New South Wales Court of Appeal CITATION : FERMENTATION INDUSTRIES (AUST) PTY LTD & ANOR v BURNS PHILP & CO LTD [2000] NSWCA 71 FILE NUMBER(S) : CA 40145/98 HEARING DATE(S) : 23 March 2000, 24 March 2000 JUDGMENT DATE : 19 May 2000 PARTIES : Fermentation Industries (Aust) Pty Ltd and Fermentation Enterprises Pty Ltd - Appellants Burns Philp & Co Ltd - Respondent JUDGMENT OF : Priestley JA at 1; Sheller JA at 4; Beazley JA at 85 LOWER COURT JURISDICTION : Supreme Court Commercial Division LOWER COURT 50210/97 FILE NUMBER(S) : LOWER COURT Rolfe J JUDICIAL OFFICER : COUNSEL : J C Campbell QC/F Kunc - Appellant J S Hilton SC/P Durack SOLICITORS : Dunhill Madden Butler - Appellants Clayton Utz - Respondent CATCHWORDS : CONTRACTS - Construction and interpretation of contract - Dispute determined by expert - Review of expert's decision - Meaning of 'price' - ND LEGISLATION CITED : Supreme Court Act 1970 Sales Tax Assessment Act (No 1) 1930 Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 Colgate-Palmolive Pty Ltd v Federal Commission of Taxation (1999) 41 ATR 357 Commonwealth Quarries (Footscray) Pty Ltd v Federal Commissioner of Taxation (1938) 59 CLR 111 CASES CITED: Holt v Cox (1997) 23 ACSR 590 Hooker Investments Pty Limited v Baring Bros Halkerston & Partners Securities Limited (1986) 5 NSWLR 156 Johnston Fear & Kingham and The Offset Printing Co Pty Limited v The Commonwealth (1943) 67 CLR 314 Legal & General Life of Australia Limited v A Hudson Pty Limited (1985) 1 NSWLR 314 Queensland Independent Wholesalers Ltd v Commissioner of Taxation (1991) 29 FCR 312 DECISION : 1. Appeal allowed; 2. Order that the orders of Rolfe J made on 12 February 1998 and 1 May 1998 be set aside; 3. In lieu thereof, declare that; (a) The appointed expert, Warwick Finney, is entitled to determine whether an adjustment is required in the selling price between the respondent and the first and/or second appellant, pursuant to the supply agreement, to recognise and take into account the benefits received by other customers of the respondent pursuant to the provision by the respondent, to other customers of capital equipment; (b) The appointed expert, Warwick Finney, is entitled to determine whether an adjustment is required in the selling price between the respondent and the first and/or second appellant, pursuant to the supply agreement, to take into account the inclusion of delivery costs to other customers in the respondent's Current Large User Price; (c) The respondent is obliged to provide to the first and/or second appellant details of the Current Large User Price; 4. The respondent to pay the appellants' costs of the proceedings before Rolfe J and of this appeal but to have a certificate under the Suitors' Fund Act 1951 if so qualified. THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40145/98 CommD 50210/97 PRIESTLEY JA SHELLER JA BEAZLEY JA FERMENTATION INDUSTRIES (AUST) PTY LIMITED & ANOR v BURNS PHILIP & COMPANY LIMITED By a supply agreement between FI and MBT, MBT agreed to manufacture and supply all of FI's yeast requirements. The price of yeast was calculated according to "principles set out in the Schedule". The Schedule gave two illustrations. For compressed yeast, PFI = PLU - 0.463 (PLU - C), where PFI referred to the selling price to FI, PLU referred to MBT's price to "largest users" (parties buying over a specified amount of yeast) and C referred to the manufactured cost. The cream yeast price was the compressed yeast price minus stipulated costs. A dispute arose in relation to the appropriate selling price under circumstances where MBT provided capital equipment and delivery into store to largest users free of charge, whereas FI was required to pay freight from MBT's premises. Pursuant to the agreement, an expert was appointed to determine the dispute. The expert's opinion was that the price to FI had ceased to represent the price charged to MBT's largest users. Accordingly, PLU should have been adjusted to take account of the freight cost and capital equipment benefits available to the largest users but not available to FI. The expert requested MBT to provide further information about the freight costs and the equipment provided to the largest users; MBT refused. At first instance, Rolfe J held that no adjustment to PLU was permitted and MBT was not obliged to furnish the requested information. His Honour further held that, since there were no longer any largest users of compressed yeast, there was no price upon which the formula could operate. FI appealed from these decisions. (Burns Philp, the respondent in the appeal, had assumed all of MBT's rights and obligations in respect of the agreement.) Held: (by Sheller JA, Priestley and Beazley JJA agreeing) In relation to the meaning of 'price' 1. The selling price to largest users is a question of fact. It is not inevitably resolved by looking into the contract or invoice price. In determining the selling price, rebates or other benefits can be examined to determine whether, as a matter of commercial reality, they effect a reduction in the selling price. Colgate-Palmolive Pty Limited v Federal Commission of Taxation (1999) 41 ATR 357, applied; Commonwealth Quarries (Footscray) Pty Limited v Federal Commissioner of Taxation (1938) 59 CLR 111, referred to; Queensland Independent Wholesalers Limited v Commissioner of Taxation (1991) 29 FCR 312, applied. 2. The relationship between PFI and PLU gave FI a price preference in yeast supply and restricted MBT's ability to compete with FI on price to largest users. The effect of MBT's allowance of a price benefit to its largest users by providing equipment free of charge would decrease the value of this price preference to FI and defeated the preferential price policy. Given the commercial reality that MBT and FI are competitors in the sale of yeast, such a result could not have been the intention of the parties. Australian Broadcasting Commission v Australasian Performing Right Association Limited (1973) 129 CLR 99, referred to. In relation to the non-existence of largest users 3. The agreement expressly contemplated the manufacture and supply of cream and compressed yeast and the formulaic principles applied to both compressed and creamed yeast. Legislation: Supreme Court Act 1970 Cases cited: Australian Broadcasting Commission v Australasian Performing Right Association Limited (1973) 129 CLR 99 Colgate-Palmolive Pty Limited v Federal Commission of Taxation (1999) 41 ATR 357 Commonwealth Quarries (Footscray) Pty Ltd v Federal Commissioner of Taxation (1938) 59 CLR 111 Holt v Cox (1997) 23 ACSR 590 Hooker Investments Pty Limited v Baring Bros Hakerson & Partners Securities Limited (1986) 5 NSWLR 156 Johnson Fear & Kingham and The Offset Printing Co Pty Limited v The Commonwealth 1943) 67 CLR 314 Legal & General Life of Australia Limited v A Hudson Pty Limited (1985) 1 NSWLR 314 ORDERS 1. Appeal allowed; 2. Order that the orders of Rolfe J made on 12 February 1998 and 1 May 1998 be set aside; 3. In lieu thereof, declare that: (a) The appointed expert, Warwick Finney, is entitled to determine whether an adjustment is required in the selling price between the respondent and the first and/or second appellant, pursuant to the supply agreement, to recognise and take into account the benefits received by other customers of the respondent pursuant to the provision by the respondent, to other customers of capital equipment. (b) The appointed expert, Warwick Finney, is entitled to determine whether an adjustment is required in the selling price between the respondent and the first and/or second appellant, pursuant to the supply agreement, to take into account the inclusion of delivery costs to other customers in the respondent's Current Large User Price. (c) The respondent is obliged to provide to the first and/or second appellant details of the Current Large User Price. 4. The respondent to pay the appellants' costs of the proceedings before Rolfe J and of this appeal but to have a certificate under the Suitors' Fund Act 1951 if so qualified. ***** THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40145/98 CommD 50210/97 PRIESTLEY JA SHELLER JA BEAZLEY JA Friday, 19 May 2000 FERMENTATION INDUSTRIES (AUST) PTY LIMITED & ANOR v BURNS PHILP & COMPANY LIMITED JUDGMENT 1 PRIESTLEY JA: In question in the present case is the meaning of some provisions in an agreement (called in the proceedings the supply agreement) which was made in March 1978. The commercial deal which the draftsmen of the document were trying to embody in it was a fairly simple one, but it involved the arranging of a mechanism to regulate the price of commodities to be sold by one party to the other for the next twenty-five years. In their efforts to provide for a number of things that might happen in that time in regard to price, formulas were created the meaning of which became the subject of argument as situations emerged not precisely covered by the formulas. 2 These arguments grew into litigation which reached this court and raised difficult questions of meaning. There was something sensible to be said on both sides of the principal issues. I have had the benefit of reading Sheller JA's reasons in draft. He has explained both the detail of the supply agreement itself and the background against which it was drafted and executed. When the text of the supply agreement is read against that background, known to the parties at the time the agreement was made, it seems to me that the interpretation arrived at by Sheller JA fits the text in context better than that put forward in opposition. 3 I agree with Sheller JA's reasons and conclusions both on the relevant matters of interpretation and the other issues in the appeal. Accordingly, I agree also with the orders he proposes. 4 SHELLER JA: INTRODUCTION This appeal from decisions of Rolfe J, given on 12 February and 1 May 1998, concerns the operation of what was called a price escalation formula in an agreement (the supply agreement) made in March 1978 whereby Fermentation Industries Pty Limited (FI) sold to Mauri Bros & Thomson (Aust) Pty Limited (MBT) its yeast manufacturing assets in consideration of MBT's long term commitment to supply yeast to FI at prices calculated in accordance with the supply agreement. 5 On 26 February 1979 the first appellant, Fermentation Industries (Aust) Pty Limited, referred to as FIA, took an assignment of all the rights and benefits of FI under the supply agreement. On 28 October 1983 the respondent, Burns Philp & Company Limited, referred to as BP or BPC, assumed all of the rights, benefits and obligations of MBT in respect of or arising from or imposed by the supply agreement. In or about August 1986, FI assigned its rights and obligations under the supply agreement to the second appellant, Fermentation Enterprises Pty Limited. It is convenient in this judgment to refer not only to the parties to the agreement but also to the appellants and the respondent as FI and MBT respectively, except in quotations or where to do so may cause confusion. THE SUPPLY AGREEMENT 6 The supply agreement recited that FI had requested MBT to manufacture its requirements of yeast for supply to its Australian domestic markets and for export and that MBT had agreed to do so on the conditions set out in the supply agreement. As a consequence, FI offered to sell to MBT and MBT agreed to purchase the manufacturing assets of FI upon the conditions more particularly described in the supply agreement. The supply agreement provided that MBT would manufacture for and supply FI with such quantities of yeast and at such of MBT's plants in New South Wales, Queensland or Victoria as FI should specify and that FI should, subject to the supply agreement, purchase from MBT its requirements of yeast for supply in its Australian domestic markets and for export. 7 Clause 8 of the supply agreement dealt with the price to be paid by FI to MBT for yeast manufactured under the supply agreement. Sub-clause (1) was in the following terms: "8. (1) The price to be paid by FI to MBT for yeast manufactured under this agreement shall be as follows: (a) As to so much of FI's requirements of yeast as do not exceed 3,400,000 kilogrammes [sic] in any year the prices shall be as calculated from time to time according to the principles set out in the Schedule hereto and upon the basis that such prices shall operate ex the factory door of MBT at the plant in New South Wales or Victoria specified by FI in its firm orders placed with MBT pursuant to clause 7(1) hereof or if the plant of MBT in Queensland be so specified upon the basis that such prices shall operate at the railhead nearest that plant or free on the truck of FI ex the door of that plant as stipulated by FI in its order. To the extent that the prices payable according to the said principles appear in the Schedule hereto it is acknowledged (i) that they illustrate the application of those principles as at the date of this agreement; (ii) that the same shall be recalculated so as to reflect the prices to be paid by FI as at the commencement date; (iii) that the same may be revised from time to time during the currency of this agreement as a result of the application of the said principles and of variances in the cost to MBT of the manufacture of yeast; (iv) that MBT shall give to FI not less than twenty-one (21) days notice in writing of any variations in such prices other than variations caused by fluctuations in the cost of labour and molasses which variations shall become effective on notification of which variations MBT shall give as much notice as is reasonable and practicable. (b) As to any requirements of FI for yeast over and above the quantity of 3,400,000 kilogrammes [sic] per annum the prices to be paid therefor by FI to MBT shall be: (i) as to such requirements of yeast as are for the Australian domestic market at prices not exceeding those at which MBT supplies yeast products to any purchaser, user or wholesaler or to any MBT selling division or branch; (ii) as to such of those requirements as are for export at prices not exceeding those at which MBT supplies yeast products to any other purchaser or to any MBT selling branch or division. (c) (i) The quantity of 3,400,000 kilogrammes [sic] of yeast referred to in paragraphs (a) and (b) of this clause shall be adjusted on the 31st day of August in each year during the term of this agreement by applying thereto the percentage increase or decrease which has taken place in the twelve (12) months ending on the preceding 30th day of June in the total consumption of yeast manufactured in Australia and used in the manufacture of bread in Australia. Such consumption shall be determined by aggregating the total sales by MBT and FI of yeast manufactured in Australia and sold for use in the manufacture of bread in Australia. The parties agree that the total consumption in Australia of yeast used in the manufacture of bread for the twelve (12) months ended on the 30th June 1977 was 15,400,000 kilogrammes [sic]. In the event that the parties shall fail to agree at any time on the total consumption of yeast determined in manner aforesaid the same shall be determined by the respective Auditors of MBT and FI whose decision shall be final and binding upon the parties. In the event that such Auditors are unable to reach a decision the matter shall be decided by a Chartered Accountant to be nominated by the President for the time being of the Institute of Chartered Accountants in Australia acting as an expert and not as an arbitrator and the decision of that Chartered Accountant shall be final and binding upon the parties. (ii) In the further event that at any time it shall become impractical to apply the formula herein contained to determine the total consumption the parties shall consider and agree upon such alternative formula as may be then more appropriate for the purpose but until such time as the parties have so agreed the formula herein contained shall apply." 3,400,000 kilograms is approximately 22 per cent of 15,400,000 kilograms. Thus the adjustments made in accordance with cl 8(1)(c) ensured FI a preferred price for 22 per cent of the total sales of MBT and FI of yeast manufactured in Australia and sold for use in the manufacture of bread in Australia. 8 I pause to emphasise that MBT had agreed to manufacture and supply all FI's requirements of yeast for its domestic and export markets. It is implicit that this was yeast to be used in the manufacture of bread. Clause 8(1) stipulated the price to be paid by FI for yeast manufactured under the supply agreement in whatever form and however packed according to "the principles set out in the Schedule". As cl 8(1)(a)(i) indicated, the prices payable appearing in the Schedule illustrated the application of the principles. 9 Sub-clauses (2) and (3) of cl8 established the methods by which FI agreed to order its requirements of yeast and provided for a price rebate in each of the first six years of the supply agreement. 10 The Schedule referred to in cl 8(1)(a) was in the following terms: " THE SCHEDULE HERETO PRICE ESCALATION FORMULA PRODUCT: A. COMPRESSED YEAST 1 Kg PACK UNIT: KG. FORMULA: PFI = PLU -.463 (PLU - C) Where PFI = Selling price to FI for base quantity of 3,400,000 Kg, which is agreed to be 38.51c/Kg as of the 13th February, 1978. PLU = MBT selling price to "largest users", which is defined as those parties buying over 50,000 Kg of compressed yeast per month, (which was 49.6c/Kg at 13th February, 1978. C = Total MBT Manufactured Cost, as defined below, which was 25.65c/Kg at 13th October, 1977, and not having changed substantially since that date, is agreed to be the same at 13th February, 1978. MANUFACTURED COST: RAW MATERIAL PRODUCT USAGES COST UNIT Units of Raw COMPONENT Cost c/Unit Material/Kg (c/Kg) Molasses Kg 5.98 1.440 8.61 Electricity KwH 2.747 .4733 1.30 Others 4.99 Total Raw Materials 14.90 TOTAL DIRECT LABOUR 3.79 Manhours/Kg of Product = 0.00728 $/Manhour = $5.206 OTHER MANUFACTURING EXPENSES 6.96 TOTAL MANUFACTURED COST 25.65 1. Costs and product usages shown are weighted averages of MBT costs (and Product Usages) calculated for MBT's factories in Queensland, New South Wales and Victoria. The weighted average is based on the previous three (3) months actual volume of production of the product at MBT factories in Queensland, New South Wales and Victoria. 2. Prices of all raw materials used will be those on suppliers' invoices on the date of the Cost Schedule. 3. The labour cost rate ($/Manhour) includes all 'on' costs associated with the direct labour manhours such as payroll tax, workers compensation, superannuation, etc. 4. Other manufacturing expenses contain all manufacturing overhead expenses incurred in the manufacture of yeast with the exception of Bank interest, Head Office charges, Research & Development costs, Freight, Distribution costs, Marketing costs and Sales expenses. PRODUCT: B. CREAM YEAST PRICE Cream Yeast Price is equal to the compressed yeast price minus the cost of packaging materials and raw materials used in Filtration together with the direct labour saving effected as a result of supplying cream yeast rather than compressed yeast. Such adjustment is illustrated as follows: Date: 13th October, 1977 COST OF PACKING & RAW MATERIAL 1.5c/Kg DIRECT LABOUR (ESTIMATED) ON FI VOLUME OF 12 TONNES/WEEK 0.5c/Kg Total Adj. 2.0c/Kg Thus on this illustration price of Cream Yeast = 36.51c/Kg" 11 It is important to note that the Schedule gave two illustrations, one for a product described as compressed yeast in a 1kg pack and the other for a product described as cream yeast. Mr Campbell QC, who appeared for FI, told us that compressed yeast is a form of yeast with the consistency of butter. Cream yeast is a form of yeast suspended in water not sold in packs but in bulk. Accordingly, the cream yeast price was to be equal to the compressed yeast price less supply cost savings. Both compressed and cream yeast are categorised as wet yeast. 12 Clause 9 of the supply agreement provided for the resolution of any dispute or difference of opinion about the correctness of the calculations of prices as follows: "In the event that at any time any dispute or difference of opinion arises between MBT and FI as to the correctness of the calculations of the prices as hereinbefore provided such dispute or difference of opinion shall in the first instance be discussed with a view to settlement between nominated representatives of MBT and FI and in the event that such representatives are unable to agree shall be settled by the joint decision of the Auditors of MBT and FI who shall act as experts and not as arbitrators and whose decision shall be final and accepted by the parties as such. In the event that such Auditors are unable to reach a decision the matter shall be decided by a Chartered Accountant to be nominated by the President for the time being of the Institute of Chartered Accountants in Australia acting as an expert and not as an arbitrator and the decision of that Chartered Accountant shall be final and accepted by the parties as such." 13 Clause 10 provided that the Auditors of FI were entitled to have reasonable access to the basic records of MBT from which the prices were being calculated and that in the event it became necessary for the respective auditors of MBT and FI to adjudicate upon a dispute or difference of opinion, such auditors should have, if they considered it reasonably necessary, access to all production costs and calculations in connection therewith. 14 Clause 11 (1) provided that the supply agreement should subsist for twenty-five years commencing on the commencement date and thereafter should continue from year to year with provisions in cl 2 for termination: · at any time by mutual agreement between the parties, · upon breach of any of the conditions of the supply agreement by either party, · at any time after the expiration of ten years by FI on the giving of not less than twelve months' notice in writing to MBT, and · at any time after the expiration of twenty-five years by either party on the giving of twelve months notice in writing to the other. 15 Clause 12 dealt with the possibility that MBT was unable to supply FI with the whole of its requirements. Clause 13 was a force majeure clause. AGREED FACTS 16 According to a statement of agreed facts, until 27 January 1995 MBT supplied FI with bakers' yeast in compressed and cream yeast forms. On or about 27 January 1995, FI sold its compressed yeast business to an Australian company known as Bakels LeSaffre Yeast Pty Limited. After that date all of FI's requirements of bakers' yeast were purchased from MBT in the form of cream yeast. On 31 March 1996, FI stopped purchasing cream yeast from MBT. Since that date FI had made no purchases from MBT. 17 MBT manufactured and supplied bakers' yeast to bakers throughout Australia. On the premises of the larger of its baker customers, MBT had installed equipment consisting of tanks in which cream yeast was stored with piping and pumps through which the yeast was conveyed to the bakery houses of those customers. Such equipment was owned or leased by MBT and no charge was made in respect of it to the customers. The equipment was for the storage and handling of cream yeast. 18 Except in respect of supplies of compressed yeast in certain parts of Queensland, since 30 June 1994 MBT had supplied yeast to its baker customers free into their stores. For deliveries of compressed yeast from MBT's plant in Brisbane to the North Queensland towns of Rockhampton, Townsville and Cairns, a charge additional to the price prevailing in Brisbane and environs was made. 19 On 14 March 1996, pursuant to the terms of the supply agreement, a chartered accountant, Warwick Finney, was appointed by the Institute of Chartered Accountants in Australia as an expert to determine a dispute between FI and MBT. The terms of engagement were set out in Mr Finney's letter of 14 March 1996. Relevantly, the letter stated: "My role is to determine the appropriate selling price for yeast between BPC and FIA having regard to the Agreement referred to above. I will request each party to submit documentation in support of their respective positions and views and shall call a meeting of the parties if requested by either party so that their views may be presented at such a meeting. Once I have considered all the material and submissions put before me I shall prepare a report and send copies of it in its final form simultaneously to both parties. If I am unable to obtain necessary documentation and/or information for any reason, I shall prepare an interim report stating my reasons as to why I cannot conclude the preparation of a final report and then send copies of that interim report simultaneously to both parties." This letter was acknowledged with the signature of an officer of MBT. 20 The issues referred to Mr Finney for determination were set out in a document headed "Agenda for Auditors' Meeting 20 December 1994". Relevant amongst them were the following: "5. PROVISION OF CAPITAL EQUIPMENT The selling price as set out in the formula does not elaborate on how this is calculated, however, disagreement between the parties has already led to one settlement between them and generally in commercial dealings one would not expect to see large items of equipment being supplied without some recognition as to the benefit given to the customer. The benefits are quantifiable and substantial. An adjustment is required 6. FREIGHT COSTS The price payable under Clause 8(i)(a) [sic] … is 'ex the factory door' and as such this charge is made to FI, however, the MBT other Large Users receive their deliveries to their door without charge (excepting one smaller country user (from memory)). It is contended that the FI price should reflect such advantage considering Paragraph 8(1)(a)(i) …. A similar conflict was settled by MBT in favour of FI. An adjustment is required." MBT disputed that the expert was entitled to determine items 5 and 6. 21 On 9 April 1997 Mr Finney made a written determination which, so far as presently relevant, referred to MBT's view that he had no jurisdiction to examine or consider agenda items 5 and 6 and said: "2.7 I further advised that my reading of the Agreement had led me to the view that the items on the agenda all had the potential to impact upon the formula set out in the Agreement. I then advised that having examined all the material before me, that a proper determination of the selling price to 'largest users' must include consideration of items 5, 6 and 7. Subsequently each party presented their submission in respect of items 5, 6 and 7. [Item 7 is not relevant to this appeal] 2.8 Having considered those submissions, in my opinion, it was appropriate for those items to be included in a proper determination of the ex factory door selling price to 'largest users'. ….. 4.7 Item 5 Provision of Capital Equipment 4.8 The Agreement dated 1 March 1978 between the parties provides, at Clause 8(1) that the price of yeast is to be calculated according to the principles set out in the Schedule to the Agreement and upon the basis that such prices shall operate 'ex the factory door' (New South Wales and Victoria) (a different requirement applies in Queensland). 4.9 The Schedule to the Agreement sets out a formula and that Schedule and the definitions or descriptions of items as set out in the Schedule provide guidance as to the principles that apply in the application of the formula. 4.10 The matter which is the subject of the claim under this item is that relating to the price of yeast charged to 'largest users', this term being defined as including those parties buying over 50,000 kilograms of compressed yeast per month. 4.11 BPC has made sales to its other 'large users' on a different basis by providing equipment free of charge to such customers and, from FIA's viewpoint, BPC has provided a benefit, interpreted by FIA as a price benefit to those other customers of BPC, which has not been made available to FIA. FIA claims it has consequently been disadvantaged as the terms of the Agreement between BPC and FIA provide that the price chargeable by BPC to FIA be a price determined by the formula set out in the Agreement which has regard to the ex factory door selling price by BPC to its 'largest users'. 4.12 The issue therefore is whether the benefits made available by BPC to its other customers should be recognised in determining the ex factory door large user price for the purposes of determining the price charged to FIA. 4.13 In my opinion, where two (or more) parties are supplied with goods at a uniform price but one (or more) of them has received a benefit not available to one (or other) of them then the prices, in effect, cease to be uniform. Further, in my opinion whether a benefit is a monetary price adjustment or a non-monetary benefit is not of relevance. 4.14 As the Agreement provides that the price payable by FIA shall have regard, by application of the formula, to the large user price for sales of cream yeast to other large users, in my opinion that large user price chargeable to other users should have regard to the benefits they receive by the provision of equipment by BPC. 4.15 FIA has calculated a refund to which it believes it is entitled in respect of purchases of cream yeast from 1 July 1995 to 31 March 1996. The amount arrived at by FIA is $454,648.59. In rebutting many of the points raised by FIA, BPC has rejected both the figures used by FIA and the methodology employed by them. 4.16 I accept the methodology applied by FIA to determine the adjustment required to the large user price applicable to sales of cream yeast by BPC to FIA. However, BPC has rejected the values and the depreciation rate used, without supplying details of the actual costs and depreciation rate applicable. I therefore now request BPC to provide me with the cost of equipment made available free of charge to customers, the date such equipment was provided, the depreciation rate they believe should be used and the interest cost applicable to the investment in such equipment. I will then be in a position to use such information to determine the appropriate adjustment for the provision of capital equipment to large users. 4.17 Item 6 Freight Costs 4.18 FIA has presented a case for an adjustment to be made to the large user price for any freight costs incurred by BPC in delivering to large users. FIA has referred to Clause 8.1(a)(i) of the Agreement claiming that the price to FIA 'shall operate ex the factory door of MBT' and noting that FIA accordingly pays freight for delivery to its customers or to itself. 4.19 It is further pointed out by FIA, inter alia, that large users supplied by BPC receive their deliveries free of any freight charge and that an adjustment should be made in favour of FIA for freight costs incurred by BPC in delivering to large users in order to establish an ex factory door selling price. 4.20 BPC has, in its submissions, rejected the arguments put forward by FIA. Included in its reasons for rejecting FIA's claim, BPC points out that no freight rebates are granted to its customers and accordingly the prices charged to those customers cannot be reduced artificially by a deemed rebate in the manner FIA contends. However based on the submission made by BPC it would appear that rather than give rebates to its large users, BPC has simply provided freight at their own cost. 4.21 The Agreement provides for the price to be 'ex the factory door of MBT'. I understand FIA is required to incur freight on yeast from BPC's premises whereas other large users have delivery costs included in their selling price. BPC has not denied or rejected this understanding. I am therefore of the opinion that the price to FIA has ceased to represent the price charged to BPC's large users. Accordingly, I now request BPC provide me with details of the freight costs incurred in delivering to large users where no charge has been made to such users. I will then be in a position to use such information to determine the appropriate freight adjustment." It should be noted that Mr Finney speaks of large or largest users of cream yeast. 22 One point of issue between the parties, which the determination highlighted, was whether the price to largest users should be adjusted to take account of the freight cost and capital equipment benefits available to them, but not available to FI. MBT provided capital equipment and delivery into store to large users free of charge. FI was required to pay freight on yeast from MBT's premises. Mr Finney addressed the issue of whether the benefits MBT made available to its other customers should be recognised in determining the ex factory door large user price (cl 4.12). Mr Finney saw the formula as designed to achieve a price payable by FI which was uniform with the price actually paid by largest users. I will come back to indicate what I think Mr Finney had in mind. These prices ceased to be uniform where the largest users received a benefit not available to FI (cl 4.13). Whether the benefit was a monetary price adjustment or a non-monetary benefit was not relevant. In Mr Finney's opinion, for the purposes of the formula, the "large user price chargeable to other users should have regard to the benefits they receive by the provision of equipment by" MBT (cl 4.14). The price to FI was ex the factory door of MBT. Accordingly, FI paid freight for delivery to its customers or itself. Largest users received delivery free of freight. Rather than giving rebates, MBT provided freight at its own cost (cl 4.20). For this reason, Mr Finney was of opinion that "the price to [FI] has ceased to represent the price charged to [MBT's] large users" (cl 4.21). 23 Mr Finney requested MBT to provide him with information about the equipment made available free of charge to customers and details of the freight costs incurred in delivering to large users where no charge had been made to them. He said he was not able to complete the task of determining the appropriate selling price at that stage for reasons he had set out in relation to items 5 and 6 and that he would complete his determination in respect of those items on receipt of the information requested. PROCEEDINGS IN THE COMMERCIAL DIVISION 24 On 31 October 1997 FI began these proceedings by summons in the Commercial Division seeking declarations that MBT was obliged to furnish to the expert such information as was necessary and required by the expert to make a decision pursuant to cl 9 of the supply agreement and then the following declaration and order: "2. A declaration that on the proper construction of the Supply Agreement and in the events that have occurred, the Appointed Expert, Warwick Finney is entitled to determine the following matters: (a) whether an adjustment is required in the selling price between the Defendant and the First and/or Second Plaintiff, pursuant to the Supply Agreement, to recognise and take into account the benefits received by other customers of the Defendant pursuant to the provision, by the Defendant to other customers of capital equipment. (b) whether an adjustment should be made to the large user price for the freight costs incurred by the First and/or Second Plaintiff to take into account inclusion of delivery costs to other customers in the Defendant's large user price. 3. An order that the Defendant specifically perform its obligations to provide such information as is necessary and required by the Appointed Expert by providing to the Appointed Expert the following information: Details of: (i) the cost of capital equipment made available to other customers; (ii) the date such capital equipment was provided; (iii) the depreciation rate to be applied in relation to such capital equipment; and (iv) the interest costs applicable to the investment in such equipment. Details of: (v) Freight costs incurred in delivering to large users where no charge has been made to such users." 25 Paragraph 15 of MBT's notice of grounds of defence raised the price point and another point: "…..the Defendant denies that it is obliged to supply to the expert the information referred to in those paragraphs for the reason that, upon a proper construction of the Supply Agreement, any costs incurred by the Defendant in providing capital equipment and freight costs incurred in effecting deliveries were not to be taken into account in the calculation of prices under clause 8(1) of the Supply Agreement. In further answer to paragraph C8(b) the Defendant says that since around February 1996 there have been no 'large users' as defined in the Supply Agreement." 26 On 30 December 1997 four questions were posed in a statement of issues: "1. Whether the Appointed Expert, Warwick Finney is entitled to determine the following matters: (a) whether an adjustment is required in the selling price between the Defendant and the First and/or Second Plaintiff, pursuant to the Supply Agreement, to recognise and take into account the benefits received by other customers of the Defendant pursuant to the provision, by the Defendant to other customers of capital equipment. (b) whether an adjustment should be made to the large user price for the freight costs incurred by the First and/or Second Plaintiff to take into account inclusion of delivery costs to other customers in the Defendant's Current Large User Price. 2. Whether in the events that have occurred and on the proper construction of the Supply Agreement, the Defendant is obliged to furnish to the Appointed Expert such information as is necessary and required by the Appointed Expert to make a decision pursuant to clause 9 of the Supply Agreement. 3. Whether the Defendant is obliged to provide to the First and/or Second Plaintiff details of the Current Large User Price. 4. Whether the Defendant is obliged to do all things necessary to enable the First and/or Second Plaintiff to have the benefit of the Supply Agreement." 27 The proceedings came before Rolfe J, who, on 12 February 1998, answered question 1(a) and (b): No. His Honour declared that in the events that had occurred and on the proper construction of the supply agreement, MBT was not obliged, pursuant to cl 9 of the supply agreement, to furnish to the appointed expert any information relating to the matters referred to in that question. In further reasons for judgment, given on 1 May 1998, Rolfe J answered question 3: No. The reason for this answer was his Honour's determination that there were no longer any largest users as defined because MBT no longer supplied any users with 50,000 kg of compressed yeast per month. REASONS FOR JUDGMENT OF 12 FEBRUARY 1998 28 Rolfe J began by considering whether the exercises upon which Mr Finney proposed to embark in relation to items 5 and 6 were committed to him by the agreement in his role as an expert and referred, amongst other authorities, to Legal & General Life of Australia Limited v A Hudson Pty Limited (1985) 1 NSWLR 314 at 331E per McHugh JA and Holt v Cox (1997) 23 ACSR 590 at 596-7 per Mason P, with whose judgment Priestley JA agreed. The authorities led Rolfe J to say that, in the circumstances, it became necessary to consider with care the contractual obligations imposed on Mr Finney and whether what he proposed to do went beyond them. 29 His Honour concluded that upon a proper construction of the supply agreement, the "price" or "selling price" was that specifically defined by the parties without any other deduction. It was not open to Mr Finney to intrude further considerations into the selling price by MBT to its "largest users". Rolfe J said: "Not only does the agreement not provide in terms for those matters to be taken into account, but there are, in my opinion, positive indications, on a proper construction of it, that they should not be when considering a quantity up to 3,400,000 kilograms. The consequence of taking those matters into account would be that the selling price would be reduced and by the application of the formula in the Schedule the selling price to FI would be reduced." 30 Rolfe J said: "The price is the sum of money or its equivalent for which property is bought, sold or offered for sale". His Honour referred to Hooker Investments Pty Limited v Baring Bros Halkerston & Partners Securities Limited (1986) 5 NSWLR 157 at 163, an appeal about the term "price" in sections of the Securities Industry (NSW) Code dealing with the price of securities on a stock market. It was in that context that McHugh JA said at 163: "The transactions which are penalised by these sections are those which involve securities which are bought and sold. The term 'price' in ss 123, 124, 125, and 127 is concerned with the sum of money or its equivalent for which a security is bought, sold or offered for sale." As appears from the judgment, that decision depended very much on the statutory context in which the word "price" was used. Rolfe J also cited the well-known statement by Starke J in Johnston Fear & Kingham & The Offset Printing Co Pty Limited v The Commonwealth (1943) 67 CLR 314 at 327 that price is the sum of money or its equivalent at which a thing is valued. 31 The factors which led the trial Judge to his conclusion included: · There should be a consistent meaning in the formula between the price to be paid by FI to MBT and the selling price to various "largest users". · The problem of determining the cost of providing equipment and freight free of charge to the largest users where these cost components differed between various largest users. The agreement states a price certain per kilogram as the selling price to the "largest users". · The fact that FI was required by the supply agreement to bear the cost of freight and the omission of freight from the total manufactured cost. "Distribution costs" were clearly capable of including the cost of transporting the product to "largest users". Rolfe J said "It would be an extraordinary result, in my opinion, if in the face of those contractual provisions FI was to obtain the benefit of freight costs to others, which are met by MBT, such benefit arising from the reduction in the price per kilogram specified as the selling price to 'largest users'. …It would be quite contrary, in my opinion, to the terms of the agreement, if those amounts, which have expressly been excluded from 'other manufacturing expenses' and, therefore, in that way have not been deducted from MBT's selling price to 'largest users' were to be taken into account by being deducted from that selling price." · "Marketing costs and Sales expenses" appeared to relate or arguably related to the provision to customers of capital equipment. The deduction of those from the selling price would have the effect of altering the formula in the same way as "Distribution costs". · The commercial realities confronting the parties. His Honour said: "MBT and FI are competitors in the field of selling yeast. In these circumstances MBT has allowed FI a price reduction and FI is at liberty to sell to its customers and, if it can make the price sufficiently attractive, to those of MBT. There seems to be no reason flowing from the terms of the agreement or such a commercial relationship why MBT would have agreed to reduce its price to FI to give effect to trade inducing concessions it may make to its customers. FI is not in competition, as certain of Mr Finney's observations seem to imply, with the 'largest users'. It is in competition with MBT." 32 Since, in his Honour's opinion, the agreement did not, on its proper construction, require or permit the base selling price, on which the formula depended, to be changed in the way for which Mr Finney contended, to pursue that approach did not conform with the requirements of the supply agreement. REASONS FOR JUDGMENT OF 1 MAY 1998 33 In his second judgment, his Honour observed that it was not in issue, as he understood it, "that there are no longer any 'largest users'. In those circumstances the question arises whether MBT is obliged to provide the information referred to in the question." Largest users were defined as "buying over 50,000 Kg of compressed yeast per month" [my emphasis]. His Honour was satisfied that on the proper construction of the supply agreement in the context in which it was entered into, the "selling price" to which the formula made reference was "the actual selling price". "Therefore, there can be no question that that is a price an expert can determine." His Honour said: "In the result I consider that the proper construction of the agreement demands that the price to be paid by FI is the price being paid by a 'largest user' or the 'largest users' to MBT. If there are none there is no price on which the formula can operate." APPEAL 34 The appellants appealed from both decisions. 35 During argument Mr Campbell told us and Mr Hilton SC, who appeared for MBT, did not dispute this, that creamed yeast is just a different way of delivering yeast. Big bakers have stopped using compressed yeast and now use instead large quantities of creamed yeast. MBT sold creamed yeast to bakers who bought over 50,000 kg of yeast or creamed yeast per month. If the word "compressed" were deleted from the definition, the formula would still work because there were largest users of yeast or creamed yeast. Alternatively, MBT sold more than 50,000 kg of compressed yeast per month to wholesalers, which at the relevant time were its subsidiary companies. SELLING PRICE TO LARGEST USERS 36 Before coming to the submissions the parties have made, I make the following general observations. Ordinarily, the sale price of goods is equated to the contract price; see Commonwealth Quarries (Footscray) Pty Limited v Federal Commissioner of Taxation (1938) 59 CLR 111 at 121. At 121-2 Dixon and McTiernan JJ said: "No doubt the parties to a sale of goods may by their contract distinguish between the price payable for the goods the property in which will pass on appropriation to the contract and the charges to be made by the seller for carrying the goods to some other place for delivery to or at the direction of the buyer. But this possibility does not justify a departure from the ordinary meaning of the words 'amount for which the goods are sold' or from the natural application of that meaning to cases where goods are sold and delivered for one single consideration." 37 That case was concerned with a provision in the Sales Tax Assessment Act (No 1) 1930 that the sale value of goods in certain circumstances would be "the amount for which the goods would be sold by the manufacturer if sold by wholesale". However, there are circumstances in which, quite clearly, the price for goods sold would not properly be reckoned simply by looking at the price agreed in the contract. Starke J acknowledged this in part in Johnston Fear & Kingham when he referred to price as the sum of money or its equivalent. A collateral benefit may be the equivalent of a sum of money. 38 In Queensland Independent Wholesalers Limited v Commissioner of Taxation (1991) 29 FCR 312, Hill J, with whose judgment Davies and Lee JJ agreed, illustrated this at 321. His Honour said: "The amount for which goods are sold will be a question of fact to be determined in each case. As I have already said, it will usually be the contractual purchase price arrived at between seller and buyer. However, this will not invariably be so. Let it be assumed that a prospective purchaser of goods inquires of the vendor the price and is told by the salesman that it is a certain sum, but that the proprietor may be prepared to reduce that price. The parties agree on a purchase at the price quoted, but the purchaser is given an assurance that if the proprietor is agreeable, any reduction of the price will be refunded to him. The purchaser has no legal right to a refund. But if the refund is, subsequent to the sale, given, then neither of the parties would be in any doubt that the amount for which the goods were sold was not the original invoice price, but that price reduced by the amount of the refund. The trading accounts of the vendor would properly reflect this transaction by treating the net figure as the gross sale price, and the trading accounts of the purchaser, if a trader, would bring into inventory the goods purchased at the net figure." 39 In Colgate-Palmolive Pty Limited v Federal Commission of Taxation (1999) 41 ATR 357 at 358 Hill, Lehane and Hely JJ referred to Queensland Independent Wholesalers and said: "It was there held that:- · The amount for which goods are sold is a question of fact; · It will usually, but not invariably, be the contractual purchase price arrived at between buyer and seller; · The fact that rebates are deferred and are discretionary would not prevent them being taken into account in determining the amount for which goods were sold, provided that the nature and manner of the rebate remained sufficiently proximate to, and connected with, the sale transaction to enable them to be accounted for in that way; · For a rebate to reduce the amount at which goods are sold, it must appear that the rebate does effect a reduction in the sale price as a matter of commercial reality, and that it is not directed at some other end. Neither party contended that the substitution of price for amount in the statutory language produced any substantive change." 40 It was obviously important to the parties, particularly FI, that the supply agreement stipulated a price or principles for determining a price for the yeast MBT had agreed to manufacture and supply for FI's Australian domestic markets and for export for at least the next twenty-five years. No doubt, the price to be paid under cl 8(1) for requirements which did not exceed 3,400,000 kilograms as adjusted in any year was intended to be a preferred price part of the arrangement whereunder FI sold its manufacturing assets to MBT on the understanding apparent from the recitals that MBT would manufacture and supply FI's requirements of yeast. FI would no longer incur the costs of manufacturing but would still have a source of supply for its continuing markets. 41 If the intention was that the two parties should continue to trade in manufactured yeast on an equal footing, one would have expected the price to be calculated by reference to the manufactured cost to MBT with an added margin of profit to MBT for the manufacturing service it was providing. This happened only indirectly and in a way which linked the price FI would pay to the price largest users would pay by a fixed proportionate difference. The preferential price over that given to largest users was by a deduction which was fixed at .463 of the difference between the price to largest users and the manufactured cost as described. For present purposes, that difference can be referred to as the on-sale mark-up. 42 It was in this sense that I think Mr Finney spoke of "a uniform price". If the price to largest users increased or decreased, so did the price to FI. The price to FI varied in accordance with any increase or decrease of the manufactured cost and by a fixed proportion of any increase or decrease of the on-sale mark-up. Clause 4 in the Schedule dealing with compressed yeast in 1 kg packs made it plain that manufacturing expenses were to be included in the total MBT manufactured cost. The term "manufacturing expenses" was defined to mean all manufacturing overhead expenses incurred in the manufacture of yeast with the exception of Bank interest, Head Office charges, Research and Development costs, Freight, Distribution costs, Marketing costs and Sales expenses. 43 Freight, distribution costs, marketing costs and sales expenses would not ordinarily, I would have thought, have been regarded as manufacturing expenses. Reference to them highlights the nature of the cost to be deducted. Put another way, FI was to pay MBT a price equal to the whole of the manufactured cost as defined other than the excepted expenses and .537 of MBT's on-sale mark-up to largest users. Obviously, the higher the price to largest users, the more FI paid. But what remained constant was the deduction of .463 of the on-sale mark-up. 44 This can be explained by the following illustrations, derived from calculations MBT provided to the Court, which assume a price to largest users, in the first, of 100 monetary units/kilogram and, in the second, of 110 monetary units/kilogram, the manufactured cost in both cases being 50 monetary units/kilogram. PFI = 100 - .463 (100-50) = 100 - .463 x 50 = 100 - 23.15 = 76.85/kg PFI = 110 - .463 (110-50) = 110 - .463 x 60 = 110 - 27.78 = 82.22/kg 45 In both cases, FI's preference is represented by a price deduction of .463 of the on-sale mark-up which increases with the increase in the price to largest users from 23.15 to 27.78. Similarly, if there is a reduction of the price to largest users by 10 monetary units, the formula works out as follows: PFI = 90 - .463 (90-50) = 90 - .463 x 40 = 90 - 18.52 = 71.48/kg 46 By linking PFI to PLU so that it rises or falls with PLU, MBT's ability to compete on price to largest users was restricted. Equally, it restricted MBT's ability to meet competitive pricing by FI. Any competitive price reduction by MBT to largest users required a proportionate reduction in the price to MBT's competitor, FI. One can infer this was intentional and the formulaic principles can be explained as based on that link. 47 The effect of MBT's increasing its contract price to largest users to 110 monetary units/kilogram but separately allowing them what Mr Finney described as a price benefit by providing equipment free of charge worth 20 monetary units/kilogram, was, if MBT's contentions are right, that the value of the price preference was no longer .463 of the on-sale mark-up, namely 27.78 monetary units, but 7.78 monetary units. 7.78 monetary units is the difference between 90 monetary units, the price to largest users taking account of the benefit, and 82.22 monetary units, the price FI had to pay under the formula, if the formula insists that PLU is the contract price to largest users, namely 110 monetary units. This is a reduction in the value of the price preference of over 70 per cent. I repeat that, had MBT calculated the price to largest users taking account of the reduction in price of 20 monetary units/kilogram, the preference price for FI calculated in accordance with the formula would have been 18.52 monetary units/kilogram. 48 If MBT, by means of a rebate or otherwise, pays to the largest users an amount representing .463 of the on-sale mark-up but the contract price to largest users is to be treated as PLU in the formula, FI effectively enjoys no preference in pricing. MBT can do this without suffering any loss by increasing the contract price to largest users so that the largest users would effectively, as a result of the rebate, receive the yeast for the same price they paid before, but the price to FI would go up to a point where it could not compete in selling yeast to largest users. Such a contrivance would, in its consequence, put at nought the preferential price policy. This can hardly have been the intention of the parties. 49 MBT argued that by such means it was doing no more than compete for business against FI. If such collateral price benefits were brought into the calculation of PFI, not only would this be contrary to the meaning of the words in the formula but it would limit MBT's ability to compete. However, it is important to recognise that the very nature of the formula the parties chose restricts MBT's ability to compete with FI on price to largest users. 50 The question remains, however, whether such considerations contribute to a proper understanding of the meaning of the formula. 51 In Australian Broadcasting Commission v Australasian Performing Right Association Limited (1973) 129 CLR 99 which relevantly concerned the method of applying a rise or fall clause by a percentage equal to the percentage movement in the cost of living in each financial year, Gibbs J, who dissented, said at 109: "It is trite law that the primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another. If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, 'even though the construction adopted is not the most obvious, or the most grammatically accurate', to use the words from earlier authority cited in Locke v Dunlop (1888) 39 ChD 387 at 393, which, although spoken in relation to a will, are applicable to the construction of written instruments generally; see also Bottomley's Case (1880) 16 ChD 681, at 686. Further, it will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument. Finally, the statement of Lord Wright in Hillas & Co Limited v Arcos Limited (1932) 147 LT 503 at 514, that the court should construe commercial contracts 'fairly and broadly, without being too astute or subtle in finding defects', should not, in my opinion, be understood as limited to documents drawn by businessmen for themselves and without legal assistance (cf Upper Hunter County District Council v Australian Chilling and Freezing Co Limited (1968) 118 CLR 429 at 437)." The Schedule is replete with ambiguity particularly in the expression "selling price" and "manufactured cost". Mr Hilton conceded that a monetary rebate, even if not revealed by the contract invoice, needed to be brought into account in determining the price to largest users. Any other construction would be both unreasonable and unjust. 52 It is helpful to go back to the factors that Rolfe J referred to as decisive. His Honour was of the opinion that the view for which Mr Finney contended meant that the words "selling price" in the formula would have a different meaning in the definitions of PFI and PLU. Mr Finney's point was, I think, that PLU could not be an artificial selling price which disguised what Mr Finney, as an expert chartered accountant, described as a price benefit. Hill J in Queensland Independent Wholesalers Limited gives the example of the deferred discretionary rebate. As the Federal Court said in that case and in Colgate-Palmolive, it becomes a question of fact whether such a rebate effects a reduction in the sale price as a matter of commercial reality. The appointed expert in this case thought that the price benefits did effect such a reduction. 53 Rolfe J pointed out that the cost of providing equipment free of charge and freight costs to largest users might differ from largest user to largest user and said that there was no way of determining whether to take the highest, the average or the lowest of such costs for the purpose of the exercise to be undertaken. The result would be that if the necessary calculations were done to deduct these costs from the contract price there would be different prices to different largest users. 54 But even on the MBT construction of PLU, account would have to be taken of different selling prices to different largest users and a decision made in accordance with the formula and the supply agreement as to which of these selling prices is the appropriate one for the calculation. As Mr Campbell remarked, in a competitive market it is unlikely that the price to all largest users would be the same. No doubt MBT would claim it was entitled to have the formula calculated on the basis of the highest of these prices and FI would claim it was entitled to have it calculated on the basis of the lowest. The problem exists whichever approach one takes. 55 Rolfe J noted that under the supply agreement the price to FI was to be ex the factory door of MBT in New South Wales and Victoria, with some variation in Queensland so that FI was required to bear the cost of freight. The definition of PLU does not state whether the selling price to largest users is also ex the factory door of MBT or into store. To be comparable, one would have expected it to have been ex the factory door. Why would FI be required to pay, as part of the price, something for delivery which MBT did not provide? The only mention of freight in the formula is in cl 4 where it is expressly excepted from "all manufacturing overhead expenses" which are to be contained in "other manufacturing expenses" which are part of the "total manufactured cost". Also excepted, as Rolfe J said, were "Distribution costs". To the extent either freight or distribution costs were part of the manufacturing overhead expenses, they would not seem to me to be or to have anything to do with the costs of delivery to largest users or to FI. Mr Finney said: "I understand FIA is required to incur freight on yeast from BPC's premises whereas other large users have delivery costs included in their selling price. BPC has not denied or rejected this understanding. I am therefore of the opinion that the price to FIA has ceased to represent the price charged to BPC's large users." With due respect, it seems to me obviously right that under the formula FI should not be required to pay any amount on account of delivery which it has to provide itself. But this is a matter for the expert. It is enough that I say that I do not regard there as being anything inherently wrong in the approach Mr Finney took. 56 With due respect, I do not see how, in the words of Rolfe J, this approach means that FI is obtaining the benefit of freight costs to others. I see it as ensuring that FI does not pay to MBT any amount on account of delivery which, under the supply agreement that FI take delivery ex MBT's factory door, is at the cost of FI. 57 The fourth factor Rolfe J considered was the exception of freight and distribution costs from total manufactured cost. Contrary to his Honour's opinion, it seems to me to be open to the expert to conclude that FI should not have to bear, as part of the price, part of the cost of transporting the product to largest users. 58 Also included in the exception from manufacturing overhead expenses were "Marketing costs and Sales expenses". His Honour said that arguably, these could relate to the provision to customers of capital equipment, which makes it more attractive for customers to purchase MBT's product. This point indicates what I regard as some confusion in approach. Before any deductions are made in working out the formula, a determination must be made of what the PLU is. If MBT allowed largest users a rebate of 10 per cent on its published prices, the PLU would be the published price less that 10 per cent. With this, Mr Hilton would agree. The 10 per cent may or may not be regarded as a market cost or sales expense and clearly should not be deducted again in working the formula. But the question here is not what is to be included in manufactured cost but what is in truth the selling price to largest users. 59 Rolfe J recognised that the formula had to be viewed in light of the commercial realities confronting the parties. MBT and FI are competitors in the field of selling yeast. His Honour said: "There seems to be no reason flowing from the terms of the agreement or such a commercial relationship why MBT would have agreed to reduce its price to FI to give effect to trade inducing concessions it may make to its customers." 60 But, in my opinion, the formula chosen by its nature restricts MBT's ability to compete on price with largest users. Its ability to compete in price to other customers is not so affected. 61 The selling price to "largest users", in the definition of PLU in the formula, is a question of fact. It is not inevitably resolved by looking to the contract or invoice price. I gratefully adopt and apply in this case what was said by the Full Federal Court in Colgate-Palmolive. It is open in determining the selling price to examine rebates or other benefits to determine whether, as a matter of commercial reality, they effect a reduction in the selling price. In applying the formula, the first step is to determine what MBT's selling price to largest users was. These are all matters for Mr Finney, the expert nominated by the President of the Institute of Chartered Accountants in accordance with cl 9 of the supply agreement. I see no reason why the Court should interfere with the conclusions he reached about them. That being so, his requests to MBT in paras 4.16 and 4.21 of his determination were appropriate. 62 In the judgment of 12 February 1998, Rolfe J said that if the contract permitted the MBT selling price to "largest users" to be adjusted to take account of the provision of equipment free of charge to "largest users" and the paying of freight costs to such users, the question arose as to whether the adjustments would constitute a consideration of "the correctness of the calculations of the prices". In Rolfe J's view, that question should be answered in the affirmative. I respectfully agree. LARGEST USERS 63 In the judgment of 1 May 1998, Rolfe J noted that it was not in issue that there were no longer any largest users meaning "parties buying over 50,000 Kg of compressed yeast per month". The consequence of this was that the price escalation formula for compressed yeast could not be worked out because a necessary element, the price for largest users, was absent and, since it was derivative, nor could the price of cream yeast be worked out. MBT's position was that there was no obligation to adjudicate upon a dispute or difference of opinion because there was no party to which MBT was presently selling compressed yeast in the required quantity. The price for cream yeast was "equal to the compressed yeast price" minus stipulated costs. 64 I am not persuaded by FI's argument that a term should be implied that in the event of there being no largest user for compressed yeast, the MBT selling price should be the last such price. The main thrust of FI's argument on this point was based on further evidence it sought to call pursuant to s75A of the Supreme Court Act 1970 to show that the concession about largest users was wrongly made. FI submitted that the expert should determine whether there were largest users, being subsidiary or related companies of MBT to which compressed yeast was sold as a step in distribution to bakers for use. 65 In the course of his submissions Mr Campbell urged that the formula was no more than illustrative of the principles to be applied in calculating the price to be paid by FI to MBT for yeast. In reply, Mr Campbell said: "[Y]our Honours will recall when I was going through this in chief, I said that what this is aiming [at] is to work out the price escalation formulae for a kilogram pack of compressed yeast, and that it is one possible construction of this that if you were trying to work out the price of crumble yeast, then you would be looking at the selling price to largest users which were parties buying over 50,000 kilograms of crumble yeast per month, because what you're trying to do is to work out the underlying principles. And given the way that cream yeast is just a different mode of delivery of the yeast, what has happened in the market is that the really big bakers have stopped using compressed yeast and gone over to cream yeast, and they're using very large quantities of cream yeast, and so it is not as though the amount of actual yeast being consumed by large users has gone down, it's just that the mode of delivery has gone down [sic changed?]. And we would say that just as the definition of cream yeast price enables you to work from a compressed yeast price to a cream yeast price, you can work back the other way as well. And by working out what is the price to large users of cream yeast you are able to give effect to the purpose of the definition which is to enable both parties to be viable in the market. SHELLER JA: So that would be the first argument, but then if that doesn't work you, as it were, fall back on the argument that for compressed yeast there were still largest users. CAMPBELL: We do." 66 The fall back submission assumed that cl 8(1) did not operate if there were no largest users defined as "parties buying over 50,000 Kg of compressed yeast per month". This assumption gives cl 8 and the Schedule a rigidity which seems to me to be unlikely. The clause was intended to operate for twenty-five years or more. It was expressed to enable the determination of a price for yeast of no stipulated type according to principles set out in the Schedule. The Schedule provided illustrations or examples, one being compressed yeast in 1 kg packs. We were told little of the surrounding facts but no doubt other forms of packaging could be used and other types of yeast were contemplated. 67 The manufacture and supply of cream yeast was expressly contemplated. If the principles illustrated in the Schedule are applied to cream yeast, the formula works without any problem, provided largest users are understood to mean "those parties buying over 50,000 Kg of cream yeast per month". This applies the principles of price determination, illustrated by reference to compressed yeast, to another type of yeast, cream yeast, by substituting the words "cream yeast" for "compressed yeast" in the model. In addition, the cream yeast price has to be adjusted as illustrated by taking out the cost of packaging materials and raw materials used in filtration, together with the direct labour saving effected as a result of supplying cream yeast rather than compressed yeast. The effect of this reduction in the manufactured cost is a reduction in the price to FI. Otherwise the principles of price determination for the two types of yeast are the same. 68 Whether the concession made at the trial was rightly made, which depends upon whether the definition of largest user includes a wholesaler, seems to me to be beside the point. It was a concession about largest users of compressed yeast. Properly understood, the formulaic principles are here to be applied to cream yeast. There was no dispute that, at the relevant times, users were buying over 50,000 kg of cream yeast per month from MBT. For this reason, in my opinion, Rolfe J erred in concluding that question 3 should be answered: no. FURTHER EVIDENCE 69 Since I am of opinion that the formula can be applied in accordance with the supply agreement where MBT is selling to parties buying over 50,000 kg of cream yeast per month, the point to be established by the further evidence becomes academic. However, I should say something about it. The concession about largest users made by FI at the trial was said to have been made in reliance on a statement in an affidavit of Kenneth Gale Sparrow, sworn on 17 December 1997 and served on FI's solicitors on 18 December 1997. Mr Sparrow deposed that he was the National Marketing Manager - Yeast of Burns Philp Yeast/Bakery Asia Pacific Region, and except for a period of 12 months between July 1995 and June 1996 had held that position since March 1988. In that affidavit Mr Sparrow said that since at the latest 4 March 1996 "none of the customers of [BP] has purchased over 50,000 Kg of compressed yeast per month and thus none of such customers had qualified as a largest user as defined in the Schedule to the Supply Agreement." In his affidavit of 1 March 2000 Mr Daniel, FI's solicitor, said that in the light of documents to which he referred he had no reason to believe prior to the judgment of Rolfe J that a party was buying over 50,000 kilograms of compressed yeast per month. In particular, Mr Daniel said that FI wished to rely on a letter from Pricewaterhouse Coopers Legal, FI's solicitors, to Clayton Utz, MBT's solicitor, dated 24 December 1999 and a reply from Clayton Utz to Pricewaterhouse Coopers Legal dated 11 January 2000. 70 On 24 December 1999, FI's solicitors wrote referring to their inspection of MBT's discovered documents on 20 December 1999. In the course of that letter they said: " The basis on which you have given discovery From our discussions with you, we understand that (a) the defendant only sold yeast by its agent, Mauri Yeast Australia Pty Ltd (b) all yeast sold by Mauri Yeast Australia Pty Ltd was sold on behalf of the defendant (c) discovery has been provided accordingly. Please confirm." On 11 January 2000, MBT's solicitors replied: "Subject to all references to ' yeast ' being ' compressed yeast ', we confirm those matters set out in sub-paragraphs (a), (b) and (c) on page 1 of your facsimile transmission." 71 The letter of 24 December 1999 from FI's solicitors continued: "In any event, to enable us to get further instructions from our client, please provide written consent for us to disclose the following facts revealed from the documents discovered by your client: 1. Points (a) - (c) above. 2. Documents 22 - 24 show that Mauri Yeast Australia only sold compressed yeast to two entities, Mauri Integrated Ingredients Pty Ltd and FIA. 3. At some stage, Kerry Ingredients replaced Mauri Integrated Ingredients. 4. The MBT selling price as defined in the agreement, could only apply to a sale to Mauri Integrated Ingredients Pty Limited (and then Kerry). 4. [sic 5] At all relevant times, Mauri Integrated Ingredients (or Kerry) was purchasing over 50 000 kilograms of compressed yeast per month." 72 To this part of the letter of 24 December 1999, MBT's solicitors, in their letter of 11 January 2000, replied relevantly: "(b) the facts set out in paragraph 2 can be disclosed so long as only those facts, rather than the documents, are disclosed. To this end, please delete the words ' Documents 22 - 24 show that '. …. (d) the matters described in the fifth paragraph (marked, erroneously, as paragraph 4) can be disclosed on the condition that the words ' At all relevant times ' are deleted and replaced with ' during the period to which the documents relate… '." 73 From this emerged the question whether the sale of compressed yeast to Mauri Integrated Ingredients Pty Limited was a sale to a "largest user". 74 MBT resisted the admission of further evidence principally on the traditional grounds that it could, with due diligence, have been discovered before the trial and that in any event it did not advance FI's case because Mauri Integrated Ingredients Pty Limited could not be a "largest user" within the meaning of the Schedule. 75 Dr Axelsen, the Managing Director of both appellants, swore an affidavit in which he deposed as follows: "5. In or around early 1996, I became aware of the existence of a group called Mauri Integrated Ingredients. Until after the second judgment of Rolfe J (1 May 1998), I believed that Mauri Integrated Ingredients was a division of Burns Philp. I knew that Mauri Integrated Ingredients sold yeast to other companies, but until sometime after the second judgment of Rolfe J I believed that it did so as a division of Burns Philp, in the same way that Mauri Yeast Australia sold yeast to FIA as a division of Burns Philp. I had no knowledge that Mauri Integrated Ingredients was a separate company from Burns Philp." 76 Dr Axelsen was cross-examined at some length to show that he knew at the latest by 1996 that there was a company called Mauri Yeast (Australia) Pty Limited and another company called Mauri Integrated Ingredients Pty Limited, both separate companies from the respondent, Burns Philp & Company Limited. At the hearing of the appeal we reserved the question of whether the further evidence should be admitted. 77 Towards the end of Dr Axelsen's cross-examination, he gave the following evidence: "Q. You see I want to suggest to you Mr Axelsen that when you were giving instructions for the conduct of these proceedings, you saw in the defence in paragraph 15 of the defence, which is on page 15 of the appeal book, that the defendant said that since around 1996 there have been no large users as defined in the supply agreement. Right? A. Mm. Q. You saw that in the defence didn't you? A. I didn't - I'm not privy to all of that stuff so-- Q. Well you were aware after the defendant filed its defence that it was contending there were no longer any large users as defined in the supply agreement. You're aware of that? A. Yes, I'm aware of that. Q. And you agreed with it, didn't you? A. No, I didn't necessarily agree with it. I had no way of checking it. I was prepared to accept Mr Sparrow's affidavit because I found him to be a very straight forward gentleman. Q. Mr Axelsen, you saw that defence well before Mr Sparrow's affidavit, didn't you? A. Yes, I think I did because of- Q. And you accepted it, didn't you? A. Accepted it in the context that I had no reason to disbelieve it at that point. Q. I suggest to you you agreed with it because you knew yourself that there were no large bakers buying over 50,000 per month. You agreed with that. A. No, I didn't agree with that. I still contend that there were but-- Q. Bakers? A. I think so, yes. Q. But it never occurred to you for a moment that any entity in the Burns Philp group of companies wholesaling yeast to bakers could be regarded as a large user for the purpose of the agreement, did it? A. It - not as such at that point in time. Q. It did not occur to you for a moment, did it? A. No. Q. You understood that the defendant took the same position, didn't you? A. Yes. Q. And the reason you allowed the trial to proceed before Justice Rolfe on the basis that it did was your view that wholesalers within the Burns Philp group couldn't be large users. Isn't that right? A. It had not occurred to me as such, but they were a wholesaler, purchaser et cetera, as we kept - keep repeating. Q. And you knew that at all times? A. Yeah, yeah. Q. And the only reason all of this has as it were been brought up, to use a neutral word, is that some time later you became aware that Kerry Ingredients had become a wholesaler of Mauri Yeast. Isn't that right? A. Yes. Q. Then you sought to take the point well Kerry must be a large user, right? A. Wholesaler, large user, purchaser. Q. As a wholesaler, suddenly Kerry as a wholesaler. A. The word used constantly by the Mauri people is purchaser of yeast. I was unaware of the Mauri Ingredients purchasing 50 tonnes or more per month from Mauri Yeast. Q. No you weren't, Mr Axelsen, I suggest to you. Your evidence is false on that, and you knew either that it was the fact, it was very likely to be the fact, that the wholesale company was buying yeast from Mauri Yeast. A. I was not privy to their internal arrangements. Q. You thought it was very likely, didn't you? A. I don't think I thought about it." 78 With due respect both listening to the cross-examination and reading the transcript leaves me in doubt about what, at any particular point of time, Dr Axelsen's knowledge was of the arrangements between Burns Philp and its various subsidiaries and divisions. I am inclined to accept that Dr Axelsen did not appreciate, in the sense that he had not particularly considered, whether BP was selling compressed yeast to its subsidiaries or using divisions or subsidiaries to sell compressed yeast to bakers. 79 I accept that Dr Axelsen did not appreciate that, within the Burns Philp group, sales of compressed yeast were made from one corporate entity to another corporate entity before compressed yeast was sold by the second entity to bakers for use in breadmaking. It was apparent from counsel for MBT's submissions that even he was not clear as to the relationship between the companies and divisions. 80 An example of the problem is found in a letter of 4 March 1996 to Dr Axelsen. The letter is headed "Burns Philp Food & Fermentation Division". On the top right hand corner an address is given under the heading "Food Australasia". At the bottom there is a note "A Division of Burns Philp & Company Limited Incorporated in NSW Australia" with an ACN number. The letter was written by Richard Meagher, who described himself under his signature as General Manager, Bakery/Yeast Food Australia. In that letter Mr Meagher wrote: "An essential element in the calculation of the compressed yeast price was the 'MBT selling price to 'largest users'….defined as those parties buying over 50,000 kg of compressed yeast per month' but because recently, the purchaser buying the largest quantity of compressed yeast from us has requirements of less than 50,000 kg per month, the formula is no longer workable." 81 Nowhere in the correspondence until 1 March 2000 when MBT's solicitors wrote to FI's solicitors does MBT clarify the situation. On that occasion the solicitors wrote: "We reject your suggestion that any ' admissions ' are made in our letter of 11 January 2000. It has always been our client's position that Mauri Integrated Ingredients is not a ' largest user ' for the purpose of the formula in the Supply Agreement. The ' largest user ' within the formula is a reference to a purchaser who not only purchases the requisite quantity but is also a user of compressed yeast for manufacturing purposes. That this is the case can be gleaned from various provisions of the Supply Agreement. Mauri Integrated Ingredients was not a purchaser using compressed yeast for manufacturing purposes. It was a wholesaler. Similarly, Kerry Ingredients performs the same function though we note that Kerry Ingredients has only been the relevant wholesaler since June 1998." 82 For my own part, I think the circumstances are such that there are special grounds for admitting the evidence so that the question can be raised as to the meaning of "largest users". The supply agreement still binds the parties. It would, in my opinion, be unfortunate that the question of whether a subsidiary which buys yeast from Burns Philp for the purpose of then selling it on to bakers is, assuming the quantity threshold is satisfied, a largest user. I think this is a special ground for admitting the evidence. MBT is not prejudiced in any way which cannot be satisfactorily dealt with by the costs orders. 83 MBT relied upon the use of the word "user" in the description to support the conclusion that the definition is directed to breadmakers and not wholesalers. FI pointed to the definition "those parties buying over 50,000 Kg of compressed yeast per month". FI submitted that the definition does not refer to "those users" but to "those parties". The result of the MBT submission is, as it is suggested has happened in the present case, that the agreement and its operation can be avoided by the simple expedient of MBT's selling to a subsidiary wholesaler, which is not, according to the argument, a "largest user". This subsidiary wholesaler can then sell on any amounts to bakers and claim that those sales, even though over 50,000 kg per month, are not sales by MBT and therefore do not produce an MBT selling price. In my opinion, the better view is that it is open to conclude that the sale to the wholesaler was a sale to a largest user. But this, ultimately, will be a matter for the expert. 84 The parties agreed in cl 9 of the supply agreement that any dispute or difference of opinion as to the correctness of the calculation of the prices should, in the circumstances, be decided by a nominated chartered accountant acting as an expert and that the decision of that chartered accountant should be final and accepted by the parties as such. What was meant in the Schedule by selling price and how the formula should be applied in the circumstances as they have emerged, were inevitably matters for the nominated expert. The parties were prepared to accept the decision of that expert. The onus was on MBT to demonstrate that it was not open to that expert to conclude that the selling price was anything other than the contract price. To my mind and with due respect to the views of Rolfe J, MBT has failed to demonstrate this. Similarly, in my opinion, it was a matter for the expert to determine on the material properly before him whether there were, during the relevant period, sales to largest users free from a concession which may not accord with actuality. ORDERS 1. Appeal allowed; 2. Order that the orders of Rolfe J made on 12 February 1998 and 1 May 1998 be set aside; 3. In lieu thereof, declare that: (a) The appointed expert, Warwick Finney, is entitled to determine whether an adjustment is required in the selling price between the respondent and the first and/or second appellant, pursuant to the supply agreement, to recognise and take into account the benefits received by other customers of the respondent pursuant to the provision by the respondent, to other customers of capital equipment. (b) The appointed expert, Warwick Finney, is entitled to determine whether an adjustment is required in the selling price between the respondent and the first and/or second appellant, pursuant to the supply agreement, to take into account the inclusion of delivery costs to other customers in the respondent's Current Large User Price. (c) The respondent is obliged to provide to the first and/or second appellant details of the Current Large User Price. 4. The respondent to pay the appellants' costs of the proceedings before Rolfe J and of this appeal but to have a certificate under the Suitors' Fund Act 1951 if so qualified. 85 BEAZLEY JA: I agree with Sheller JA. ***** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.