Bindaree Beef Pty Ltd v Chinatex (Australia) Pty Ltd [2017] NSWSC 1615

Supreme Court New South Wales

Medium Neutral Citation: Bindaree Beef Pty Ltd v Chinatex (Australia) Pty Ltd [2017] NSWSC 1615 Hearing dates: 16, 18, 19, 23, 24 October, 17 November 2017 Decision date: 24 November 2017 Before: Hammerschlag J Decision: Judgment for the plaintiff for $31,350,364 to be adjusted to net present value for the unexpired portion of the contract (see para [107]) Catchwords: CONTRACTS - breach of contract - frustration - implied terms - damages - assessment of damages - whether claim in debt - Service Kill Agreement under which the plaintiff was to purchase cattle, slaughter and produce meat products for delivery to the defendant - where defendant breached by failing to pay amounts due and refusing to take delivery Legislation Cited: Civil Procedure Act 2005 (NSW) Sale of Goods Act 1923 (NSW) Category: Principal judgment Parties: Bindaree Beef Pty Ltd - Plaintiff Chinatex (Australia) Pty Ltd - Defendant Representation: Counsel: I.M. Jackman SC with T.W. Marskell - Plaintiff M.L.D. Einfeld QC with D. Krochmalik - Defendant

Solicitors: Hunt Partners Lawyers - Plaintiff Websters Lawyers - Defendant File Number(s): 2016/184465

Judgment

background 1. HIS HONOUR: The plaintiff, Bindaree, sues the defendant, Chinatex, for damages for breach of a written Service Kill Agreement (the SKA) which they entered into on 1 May 2015. 2. For the reasons which follow, Bindaree is entitled to succeed. 3. Bindaree operates an abattoir at Inverell, New South Wales. It processes cattle into consumable beef and beef products for sale. It also operates its own feedlot. 4. Chinatex is an Australian subsidiary of a Chinese state corporation, whose primary business is the import and export of textiles to and from the People's Republic of China. 5. In late 2014, negotiations commenced between Bindaree and an organisation styled Shenzhen Lianhua Enterprise Development Co. Ltd (SLED), a Chinese meat wholesaler, with a view to entering into an agreement under which Bindaree would slaughter cattle owned by SLED and would process it for a fee, upon payment of which, SLED would take the beef to sell on the market. This type of arrangement is sometimes described as a toll or service kill. 6. Mr Andrew McDonald (McDonald), Bindaree's Chief Executive Officer, represented Bindaree in the negotiations. SLED was represented principally by Mr William Li (sometimes spelt Lee) (Li). Other participants for SLED were a Mr Qu and Mr Huang. Chinatex had some involvement in the discussions. The precise nature of Chinatex's relationship with SLED is not clear. SLED had no corporate presence in Australia, whereas Chinatex did. For this reason, McDonald suggested that Chinatex guarantee SLED's obligations. 7. However, on 19 December 2014, Li wrote to McDonald requesting that Chinatex be made the formal signatory to the contract rather than SLED, obviating the need for a guarantee. McDonald agreed. 8. Chinatex was represented principally by Mr Zhihua Liang (Liang). 9. Somewhere in the background, unbeknown to Bindaree, was another entity, Uniwell Group Pty Ltd (Uniwell), an Australian subsidiary of SLED. It was seemingly contemplated on the Chinatex side of the deal that Uniwell would be the ultimate purchaser of the beef products to be produced under the proposed agreement between Bindaree and Chinatex. McDonald, who I found to be an entirely truthful witness, gave evidence that he became aware of Uniwell's existence for the first time on 14 May 2015 during a visit to Beijing. 10. In early 2015, Bindaree instructed its solicitor, Mr Norman Hunt, to prepare a draft agreement. Various drafts were produced. Chinatex had its own solicitor. Discussions between them covered the procedure that would apply to the choice of cattle and the prices which would be paid. 11. On 1 May 2015, Bindaree and Chinatex signed the SKA. It defines Chinatex as the Customer and Bindaree as the Processor. The Recitals record that the Processor operates beef abattoir facilities at Inverell and that the Customer has agreed to engage it to purchase cattle and carry out a Service Kill for it on the conditions of the SKA. 12. The following are the materially relevant terms of the SKA: 1. DEFINITIONS AND INTERPRETATION 1.1. Definitions AUS-MEAT Descriptors means the bovine basic end alternative categories descriptors as published in the Aus-Meat Handbook of Australian Meat 7th Edition Carcass Cost means and includes the average price paid by the Processor to acquire cattle of the same quality, price and trade descriptors referred to in clause 2.2 of this Agreement, including the Service Kill Cattle, during that Service Kill Week in which the Service Kill is carried out in accord with the provisions of this Agreement and all costs and expenses of whatsoever nature in transporting and delivering those Service Kill Cattle that are purchased at auction to the Abattoir . Customer means Chinatex (Australia) Pty Ltd ACN 003400217 of Level 11, 53 Walker Street, North Sydney NSW 2060 Customer's Purchasing Representative means Mr Zhihua Liang or such other person nominated by the Customer in writing to the Processor as the Customer's authorised representative to approve all the Customer's proposed Service Kill Cattle purchases for the purposes of this Agreement Product means and includes all boned beef from the Service Kill Cattle and any Customer Residuals not acquired by the Processor pursuant to Clause 6, but does not include the Processor Residuals. Service Kill means and includes holding feeding and watering the Service Kill Cattle at or around the abattoir prior to slaughter including, any veterinary costs incurred with respect to those Service Kill Cattle prior to the time that they are slaughtered, and the yarding, slaughtering, skinning and gutting of those Service Kill Cattle and disposal of waste material therefrom, chilling and boning carcasses, vacuum packing and packing beef into boxes by the Processor for the Customer in compliance with the Customer's boning specifications in Schedule 1 of this Agreement, all AUS-Meat specifications and all relevant AQIS export standards, for a fee for service. Service Kill Cattle means the mixture of Aus-Meat Descriptor cattle referred to in clause 2.2, which have been acquired by the Processor and delivered to the Abattoir by the Processor during the Service Kill Period to be slaughtered and otherwise dealt with by the Processor for the Customer in accordance with the terms of this Agreement. Service Kill Fee means the sum of $405 for each head of the Service Kill Cattle that the Processor provides a Service Kill for pursuant to the terms of this Agreement. Service Kill Period means 50 weeks during each 52 week period during the Term, and/or such other days that may be agreed between the parties. Service Kill Week means any week during the Service Kill Period Total Product Fee means the Service Kill Fee plus the Carcass Cost 2. SERVICE KILL 2.1. The Processor agrees, and is hereby authorised and directed by the Customer, to acquire and deliver, or cause to be delivered, in consideration of the payment of the Total Product Fee by the Customer, nine hundred (900) head (or such other number as may be agreed between the parties) of Service Kill Cattle, to the Abattoir, and carry out a Service Kill of those Service Kill Cattle for the Customer during each Service Kill Week nominated by the Processor to the Abattoir during the Service Kill Period. 2.2. Unless otherwise agreed between the parties the Service Kill Cattle to be delivered, or caused to be delivered, to the Abattoir by the Processor for the purpose of this Agreement shall be grass fed cattle and be a mixture of Aus-Meat Descriptors PR/YG/S(Ox)/Steer SS average 300kg to 320kg dressed carcass weight, and Manufacturing Cow average 240kg dressed carcass weight, with the average dressed weight for the Service Kill Cattle for each Service Kill Day being approximately 275kg 2.3. Subject to clause 2.5, the Service Kill Cattle to be delivered, or caused to be delivered, by the Processor for the purposes of this Agreement will be purchased by the Processor, in accordance with clauses 2.2 and 3 of this Agreement, on behalf of the Customer with the prior authorisation of the Customer's Purchasing Representative whose authorisation shall be final and binding on the Customer 2.4. In the event that the Customer's Purchasing Representative does not authorise the Processor to purchase a mixture of Aus-Meat Descriptors for a Service Kill Week in accord with the provisions of clause 2.2 by the ordinary close of business in New South Wales of the previous Service Kill Week, then the Processor may purchase and deliver 900 head of cattle of the mixture of the Aus-Meat Descriptors in accordance with clause 2.2 chosen by the Processor for the following week's Service Kill. 2.5. The Service Kill Fee for the Service Kill Cattle is to be paid in advance, in full and cleared funds, by the Customer to the Processor on the first Business Day of every Service Kill Week throughout the Term for that Service Kill Week 2.5. The Processor is not obliged to acquire Service Kill Cattle unless the Service Kill Fee has been paid to the Processor in accordance with clause 2.5 3. TOTAL PRODUCT FEE 3.1. The Total Product Fee is to be paid by the Customer to the Processor in two separate instalments, as follows: i) the Service Kill Fee is to be paid on the first Business Day of every Service Kill Week pursuant to clause 2.5 ii) the Carcass Cost is to be paid before the Product is loaded onto the Customer's transport pursuant to clauses 3.2 and 12 3.2. The Customer will pay the Processor the Carcass Cost for each Service Kill Day's production and in any event within 7 days of the Product, and any Customer Residuals not acquired by the Processor in accord with the provisions of clause 5 of this Agreement, being ready to be loaded into containers or refrigerated transport in accord with the Customer's written specifications. If the Processor does not receive payment in full in cleared funds in accord with the terms of this Agreement, then the provisions of clause 12.1 shall apply and indefeasible title to the Product will remain with the Processor 4. BONING YIELD 4.1. If meat yield does not reach 77% from beef carcass to beef cuts, the Processor must make up corresponding beef cuts of the same quality as compensation. 7. PRODUCT PACKAGING AND DISPATCH 7.1. The Processor will pack the Product into the Customers branded cartons ready for delivery and all Product produced in one week must be loaded into refrigerated transport or containers by the Customer prior to the next weeks' Service Kill Day's production. Any Product still on site on a subsequent weeks' Service Kill Day, will be transported to a China Approved Cold Store in Brisbane at the Customer's cost provided the Processor has received payment in full for those costs in advance of the transport. In the event that the Processor does not receive payment in full in advance of transport, the provisions of clause 12.1 of this Agreement will apply. 9. FAILURE TO PAY 9.1. In the event that the Customer fails to pay the Total Product Fee, or any part thereof, at the time stipulated by the provisions of this Agreement it will be a breach of a fundamental term of this Agreement and without limiting any other rights that the Processor may have at law with respect to any such breach of that fundamental term by the Customer, the Processor's obligation to acquire Service Kill Cattle on behalf of the Customer for a following Service Kill Day or Service Kill Week pursuant to clause 2.1 of this Agreement shall cease and the provisions of clause 10.3 of this Agreement shall apply 12. OWNERSHIP OF PRODUCT 12.1. Indefeasible title in the Service Kill Cattle and the Product remains with the Processor at all times until the Total Product Fee with respect to the Product has been received in full by the Processor from the Customer for the Product 12.2. Title in the Product passes to the Customer once the Total Product Fee has been received in full by the Processor prior to the loading of the Product onto the Customer's loading containers or refrigerated transport at the Abattoir 12.3. Where the Processor has not received payment in full and therefore retains indefeasible title in the Product pursuant to clause 12.1, the Processor has the absolute right and discretion to sell that Product to any person or entity that they so wish and retain the proceeds of sale of that Product for its own beneficial use 12.4. Indefeasible Title in any Customers Residuals acquired by the Processor shall pass to the Processor at the time that the Customer delivers its written request to the Processor for the Processor to acquire any or all of the Customers Residuals produced during particular Service Kill Day 13. CUSTOMER SPECIFICATIONS 13.1. The Customer's Boning Specifications are set out in Schedule 1 to this Agreement. 1. Schedule 2 of the SKA names Liang as the Customer contact person for Chinatex. 2. The SKA contemplated the acquisition and slaughter by Bindaree of 900 head of cattle per week, over the 150 week period from 18 August 2015 to 18 August 2018, with a two week hiatus each year. Chinatex was to pay Bindaree the Total Product Fee comprising the Service Kill Fee of $405 per head, and the Carcass Cost, being the average price paid by Bindaree to acquire the cattle, plus the costs and expenses of transporting cattle bought at auction to Inverell. 3. Five days earlier, on 27 April 2015, Chinatex and Uniwell entered into a written Underwriting Contract with each other in contemplation of Chinatex entering into the SKA. Under that instrument, Uniwell would assist Chinatex to reach agreement with Bindaree and would sign the SKA, and Uniwell would pay Chinatex for products according to the Underwriting Contract and the agreed amount in the SKA. 4. McDonald travelled to Beijing where, on 14 May 2015, he met, amongst others, with Li, who told him that "they" were now operating as Uniwell, which was going to be the sole sales company for Chinatex for the meat. This is when McDonald says he first learnt of Uniwell's existence. 5. The SKA was a potentially very lucrative arrangement for Bindaree. The risk of movements in the market prices for cattle was Chinatex's. On the other hand, Bindaree would profit to the extent that its production costs were under $405 per head. 6. Market prices for cattle apparently increased after the SKA was signed. Chinatex would have to pay more for the cattle slaughtered and processed under the SKA. 7. 18 August 2015 was scheduled to be the start of the first Service Kill Week. 8. Things did not start well for the SKA. 9. On 13 August 2015, after a somewhat extensive exchange of correspondence about prices, Li emailed McDonald as follows: We stressed many times, Chinatex can not lose money which is bottom line. 1. On 19 August 2015, McDonald met with Liang and Bindaree's solicitor, Mr Hunt. A conversation to the following effect took place: McDonald: We are starting to kill cattle today under the contract. The market has turned and I know there will be a rough time at first and you will lose some money in the beginning, but over the three-year contract there will be highs and lows, we hope that you will come out of it in front. Liang: Look, you got to help me. I think Uniwell is going to walk. I am aware of Chinatex's obligations under the contract, but I cannot show losses to head office from the beginning of the Service Kill. If only we were making money to start with, then I could deal with losses later. I need to hide the losses. I don't want Beijing to know. You've got to help me. Help me, help you. McDonald: I am happy to work with you on possible commercial solutions here. But until we agree on another solution, Bindaree will continue to purchase and process cattle under the Chinatex contract. Liang: We are here for a long-term business relationship with Bindaree. But you got to help me. I can't afford to have a loss. We could sell grain to you cheap and under market value for your feedlot and you offset that from the cost of the beef. Or we could provide a finance facility at good rates for meat trading. I have access to cash. You have just got to help me. I cannot show these losses up front. McDonald: Liang, we are happy to work with you, but we need you to honour the contract. Liang: I understand Chinatex's obligations under the contract. 1. Liang gave evidence. Notwithstanding significant contemporaneous evidence to the contrary, he denied having acknowledged Chinatex's obligations under the SKA (then or at any other time) or having made any request for assistance in hiding losses from Beijing. He is an intelligent, articulate and thoroughly unscrupulous man, entirely lacking in any commercial moral compass, whose evidence I reject where it conflicts with that of McDonald, and in any event, where it is not supported by contemporaneous, objective material. Senior Counsel for Chinatex correctly did not seek to support his evidence. Liang's attitude (which informed his behaviour throughout) can be simply stated: Chinatex cannot lose money. 2. At some point in his evidence, Liang said, unconvincingly, that this attitude yields to Chinatex's legal obligations. His and Chinatex's behaviour throughout shows otherwise. 3. It is clear that Chinatex never intended to perform its obligations under the SKA to take meat products and pay for them if that meant paying prices which it did not like. A limited selection of outward expressions of this attitude is set out below. 4. On 27 August 2015, Liang wrote to McDonald: Well noted the cattle killed for last week and would love to discuss next week on how to proceed between Chinatex and Bindaree/Sanger. Please make sure we must not show loss in our book. I wish the lower AUD would help a bit. 1. On 2 September 2015, Liang wrote, amongst others, to McDonald: Thanks for your mail and please be noted that since Uniwell's position changed, both Bindaree and Chinatex need to work out a solution for win win long term cooperation. As we discussed in last meeting, I would request you to help Chinatex not to show a loss in one month or two month general. Please consider how to coordinate between Bindaree/Chinatex/Sanger. 1. On 7 October 2015, Liang wrote, amongst others, to Campbell: Thanks for your reply and we would like to confirm that Chinatex needs to take all the products from the Service Kills and pay the costs of cattle and service charges. We just cannot accept the sales arrangement from your side and the calculations of profits and loss. 1. Chinatex gave no instructions to Bindaree for the purchase of any cattle. It did not take delivery of any meat products. Its communications made it clear that it would not do so. It did not make any payments. 2. Clause 10 of the SKA required Chinatex to deposit a security bond for its performance. On 15 October 2015, it transferred $364,000 into the trust account of Bindaree's solicitors. 3. McDonald was hopeful that Chinatex would find an acceptable commercial solution so that Bindaree could start delivering the meat processed under the SKA. He was reluctant for Bindaree to commence legal action. 4. So that Chinatex could not say that Bindaree had failed to hold up its end of the bargain under the SKA, Bindaree (presciently) adopted the following course: from 19 August 2015 until 5 October 2015 for each Service Kill Week, Bindaree bought cattle from saleyards or farmers and slaughtered, boned and placed them in chillers separate from Bindaree's own cattle. 5. Bindaree generated a daily production summary of this activity. The meat was, of course, never delivered to Chinatex. 6. Bindaree carried out the Weekly Service Kill in the hope that Chinatex would take delivery, but in the knowledge that this was hardly likely. 7. From 18 August 2015 to 5 October 2015, Bindaree regularly invoiced Chinatex for the difference between the Total Product Fee under the SKA and the amounts which it received from third parties to whom it sold the Products. These invoices totalled $6,916,684.47. Chinatex paid nothing. During the proceedings this period was termed the first non-performance period. 8. When payment was not received by Bindaree from Chinatex for a particular week, the Product was sold by Bindaree on a piecemeal basis to make up orders for other customers, via Sanger Australia Pty Ltd (Sanger), a sales and marketing agent to whom Bindaree paid a commission on sales. Sanger received orders from customers which it relayed to Bindaree. Bindaree sourced and processed meat to fill the orders. The sales agency relationship between Bindaree and Sanger had been in place for years. 9. McDonald gave evidence, which I accept, that if Chinatex had wanted delivery, Bindaree would have given it. Arrangements to supply Bindaree's other customers would have been made. Bindaree was at all times ready, willing and able to, and to the extent it could without Chinatex's cooperation, it did, perform. 10. On 6 July 2015, Bindaree and Sanger merged. Sanger continued to sell the meat products, but was no longer paid a commission. 11. In August 2015, Mr James Campbell (Campbell) was appointed Chief Executive Officer of Sanger. McDonald assigned to him responsibility for managing the SKA. Campbell was an entirely truthful witness. I prefer his evidence to that of Liang where they conflict. 12. On 29 September 2015, Campbell met Liang. Liang told him that the overall arrangement from Chinatex's perspective had been that Bindaree would sell to Chinatex, which would sell to Uniwell, which would sell to a Chinese "off-taker", which was unable to import beef in its own right. Liang said that Chinatex had been unable to perform the SKA because the Chinese off-taker had gotten into financial difficulty. Uniwell was unable to facilitate the export of the beef to the off-taker and therefore could not pay Chinatex, which was therefore unable to pay Bindaree. Liang said that Chinatex understood its obligations under the contract and needed to find a solution. 13. Liang identified a Chinese company called Hondo as a possible customer for Chinatex to sell the beef from the Service Kill. More than once, Campbell made it clear that Bindaree was willing to work with Chinatex to assist it in meeting its obligations under the SKA. 14. From mid-September 2015 to May 2016, Campbell dealt mainly with Liang. He also dealt with a Mr Clement Quan, who he learnt from Liang was an agent for Hondo. 15. On 8 October 2015, Campbell had a conversation to the following effect with Liang: Campbell: How is Hondo going? Liang: Good, we are in a position to perform under the contract with Hondo as our customer. Campbell: Will you take the product? Liang: Yes, except residues. Campbell: Will the product go to China? Liang: Yes. Campbell: Do you want it all "A" grade cow? Liang: Yes, within the specs of the contract, we want as much as possible chilled. The current cuts under the contract are too small, Clement will go to Bindaree to adjust some of the cuts, and he is authorised on behalf of Chinatex. Campbell: Great. We are willing to work closely with you and Clement in order to find a commercial solution. 1. Hondo started taking meat products produced by Bindaree from 8 October 2015. 2. In November 2015, McDonald visited Hondo in Chongqing, China. 3. Hondo's specifications were more onerous than those which the SKA contemplated, but Bindaree met them anyway, according to McDonald, at Chinatex's direction to satisfy its customer. 4. From 8 October 2015 to 15 January 2016, Bindaree invoiced Chinatex $17,583,093.39 for these sales. Chinatex paid. It never suggested it was wrongly invoiced. The parties termed this period the performance period. 5. Liang, in my view dishonestly, denied that his understanding was that the Hondo arrangement was Chinatex's performance of the SKA. 6. Hondo stopped buying from Bindaree at the beginning of January 2016. 7. Communications between Bindaree and Chinatex about future performance of the SKA ensued. These included the assertion on 5 January 2016, for the first time, by Liang that cl 2.3 of the SKA required Bindaree to seek Chinatex's authorisation to buy cattle each week, and that without asking Chinatex for authorisation, Bindaree should not buy cattle, and a response by Campbell that under cl 2.4, if Chinatex's Purchasing Representative did not provide authorisation, Bindaree could choose the mix of Aus-meat descriptors specified in cl 22, and deliver that mix. 8. There were exchanges regarding, amongst others, payment of $2,641,048.63 owed for the Service Kill performed by Bindaree during the weeks beginning 21 and 28 December 2015. 9. There were negotiations about a settlement agreement to bring the SKA to an end, but these did not reach fruition. In a letter dated 15 January 2016, Campbell referred to a verbal agreement reached on 5 January 2016, that the two week period from 4 – 15 January 2016 had been a period of suspension under the Service Kill Period definition in accordance with the SKA. 10. Campbell says that because it appeared to him that Chinatex accepted it had to comply with the SKA, he allowed the weekly kill in accordance with the SKA to continue into 2016. 11. Once Hondo stopped buying, Chinatex reverted to form by not performing the SKA because its commercial interests did not suit it to do so. 12. On 8 April 2016, Chinatex's solicitors, Websters, wrote to Campbell denying any liability to pay any amounts to Bindaree, and asserting that the SKA came to an end when Chinatex "long since indicated that it would no longer perform its obligations under the contract". The letter also asserted that Bindaree, not Chinatex, had been in fundamental breach of the contract. 13. On 31 May 2016 Bindaree's solicitors wrote to Chinatex's solicitors, terminating the SKA effective immediately. 14. The parties termed the period from 15 January 2016 to 31 May 2016 the second non-performance period.