FEDERAL COURT OF AUSTRALIA Ford Motor Company of Australia Ltd v Arrowcrest Group Pty Ltd [2002] FCA 1156 CONTRACT – construction – incorporated terms – inconsistency with expressly agreed terms – manufacturer to strive for "cost competitiveness" – obligation to provide quotation for new product – falsa demonstratio non nocet - rescission – rescission in part Adamastos Shipping Co Ltd v Anglo-Saxon Petroleum Co Ltd [1959] AC 133 applied Australia Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104 referred to Beattie v Fine [1925] VLR 363 referred to Bunge SA v Kruse [1979] 1 Lloyd's Rep 279 referred to Coal Cliff Collieries v Sijehama Pty Ltd (1991) 24 NSWLR 1 referred to Courtney & Fairbairn Ltd v Toliani Brothers (Hotels) Ltd [1975] WLR 297 referred to Hamilton and Co v Mackie and Sons (1889) 5 TLR 677 applied Heyman v Darwins Ltd [1942] AC 356 referred to King's Motors (Oxford) Ltd v Lax [1970] 1 WLR 426 referred to Mamedoil-Jetoil Greek Petroleum Co SA v Okta Crude Oil Refinery AD [2001] 2 Lloyd's Rep 76 referred to May & Butcher v The King [1934] 2 KB 17 referred to Mitsui OSK Lines Ltd v AGIP SpA [1978] 1 Lloyd's Rep 263 referred to Modern Buildings Wales Ltd v Limmer & Trinidad Co Ltd [1975] 1 WLR 1281 applied Moschi v Lep Air Services Ltd [1973] AC 331 referred to Offshore International SA v Banco Central SA [1976] 2 Lloyd's Rep 402 referred to O'Keefe v Routledge 103 P2d 307 (1940) referred to Photo Productions Ltd v Securicor Transport Ltd [1980] AC 827 referred to Queensland Electricity Generating Board v New Hope Collieries Pty Ltd [1989] Lloyd's Rep 205 referred to Randazzo v Goulding [1968] Qd R 433 referred to Smith v South Wales Switchgear Co Ltd [1978] 1 WLR 165 applied T W Thomas and Company Ltd v Portsea Steamship Co Ltd [1912] AC 1 applied Vroon BV v Foster's Brewing Group Ltd [1994] 2 VR 32 applied Walford v Miles [1992] 2 AC 128 referred to 17A American Jurisprudence 2d Contracts (1991) 3 Black on Rescission and Cancellation 2nd ed. (1929) Norton on Deeds 2nd ed. (1928) Restatement (Second) of Contracts (1981) 5 Williston on Contracts 4th ed. (2000) FORD MOTOR COMPANY OF AUSTRALIA LIMITED v ARROWCREST GROUP PTY LTD V300 of 2002 FINKELSTEIN J 17 SEPTEMBER 2002 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 300 of 2002 BETWEEN: FORD MOTOR COMPANY OF AUSTRALIA LIMITED Applicant AND: ARROWCREST GROUP PTY LTD Respondent JUDGE: FINKELSTEIN J DATE: 8 OCTOBER 2002 PLACE: MELBOURNE THE COURT ANSWERS THE QUESTION STATED AS FOLLOWS: Q. Was Ford entitled as at 3 September 2001 to insist upon performance of the supply agreement in relation to wheels for the Grizzly model and entitled to terminate the supply agreement in relation to wheels for the Barra model? A. No. THE COURT ORDERS THAT: 1. The application be dismissed. 2. The applicant pay the respondent's costs of the application including any reserved costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 300 of 2002 BETWEEN: FORD MOTOR COMPANY OF AUSTRALIA LIMITED Applicant AND: ARROWCREST GROUP PTY LTD Respondent JUDGE: FINKELSTEIN J DATE: 17 SEPTEMBER 2002 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 This case is about a contract for the supply of wheels for a Grizzly and a Barra. The parties to the contract are the Australian subsidiary of the Ford Motor Company, one of the world's largest motor vehicle manufacturers, and Arrowcrest Group Pty Ltd which, through its division ROH Automotive, manufactures steel wheels in Adelaide. In the early part of 2000 (the precise date is not known) the parties entered into a contract for the long-term (five year) supply by ROH to Ford of steel wheels for the Grizzly and Barra, code names for models in the Falcon range. The Grizzly was the current model and the Barra was to be introduced in 2002. Ford says that on 3 September 2001 it terminated the contract in so far as it related to the Barra wheels. Ford's action gave rise to this suit. The various issues that arise will be resolved if the parties have an answer to the question: Was Ford entitled as at 3 September 2001 to insist upon performance of the supply agreement in relation to wheels for the Grizzly model and entitled to terminate the supply agreement in relation to wheels for the Barra model? 2 The dispute arose in the following way. ROH had been supplying Ford with steel wheels for many years. In February 1999 it entered into an agreement to supply Ford with "100% of [Ford's] requirements of Products for both original manufacture and resale into the aftermarket … during the period 1/3/99 to Job 1 Barra." The products were a 15" black steel wheel and a 15" silver steel wheel. In mid 1999 Ford decided to change the wheel size for the Grizzly to a 16" steel wheel and to develop a 16" steel wheel for the Barra. It entered into a contract to obtain these wheels from ROH. This contract, which the parties refer to as a supply agreement, is the subject of this action. 3 The contract comprises a number of documents and it is necessary briefly to refer to each of them. The first, though not in point of time, is entitled "Memorandum of Understanding Relating to the Long Term Supply of Grizzly Steel Wheels". The heading is in error in confining the contract to Grizzly steel wheels. It also covers wheels for the Barra. The Memorandum recites that ROH will supply the wheels "specified in [Ford's] Purchase Order Number for 1R23 1087 GA/HA". The Memorandum bears the printed date 30 September 1999. It purports to have been signed by Ford on that day and by ROH on 5 April 2001 but the parties agree that it was in fact signed by Ford a little later than 30 September 1999. This notwithstanding it is clear that the Memorandum became a binding contractual document before it was executed by both parties. Until the end of March 2000 ROH manufactured 15" steel wheels for Ford under the February 1999 contract. It began supplying 16" steel wheels in April 2000. It is reasonable to infer that the Memorandum was adopted around that time. The mutual assent that is required to bring about a contract need not be manifested by an offer and acceptance. The existence of a contract can be inferred from conduct. Many of the relevant authorities are collected by Ormiston J in Vroon BV v Foster's Brewing Group Ltd [1994] 2 VR 32, 81-83. 4 The Memorandum is a five page document. It contains three recitals and eight conditions. The recitals refer to the purchase orders previously mentioned and record that ROH will supply Products (which are defined in schedule 1 as 16" steel wheels) at "world class quality levels and competitive prices", ensure timely delivery of the products, and support the products with "effective, efficient and high quality after-sale service". Some of the conditions are sufficiently important to be set out in full: "1. Subject to the terms and conditions set out in this Memorandum, the Seller shall sell to the Buyer and the Buyer shall purchase from the Seller 100% of the Buyer's requirements of Products for both original manufacture and resale into the after-market, and/or provision of a Service (as detailed on Purchase Order Number during the period from 1/3/99 to 31/3/2004 (the "Period") at the prices (the "Prices") in Schedule 1. … 3. The Seller will continue to strive for continuous improvement in product and/or service quality, cost competitiveness and timely delivery in accordance with the Buyer's requirements. … 7. While it is the intention and desire of the Buyer to purchase 100% of the Buyer's requirements for products and/or services from the Seller during the Period, if the Seller at any time during the Period is unable or unwilling for any reason whatsoever to supply products to the Buyer: (a) in such quantities as the Buyer requires, or at all; (b) in accordance with the Buyer's delivery and timing requirements; (c) at world class quality levels; or (d) at the agreed prices the Buyer may at its option: (a) purchase some or all of the Products and/or Services from another supplier; (b) suspend the operation of this Memorandum for such period as is reasonable in the circumstances; or (c) terminate this Memorandum. 8. The Buyer's purchase order terms and conditions will be adhered to in accordance with the spirit and intent of this Long Term Agreement." 5 The purchase orders referred to in the recitals were issued on 30 September 1999 and 4 October 1999 respectively and constitute the second and third of the contract documents. The purchase orders do not specify the quantity of wheels to be supplied. The quantity was recorded as "B.G." which I am told means "blanket order". The quantity of wheels acquired by Ford were ordered weekly in accordance with a schedule provided to ROH. 6 Each purchase order contains the following notation: "the seller agrees to sell and deliver the Supplies set out below, subject to the Buyer's terms and conditions clauses 1 to 22 set out in terms and conditions booklet dated June 1997 … and any terms and conditions set out below." The following term appears at the foot of each purchase order: "Subject to the buyers rights of termination under paragraphs 10 and 11 of the standard terms and conditions which form part of this purchase order and to the relevant provisions of any applicable statutory enactment. This purchase order shall remain in force and effect until terminated by the buyer or the seller by the giving of thirty days notice in writing (expiring at any time) to the other of them." By these words the parties incorporated into their contract, without the need to rewrite them, the standard terms and conditions published by Ford in June 1997. The meaning and effect of a number of the incorporated terms is a matter of controversy to which I will return. In the meantime I will deal with an issue that arises in relation to the referential incorporation. In May 2000 Ford published a new set of standard terms and conditions. The new terms differ in some material respects from those which they replaced. Ford contends that the new terms and not the 1997 standard terms form part of the contract with ROH. I do no agree. The cases show that prima facie a reference to standard terms and conditions is a reference to the terms and conditions current at the date of the contract: Smith v South Wales Switchgear Co Ltd [1978] 1 WLR 165, 171. There will be occasions when the incorporation includes amendments made from time to time: Offshore International SA v Banco Central SA [1976] 2 Lloyd's Rep 402; Mitsui OSK Lines Ltd v AGIP SpA [1978] 1 Lloyd's Rep 263. Usually this will only occur when the amendments are of a procedural, and not a substantive, type: Bunge SA v Kruse [1979] 1 Lloyd's Rep 279. Here, however, the 1997 standard terms were expressly incorporated, and there is no basis upon which the new terms could replace them. 7 The only provisions of the 1997 standard terms to which reference need be made at this point are those relating to termination, namely clauses 10 and 11. Clause 10 permits Ford to terminate "the performance of work under [a] Purchase Order" in whole or in part at any time by written notice. If a notice is given the seller must terminate all work under the contract, settle claims arising out of the termination and transfer title in all completed work and work in progress to Ford. For its part Ford is required to pay the seller all money due before termination together with the costs incurred by the seller in accordance with the purchase order. Clause 11 permits Ford to terminate the "Purchase Order in whole or in part" for breach if the breach is not made good after the service of a 10 day notice. The particular breaches to which the clause refers are a "failure to deliver supplies within time", a "failure to perform any other provisions of [the] Purchase Order", and a "failure to make progress so as to endanger the performance of [the] Order". Under this clause Ford has no obligation to pay for products already provided by the seller. In addition, it will be remembered that the purchase orders themselves also confer upon Ford a right of termination. The right is conferred by reference to clauses 10 and 11 of the 1997 standard terms, with the proviso that thirty days' notice of termination must be given. 8 Putting to one side cl 11, the termination clauses that appear in the purchase orders and cl 10 of the 1997 standard terms are inconsistent with the Memorandum. The inconsistency arises because the Memorandum specifies the period of the contract to be five years (cl 1) subject to the right to terminate for cause given by cl 7. Finding an inconsistency is not a novel situation when standard terms are incorporated into an agreement. The proper approach is to disregard those incorporated terms that conflict with the expressly agreed terms. In Modern Buildings Wales Ltd v Limmer & Trinidad Co Ltd [1975] 1 WLR 1281 (at 1289) Buckley LJ said, "if any of the imported terms in any way conflict with the expressly agreed terms, the latter must prevail over what would otherwise be imported": see also Hamilton and Co v Mackie and Sons (1889) 5 TLR 677; T W Thomas and Company Ltd v Portsea Steamship Co Ltd [1912] AC 1. It follows that on the proper construction of the contract Ford is not entitled to terminate the arrangement either at will under cl 10 of the 1997 standard terms or on giving thirty days' notice under the termination provisions in the purchase orders. 9 It is possible that cl 11 of the standard terms is also inconsistent with cl 7 of the Memorandum. Plainly there is an overlap between the two. A refusal or failure to deliver wheels, or to deliver them in due time, is covered by both. Under cl 7 Ford could take one of three courses: purchase some or all of its products elsewhere, suspend the operation of the Memorandum or terminate the Memorandum. On the other hand, if cl 11 applies only two courses of action are available: Ford could either terminate the contract in whole or terminate it in part. Ford's right to act under cl 11 is conditional upon the failure by ROH to comply with a written notice of default. How the inconsistency between these two clauses should be resolved is not an issue that requires resolution. 10 Here Ford acted as it did because it alleged that ROH "fail[ed] to perform [a] provision of [the] Purchase Order". The provision is said to be cl 3 of the Memorandum. The nature of the alleged breach, which I will explain in a moment, is not one that is caught by cl 7. It might, however, be covered by cl 11. In that case there is no direct inconsistency. There may, however, be indirect inconsistency, for example if the parties intended cl 7 of the Memorandum to cover the field of breaches which could lead to a suspension or termination of the contract. If that be so then cl 11 should be disregarded. This possibility notwithstanding, ROH did not invite me to adopt such a position so I will proceed on the basis that if there is a breach of cl 3 of the Memorandum Ford is entitled to the action under cl 11 of the standard terms. 11 I can now come back to the facts. Under the standard terms Ford was entitled to change the "specification applicable to the supplies … covered by the Purchase Order": cl 13(a). If the change affected the cost of manufacturing the supplies Ford was required to "negotiate with [ROH] for an adjustment to the Purchase Price": cl 13(b). As to the validity of a clause requiring parties to a contract to negotiate the price of goods or services see May & Butcher v The King [1934] 2 KB 17; King's Motors (Oxford) Ltd v Lax [1970] 1 WLR 426; Courtney & Fairbairn Ltd v Toliani Brothers (Hotels) Ltd [1975] WLR 297; Mamedoil-Jetoil Greek Petroleum Co SA v Okta Crude Oil Refinery AD [2001] 2 Lloyd's Rep 76; Beattie v Fine [1925] VLR 363; Randazzo v Goulding [1968] Qd R 433. If the obligation is expressly or by implication one which requires the parties to negotiate in good faith see Queensland Electricity Generating Board v New Hope Collieries Pty Ltd [1989] Lloyd's Rep 205; Walford v Miles [1992] 2 AC 128; Coal Cliff Collieries v Sijehama Pty Ltd (1991) 24 NSWLR 1; Australia Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104. 12 In November 2000 Ford advised ROH that it was considering a change in the specification for the 16" steel wheels, namely the substitution of a lightweight steel for the steel that was currently being used for the wheel's manufacture. The lightweight steel was produced by Nipon Steel Corporation of Japan. Ford believed that a reduction in the weight of the steel would reduce the cost of production of the wheels (by reducing the cost of raw materials) and produce a lighter vehicle resulting in lower fuel consumption and reduced noxious emissions. Arrangements were made for ROH to carry out a trial manufacturing run and provide costings for the lightweight steel wheel based on a number of design variations. 13 I now come to the events which are the immediate trigger for the dispute between Ford and ROH. In May 2001 Ford informed ROH that it intended to supply the lightweight steel for the new wheels in order to keep down the costs of manufacture. Previously all steel wheels had been manufactured from steel purchased by ROH. On 29 May 2001 ROH was asked to "provide the sell price for the 16" wheels excluding all [relevant] raw material costs" ideally by the following day. At this time it was proposed that lightweight steel only be used on Barra wheels. ROH refused to offer a price. On 16 June 2001 it provided its reasons: "In general terms, your proposal would weaken our bargaining and purchasing power with our other suppliers which would inevitably result in cost increases. It would also introduce a level of complexity that we believe would detract from our day-to-day operations. For example, your proposal raises many questions about who would be responsible for the steel, including stock discrepancies, yields, scrap recovery etc, and we simply do not have the resources necessary to devote to the kind of external reconciliation issues that would invariably arise. Processing of material issued to us by our customers is not our usual commercial practice and, as we assess the situation, such practice might ultimately prove contrary to Ford's own interests for reasons not dissimilar to the above." ROH was not against the use of lightweight steel. It advised Ford that it would submit a quotation for lightweight 16" steel wheels provided it could purchase the lightweight steel. 14 Two weeks later ROH submitted an indicative price for the 16" lightweight steel wheel based on its ability to obtain the steel from Nipon at a particular purchase price, which was mentioned in the quotation. Ford responded that at this stage it would "proceed with prototypes only" because it "wish[ed] to review these prior to making any final decision for the lightweight design." 15 If the proposal for the new wheels was to go ahead Ford still intended to purchase the lightweight steel. It wrote to ROH on 23 July 2001 advising that: "We have confirmed that we can purchase bulk steel at highly competitive rates. This makes it worthwhile for us to provide steel on consignment to many suppliers. For Barra steel wheels, it is our intention to use consignment steel to ROH (sic). At the moment, ROH have declined to quote. I ask ROH to re-consider their position on this quotation. We are conscious of time and would like to move ahead asap." This was ROH's reply: "As explained to you previously by Mr. Bill Davidson, it is not our policy to undertake manufacturing using consignment steel, for the reasons as detailed in Mr. Davidson's previous correspondence to Mr. Gargano." 16 Ford took this response to be a breach of cl 3 of the Memorandum. Accordingly on 21 August 2001, purportedly pursuant to the standard terms issued in May 2000, Ford gave "notice that unless [ROH] agree[s] to accept Ford's position regarding consignment steel within ten (10) days of this date, we will have no option but to terminate the Purchase Order and the MOU [a reference to the Memorandum of Understanding]." ROH still declined to submit a quotation. So on 3 September 2001 Ford notified ROH "that that Purchase Order and MOU have been terminated. ROH will not be our supplier of Barra Steel Wheels." 17 I will now come back to the question which the parties wish to have answered. The question has two components: (a) Was Ford entitled to insist upon performance of the supply agreement in relation to Grizzly wheels? and (b) Was Ford entitled to terminate the supply agreement in relation to Barra wheels? The answer to the first part of the question is dependant upon the answer to the second, so I propose first to deal with that part. 18 In order to decide whether Ford was entitled to terminate the supply agreement three issues must be considered: (a) Was ROH under an obligation to provide a quotation for a lightweight steel wheel manufactured from steel supplied by Ford? (b) If yes to (a), was the failure to provide that quotation a breach that entitled Ford to act under cl 11 of the 1997 standard term? (c) If yes to (b), was Ford entitled to terminate the contract only in respect of the Barra wheel. 19 According to Ford, cl 3 of the Memorandum is the source of the obligation to provide the quotation. To recapitulate, cl 3 relevantly requires ROH "to strive for continuos improvement in product and/or service quality, cost competitiveness and timely delivery." The meaning of this clause must be considered in the context of the Memorandum as a whole. In that regard it is necessary to draw attention to cl 4 which provides that Ford "will use reasonable endeavours to assist [ROH] in the implementation of such reasonable cost reduction actions in relation to the production, delivery and supply of the Products and/or Services as are initiated by [ROH]." Reference should also be made to cl 2 which deals with price changes during the currency of the agreement. Clause 2(i) provides for a reduction in prices "to reflect the productivity gains agreed to by [ROH] at the date of [the] Memorandum". The reductions, referred to as "cost down rates", are set out in item 1 of schedule 2. Clauses 2, 3 and 4 all show that it was important to Ford that, when it was reasonable to do so, ROH would take steps to keep down the cost of producing steel wheels. Ironically, however, there does not appear to be any mechanism by which cost savings could be passed on to Ford. It seems that there is at least this deficiency in the drafting unless some implication will save the day. 20 The more immediate problem is to determine the precise subject matter to which cl 3 is directed. The task may be assisted by reference to an hypothetical situation. We know that Ford requested ROH to conduct a trial manufacturing run for the proposed lightweight steel wheels. We also know that Ford contemplated the change to lightweight steel wheels in order to become more "cost competitive". ROH was willing to conduct the trials. What would have been the position, however, if ROH had refused to co-operate? Would that conduct have breached cl 3? 21 Let us examine what could be involved if ROH were directed to conduct a trial production run. First, ROH would need to tool up for the new wheel. Who would bear those costs, Ford or ROH? If they were to be paid by Ford, would they be confined to out of pocket expenses or would indirect costs and overhead expenses be included? As regards quantum would Ford be required to pay the actual cost incurred or only reasonable costs? Second, someone must decide when the trial run is to occur. Is this a matter for Ford or is to be left to ROH to decide? If Ford is able to specify when the trial is to occur, must the trial date be reasonable in all the circumstances? Third, there may be differences of opinion about how the production run should be conducted. Whose view is to prevail? Not one of these matters is covered by the contract. Are the answers to be found in implied terms? What an extraordinary contract that would be, and surely not one that was contemplated by the parties. 22 It is clear to me that cl 3 does not require ROH to conduct trials. I accept that Ford would not go ahead with the proposed lightweight steel wheel unless it was satisfied that the end product met its specifications, could be produced in an economic and efficient manner and would provide Ford with the cost benefits it desired. Therefore Ford must evaluate the wheel to see if it would meet its requirements. But ROH is not under any obligation to lend its assistance by conducting a trial production run, although a trial would help Ford in its evaluation, because trial production is beyond the scope of cl 3. Under the contract ROH is required to manufacture steel wheels in accordance with Ford's specifications, at "world class quality levels", and at "competitive prices". It must deliver the wheels in a timely fashion in accordance with Ford's requirements. It must also provide "effective, efficient and high quality after-sale service". It is these activities, and these activities alone, with which cl 3 is concerned. 23 Similar reasoning also applies to the question whether ROH was required to provide a quotation for lightweight steel wheels ex raw materials. Logically, of course, a quotation could only be given after tests (which ROH is not obliged to perform) have been completed. Moreover, ROH would incur costs in preparing the quotation. The provision of a quotation which might assist Ford in deciding whether to change the specifications for the wheels manufactured under the contract does not relate to the production, quality or delivery of wheels to Ford, or to any after-sales service which ROH is required to provide. For that reason it is beyond the scope of cl 3. 24 There is another consideration which detracts from Ford's construction of cl 3. Ford's construction is founded on the assumption that it has the right to compel ROH to take from Ford the steel required to manufacture the Barra wheels but this assumption appears not to be sound. Clause 13 of the standard terms permits Ford to make changes to the drawings, designs and specifications for the steel wheels, their method of shipment and packing and their place of delivery. But there is no provision which, in terms, permits Ford to nominate itself as the supplier of the raw materials to be used in manufacture of the steel wheels. Clause 14 of the standard terms contemplates that Ford may provide ROH with certain equipment "on consignment" (supplies, materials, facilities, tools, jigs, etc) so that ROH can perform its obligations under the contract. But the manner in which this equipment must be dealt with, including ROH's obligation to return it to Ford, shows that this clause cannot be applied to raw materials. So, if there is a right to instruct ROH to take its raw material from Ford on consignment, it must be found in cl 3 of the Memorandum. I do not read the clause as going that far. If it did bear that construction it would entitle Ford to give directions in relation to every aspect of the production and delivery of the steel wheels, provided the direction was designed to improve Ford's "cost competitiveness". No matter how important it may be to Ford to keep down the costs of the steel wheels, cl 3 does not give it the right to direct ROH how it should operate its business. 25 The construction of cl 3 that I prefer is confirmed by the absence in the contract of any provision which deals with matters such as the quantity of steel that Ford would be required to supply to ROH to enable ROH to meet its contractual commitments. The importance of this omission should not be underestimated. In simple terms a steel wheel is made up of two parts, a disc and a rim. The disc is cut from steel sheeting and the rim is formed by rolling a steel strip to form a circle which is welded at the join. The disc is then welded to the rim. The process of manufacture results in both wastage and, on occasion, defectively formed wheels. It is not always possible to estimate the precise number of wheels that will be produced from a given quantity of steel. Indeed, as the evidence here shows, the quantity of steel required for a particular quantity of wheels is dependent upon the efficiency of the manufacturing process, which may vary from time to time. It is unlikely that the parties contemplated a situation where ROH was required to manufacture a specified number of wheels, but Ford was not under a corresponding obligation to provide whatever steel was needed to produce that number. One could say that ROH would have taken leave of its commercial senses to make such an agreement. 26 Once it is accepted, as I think it must be, that ROH was not required to provide a quotation to enable Ford to evaluate the possibility of proceeding with a lightweight steel wheel, strictly it is unnecessary to consider whether Ford was entitled to act under cl 11 of the standard terms and, if it was, whether it could terminate only part of the contract, if that is what it purported to do. (Speaking strictly, Ford relied on cl 27 of the 2000 standard terms but that does not prevent it from now relying upon cl 11 of the standard terms which is substantially the same.) Nevertheless, because these points were argued I should briefly state my views on them. 27 As regards the applicability of cl 11, ROH's principal submission was that the clause was only concerned with a failure to comply with provisions in the "Purchase Order", and the breach alleged was of a condition in the Memorandum. I think that the answer to this point is to apply the principle falsa demonstratio non nocet to disregard "what is inaccurate and inapplicable and [proceed] upon that which is appropriate and intelligible and what are evidently intended to be the governing words": Modern Buildings Wales Ltd v Limmer & Trinidad Co Ltd [1975] 1 WLR 1281, 1288 per Buckley LJ; Adamastos Shipping Co Ltd v Anglo-Saxon Petroleum Co Ltd [1959] AC 133, 159; Norton on Deeds 2nd ed. (1928), 233-235. Here, the words "this Purchase Order" or "the Purchase Order" in the standard terms should be read as "this Memorandum" or "the Memorandum". 28 The last point concerns the ability of an innocent party to rescind part of a contract. In the absence of express provision, the right of a party to rescind or discharge a contract comes about where the other party renounces his obligations, by his own act makes performance impossible or fails to perform an obligation which goes to the root of the contract. The rule in England and Australia is that the innocent party must rescind the whole contract, although certain primary obligations, such as exemption and arbitration clauses, may survive. See generally Heyman v Darwins Ltd [1942] AC 356; Moschi v Lep Air Services Ltd [1973] AC 331; Photo Productions Ltd v Securicor Transport Ltd [1980] AC 827. 29 The Anglo-Australian doctrine is not favoured by all common law jurisdictions. For example in the United States, where the law of contract is in many respects more flexible, the position is different. The general rule is the same. A discharge must be of the whole contract. But where a contract is divisible into a number of elements or transactions, each of which is independent of the others, the contract may be rescinded in part, provided the ground of rescission relates to the severable part: 17A Am. Jur. 2d Contracts § 548 (1991); Restatement (Second) of Contracts § 383 (1981); 15 Williston on Contracts 4th ed. para 45.7. (2000) 3 Black on Rescission and Cancellation 2nd ed. (1929) section 585 puts the matter this way: "When a contract is separable or divisible into a number of elements or transactions, each of which is so far independent of the others that it might stand or fall by itself, and good cause for rescission exists as to one of such portions, it may be rescinded and the remainder of the contract affirmed. And it has been held that where a contract consists of parts so distinct and independent that each could be performed without reference to the others, a failure of one of the parties to perform one of the parts or terms of the contract does not authorise the other to rescind the whole contract, and refuse to accept a tender of performance of the remainder of the contract by the party in default. For instance, where one contracted to sell his stock of goods and his two stores and the lots on which they stood to the same purchaser, and both goods and land were sold at the same time and embraced in the same contract, but they were treated as distinct subjects of sale, the price of each being definitely fixed, it was held that an avoidance of the contract by the seller as to the land did not avoid it as to the stock of goods." (citations omitted) This passage was cited with approval in O'Keefe v Routledge 103 P2d 307 (1940), a decision of the Supreme Court of Montana. 30 In the instant case the right to rescind in part is conferred by the standard terms. Ford purported to exercise this right by rescinding the contract in so far as it related to all Barra wheels. There was some controversy about whether Ford's purported rescission related to the whole contract but, though the matter is not free from doubt, on balance I incline to the view that its notice of default and letter of rescission related only to the Barra wheels. I have arrived at this conclusion by reading all the relevant parts of the documents, including the headings. Ford's complaint related to the Barra wheel, but not the manner in which that wheel was manufactured. It acted because of ROH's refusal to provide information (price quotations) which Ford needed in order to decide whether it should use lightweight steel in the production of the Barra wheel, a decision which, as I apprehend it, has still not been taken. It follows, in my opinion, that the right of partial rescission, if it existed, was confined to the lightweight steel wheel. That is a severable part of the contract, and it is the part to which the alleged breach related. 31 I am now in a position to answer the stated question. The answer to the second part of the question – Was Ford entitled to terminate the supply agreement in relation to Barra wheels? – is no. The answer to the first part – Was Ford entitled to insist upon performance in relation to Grizzly wheels? – is also no, provided this part of the question is understood to be inquiring whether Ford was entitled to insist upon performance solely in relation to Grizzly wheels. 32 The applicant should within 7 days bring in short minutes of orders to give effect to these reasons. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein. Associate: Dated: 17 September 2002 Counsel for the Applicant: R Macaw QC M Moshinsky Solicitor for the Applicant: Allens Arthur Robinson Counsel for the Respondent: D Collins SC I Roberston Solicitor for the Respondent: Cosoff Cudmore Knox Date of Hearing: 1 July 2002 Date of Judgment: 17 September 2002