Rehau Pte Ltd v AAP Industries Pty Ltd

MACFARLAN JA: I agree with Sackville AJA.

SACKVILLE AJA: This is an appeal against a decision of a Judge of the Common Law Division (Davies J) giving judgment for the respondent (AAP), the plaintiff in the proceedings, in the sum of $240,166. [1] The primary Judge awarded this sum as damages for breach of contract, consequential on a finding that the appellant (Rehau) repudiated a Supply Agreement entered into between the parties on 29 September 1999. Rehau is a company incorporated in Singapore.

The finding that Rehau repudiated the Supply Agreement depended on the primary Judge’s acceptance of AAP’s contention that the Supply Agreement, properly construed, obliged Rehau to order nine specified plumbing articles exclusively from AAP and from no other supplier (Exclusivity Term). On AAP’s case, Rehau breached the Supply Agreement in 2013 when it ordered the articles from a different supplier and AAP subsequently accepted the breach as a repudiation of the Supply Agreement. Rehau’s appeal challenges the primary Judge’s construction of the Supply Agreement.

Rehau also challenges the primary Judge’s order that Rehau pay AAP’s costs of the Common Law proceedings. Rehau makes a number of submissions in relation to costs which are addressed later in this judgment. [2]

AAP has filed a cross-appeal. This challenges the primary Judge’s rejection of a claim for damages made by AAP based on Rehau’s alleged breaches of further agreements relating to the supply of articles not referred to in the original Supply Agreement. The primary Judge rejected AAP’s claim that the later agreements included the same Exclusivity Term as was implied in the Supply Agreement.

Apart from the Supply Agreement itself and other documents executed by the parties at the same time, there was virtually no evidence as to the circumstances that gave rise to the execution of the Supply Agreement. AAP read three affidavits affirmed by Mr Sarapuu, who commenced employment as AAP’s operations manager in September 2006. Not surprisingly, Mr Sarapuu could shed no light on the background to the Supply Agreement. Indeed he said that he first learned of the existence of the Supply Agreement in 2010.

Although Rehau filed several affidavits prior to the hearing in the Common Law Division, it did not read any affidavits and called no oral evidence on liability.

There is no dispute that the construction of the Supply Agreement is to be undertaken in accordance with the principles stated in Electricity Generation Corporation v Woodside Energy Ltd, as follows: [3]

The Supply Agreement was printed on Rehau letterhead and was executed by Rehau on 7 September 1999. It was executed by AAP on 29 September 1999.

The Supply Agreement is expressed to be between Rehau and AAP. Clause I provides as follows:

Each of the nine item numbers in cl I refers to a particular plumbing article, although the items are not described in the Supply Agreement itself. In most if not all cases a description of the items can be found elsewhere in the documentation. For example a “Delivery and Packing Directive”, also executed by AAP on 29 September 1999, records that Item 259455 is a “Coupler 16”.

Oddly enough, neither counsel initially could assist the Court as to the meaning of “call-off order”, a term that does not seem to be defined in any of the standard or commercial dictionaries. Mr Heath, who appeared for Rehau, ultimately informed the Court without objection that according to Wikipedia the expression has the same meaning as “blanket order”, namely:

Clause II of the Supply Agreement is as follows:

Clause III contains provisions that AAP relies upon as supporting its case on exclusivity. They include the following:

Clause IV deals with deadlines, as follows:

Clause V is critical to the issue of construction. It provides as follows:

The Supply Agreement does not record any “agreed prices” for the nine plumbing articles. Nor was there any evidence that Rehau and AAP had agreed on the prices for the articles on or before the date the Supply Agreement was executed.

Clause VI provides that Rehau “shall be entitled to withdraw from this Supply Agreement should deliveries be made repeatedly in non-compliance of the technical delivery specification”.

Clause IX deals with aids to production and tooling, as follows:

Clause XI provides as follows:

Clause XIII provides that the agreed place of jurisdiction irrespective of the amount in dispute is Singapore.

The final page of the five-page Supply Agreement records that three documents form appendices to the Supply Agreement. Relevantly, Appendix 2 comprises Rehau’s Conditions of Purchase which “supplement and form an essential part of [the] Supply Agreement” (cl II). (Appendices 1 and 3 consist of the “Technical Delivery Specification” and the “Delivery and Packing Directive”, respectively).

Rehau’s Conditions of Purchase include the following provisions:

AAP’s statement of claim pleaded that between 2000 and 2002 the parties entered into further agreements relating to the manufacture and supply of seven categories of brass articles, none of which was covered by the Supply Agreement. The primary Judge found that Rehau sent purchase orders requesting these articles to AAP on 21 December 2000 (Order 1), 17 August 2001 (Order 2) and 22 January 2002 (Order 3).

Order 1 was for the manufacture and supply of three of the nine articles identified in the Supply Agreement and two other items specified in the statement of claim. Order 2 was for two items identified in the Supply Agreement and five items specified in the statement of claim. Order 3 appears to have been for five items identified in the Supply Agreement and three items specified in the statement of claim. [5] Rehau placed Orders 1 and 2 after correspondence between the parties in which AAP provided quotations for the price of each of the items. It is not clear whether correspondence preceded Order 3. None of the Orders made any reference to the Supply Agreement or to the issue of exclusivity. The agreements constituted by the Orders were referred to by the parties as the Further Supply Agreements.

As has been noted, neither party adduced evidence of the circumstances leading to the execution of the Supply Agreement in September 1999. Nor was there any evidence as to the steps taken by each party pursuant to the Supply Agreement during the first year it was in force. Thus there was no evidence as to when (if at all) the parties agreed on the price of the nine articles identified in the Supply Agreement.

The primary Judge found that from September 1999 until about 2009 neither party gave notice terminating the Supply Agreement pursuant to cl XI. [6] Rehau continued to request AAP to supply both articles specified in the Supply Agreement and other plumbing articles. AAP continued to manufacture and supply articles ordered by Rehau from time to time.

The primary Judge accepted Mr Sarapuu’s evidence that he did not become aware of the existence of the Supply Agreement until July 2010. From the time he commenced employment with AAP in 2006, Mr Sarapuu simply followed the practices he had inherited from his predecessor, Mr Bambury. [7]

In 2009, Rehau redesigned the plumbing articles it had previously ordered from AAP. The redesign presumably required AAP to change its production processes for the articles. Lengthy discussions then ensued between the parties but Rehau continued to place orders with AAP.

On 6 July 2012, Mr Teo of Rehau sent an email to Mr Sarapuu asking for possible price reductions for articles required by Rehau. Mr Teo sought an “understanding” that until discussions concluded AAP should cease production. Notwithstanding this email Rehau continued for about another year to place orders with AAP for plumbing articles.

Rehau ceased placing any orders with AAP after 11 July 2013. On 2 June 2014 AAP’s solicitors sent a letter to Rehau asserting that Rehau had breached the Supply Agreement by failing to order any of the nine specified articles from AAP. The letter stated that by its conduct Rehau had repudiated the Supply Agreement. The letter further stated that AAP accepted the repudiation and would seek damages from Rehau for loss of bargain.

AAP’s letter of 2 June 2014 claimed that it was entitled to damages of $2,689,612.95 including loss of profits of $1,213,521.75 and the loss of opportunity to enter into a further supply agreement with Rehau assessed by AAP as having a value of $985,593.60. The letter also indicated that AAP would accept $1,000,000 in full and final satisfaction of its claim. Rehau did not accept the offer.

AAP commenced the proceedings in the Common Law Division on 12 December 2014. Since Rehau is incorporated in Singapore, the initiating process was served outside the jurisdiction.

Rehau filed a notice of appearance and a notice of motion seeking an order that service of the statement of claim be set aside. Rehau contended that the Supreme Court was an inappropriate forum because cl XIII of the Supply Agreement constituted an exclusive jurisdiction clause and required any proceedings to be brought in Singapore. By a judgment delivered on 10 April 2015, McCallum J dismissed Rehau’s notice of motion. [8]

On 21 August 2015, AAP served a report from Mr Vella, a chartered accountant, quantifying AAP’s damages at $724,428.

On 3 September 2015, a settlement conference took place but no settlement was reached.

On 5 November 2015, Rehau’s solicitors sent what they described as a Calderbank offer to AAP. The terms of that letter are set out below. [9] AAP did not accept the offer.

The hearing took place before the primary Judge on 2 and 3 November 2016. AAP abandoned the claim based on loss of opportunity during the hearing. A revised report by Mr Vella was tendered which assessed AAP’s damages at $518,759.

The primary Judge delivered the Primary Judgment on 21 April 2017, finding in AAP’s favour on its claim under the Supply Agreement but rejecting its claim founded on Rehau’s alleged breach of the Further Supply Agreements.

His Honour delivered the Second Judgment on 31 August 2017. As noted earlier, he gave judgment for AAP in the sum of $240,166 and ordered Rehau to pay AAP’s costs.

Relevantly for present purposes the primary Judge identified the following issues: [10]

AAP’s case was that the Supply Agreement and each of the Further Supply Agreements contained the Exclusivity Term requiring Rehau to order the specified articles from AAP and from nobody else. The primary Judge observed that there is no bright line between construing the terms of a contract and implying a term to give the contract business efficacy. [11] Since different factual and legal considerations applied to the Supply Agreement and the Further Supply Agreements his Honour thought it necessary to address them separately. [12]

The primary Judge considered that a number of provisions in the Supply Agreement suggested that, on its proper construction, Rehau was bound to obtain supplies of the nine specified items exclusively from AAP. His Honour identified six matters as follows: [13]

The primary Judge observed that: [14]

In view of this conclusion, it was not necessary for his Honour to deal with AAP’s alternative argument that the Exclusivity Term should be implied in the Supply Agreement as a matter of business efficacy on the principles stated in Codelfa Construction Pty Ltd v State Rail Authority (NSW). [16] Nonetheless his Honour concluded that the requirements for implying a term were satisfied. Since AAP was required to reserve production capacity and raw materials and to hold two months buffer stock, it was “entirely equitable and reasonable to imply the [Exclusivity Term]”. Furthermore, without the Exclusivity Term the Supply Agreement would for all purposes be ineffective as it would impose no obligation at all on Rehau. [17]

The position in relation to the Further Supply Agreements was different: [18]

The primary Judge found that Rehau had not terminated the Supply Agreement at any time prior to AAP’s letter of 2 June 2014. Specifically, Rehau’s email of 6 July 2012 did not constitute notice satisfying cl XI of the Supply Agreement. [19] However, Rehau had repudiated the Supply Agreement by failing to place orders with AAP after July 2013. [20] AAP’s letter of 2 June 2014 accepted Rehau’s repudiation and terminated the Supply Agreement. [21]

By contrast, the Further Supply Agreements were simply ad hoc arrangements for the placement of orders and the supply of articles pursuant to the orders. Rehau was free to place further orders or not as it chose. [22]

The primary Judge considered that the evidence was insufficient to enable him to assess damages. He therefore formulated principles or guidelines for the proper calculation of damages and gave the parties the opportunity to calculate the appropriate award. [23]

In the Second Judgment the primary Judge noted that the parties had agreed on two heads of damage, namely loss of profits at $86,903 and losses in respect of finished goods at $26,458. His Honour found that AAP was entitled to a further sum of $83,583 for loss of raw materials. [24] The result was that AAP was entitled to judgment for $196,944 plus interest. [25]

Rehau advanced three contentions in relation to costs. First, that it was entitled to indemnity costs as from 6 November 2015 by reason of the Calderbank offer of 5 November 2015. Secondly, Rehau sought what it described as a proportionate costs order. Thirdly, Rehau embraced a suggestion by the primary Judge that r 42.34 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) might preclude AAP from obtaining a costs order because the proceedings should have been commenced in the District Court. [26] The primary Judge rejected all three submissions.

His Honour calculated AAP’s entitlement to interest at a total of $43,222 producing a judgment figure of $240,116. [27]

The primary Judge distinguished between two kinds of implied terms in a contract. The first comprises implications contained in the express words of the contract. The second consists of implications from considerations of business efficacy. The distinction drawn by the primary Judge is consistent with the conventional classification of implied terms [28] and was not challenged by Rehau.

Rehau challenged – as it had to – both bases for the primary Judge’s conclusion that the Supply Agreement should be construed to include the Exclusivity Term. Most attention, however, was devoted in argument to the primary Judge’s holding that the express terms of the Supply Agreement, properly construed, required the Exclusivity Term to be implied. It is convenient to deal first with Rehau’s challenge to this holding.

Rehau’s principal contention – although one that emerged only in oral argument – was that the express terms of the Supply Agreement should not be construed to imply the Exclusivity Term because at the date of execution the parties had not reached agreement on the price of the nine specified articles. Mr Heath submitted that the language of cl V, coupled with the absence of any reference in the Supply Agreement to the actual price of the articles, evinced an intention that the “fixed price” would be negotiated after the date the Supply Agreement was executed and came into force. Mr Heath relied on AAP’s failure to adduce any evidence that the parties had in fact agreed on a fixed price for each of the items prior to execution of the Supply Agreement.

Mr Heath contended that the absence of an agreed price at the date execution made it impossible to construe the Supply Agreement as incorporating the Exclusivity Term. To construe the Supply Agreement in this way would be to require Rehau to purchase the nine specified items exclusively from AAP, regardless of whether the parties were able to negotiate an agreed price. On no view, so he argued, could a reasonable business person attribute such a meaning to the Supply Agreement.

Mr Heath submitted that the Supply Agreement should be construed as setting out the terms which would apply to orders placed by Rehau if and when the parties agreed on the price of those articles. If they could not agree, Rehau obviously had to be free to purchase its requirements elsewhere. If they did agree on a particular price for the supply of one or more of the nine articles, the terms of the Supply Agreement and the Conditions of Purchase would govern the contract for the supply of those articles. But whether or not the parties agreed on price, Rehau was free to place orders for the nine articles with other suppliers. On this construction the Supply Agreement was a kind of umbrella agreement which set out the terms to apply if and when Rehau placed orders with AAP for the supply of articles specified in the Supply Agreement.

It does not appear that the argument based on the absence of agreement as to price was advanced by Rehau at the trial. Perhaps more significantly for present purposes, Rehau made no submission at trial that the Supply Agreement was not binding on the parties because they had failed to agree on an essential term of the contract for the supply of the nine articles, namely price. [29] On the contrary, it was common ground at the trial that the Supply Agreement continued in force from year to year as contemplated by cl XI, at least until Rehau sent its email of 6 July 2012. (As has been seen, the primary Judge rejected Rehau’s contention that the letter terminated the Supply Agreement).

The submissions at trial therefore did not address how the Supply Agreement could be a valid and binding contract if (as Mr Heath contended in this Court) the parties had not agreed on price. It was not submitted to the primary Judge, for example, that the parties agreed on a specific mechanism for resolving any disagreements to price [30] or that a term should be implied requiring the parties to negotiate in good faith to reach an agreement on price. [31] Nor was it submitted that a term should be implied requiring Rehau to pay a reasonable price for the supply of the nine items identified in the Supply Agreement. [32]

It is difficult to construe the reference to a “fixed price” in the Supply Agreement as meaning a price to be fixed in the future without determining how the Supply Agreement could be a valid and enforceable contract if at the date of execution the parties had not agreed on the “fixed price” for the articles. The Court pointed out the difficulty in the course of oral argument but no submissions were advanced as to how the difficulty could be overcome.

In view of the approach taken by both parties it is necessary to construe cl V on the assumption that the Supply Agreement was valid and enforceable at least until AAP’s acceptance of what it claimed was Rehau’s repudiation of the Agreement. It will be recalled that cl V records the parties’ agreement that “[t]he agreed prices are fixed” and that “[t]he fixed prices are valid for one year”. The Supply Agreement came into force with immediate effect and was initially for a term of one year “upon signing” (cl XI). It follows that the fixed prices were valid for one year from the date of execution of the Supply Agreement.

If cl V is read in isolation, the natural meaning of the language is to record that the parties have agreed on fixed prices for the nine articles. The first sentence uses the present tense; it does not say that the parties will (or are to) agree on fixed prices. The fact that the fixed prices are “valid” as from the date the Supply Agreement is executed evinces an intention to record an existing agreement as to prices capable of implementation from the very outset of the contract.

The import of the second sentence of cl V (“[The agreed prices] shall remain valid even if the scope of deliveries conveyed or performance be changed …”) is by no means clear. But the sentence seems to have been drafted on the basis that the parties have already agreed on “the scope of deliveries” to apply during the first year of the Supply Agreement. The sentence suggests that the agreed prices should remain fixed even if there are variations in the “scope of deliveries”. So understood, the second sentence supports a construction of the Supply Agreement as recording a pre-existing agreement on the fixed prices to apply to articles supplied by AAP to Rehau.

Clause V must of course be read in the context of the Supply Agreement as a whole. There are, however, other indications in the Supply Agreement suggesting that cl V is intended to record that the parties have already agreed on fixed prices for the articles. In particular, cl I states that “REHAU shall purchase the [nine] articles from AAP”. This unqualified language conveys that Rehau is obliged to purchase articles from AAP as from the date the Supply Agreement comes into force. There is nothing in the wording to indicate that Rehau’s obligation to purchase the articles will arise only if and when the parties agreed on fixed prices in the future. On the contrary, Rehau could not be obliged to purchase any articles unless the parties had already agreed on the “fixed prices” to apply during the first year of the Supply Agreement. The requirement that AAP maintain sufficient production capacity to supply the quantities of articles required by Rehau (cl III) also strongly suggests that the parties intended the Supply Agreement to operate from the outset. This could only occur if fixed prices had already been agreed.

It is true, as Mr Heath submitted, that the indications are not all one way. For example, it is odd that if the parties had agreed on the fixed prices for the first year of the Supply Agreement they did not record the prices in the Supply Agreement itself, or at least in a document signed at the same time. It also seems odd that the Conditions of Purchase refer to prices stated in “this order” (cl 5) when the Supply Agreement provides for fixed prices to apply throughout each year in which the Supply Agreement is in force. Yet the express inclusion of the Conditions of Purchase as “an essential part of [the] Supply Agreement” seems odd in any event. The Conditions of Purchase contain terms and conditions applicable to individual purchase orders. These terms and conditions overlap with those in the Supply Agreement which are expressed to apply to “each call-off order placed under [the] Supply Agreement” (cl I). [33]

As has been noted, there was no evidence beyond the terms of the Supply Agreement itself that Rehau and AAP in fact reached agreement on the fixed prices to apply during the first year. While this is surprising, evidence that the parties reached agreement is not essential in order to construe the Supply Agreement as recording that the parties had agreed on fixed prices for the articles. If this was not the factual position it was open to Rehau, which presumably had access to the relevant material, to adduce evidence that the parties had not settled on prices prior to execution of the Supply Agreement.

For these reasons, the Supply Agreement should be construed as recording that the parties had agreed on the fixed prices that were to apply during the first year the Supply Agreement was in force. It follows that under the Supply Agreement the fixed prices were to apply to each order placed by Rehau with AAP during the first year. It also follows that the terms of the Supply Agreement, insofar as relevant, were also to apply to each such order.

In my opinion, to use the language of the High Court in Woodside Energy [34] , this construction of the Supply Agreement gives it a businesslike interpretation on the assumption that the parties intended a commercial result. Unless the parties had reached agreement on the fixed prices, the terms of the Supply Agreement would make little commercial sense.

As the primary Judge observed, a number of provisions in the Supply Agreement support AAP’s contention that, properly construed, the Supply Agreement includes the Exclusivity Term. The provisions identified by his Honour have been reproduced earlier. [35] The matters referred to below overlap to some extent with his Honour’s analysis but are not identical.

First, as has been explained, the parties to the Supply Agreement agreed on fixed prices for the nine articles to be manufactured and supplied by AAP to Rehau. The prices were to apply for a period of one year. As cases such as Colonial Ammunition Co v Reid [36] demonstrate, an agreement to provide goods at a fixed price during a particular period is not necessarily inconsistent with the other party being free to purchase the articles from other sources. But the parties’ agreement in this case on fixed prices for the articles provides the context within which other provisions in the Supply Agreement need to be understood.

Secondly, the provision stating that Rehau “shall purchase” the nine articles from AAP (cl I) suggests that, while Rehau would be free to determine the quantities to be purchased from AAP, it would purchase all its requirements at the agreed prices exclusively from AAP.

Thirdly, the articles specified in the Supply Agreement were to be produced in accordance with drawings, tooling, models and the like made available by Rehau to AAP. All such items remained the property of Rehau and any tooling manufactured by AAP used in the production process was to become the property of Rehau. Aids to production supplied by Rehau or manufactured by AAP to Rehau’s specifications could be used only for orders from Rehau and were not to be made available to any third parties. Moreover, AAP was obliged at its own cost to keep the tooling up to date and ready for use (cl IX). These elaborate arrangements for the manufacture and supply of a limited range of articles meeting Rehau’s design specifications for which prices had been agreed suggest that the manufacturer was to be the exclusive supplier of the articles to Rehau for the term of the Supply Agreement.

Fourthly, the Supply Agreement obliged AAP to maintain sufficient production capacity for the quantities of articles required by Rehau (cl III). The Supply Agreement did not specify the quantities required by Rehau during any particular period. While there may be some doubt as to the meaning of this provision, it apparently contemplated that Rehau was to inform AAP from time to time of the quantities of articles it needed (although not yet necessarily ordered). AAP was then to ensure that it had sufficient production capacity to meet the anticipated demand if and when these indications translated into orders from Rehau.

Fifthly, AAP was required to maintain a “minimum buffer stock of 2 months of the articles … free of charge” (cl III). The minimum quantities were not specified in the Supply Agreement, but were to be ascertained following “the breakdown of quantities to be delivered as stipulated by REHAU”. The obvious commercial purpose of maintaining a buffer stock was to ensure that AAP could meet Rehau’s anticipated requirements for the articles. AAP’s obligation to maintain buffer stock is not decisive of itself, but in combination with the other provisions strongly supports the implication of the Exclusivity Term into the Supply Agreement.

Sixthly, the Supply Agreement provided that if AAP failed to meet the “absolutely binding” deadlines, Rehau was to be “further entitled to make covering purchases to maintain production” (cl IV). This language implies that, provided AAP met the imposed deadlines, Rehau would purchase all its requirements for the articles from AAP. Otherwise there would be no need to specify that Rehau was entitled to make “covering purchases”.

Seventhly, Rehau was entitled to withdraw from the Supply Agreement if non-complying deliveries were made repeatedly (cl VI). As the primary Judge observed, this provision would not have been necessary unless the parties intended that Rehau should purchase the articles exclusively from AAP.

Mr Heath submitted that the provisions in the Supply Agreement were consistent with Rehau retaining the right to obtain supplies of the articles from sources other than AAP. He characterised the provisions as “reasonable commercial terms … negotiated to ensure [Rehau] received the product quality and quantity it required”. Mr Heath contended that the Supply Agreement should be understood as an umbrella agreement designed to be supplemented by call-off orders which Rehau might never make. He supported this argument by referring to the last paragraph of cl I which states that “Execution of an order shall imply acceptance of these terms”. [37]

It may be accepted that, as observed by Owen J in Colonial Ammunition Co v Reid, [38] where a written agreement contains express covenants on the part of one party, the Court ought not to imply an unexpressed covenant by the same party except in the clearest case. In this case the Supply Agreement, which was obviously drafted by Rehau, expressly imposed virtually no obligations on Rehau, except the obligation to purchase the articles (cl I). In any event, I do not accept that the terms of the Supply Agreement are consistent with Rehau retaining the right to obtain supplies of the articles from sources other than AAP. For the reasons given, the Supply Agreement read as a whole makes commercial sense only if it is construed as requiring Rehau, while the Supply Agreement remains in force, to purchase its requirements for the articles exclusively from AAP. This is a sufficiently clear case to warrant implying the Exclusivity Term.

The last paragraph of cl I does not assist Rehau’s argument. It prevents AAP imposing other terms in acknowledgements of call-off orders. The last sentence of the paragraph is curious because the previous paragraph plainly contemplates that the terms of the Supply Agreement will apply to call-off orders placed by Rehau with AAP. It may be that the last sentence is intended to create the mechanism (“Execution of an order”) by which the terms of the Supply Agreement apply to a particular call-off order. In any event, the last paragraph of cl I cannot overcome the inference to be drawn from the other provisions in the Supply Agreement referred to above.

The decision in Colonial Ammunition Co v Reid is clearly distinguishable from the present case. A company agreed to supply certain ammunition to the Government of New South Wales for seven years. Clause 4 of the agreement provided that if the Government required different kinds of ammunition it would give the company six months’ notice. If the company did not state in writing that it would be able to execute orders for the supply and delivery of special ammunition, the Government had the right to purchase the ammunition elsewhere. The Government required special ammunition but gave no notice to the company and simply purchased the special ammunition elsewhere.

The Supreme Court of New South Wales held that cl 4 did not require the Government to purchase all special ammunition from the company. The Court interpreted cl 4 as being for the benefit of the company which otherwise “might have been called upon at a moment’s notice to supply ammunition for any number of weapons of different patterns”. [39] The purpose of cl 4 was to give the company a chance to decide whether or not it wished to supply the special ammunition. Clause 4 bears little resemblance to the terms of the Supply Agreement. [40]

Accordingly, the Supply Agreement should be construed as incorporating an implied term that during the currency of the Agreement Rehau was obliged to purchase all its requirements for the nine specified articles exclusively from AAP. In view of this conclusion it is not necessary to consider whether the primary Judge was correct to conclude that the Exclusivity Term should be implied in the Supply Agreement on the principles stated in Codelfa Construction Pty Ltd v State Rail Authority (NSW).

It is fair to say that Mr Zammit, who appeared for AAP, did not press the cross-appeal with particular force. This is not surprising as the cross-appeal is without merit.

The three Orders comprising the Further Supply Agreements [41] made no reference whatsoever to the Supply Agreement. Each Order related to articles not covered by the Supply Agreement (as well as some articles identified in the Supply Agreement). The argument advanced by Mr Zammit was that the parties had engaged in a course of dealing that incorporated the terms of the Supply Agreement, including the Exclusivity Term, into each of the Further Supply Agreements.

The foundation for this argument was obscure. Mr Zammit relied on evidence by Mr Sarapuu as to his practice between 2006 and 2011 in fulfilling particular orders. Quite apart from the fact that the evidence related to a period years after the Further Supply Agreements were entered into, Mr Sarapuu’s evidence did not establish that his practice had anything to do with the terms of the Supply Agreement. As has been noted, he did not become aware of its existence until 2010.

The documentation in evidence relating to the Further Supply Agreements goes no further than establishing that a series of orders for products were placed by Rehau and filled by AAP on prices and terms agreed from time to time. The primary Judge correctly concluded that there was nothing in the dealings between the parties that could incorporate the Exclusivity Term into the Further Supply Agreements.

Mr Heath submitted that the primary Judge erred in finding that it was not unreasonable for AAP to have rejected Rehau’s Calderbank letter of 5 November 2015. The letter was as follows:

The total of the amounts in items 2 and 5 in the letter was $200,279. [42] The primary Judge found that at the time the letter was sent Rehau considered that AAP had 36,315 kgs of scrap metal in its possession. As has been seen, his Honour ultimately awarded AAP damages of $196,944 plus interest, a total of $240,166.

The primary Judge gave several reasons for concluding that AAP did not act unreasonably in rejecting Rehau’s offer:

Mr Heath contended that the primary Judge’s discretion in relation to the Calderbank letter miscarried because his Honour should not have required a particular price to be placed on the scrap metal. According to Mr Heath, the “value was the value”. This submission did not explain what the true value of the offer was nor how the offer would benefit AAP (which presumably could sell the scrap metal at market value in any event).

The primary Judge gave cogent reasons for his finding. His Honour’s approach to the offer, insofar as it related to scrap metal, has not been shown to be in error.

Section 98(1) of the Civil Procedure Act 2005 (NSW) provides that, subject to the rules and other Acts, costs are in the discretion of the Court. UCPR r 42.1 states that if the court makes any order as to costs:

Rehau submitted to the primary Judge that he should take into account two matters when considering the appropriate costs orders. The first was that AAP had only partially succeeded in its claim in relation to the Supply Agreement and had failed in its claim based on the Further Supply Agreements. The second was that AAP abandoned its claim for lost opportunity damages at the outset of the hearing. These factors were said to warrant a departure from the general rule stated in r 42.1.

The primary Judge observed that the general rule is that a successful party is entitled to costs without the court attempting to differentiate between issues on which that party succeeded and those on which it failed. [46] However his Honour recognised that it may be appropriate to deprive a successful party of a portion of his or her costs if the issues on which that party failed took up a significant amount of time either by way of evidence or argument. [47]

His Honour considered that the issues and evidence in relation to the Supply Agreement and the Further Supply Agreements were intertwined. They were therefore not so separate as to justify depriving AAP of part of its costs. [48] The costs associated with abandonment of AAP’s loss of opportunity claim were generated by the need for Rehau to discover documents relating to its purchase of goods from suppliers other than AAP. In his Honour’s view, the discovered documents related not only to the loss of opportunity claim, but also to AAP’s loss of profits claim on which it succeeded. [49] Moreover, AAP had recovered a substantial judgment even if it was for an amount much less than originally sought. [50] In these circumstances it was inappropriate to depart from the usual costs order.

Mr Heath did not contend that the primary Judge misstated the relevant principles. Rather he submitted that the issues involving the Supply Agreement and the Further Supply Agreements were not as intertwined as the primary Judge found. This was said to be an error vitiating the exercise of the primary Judge’s discretion as to costs.

The primary Judge was better equipped than this Court to determine how far the issue at the trial were “intertwined”. Mr Heath’s submissions did not identify any particular matters that his Honour misapprehended or failed to appreciate. No appellable error has been shown.

UCPR r 42.34 provides as follows:

Rehau accepted before the primary Judge that AAP had properly commenced proceedings in the Supreme Court rather than the District Court because of the jurisdictional question which was resolved by the decision of McCallum J. [51] Rehau’s contention was that thereafter the proceedings should have been transferred to the District Court. [52]

The primary Judge accepted that UCPR r 42.34(1)(a) was satisfied because AAP had recovered a verdict considerably under the jurisdictional limit of the District Court ($750,000) and considerably under the sum of $500,000 referred to in the rule. [53] However his Honour considered that in circumstances where commencement in the Supreme Court was “entirely warranted”, continuation of the proceedings in the same court was justified. [54] His Honour took into account that the proceedings involved some relatively complex issues concerning the implication of terms on contract and the admissibility of evidence of post-contractual conduct. [55] This did not mean that the District Court was incapable of dealing with the issues but the decision of this Court in New South Wales v Quirk [56] recognised that the complexity of a case may warrant its commencement or continuation in the Supreme Court. [57] His Honour added that NSW v Quirk appeared to accept that it was relevant that a plaintiff’s claim, if successful, would have approached the $500,000 figure. While the primary Judge expressed doubt as to whether this was a factor to which r 42.34 was directed, he observed that “if that is regarded as a relevant consideration, the same could be said of AAP in the present case”. [58]

Mr Heath submitted that the primary Judge erred because his Honour:

These submissions should be rejected because:

The following orders should be made:

EMMETT AJA: The primary question in this appeal is whether the appellant, Rehau Pte Limited (Rehau), repudiated a contract made with the respondent, AAP Industries Pty Ltd (AAP). AAP sued Rehau in the Common Law Division for damages for repudiation of the contract. AAP contended that Rehau was under an obligation not to acquire specified articles from any supplier other than AAP and that Rehau breached that obligation. A judge of the Common Law Division (the primary judge) concluded that under a supply agreement entered into between AAP and Rehau, Rehau agreed that it would not acquire relevant goods from any supplier other than AAP. The primary judge held that AAP was entitled to judgment in the sum of $240,166 and ordered Rehau to pay AAP’s costs of the proceedings.

Rehau appealed from the orders made by the primary judge. AAP also cross-appealed on the basis that his Honour erred in failing to find that subsequent supply agreements between AAP and Rehau were not subject to a similar exclusivity provision. I have had the advantage of reading in draft form the proposed reasons of Sackville AJA for concluding that both the appeal and cross-appeal should be dismissed with costs. I agree with his Honour for the reasons proposed that the supply agreement between AAP and Rehau should be construed as incorporating an implied term that, during the currency of the agreement, Rehau was obliged to purchase all its requirements for nine specified articles exclusively from AAP. I also agree with his Honour’s conclusion, for the reasons proposed, that there was nothing in the dealings between the parties that could incorporate such an exclusivity arrangement into the further supply agreements between the parties.

Rehau also appealed from the orders made by the primary judge that it pay AAP's costs of the proceedings. The primary judge held that it was not unreasonable for AAP to have rejected an offer made by Rehau. I agree with Sackville AJA that the primary judge gave cogent reasons for his finding and that his Honour’s approach was not in error. The primary judge made no error in concluding that the issues concerning the principal agreement and the further agreements for supply were so intertwined as to justify depriving AAP of part of its costs.

The orders of the Court should be those proposed by Sackville AJA.