Merewyn Pty Limited & Ors v Simeon Wines Limited [2002] NSWSC 207

New South Wales Supreme Court

CITATION : Merewyn Pty Limited & Ors v Simeon Wines Limited [2002] NSWSC 207 CURRENT JURISDICTION: Equity Division Commercial List FILE NUMBER(S) : SC 50005/02 HEARING DATE(S) : 27 - 28 February 2002 6 - 7 March 2002 JUDGMENT DATE : 22 March 2002

PARTIES : Merewyn Pty Limited & Ors (Pltfs) Simeon Wines Limited (Def) JUDGMENT OF : McClellan J

COUNSEL : B W Rayment QC/W S Johnson/J R J Lockhart (Pltfs) F M Douglas QC/D T Kell (Def) SOLICITORS : Coudert Brothers (Pltfs) Mallesons Stephen Jaques (Def) CATCHWORDS : CONTRACT - interpretation - contractual term obliged one party to accept the reasonable opinion of another - ambiguous contractual term - "first quality wine" - pre-contractual conduct of parties considered - whether evidence of post-contractual conduct may be considered - the word "otherwise" after specific description words should be considered in the context of the clause Bickel v Duke of Westminster (1977) 1 QB 517 Commonwealth v Sterling Nicholas Duty Free Pty Ltd (1972) 126 CLR 297 CASES CITED : Jones & Anor v Clarke (1858) 2 H & N 725 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 Brambles Holdings Ltd v Bathurst City Council (unreported, 23 March 2001, NSWCA 61 Spunwill Pty Ltd v BAB Pty Ltd (1994) 36 NSWLR 290 DECISION : See paras 80-84

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

McCLELLAN J

FRIDAY 22 MARCH 2002

50005/02 - MEREWYN PTY LIMITED & ORS v SIMEON WINES LIMITED JUDGMENT Introduction 1 The plaintiffs are grape growers at Balranald in the Sunraysia Murray Darling Wine District ("Sunraysia District") of south western New South Wales. Each of them owns a vineyard of at least 40 hectares, which were developed and are managed together as one holding by Whitnall Rohde Farm Management Services Pty Ltd ("Whitnall Rohde"). The development is known as the Balranald Vineyards. 2 The defendant, a public company, is one of Australia's largest wine makers. It has a major winery at Buronga Hill in the Sunraysia District and has contracted to take all of the plaintiffs' grapes grown on the Balranald Vineyards for processing into wine at that winery. The contract contains a number of conditions of which one is in dispute in these proceedings. 3 These proceedings involve controversies beyond the disputed condition. However, when first commenced, there was an immediate problem in relation to a substantial volume of grapes suitable for making red wine, ("red wine grapes") which were almost ready for picking, and the matter was brought on for hearing with some urgency. The plaintiffs were fearful that the defendant may not take all of their red wine grapes and both parties were concerned to know of their rights and obligations under the contract. During the hearing, the parties were able to agree a regime which has allowed the grapes to be picked, processed and held as must or wine pending the outcome of the proceedings. The decision in the proceedings may be relevant to any decision by the defendant to retain the product of the processed grapes or return it to the plaintiffs. 4 The plaintiffs commenced these proceedings after they received a letter from the defendant dated 15 January 2002. That letter imposed a minimum colour standard in respect of the plaintiffs' red wine grapes expressed in milligrams of anthocyanin per gram of berry weight. It stated that unless the identified levels were evident in each of the nominated variety of grapes sampled before harvest, the grapes would, at the election of the defendant, either be rejected or accepted at a reduced price. 5 Although the defendant has contracted separately with each plaintiff, the grape supply contracts are relevantly identical. I shall only refer to one contract in these reasons ("the contract"). The contract contains no reference to a colour standard expressed in milligrams of anthocyanin or otherwise, and the evidence indicates that no practical method of measuring colour was available in 1995 when the contract was first executed. However, in more recent years a method of testing for colour has been developed and for grapes grown in warmer regions such as the Sunraysia District, the defendant and at least another major wine company – BRL Hardy Limited - believe that they can relate colour measured in red grapes with the quality of the wine made from those grapes. In general terms, the more dense the colour of the grapes, the better the quality of the wine. 6 The letter of 15 January 2002 was preceded by grower information meetings chaired by representatives of the defendant, where matters relevant to the colour and quality of grapes and wine were discussed. From material which the defendant had made available to growers at these meetings, which included the colour measurements taken of red wine grapes in recent vintages, the plaintiffs formed the view that, in particular, their cabernet sauvignon grapes would almost certainly not meet the colour criteria set by the defendant in the letter of 15 January 2002. Whether they were correct in their conclusions is questioned by the defendant. 7 However, as a consequence of these concerns, when these proceedings were commenced, the plaintiffs sought to restrain the defendant from refusing to accept grapes which did not meet the colour standards provided in the letter of 15 January 2002 or indeed any colour standard. 8 Before the proceedings came on for hearing, the defendant wrote a further letter dated 19 February 2002, which was intended to modify the position stated in the letter of 15 January 2002. However, the second letter was not entirely clear and it was necessary for the defendant's senior counsel to make plain in court, that the January letter was not to be relied upon. Any claim by the defendant that it can reject grapes merely because they do not meet an identified colour standard has been withdrawn. 9 Unfortunately, this did not eliminate all of the problems between the parties. Having withdrawn any claim that it could impose a colour standard, the defendant nevertheless said that it was entitled to reject grapes which did not meet the quality standard provided in the contract, in which colour may play a part. This standard is embodied in clause 4.1 of the Schedule to the contract, which provides that the defendant is not bound to "purchase from the Grower any Grapes which in the reasonable opinion of the Processor's grader (the defendant is the processor) are not of sufficient quality for "making first quality wine whether by reason of unsoundness, damage, contamination, disease or otherwise." 10 The parties cannot agree as to the meaning of the phrase "first quality wine" in the clause. In short, the defendant says that it means wine of a quality suitable to be sold under the Jacobs Creek label of Orlando Wyndham Group Pty Ltd ("Orlando Wyndham"). As it happens, the defendant's largest customer is Orlando Wyndham to which it sells significant quantities of wine suitable for Jacobs Creek. It also sells significant quantities of lesser grade wine to Orlando Wyndham, which is used in inferior products. 11 The plaintiffs' position is that "first quality wine" means sound wine, being wine without physical defects, irrespective of its quality. 12 The parties have proffered possible declarations, which it is submitted may be appropriate in the circumstances. 13 I have been troubled by whether the court should intervene at this stage of the dispute or whether as the defendant has submitted, the plaintiffs should be left to a remedy in damages, should it be available. But for the arrangements which the parties have put in place, in relation to the grapes from the current vintage, there was a risk that a significant quantity of grapes may have been entirely lost, which, even if rejected by the defendant, may have had real value in the market place. Although that risk has been eliminated there remains a real dispute between the parties as to the meaning of clause 4.1 and the rights which each party has under the contract. Rather than leave the parties with the real possibility of significant further litigation, which may require an examination of complex factual issues, such as the criteria by which any grapes were rejected and even more complex inquiries with respect to damages, I am satisfied that, if a declaration can be made, then it should. (See the discussion in Meagher, Gummow and Lehane Equity: Doctrines and Remedies, 3rd ed p 358). 14 I am mindful of the remarks in Bickel v Duke of Westminster (1977) 1 QB 517 at 524 where Lord Denning emphasised the care with which a court must approach a claim for relief, in respect of contractual terms, which oblige one party to accept the reasonable decision of another. However, in a case such as the present where the parties accept that a discretion is available to the defendant's grader, but are at issue as to the matters which are relevant to inform that discretion, I am satisfied it may be appropriate for the court to grant declaratory relief. There can be little doubt that the grant of such relief may enable the parties to proceed to order their affairs more efficiently and with greater certainty than might otherwise be the case, (see Commonwealth v Sterling Nicholas Duty Free Pty Ltd (1972) 126 CLR 297 at 305). 15 The contract made by the parties does not define the phrase "first quality wine" and it is not a term of art known in the wine industry as perhaps "fair average quality" is used in relation to primary produce. (see Jones & Anor v Clarke (1858) 2 H & N 725). It is agreed between the parties that because it is impossible to make wine described in the industry as Icon wine (an example being Penfolds Grange) from grapes grown in the Sunraysia District – it is just too hot and dry – "first quality wine" cannot mean the best wine which can be made. However, it is plain that the meaning of the phrase is ambiguous and accordingly, assistance, if available, may be sought in the precontractual conduct of the parties. By this means, the court may be informed of "the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting." See Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 347-352. 16 Evidence of post contractual conduct is "not admissible on the question of what a contract means as distinct from the question of whether it was formed". (Brambles Holdings Ltd v Bathurst City Council (unreported, 23 March 2001, NSWCA61 Mason P, Heydon JA and Ipp AJA). However, see the suggestion by Santow J to the contrary in Spunwill Pty Ltd v BAB Pty Ltd (1994) 36 NSWLR 290. 17 In the present case, because the dispute has its origin in the attempt by the defendant to impose an objective colour standard for red wine grapes, considerable evidence of the conduct of the parties in recent years has been admitted. I have related that evidence briefly in these reasons but it now provides no more than background to the dispute. It cannot be relevant to an understanding of the true bargain between the parties. The background 18 Grapes suitable for the making of table wine are grown in many parts of Australia with varying climate and soils. The Sunraysia District is a warm inland grape growing region with most vineyards relying on irrigation. Cooler grape growing regions, such as the Coonawarra and Barossa Valley, but there are many others, rely far less on irrigation. The cooler areas are generally believed to provide grapes which make higher quality wine than can be made with grapes from the warm inland areas. 19 Most of the major wine companies have interests in the Sunraysia District. By 1995, when the contract between the parties was executed, the major winery owners in the District were the defendant, Southcorp Ltd, BRL Hardy Ltd, Mildara Blass and Cranswick Wines. The District produced in the order of twenty percent of Australia's wine grapes, the vineyards producing larger quantities of grapes per hectare than vineyards in the cooler regions. Vineyards in the Sunraysia District produce on average, twenty-four tonnes of grapes per hectare whereas in the Coonawarra region, the average production may be only ten tonnes of grapes per hectare. 20 In 1995, the average price per tonne for wine grapes grown in the Sunraysia District was between one third to one half of the average price per tonne for grapes grown in the cooler wine grape growing regions. 21 The global market for wine and its various segments can be described in a number of ways. However, in these proceedings, the labels generally applied to the various market segments in the United States of America, were adopted. Using those labels at the top of the quality range are Icon wines, comprising one percent of the market, Ultra Premium wines comprising five percent of the market, Super Premium wines comprising ten percent of the market, Premium wines comprising thirty-four percent of the market and Basic wines which make up fifty percent of the market. 22 Brands which are accepted as indicative of the Premium segment of the market include Banrock Station, Jacobs Creek, Lindemans Bin Range, Oxford Landing and BRL Hardy's Nottage Hill. Generally wines suitable for the Premium segment are packaged into bottles although some wines of this quality are sold in both bottles and casks – generally two litre casks. Basic wines are sold in casks generally of four litres in size. These are generally referred to as generic casks as a significant proportion of the wine may be made from multi-purpose or non-varietal wine grapes, although this is not always the case. 23 The defendant was formed in 1994 and was listed on the stock exchange in June of that year. From the outset it had a close relationship with Orlando Wyndham which is Australia's third largest wine company. One of the goals of the defendant, upon flotation, was to be able to provide processed varietal grapes for use in making Orlando Wyndham's flagship wine marketed under the Jacobs Creek label. Apparently, the name Simeon was chosen for the defendant because in biblical terms, Simeon was the son of Jacob. Orlando Wyndham remains the defendant's largest single shareholder. One of the defendant's original assets was the Buronga Hill winery which is situated so that it can accept and process grapes from the Sunraysia District. 24 Mr Mackenzie has been the Managing Director of the defendant since its formation. He was formerly employed by Orlando Wyndham. He gave evidence that in Australia in 1995, there was only a limited amount of wine packaged in two litre varietal casks and this was mainly white wine. Although selling at a higher price than generic cask wine, the wine was inferior in quality to bottled wine such as Jacobs Creek or Nottage Hill, which was the wine of BRL Hardy equivalent to Jacobs Creek. In 1995, some varietal grapes such as cabernet sauvignon, shiraz and merlot found their way into generic casks but only when considered unsuitable for either varietal cask or bottled wine. 25 Mr Mackenzie gave evidence about the state of the Australian wine industry in 1995. In his affidavit he said the following: "In 1995 wine was produced in Australia and sold both in Australia (bottle and casks) and for export, mainly in bottles. Generic cask wine was (and remains) the minimum standard of drinkable wines. This minimum standard was in 1995, and remains today, reflected in the retail price of such generic cask wines (in 2001, $10 for 4 litres). Bottle wine in Australia in 1995 was almost invariably made from varietal grapes such as, in the case of red wine, Cabernet Sauvignon, Shiraz and Merlot. Bottled wine ranged from commercial bottled wine (such as Jacobs Creek and Nottage Hill, in 1995 $6, now currently $8 bottle) up to premium bottled wines such as Hill of Grace (currently $200 bottle). In between these two categories fell what may be regarded as mid-range quality bottled wines (that presently retails for about $15.00 per bottle, such as Peter Lehman). There was, in Australia in 1995, only a very limited amount of dedicated 2 litre varietal casks (such as Yalumba) and then mainly for white wine. Those dedicated varietal casks sold at a significantly higher price than generic cask wine, but were regarded as being at a qualitative level below Jacobs Creek and Nottage Hill. In 1995 varietal grapes such as Cabernet Sauvignon, Shiraz and Merlot typically found their way, in very limited form, into generic casks only when adjudged to be substandard, that is to be of insufficient quality for inclusion in dedicated varietal product, whether bottled or, in more limited quantities, varietal cask. This remains the case today. In 1995 generic cask wine was commonly referred to in the industry, including by me, as base wine or cask wine." 26 Mr Mackenzie also gave evidence that in late 1994 and early 1995 there was a general expectation in the wine industry that export sales would provide a significant avenue for growth. However, that expectation was confined to the export of bottled wine, in particular Premium wine (called by Mr Mackenzie "commercial wine") rather than of cask wines. The natural response to this expected increase in demand for Australian wine was the planting of new vineyards to provide the necessary grapes. In particular, cabernet sauvignon, shiraz and merlot wines were planted in the Sunraysia District. 27 In April 1994, the defendant issued a prospectus which contained amongst other information, the following statements: "Orlando Wyndham has contracted for ten years to take a large quantity of the Buronga Hill winery's output, and has contracted for fifteen years to take all of the grapes from the vineyards. Orlando Wyndham's demand for additional supply is largely based on its substantial forecast increase in export sales, particularly of the Jacobs Creek brand.