DUNCAN'S HOLDINGS' LIMITED v _ HARRIS-DAISHOWA (AUSTRALIA) PTY LTD SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL Hope, MAHONY and MEAGHER JJA 27 June 1989, 21 July 1989 [1989] NSWCA 70 CONTRACT — construction — contract for supply of pulpwood chips — price for chips to be agreed by parties and to be reviewed annually — discussions to be held between the parties and any variation to chip price to be applicable from 1st January each year — clause referred to arbitration (same as otherwise provided by the contract) any dispute or difference which either party considered arose out of or relating to the contract or the breach thereof which could not be settled amicably by the parties — chip price variations agreed for a number of years — Failure to agree for year 1988 — notice given by supplier referring difference to arbitration — no issue that contract was entered into by parties — Provision for termination of contract on 2 year notice from ensuing 1st January — Further provision for right to request a review of any clause of contract on an annual basis — Right to determine contract on 1 year notice if parties could not reach agreement on any major variation to terms and conditions which had been requested by one of the parties — Claim by buyer of chips that arbitration claim was inapplicable and that failure to agree on 1988 price was a failure to reach agreement on a major variation of a term of the contract entitling it to give 1 year's notice of termination — Held: 1. Failure to agree on 1988 price was a difference falling within the terms of the arbitration clause. 2. Price to be determined by the arbitrator was a reasonable price. 3. The lack of any stated formula or standard in the agreement did not render the task of the arbitrator impossible in practice. Eric J Hart Pty Ltd v Dermide (Australia) Pty Limited CA Unreported; 19.3.67 and Whitlock v Brew (1968) 118 CLR 445 distinguished. Foley v Classique Coaches Limited [1934] 2 KB 1; FG Sykes (Wessex) Limited v Fine Fare Limited (1967) 1 Lloyds List Reports 53; Attorney General v Barker Brothers Limited [1976] 2 NZLR 495 and Hillas and Company Limited v Arcos Limited (1932) 147 LT 503; 43 LI.LR 359 discussed. (a) Failure to agree on price did not fall within term of contract as to failure to agree on a major variation sought at one party's request. (b) Supplier was accordingly entitled to refer failure to agree on 1988 price to arbitration. Appeal allowed. ORDERS 1. Appeal allowed 2. Declarations and orders made by Rogers CJ of CD set aside. 3. Declarations made in accordance with paragraphs 1 and 2 of plaintiff's summons. 4. Declared further that a failure to agree to a variation of price was not a failure to agree to a major variation of the terms and conditions of the agreement for the purposes of CL2 thereof. 5. Defendant's cross-summons dismissed. 6. Defendant to pay the costs of the appeal and of the summons and cross-summons and to have a certificate under the Suitors Fund Act in respect of the costs of the appeal if otherwise qualified. Hope JA By what was called a "Sawmill Waste Agreement" made on or about Ist October 1983. Harris-Daishowa (Australia) Pty Limited (Harris-Daishowa) agreed to buy and Duncan's Holdings Limited - Eden (Duncan) agreed to sell what were described as pulpwood chips produced by the chipping of offcuts and edgings obtained in the production of sawn timber by mills. In the agreement Harris-Daishowa was referred to as "the Company", and Duncan was referred to as "the Supplier". CL1 of the agreement provided that Duncan's understood and 2 UNREPORTED JUDGMENTS acknowledged that the woodchips delivered to Harris-Daishowa under the agreement were intended for the production of pulp and paper. CL2 of the agreement was in these terms: "2. The company agrees to buy and The Supplier agrees to sell during the period of supply hereinafter defined at prices ascertained as provided in CL4 of the Schedule hereto (hereinafter called "The Schedule Prices'') pulpwood chips produced by the chipping of off-cuts and edgings obtained in the production of sawn timber by mills. The period of supply shall commence on the Ist day of October, 1983 and shall continue until the expiration of two (2) years from the Ist of January next following notice of termination given by one party to the other in the manner hereinafter specified, provided that if the parties cannot reach agreement on any major variation to the terms and conditions contained herein which has been requested by one of the parties, then on or after 31st December, 1984 either Party may give to the other not less than twelve months' notice of termination of this agreement expiring at any time and on the expiry of such notice the period of supply shall expire and this Agreement shall terminate. Either party shall have the right to request a review of any individual Clause within this agreement on an annual basis should a variation be considered necessary because of changes in requirements, market conditions, industrial situations etc. Either party will give maximum notice of any such request but of no less than three (3) months and the results of any review be applicable no later than the Ist of January of each ensuing year." CLS provided that the chips should be purchased on delivery at the price determined from time to time in accordance with CL4 of the Schedule to the agreement. CL11 provided for the arbitration of disputes or differences in these terms: "11. Save as otherwise provided herein any dispute or difference which either the Company or The Supplier considers arises out of, or relating to this Agreement or the breach thereof which cannot be settled amicably by the parties, shall be settled by Arbitration under the provisions of the Arbitration Act of the State of New South Wales." The price for the chips was provided for by CL4 in the Schedule to the agreement in these terms: "4. 'The price paid for chips shall be as agreed upon by the Company and the Supplier. The price shall be reviewed annually and discussions held between the Company and The Supplier and any variation to the chip price shall be applicable from the 1st January each year." The initial price was agreed upon, and then, during the course of the agreement, variations of price were regularly agreed upon, the last variation fixing the price for the year 1987 at $26.50. Discussions were held between the parties as to the price to operate from Ist January 1988. However the parties failed to agree, and ultimately the result was the proceedings in the Commercial Division of the Court from which the present appeal is brought. Following the failure to agree as to price Duncan gave the appropriate notice to bring the difference or dispute between the parties before an arbitrator pursuant to CL11 of the agreement. Harris-Daishowa adopted the attitude that CL11 did not apply in the case of a failure by the parties to agree to a price, and that following such a disagreement the existing price would continue unless and until a variation was agreed upon at the next annual review or the agreement was terminated by a notice of at least two years' (alternatively one year's) duration UWRINCAN'S HOLDINGS LIMITED v HARRIS-DAISHOWA (AUSTRALIA) PTY LTD (Hop& JA) pursuant to CL2 of the agreement. Duncan thereupon instituted the present proceedings seeking declarations that the failure to reach agreement on a variation of the price for the woodchips constituted a dispute or difference arising out of or relating to the agreement within the meaning of CL11, and that it had acted in accordance with the agreement in taking steps to have that dispute or difference referred to arbitration. Harris-Daishowa filed a cross-summons seeking declarations that the failure to agree upon a price did not entitle either party to refer that failure to arbitration pursuant to CL11, that a variation in price was a major variation for the purposes of CL2 of the agreement and that the notice given by Duncan referring the dispute or difference to arbitration was not a valid notice. The proceedings came on for hearing before Rogers CJ of CD who rejected the submissions of Duncan and accepted those of Harris- Daishowa. His Honour held that the failure to agree upon a price was not a dispute or difference which could be referred to arbitration pursuant to CL11 of the agreement and so declared, and he also held and declared that a variation in price was a major variation for the purposes of CL2 of the agreement. In coming to his conclusion, which his Honour said he reached reluctantly, he placed reliance on an unreported decision of this Court, given on 19 March 1967, in Eric J Hart Pty Limited v Dermide (Australia) Pty Limited. I shall discuss this decision later, but it is sufficient for present purposes to say that it concerned the sale of felt based plastic floor covering, and contained both a provision that the price to be paid by an agent to a principal should be agreed on mutually, and a provision referring disputes arising out of or in relation to the agreement to arbitration. It was held that the provision as to arbitration did not apply to a dispute arising under the provision as to agreement as to price, and that the agreement was unenforceable. In his reasons Walsh JA, with whom the other members of the Court agreed, quoted extensively from the judgment at first instance of Macfarlan J. In the passages quoted by Walsh JA, Macfarlan J referred to the unlikelihood of a party to the agreement intending that its terms should be implemented not pursuant to a price to which it had agreed but on the basis of a price fixed by an arbitrator. In his reasons Rogers J quoted these passages from the judgment of Macfarlan J, and said that "It would be strange if the parties had... agreed to be forced, in the absence of agreement on price, to deal with one another for two years from | January next after a notice of termination was given at a price which was the outcome of an arbitration". He went on to point out that even if one assumed that a failure to agree on a price might ground a 12 month notice in accordance with the proviso in the second paragraph of CL2, there would be not less than 12 months of trading at a price to which one or other or both the parties had not agreed. With respect to his Honour, I do not see the force of this reasoning. As I will seek to show, the present case is quite different from that the subject of the decision in Eric J Hart Pty Limited. Under CL4 of the Schedule to the present agreement, a review by the parties of the price for the woodchips on an annual basis was mandatory. As has appeared, until 1988 the parties managed to agree upon a variation of price. If however they failed agree and no arbitration clause operated to resolve the difference, the contract (on Harris-Daishowa's submissions) would continue for at least for two years and probably longer thereafter. I will put to one side for the moment the question whether a 12 months notice of termination could be given in such a case. However, until the expiration of two years from the next Ist January, one and possibly both of the parties would 4 UNREPORTED JUDGMENTS be compelled to continue with the contract at a price which it or they considered unsatisfactory. If one of the parties wanted to maintain the existing price and the other party to raise or lower it, then the party who wanted the change would be prejudiced by the failure to agree. If one party wanted to lower the price and the other party wanted to raise the price and there was no agreement, both parties would be compelled to continue with the implementation of the contract at a price unsatisfactory to each. I do not understand the distinction between this situation and that discussed by Rogers J. True the parties would have, at some time in the past, agreed to that price, but that would have been upon the basis of the mandatory annual review of price, a procedure which predicates at least a possibility of regular variations. It seems strange to me that the parties would have intended that they would have to put up with an impasse arising from a failure to agree as to a variation of a price for a period not less than two years and possibly approaching three years. In discussing this question, I put to one side the possibility of the parties, in the absence of agreement as to a variation of price, giving one year's notice pursuant to the second paragraph of CL2. In my opinion the provision for a 12 months' notice in the second paragraph of CL2 has no application to a failure to agree to a variation of price. I have previously set out the terms of CL2, and it will be seen that what is referred to is the situation where the parties cannot reach agreement on any major variation to the terms and conditions contained therein which has been requested by one of the parties. The third paragraph then goes on to give each party a right to request a review of any individual clause within the agreement on an annual basis. In my opinion it is to this provision that the power to give 12 months' notice is directed. The provisions of CL4 of the schedule as to price do not fall within the terms of the third paragraph of CL2; the annual review provided by CL4 is one which is mandatory and which is not conducted at the request of one of the parties. No doubt one of the parties might commence the discussion, but in my opinion that is not the request for a variation which is referred to in CL2. It follows that a failure to reach agreement as to price pursuant to CL4 is not a failure to reach agreement on any major variation to the terms and conditions of the agreement which has been requested by one of the parties within the meaning of CL2. The result is that if there is a failure to agree upon a price upon an annual review under CL4, the only way provided by the terms of this agreement for determining the contract is the giving of two year's notice from the next ensuing Ist January. Before going to the main question, that is, whether the interpretation clause applies when there has been a failure to agree upon a variation of price at an annual review, it is appropriate to look at the general nature of the contract and the surrounding circumstances, so far as they are known. The contract is described on its cover page as a "Sawmill Waste Agreement". In describing the nature of the dispute in its summons, Duncan alleged that it carried on a sawmilling business at Eden in southern New South Wales and that waste wood chips were a by-product of that business. The agreement itself stated that the woodchips delivered to Harris-Daishowa under the agreement were intended for the production of pulp and paper, and Duncan alleged in its description of the nature of the dispute that Harris-Daishowa purchased woodchips in Australia for export into Japan. These statements in Duncan's summons were not denied by Harris-Daishowa. UWRINCAN'S HOLDINGS LIMITED v HARRIS-DAISHOWA (AUSTRALIA) PTY LTD (Hop& JA) One of the submissions made for Harris-Daishowa was that the agreement was not for any fixed or long term; it was at most an agreement for a term which might expire after two years from Ist January 1984. The suggestion was that the agreement should be regarded as one which contemplated a fairly short duration. I do not agree with this submission. The agreement has a specified commencing date, 1st October 1983, but no period of its duration is specified. It is true that the agreement provides for termination by two years' notice from the next ensuing Ist January. However looking at its terms as a whole, it is apparent that the agreement contemplated an ongoing relationship which would probably last for a considerable time. While possible, it would be quite unlikely that a two years' notice of determination would be given within a few months of the commencement of the agreement. The provision in CL4 of the Schedule for an annual review of the price shows that the parties contemplated an ongoing and reasonably long contractual relationship. It was also submitted that there was no evidence that Duncan was required to expend moneys to enable it to carry the contract into effect. However the contract itself shows that Duncan would have necessarily been put to expense. For example, clause 2 of the Schedule provides that to facilitate uniformity each supplying sawmill should be equipped with a chipper designed and adjusted to produce chips with a nominal length of 25 millimetres, a top screen with a maximum of 38 millimetre square openings, and a second screen with minimum 10 millimetre round openings. The screens were to be of sufficient area to completely screen all productions. The waste woodchips being a by-product of Duncan's business, it had therefore to construct or otherwise establish the chippers and screens described in this clause. It is apparent from this and other provisions in the agreement, including the Schedule, that Duncan would be put to expense in establishing and maintaining its capacity to carry out the terms of the contract. In my opinion, the general effect of the agreement in the surrounding circumstances, insofar as they are known, is that the parties contemplated an arrangement for the supply of chips which, true enough, could be terminated by the giving of a long notice, namely a two years notice, but which nonetheless was entered into upon the basis of a probable lengthy period of operation. With this background I shall go to the provisions of CL11 and of CL4 of the Schedule to consider whether, upon the true construction of the agreement, a difference arising as a result of a failure to agree upon the price at an annual review was one which was, by the agreement, referable to arbitration under CL11. First, it is well established that where a contract provides that the parties shall agree upon a matter such as price or quantity, a failure to agree can be a "difference" within the meaning of a clause such as CL11: Foley v Classique Coaches Limited 1934 2 KB 1; F and G Sykes (Wessex) Limited v Fine Fare Limited (1967) 1 Lloyds List Reports 53; Attorney General v Barker Brothers Limited [1976] 2 NZLR 495. It has been submitted for Harris-Daishowa that this conclusion is contrary to the decision of the High Court in Whitlock v Brew (1968) 118 CLR 445, which it is put is "exactly in point and not relevantly distinguishable". As it seems to me, this decision is not in point, and is clearly distinguishable. It concerned a contract for the sale of land on part of which a petrol service station was conducted. CL5 of the contract provided: "Portion of the land sold is used for the sale of petroleum, oils and greases and petroleum products of the Shell Co of Australia Limited. The purchaser covenants that he will immediately upon taking possession hereunder grant lease of that portion of the land sold as is now used for the sale of the abovementioned products to the 6 UNREPORTED JUDGMENTS Shell Co of Australia used by Shell or their sub-tenant or licensee for the sale of such products and upon such reasonable terms as commonly govern such a lease. In the event of any dispute between the parties as to the interpretation or operation of this clause such dispute shall be referred to an arbitrator to be appointed failing agreement as to an arbitrator by the President for the time being of the Law Institute of Victoria and such arbitrators shall arbitrate thereon in accordance with the 2 provisions of the Arbitration Act 1958." It was held that this clause was uncertain, that it could not be severed from the contract, and that there was no concluded agreement between the parties. On the question of uncertainty, Taylor, Menzies and Owen JJ in their joint judgment, said at 460-461: The first question to be considered is whether the contention that special condition 5 is uncertain should be upheld. The appellant asserts that it should not and that, in effect, that clause simply provides that in the event of there being no agreement as to the terms of the contemplated lease, including both the period during which it is to subsist and the rent to be paid, the parties shall enter into a lease in the form settled by an arbitrator. Of course if this were so the basis for the contention that the clause is uncertain would disappear. But the language of the clause does not permit of this view. The lease is to be "upon such reasonable terms as commonly govern such a lease" and in the event of a dispute as to the interpretation or operation" of the clause the dispute is to be referred to arbitration. We are firmly of opinion that the expression upon such reasonable terms as govern such a lease" is not, in the context in which it appears, apt to refer to either the period for which the contemplated lease is to subsist or to the rent to be payable thereunder. Nor do we think that the further expression "'as to the interpretation or operation" of this clause covers a dispute as to either of those matters. We, therefore, are of opinion that the clause is uncertain in that it neither specifies nor provides a means for the determination as between the parties of the period for which the contemplated lease shall be granted or the rent which shall be payable thereunder." Thus the uncertain clause was held not to refer to rent, while clause 4 of the Schedule refers expressly, indeed only, to price. Again the language of this arbitration clause was completely different from the language of CLI11. In my opinion the decision provides no authority for the resolution of the present case. Nor in my opinion do other decisions of the High Court on which reliance is placed. Thorley v Goldberg (1964) 112 CLR 597; Stocks and Holdings (Constructors) Pty Ltd v Arrowsmith (1964) 112 CLR 646. Their language and context are quite different. CL11 is in much wider terms than the ordinary arbitration provision. What were referred to arbitration were not differences arising between the parties; they were differences which Harris- Daishowa or Duncan "considers arises out of or relating to the agreement". It is clear that Duncan considered that the difference resulting from the failure to agree as to price was a difference arising out of or relating to the agreement, it is not suggested that it was not bona fide in this regard, and it is also clear, if it be relevant, that it would be a reasonable belief to hold. Reliance is placed for Harris-Daishowa on the opening words of CL11, "save as otherwise provided herein', and it is submitted that it is otherwise provided in the agreement. There are only two possible provisions which can be relied, upon for this purpose. First there is CL2, which I have earlier discussed. In my opinion, that clause has nothing to do with a failure to agree arising under CL4 of the Schedule. In addition to what I earlier said, it should be noted that the right to request a review given by the third paragraph of CL2 is one which is to be UWRINCAN'S HOLDINGS LIMITED v HARRIS-DAISHOWA (AUSTRALIA) PTY LTD (Hopé JA) exercised upon the giving of a notice of not less than three months. Such a provision could not be applied to the mandatory annual review of prices referred to in CL4 of the Schedule. The other provision is CL4 of the Schedule itself which provides for agreement, annual reviews and discussions. It is submitted that this is in itself a contrary provision. I do not agree. The clause requires that there should be an annual review and discussions. The review and discussions having been held, there is either an agreement or a difference. The difference is something which arises after there have been discussions and a failure to agree. There is nothing in CL4 which provides for the resolution of that difference. Indeed, since the applicability of any arbitration clause would be subject to any contrary provision in the agreement, it is implicit in the decisions which I have cited as authority for the proposition that an arbitration clause can apply in such a case that a clause providing for agreement as to price or quantity does not, of itself, contain a provision contrary to the applicability of an arbitration clause. Why then should the arbitration clause not apply to a difference arising as a result of a failure to agree upon an annual review of the price under the agreement? On one view, and I think it is the better view, since there is no provision to the contrary, and the clause is prima facie applicable to that difference, the fact that Duncan bona fide and reasonably considered that the arbitration clause applied and wished to have it applied concludes the matter. If that view is wrong, it is necessary to consider the matters upon which Harris-Daishowa relies to establish the inapplicability of CL11. As I have said, it relies among other things on the decision of the Court of Appeal in Eric J Hart Pty Limited, which was given upon an appeal from a decision of Macfarlan J. In that case the agreement concerned the supply of felt based plastic floor covering. The agreement provided for a period of five years with an option to renew for a further five years. CLS of the agreement provided that the price to be paid should be agreed on mutually. There was an arbitration clause which referred "disputes" but not "differences" to arbitration. Macfarlan J held, as did the Court of Appeal, that there was no agreement upon which the arbitration clause could operate. It appears explicitly in the reasons of Macfarlan J and it is apparent in the reasons of Walsh JA that the principal ground relied upon by counsel for the party opposing the enforcement of the option which the other party had purported to exercise was that there had been no completed agreement reached between the parties. It was on this ground that Macfarlan J dismissed the summons to enforce the option, and it was on this ground that his decision was upheld by the Court of Appeal. Counsel for the appellant in the present case was given leave to reargue this decision. If it were necessary to do so, I would, with respect to the learned judges who decided it, conclude that it was wrong and should not be followed. However I do not think that it is necessary to adopt this course. In the first place, the issue there was whether there ever had been a completed agreement. There is no issue in the present case that there was a completed agreement. In the second place, the agreement under consideration in that case was a different agreement, and in particular the arbitration clause was in different terms. A failure to agree upon a price in a clause such as CL4 does not, it would seem, give rise to a "dispute" within the meaning of an arbitration clause, but it does give rise to a "difference". F and G Sykes (Wessex) Ltd at 60. The arbitration clause in EJ Hart Pty Limited did not refer to differences. I would also add that much water has passed under this bridge since 19 June 1967. 8 UNREPORTED JUDGMENTS Ihave already cited three decisions as to the applicability of arbitration clauses to differences such as the present one. Those decisions are also of course relevant to the question I am now discussing. I add to those decisions the following: Hillas and Company Limited v Arcos Limited (1932) 147 LT 503; 43 LI LR 359; Scammel and Nephew Limited v Ouston [1941] AC 251; Federal Commissioner of Taxation v Shaw (1950) 80 CLR 1; Queensland Electricity Generating Board v Newhope Collieries Pty Limited (1989) 1 Lloyds Reports 205. To these decisions must of course be added May and Butcher Limited v The King [1934] 2 KB 17 which is strongly relied upon by Harris-Daishowa in the present case and was applied by the Court of Appeal in EJ Hart Pty Limited. I do not think that it is necessary to discuss all these decisions, an exercise which has occurred often enough already. Counsel for Harris-Daishowa relied on a number of grounds in an attempt to distinguish the decisions which would support the applicability of the arbitration clause in the present case. In my opinion the only matters which it is necessary to consider are what would be the basis upon which an arbitrator would determine the difference, and whether, to use the language of Richmond P in Attorney General v Barker Bros Limited at 503: "It can be seen that the lack of some stated formula or standard will render the task of the arbitrators impossible in practice". In my opinion the following passage in the judgment of Lord Wright in Hillas v Arcos 147 LT at 517: 43 LI LR at 371, points to the answer to these problems. His Lordship said: "When the learned Lord Justice speaks of essential terms not being precisely determined, ie by express terms of the contract, he is, I venture with respect to think, wrong in deducing as a matter of law that they must therefore be determined by a subsequent contract; he is ignoring, as it seems to me, the legal implication in contracts of what is reasonable, which runs throughout the whole of modern English law in relation to business contracts." His Lordship went on to refer to the applicability of this approach to the ascertainment of the price of goods and of other matters. This passage was quoted with approval by Williams J in York Airconditioning and Refrigeration (Australasia) Pty Limited at 26. The same approach is adopted in many other decisions. In Foley v Classique Coaches Limited, the contract provided for the supply of petrol at a price to be agreed by the parties from time to time. It was held by the Court of Appeal that the arbitration clause in the agreement applied to any failure to agree as to the price, and that it should be implied that the price to be determined was a reasonable price. In F and G Sykes (Wessex) Pty Limited, the contract concerned the supply and sale of chickens. Provision was made for the fixing of the number of chickens in the first year of the contract but thereafter agreement was required between the parties. The contract contained an arbitration clause which applied to differences as well as disputes. In holding that the contract was enforceable, Lord Denning MR said at 58: "Bearing those principles in mind, I am quite satisfied that this phrase (after the first year) such other figures as may be agreed between the parties hereto", does not introduce such uncertainty into the contract as to render it no contract. If fact can be given to this agreement by saying that in default of agreement, the number of chicks shall be such reasonable number as may be ascertained by an arbitrator under the arbitration clause. You can either imply a term that, in default of agreement, the number shall be a reasonable number, the subsequent provision that in the case of any dispute as to what is reasonable, it should be determined UWRINCAN'S HOLDINGS LIMITED v HARRIS-DAISHOWA (AUSTRALIA) PTY LTD (Hop® JA) by arbitration: or, alternatively, run the two terms together and say "such reasonable figures as the arbitrator may determine". Which ever is adopted, it all comes to the same thing. The provision that figures were to "be agreed" does not nullify the contract. It can be made certain by reasonable figures being ascertained by the arbitrator." Danckwerts LJ said at 60: "The arbitrator has jurisdiction to decide the matter referred to him as to what is a reasonable amount for the defendants to have given notice of and at which the supplies should be in a position to supply." In Queensland Electricity Generating Board, the contract concerned the supply of coal, and as well as containing an arbitration clause, it provided for a review of the price for the coal at not more than five yearly intervals. In giving the judgment of the Privy Council, Sir Robin Cooke said at 210: "In accordance with the approach adopted in those cases, their Lordships have no doubt that here, by the agreement, the parties undertook implied primary obligations to make reasonable endeavours to agree on the terms of supply beyond the initial five year period and, failing agreement and upon proper notice, to do everything reasonably necessary to procure the appointment of an arbitrator. Further, it is implicit in the commercial agreement of this kind that the terms of the new price structure are to be fair and reasonable as between the parties. That is the criterion or standard by which the arbitrator is to be guided." Adopting this approach I see no reason why the task of the arbitrator should not be to determine what, at the relevant time, was a reasonable price for the supply of the chips by Duncan's to Harris-Daishowa. As Maugham LJ said in Foley v Classique Coaches Limited at 15: "Are we to assume that both parties were so ignorant of business that no dispute as to price could possibly arise?" In my opinion the parties to the present contract left the determination of any difference as to the variation of price to arbitration pursuant to CL11. I see no difficulty in the arbitrator determining what such a reasonable price would be. I do not know whether there is a market price for woodchips. If there is, that may, in the circumstances, be the reasonable price. However a reasonable price is not necessarily determined by the market price and the absence of a market price clearly does not preclude an arbitrator from determining what a reasonable price is. It follows that Duncan was correct in its claim that the provisions of CLI1 applied to a difference arising as a result of a failure to agree upon a variation of price at an annual review as provided by CL4 of the schedule. I would add that I glad that I have been able to arrive at this conclusion, for to use language which has been adopted elsewhere in relation to similar situations, it would be deplorable if the Court were constrained to conclude that this commercial contract, which had been in force for quite a few years, must be brought to an end, or continued on a basis which its provisions show the parties did not contemplate. In my opinion the appeal should be allowed, and the declarations and orders made by Rogers J set aside. Declarations should be made in accordance with paragraphs | and 2 of Duncan's summons, and it should be further declared that a failure to agree to a variation of price is not a failure to agree to a major variation of the terms and conditions of the agreement for the purposes of CL2. The cross summons of Harris-Daishowa should be dismissed, Harris-Daishowa 10 UNREPORTED JUDGMENTS should pay the costs of the appeal and of the proceedings before Rogers J and should have a certificate under the Suitors' Fund Act in respect of the costs of the appeal if otherwise qualified. Mahony JA There are two issues in this case: the scope of CL11 of the agreement ('the arbitration clause''); and the effect of the parties' failure to agree on a new price upon their right to terminate the agreement. Rogers CJ of Comm Div held that the arbitration clause does not extend to the dispute as to price. My brethren, whose judgments I have had the privilege of reading, have taken a different view of the scope of the arbitration clause. They are of the view that it extends to enabling such a dispute to be settled by an arbitrator. During the argument, I indicated my doubts as to the construction of this clause. In any contract, particularly a long term contract, the parties may feel it appropriate to give consideration to, inter alia, two things: the procedures for determining disputes as to their existing rights; and what is to be done if circumstances suggest changes or revisions in their existing rights. To deal with the first of these, procedures may be set up to do what, in principle, courts do. Arbitration, in the formal sense, is such a procedure. In the second, what is done is, in principle, different. In such cases, the parties may contemplate that the conduct of their affairs may require either that they subsequently agree upon particular matters or that they vary the rights upon which they have already agreed. Building and engineering cases are obvious examples. Various mechanisms are available to provide for such events. Thus, the parties may provide that such matters are to depend upon their further and unfettered agreements; they may provide that a third party, eg, an engineer or an architect, shall, because of his expertise or otherwise, be empowered to specify what changes are to be made in their rights; or they may provide that what they are to do is to be determined after some form of hearing process. And they may, of course, use combinations of these. But in each of them, the result will be to substitute new rights for the existing rights of the parties. The scope of the arbitration clause depends, in this sense, upon whether it is a mechanism of the first or the second kind. There is ground for the view that it is of the first kind, ie, that it is limited to disputes as to the parties' existing rights under the agreement. One meaning of "arbitrate", perhaps the primary meaning in this area of the law, confines it to the decision as to existing rights. That is the meaning which, I think, the learned trial judge adopted. And that view has support in the terms of CL11 itself in that it provides for disputes or differences to be "settled by Arbitration under the provisions of the Arbitration Act of the State of New South Wales". That Act is directed, either solely or at least primarily, to arbitration concerned with parties' existing rights. But, as was said by Sir Robin Cooke, in delivering the judgment of the Privy Council in The Queensland Electricity Generating Board v New Hope Collieries Pty Ltd (1989) 1 LI LR 205 at 210, in dealing with a submission as to uncertainty: "At the present day, in cases where the parties have agreed on an arbitration or valuation clause in wide enough terms, the Courts accord full weight to their manifest intention to create continuing legal relations. Arguments invoking alleged uncertainty, or alleged inadequacy in the machinery available to the Courts for making contractual rights effective, exert minimal attraction." I accept that the forms of the Arbitration Act, if not in terms applicable to the present case, may, if the parties so intended, be adapted to serve procedures of the second kind. In the end, the matter is to be determined by what the parties intended the UWRINCAN'S HOLDINGS LIMITED v HARRIS-DAISHOWA (AUSTRALIA) PTY LTD (Meagher JA) arbitration clause to do. If they intended the procedure to permit the creation of new rights, then, whatever be the limitations of arbitration in the ordinary case, they may be adapted accordingly. In Broom's Legal Maxims, 9th ed (1924), it is said in relation to the construction of a deed: "The construction, likewise, must be such as will preserve rather than destroy; it must be reasonable, and agreeable to common understanding; it must also be favourable, and as near the minds and apparent intents of the parties as the rules of law will admit, and, as observed by Lord Hale, the judges ought to be curious and subtle to invent reasons and means to make acts effectual according to the just intent of the parties; they will not, therefore, cavil about the propriety of words when the intent of the parties appears, but will rather apply the words to fulfil the intent, than destroy the intent by reason of the insufficiency of the words." Upon the basis that the intent of the parties is, of course, to be taken from the words they have used and the context in which they have used them, these observations apply in the present case. The learned trial judge concluded that the parties did not intend to commit determination of the price to the arbitration clause. Their provision for it to be "ascertained as provided in CL4 of the Schedule hereto" supports his conclusion and the terms of that clause provide some support for the judge's view. And, perhaps, the opening words of CL11 ("Save as otherwise provided herein") may be intended to refer to CL4 of the schedule. In the end, the parties' intention is a matter of impression. Hope AP has, in his judgment, detailed the considerations which support the view which he has taken. I do not feel so confident in the contrary view as to record dissent. In relation to the second issue, the right of termination, the argument is that there is a distinction in the agreement between the review of price, which "shall be reviewed annually" and the review of other terms conditions which need not be reviewed annually but in respect of which each "party shall have the right to request a review... on an annual basis...". The argument is that the relevant provisions of CL2 as to termination apply to the latter but not to the former. The construction of the agreement in this regard is unclear. I adopt the view which has been taken by Hope AP and Meagher JA. Meagher JA In this matter I have read the reasons of Hope JA in draft and entirely agree with them. In my view, his Honour's reasons and the conclusions to which they led him are reinforced by a consideration of the situation which would ensue if the parties met to discuss what price was payable for the following twelve months but failed to agree on a price. Bearing in mind that in this case both parties asserted that this written agreement constituted a valid and binding contract (unlike such cases as May and Butcher Limited v The King [1934] 2 KB 17, where the issue was contract or no contract), the parties would be confronted with the situation where Duncan's Holdings Limited remained for at least two years obliged to supply pulpwood chips to Harris-Daishowa (Australia) Pty Limited and Harris-Daishowa (Australia) Pty Limited would be obliged for at least two years to pay for all the chips supplied, but there would be no agreed price. Since some price would be payable, it could only be (a) the old price which obtained before the disagreement, (b) a new price ascertained on a quantum meruit basis, or (c) an arbitrated price. The basis of (b) and (c) would, of course, be the same: a reasonable price. I see no reason to suppose that (a) would be the correct solution to this dilemma, first because the contract does not say so, and secondly because 12 UNREPORTED JUDGMENTS ex hypothesi a continuation of the old price would not have "agreed to" by the parties. In these circumstances, it is not difficult to hold that the price payable would be an arbitrated price. In this regard, one of the submissions by Mr Gyles QC on behalf of the respondent, was that if a price were fixed by an arbitrator it would not fall within description of "a price agreed upon by" the parties (schedule d.4) and allied descriptions but would be a price foisted on the parties in the event of their disagreement, the antithesis of "an agreed price". there are, I think, three things which must be said about the submission. In the first place, in the example I have given, the same argument would invalidate the continuation of the old price for which Mr Gyles also contended, which would clearly not have been "agreed upon". In the second place, it is contrary to such well established decisions in Foley v Classique Coaches Limited 1934 2 KB 1 and Attorney General v Barker Brothers Limited [1976] 2 NZLR 495. In the third place, those cases and the present one illustrate that the parties' agreement to the arbitration clause carries with it the consequence that any arbitrated price is, relevantly, an "agreed price". The appeal should be allowed, and the declarations and orders made by Rogers J set aside. Declarations should be made in accordance with paragraphs | and 2 of Duncan's summons, and it should be further declared that a failure to agree to a variation of price is not a failure to agree to a major variation of the terms and conditions of the agreement for the purposes of CL2. The cross summons of Harris-Daishowa should be dismissed, Harris-Daishowa should pay the costs of the appeal and of the proceedings before Rogers J and should have a certificate under the Suitors' Fund Act in respect of the costs of the appeal if otherwise qualified. Counsel for the Appellant: R Bainton QC and A Robb Solicitors for the Appellant: Holman Webb Counsel for the Respondent: R Gyles QC and SD Rares and P Emmett Solicitors for the Respondent: Barker Gosling