s. 51(1)(b) of the Trade Practices Act, as being _acts done in Victoria of a kind specially authorised or approved by an Act of the Parliament of that State, namely, the Dairy Industry Act. I consider that this submission raises matters of law not apt to be disposed of in interlocutory proceedings. I further consider that the reasoning of Brennan, J. in Re Ku-Ring-Gai Co-Operative Building Society (No. 12) Ltd. [1978] F.c.R. 134 at p. 151-152, when applied to the present case indicates that the applicants have a fair chance of success at the hearing on this question of law (Victorian Egg Marketing Board Case at page 146). As mandatory relief zs not sought on this aspect of the claim, I do not need to consider the further question of whether I feel "A high degree of assurance" of the applicant's ultimate success. It is sufficient that there be, as I have found, a serious question to be tried. 35. I turn to the question of balance of convenlence. Midland points to the severe disruption to its ordinary business activities that would be entailed 1f£ the condition were enforced up to the time of trial. Currently, 21t receives from dairy farmers, apparently favourably disposed to it, large quantities of milk for manufacturing into milk products. If the condition is enforced it cannot continue to do so. The evidence at this stage also produces doubts as to whether those dairy farmers could effectlively dispose of that milk elsewhere other than by entering into long-term arrangements which could prevent their reverting to their normal business arrangement with Madland should it be successful at the hearing. I consider that damages, 1f£ it would be appropriate to award them, would be difficilt to quantify. From the Authority's point of view, it has asserted that in the absence of condition 6 it will be obliged to maintain an expensive audit presence at Midland's premises. As already discussed, Midland denies the need for this. [In all the circumstances I consider that the balance of convenience is in favour of Midland. I therefore propose to grant anterlocutory relief in respect of this aspect of the claim. At the request of both parties, I reserve the question of the costs of this application. 36. > : 7! on poe ee ee Fo oe ee reine ee m ¥ he os a I therefore order that upon the first applicant giving the usual undertaking as to damages the respondent, until the hearing or further order of the Court, be restrained from giving effect to or enforcing compliance with the term and condition imposed by the Authority on supply of milk to the first applicant, Midland, pursuant to the notice dated 26 November, 1987, being part of exhibit GTC 21 to the Affidavit of Grant Thomas Crothers sworn on 30 November, 1987; that milk, other than milk previously accepted by the Authority, shall not be delivered to or received at the nominated premises of Midland, where such milk is to be used and 1s in fact used for manufacture of products other than market milk. I reserve the costs of the application. KREKKKKEKKEKKEKEKEKEEER f certafy that this aud the 36 Preeechng prges are a true copy of the rmagons for jodgment herom of His Honvat, Mi. Justice Foster K - . Assoviate Dated 23 Februciy ASS. 37. Applacants: Respondent: Hearing Dates: 1, 3, 8, 9, 14 and 15 December, 1987. Date of Judgment: APPEARANCES A. B. Shand, Esq., Q.C. F. M. Douglas, Esq., P. F. Esler, Esq. instructed by Messrs. Hunt & Hunt. K. E. Landgren, Esq. (1 December, 1987) A. C. Archibald, Esq., Q.C. N. d. Young, Esq. (3 December, 1987) R. Merkel, Esq., Q.C. P. J. Jopling, Esq. (8, 9, 14 & 15 December, 1987) instructed by Messrs. Minter Ellison. 24 December, 1987. ene Fee eI te atte sere eee Sb cores =