AAP Industries Pty Ltd v Rehau Pte Ltd

1. [1]

   This is a claim for breach of contract. There is one written contract executed by each of the parties and made on 29 September 1999. It is a contract for the supply by the Plaintiff (AAP) to the Defendant (Rehau) of certain plumbing articles. In addition there are said to be seven informal contracts constituted by purchase orders and associated documents passing between Rehau and AAP for other plumbing articles.

2. [2]

   The principal issue in the proceedings is whether both the formal contract and the informal contracts had an implied term of exclusivity. The contracts were said to be breached in 2013 when Rehau ceased to order the plumbing articles from AAP. AAP thereafter accepted what was said to be Rehau’s repudiation, and brings these proceedings claiming damages from it.

The Supply Agreement

1. [3]

   The Supply Agreement was one made in writing and executed by the Defendant on 7 September 1999 and by the Plaintiff on 29 September 1999. It is necessary to set out a good deal, but not all, of this contract. It was prepared on Rehau letterhead and provided as follows:

2. [4]

   Rehau’s standard Conditions of Purchase were said in Clause II of the Supply Agreement to “supplement and form an essential part of the Supply Agreement”. Of some relevance is condition 15 which provides:

The Further Supply Agreements

1. [5]

   There were said to be seven informal contracts, constituted by purchase orders placed by Rehau with AAP. These were referred to in the submissions as the Further Supply Agreements. These agreements were said to deal with brass articles other than those referred to in the Supply Agreement. Those Further Supply agreements are identified from the following documents:

2. [6]

   These documents result in the Further Supply Agreements being related to the following article numbers: 257346, 259485, 259495, 138253, 259515, 259475 and 257366. The article numbers referred to in the Supply Agreement and the Further Supply Agreements were Rehau’s identification numbers.

Course of dealing and termination of the contract

1. [7]

   For the period 1999 until about 2009 the contracts continued. No notice was given pursuant to cl XI of the Supply Agreement and supply continued to be requested and made of the articles in the Supply Agreement and the Further Supply Agreements. The evidence suggested, however, that AAP and possibly Rehau were unaware of the contractual arrangements reflected in the Supply Agreement. Mr Sarapuu at AAP said that he did not ever see the Supply Agreement until July 2010. He simply acted in accordance with prior practice that he had learnt when he first assisted Mr Bambury. On Rehau’s part, an email from Sarah Lemke (set out below at [11]) suggested that there was uncertainty about the terms of the agreement under which the parties were operating.

2. [8]

   In 2009 all of the articles referred to in the Supply Agreement and those referred to in the Further Supply Agreements were redesigned by Rehau to allow the polymer sleeve manufactured by Rehau to fit over the redesigned articles. Rehau provided drawings to AAP of the redesigned articles requesting (amongst other things) new pricing and expected lead times. AAP provided this information.

3. [9]

   From at least 2010 there were discussions between the parties about the price of the articles being supplied by AAP. Rehau pointed out that AAP’s prices were higher than those articles which could be obtained from Europe and China.

4. [10]

   On 1 July 2010 a meeting was held between representatives from AAP and Rehau. An email from Mr Sarapuu dated 5 July 2010 reflects what was discussed:

5. [11]

   On 17 August 2010 Sarah Lemke of Rehau sent an email to Kalev Sarapuu at AAP saying this:

6. [12]

   Mr Sarapuu replied by saying that it looked as if the latest supply agreement between the parties was in September 1999, and he asked if they wanted a copy of it. Ms Lemke replied by saying there was no need to send it over – Rehau had the same paperwork. She concluded by saying:

7. [13]

   The discussions regarding pricing continued during 2011 and 2012.

8. [14]

   On 6 July 2012 Mr Shawn Teo at Rehau sent an email to Mr Sarapuu saying this:

9. [15]

   The Defence pleaded that this email was a notice of termination within the meaning of clause XI of the Supply Agreement with the result that the Supply Agreement terminated in July 2013. The Plaintiff pleaded that the Defendant repudiated the contract by not purchasing exclusively from the Plaintiff and that the Plaintiff accepted that repudiation by letter dated 2 June 2014.

10. [16]

    The letter of 2 June 2014 was not annexed to any of AAP’s affidavits but was contained in Volume 4 of the Court Book which consisted of the parties’ discovered documents. The letter was, mysteriously enough, marked “Without prejudice save as to costs”. When Mr Zammit for AAP sought to tender this letter he said that he waived the privilege imposed by the heading. However, Mr Heath for Rehau correctly pointed out, in the circumstances, that the privilege belonged to both parties and he declined to waive it.

11. [17]

    The matter rested there until final addresses. Mr Zammit sought to rely on the part of the letter which, in terms, asserted repudiation of the contracts between the parties and the acceptance of that repudiation. When I asked him if the balance of the letter contained some offer of compromise he said that it did.

12. [18]

    During his submissions Mr Heath said this:

13. [19]

    In the light of what Mr Heath said I have read the whole of that letter. It contains no offer of compromise nor any material which could have justified a “without prejudice” heading. It is in the form of a letter of demand where the repudiation is detailed, asserted, accepted and a claim for damages is made. No ground is given nor compromise suggested in what is asserted and claimed. The letter should not have been marked “without prejudice”. I consider that I should have regard to it when examining the question of the termination of the contractual arrangements.

The evidence and the issues

1. [20]

   The Plaintiff read three affidavits of Mr Kalev Sarapuu. Two of those were sworn on 14 August 2015 and a third was sworn on 21 August 2015. The Plaintiff sought to read a fourth affidavit of Mr Sarapuu sworn on 27 October 2016. I declined to permit the Plaintiff to do so because of its late service. The affidavit was said to be a more efficient way of answering a Notice to Produce served by Rehau. However, the Notice to Produce was served on 17 February 2016 and was not responded to.

2. [21]

   An explanation for that was that the first date for the hearing of the matter on 3 May 2016 was vacated by consent. However, that occurred some considerable time after the Notice to Produce ought to have been answered. Further, nothing further was done in relation to the Notice to Produce until Mr Sarapuu’s affidavit of 27 October 2016 was served. That was done in the knowledge that the matter had been refixed for hearing on 2 November 2016. The affidavit sought to claim a further sum of $95,303.00 said to be the scrap value of the metal contained in articles that the Plaintiff was unable to dispose of in any other fashion after the purported repudiation by Rehau. Counsel for Rehau said that he was not able to meet that additional claim at such late notice.

3. [22]

   The result was that I refused to allow the Plaintiff to rely on that affidavit of Mr Sarapuu and a related updated affidavit of the Plaintiff’s expert Mr Trevor Vella also sworn on 27 October 2016.

4. [23]

   The Plaintiff also read an affidavit from Mr Vella of 21 August 2015.

5. [24]

   Although the Defendant had served affidavits, it did not read any affidavits at the hearing.

6. [25]

   The parties agreed five issues in the proceedings as follows:

(1) Is there an implied term in the contracts?

1. [26]

   AAP submitted that there was an implied term in the Supply Agreement and the Further Supply Agreements of exclusivity, that is, that Rehau was bound to order all of the 16 identified articles from AAP and from no one else. In support of the implication of such a term the Plaintiff pointed to a number of the express provisions contained in the Supply Agreement. Those submissions caused me to ask Mr Zammit whether the issue could not be resolved by properly construing the existing terms of the contract without the need to imply a further term.

2. [27]

   It is apparent from the authorities that there is no bright line between properly construing the terms of a contract and the implication of a further term to give the contract business efficacy. However, the difference between the two concepts may be significant because of rules relating to adducing evidence about post-contractal conduct. The general rule is that evidence of the way the parties have conducted themselves after the contract is made cannot be relied upon to construe the meaning of the contract. On the other hand, authority suggests that such conduct can be admitted to determine whether a term should be implied: Council of the City of Sydney v Goldspar Australia Pty Ltd [2006] FCA 472 at [164]. Further, that position is clearer where the asserted contract is not clearly embodied in an agreement with the terms spelt out: County Securities Pty Ltd v Challenger Group Holdings Pty Ltd [2008] NSWCA 193 at [17], [20]-[21].

3. [28]

   In Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337; [1982] HCA 24 Mason J said (at 345-347):

4. [29]

   His Honour went on to discuss to what extent evidence of surrounding circumstances was admissible to assist in the interpretation of a contract. Having done so, his Honour said this (at 353):

5. [30]

   The matter was discussed further by the High Court in Commonwealth Bank of Australia v Barker (2014) 253 CLR 169; [2014] HCA 32:

6. [31]

   Subsequently in Regreen Asset Holdings Pty Ltd v Cashtricum Brothers Australia Pty Ltd [2015] VSCA 286 the Victorian Court of Appeal discussed the relationship between the construction of a contract and the implication of a term to give business efficacy to the contract as well as to the difficulties in relation to admissible evidence by reason of that relationship. The Court said:

7. [32]

   It is important to set out the whole of the passage from the judgment of Gyles J in Goldspar. His Honour said at [164]:

8. [33]

   Different legal and factual considerations apply to the Supply Agreement on the one hand, and to the Further Supply Agreements on the other. It is necessary, therefore, to consider them separately.

9. [34]

   The Plaintiff pointed to a number of the terms of the Supply Agreement (set out at [3] above) and submitted that they led to the conclusion that the contract, properly construed, required Rehau only to order from AAP. The Plaintiff submitted that the requirements of BP Refinery were met. The requirement of being equitable and reasonable was a reference to fairness as between the parties: New South Wales v Banabelle Electrical Pty Ltd (2002) 54 NSWLR 503. The Plaintiff submitted that the burden to AAP and the benefit to Rehau by the express terms made it fair to imply a term of exclusivity.

10. [35]

    The Plaintiff submitted that if the term was not implied AAP would be reserving its production capacity for Rehau but without obtaining any benefit or certainty from the transaction. In that way it would be contrary to commercial common sense for AAP to enter into such a transaction without obtaining a benefit of the implied term.

11. [36]

    The Plaintiff submitted that such a term is so obvious that it goes without saying and that the word “shall” in clause I means that the parties, as reasonable persons, would have readily agreed to the implied term if it had been suggested to them: Banabelle at [50].

12. [37]

    The Plaintiff submitted that such a term is capable of clear expression and that was not disputed by the Defendant.

13. [38]

    The Plaintiff submitted that the implied term was not inconsistent with any of the express terms of the agreement. On the other hand it was entirely consistent with clause XI because such a provision would not otherwise have been necessary.

14. [39]

    The Plaintiff submitted that the subsequent conduct of the parties was consistent with the implied term. In particular from at least 2006 Rehau provided AAP with complete information relating to Rehau’s future Australian requirements of the articles listed in the Supply Agreement. Further, in July 2010 Rehau gave notice to AAP that it intended to replace some of the brass articles with new polymer articles.

15. [40]

    The Defendant submitted that there is a general presumption against implying terms into written contracts, and made reference to what Mason J said in Codelfa at [6] (set out at [28] above). In the present case the Defendant submitted that because there is a formal contract apparently complete on its face the BP Refinery test is applied more stringently than if the contract was an informal one.

16. [41]

    The Defendant drew attention to the submission of the Plaintiff that at the time the Supply Agreement was made it was the only supply agreement Rehau had entered into for the supply of the brass articles and that previously Rehau had placed single orders with various suppliers. The Defendant submitted that the past ordering pattern of Rehau and the entry into this agreement threw no light on the question of exclusivity. Nor was a mere expectation that Rehau would order exclusively from AAP sufficient to imply a term.

17. [42]

    The Defendant relied on the similarity of the factual position in Colonial Ammunition Co. v Reid (1900) 21 NSWR 338 and the holding in that case.

18. [43]

    The Defendant submitted that the Supply Agreement was a comprehensive and detailed contract and pointed to the third paragraph of clause I which said that only the terms stated in the Agreement or referred to in it should apply for the term of the agreement and that clause XII required collateral agreements, additions, supplements and modifications to be made in writing in order to be valid. The Defendant submitted that the implied term would be inconsistent with what appears in the third paragraph of clause I.

19. [44]

    The Defendant submitted that it is not enough for a court to consider that the implied term expresses what would have been reasonable for the parties to agree to. Rather, following what was said in Barker at [22] the Court must be satisfied that that is what the contract actually means. The Defendant submitted that the references to the Supply Agreement providing for a reservation of production capacity and the obligation for AAP to maintain a two months buffer stock was simply perfectly reasonable commercial requirements that were open to negotiation when the contract was entered into. Nor, the Defendant submitted, was the Supply Agreement all one way because under clause IX Rehau had to make available to AAP aids to production.

20. [45]

    The Defendant submitted that such a term was not necessary to give business efficacy to the contract because the Supply Agreement could effectively operate without such a term. The Defendant submitted that AAP obtained a benefit and certainty from the Supply Agreement because of the minimum term referred to in clause XI together with the extension in the absence of a notice of termination.

21. [46]

    By reason of what was said by Mason J in Codelfa, by the joint judgment in Barker and AAP’s approach in the present matter, a determination of whether there is such an implied term of exclusivity depends in large part on the construction of the express terms of the Supply Agreement. In Electricity Generation Corporation v Woodside Energy Ltd [2014] 251 CLR 640; [2014] HCA 7 the joint judgment of French CJ, Hayne, Crennan and Kiefel JJ said at [35]:

22. [47]

    A number of provisions in the Supply Agreement suggest that on a proper construction of that agreement Rehau is bound to obtain its supplies only from AAP. Those matters are these:

23. [48]

    If the agreement between AAP and Rehau was one which merely regulated the arrangements between the parties in the circumstances when Rehau ordered product from AAP, many or all of the provisions to which I have referred would be unnecessary. All that would be necessary would be for Rehau to stipulate how AAP was to perform its task in meeting the supplies requested at any given time by Rehau. Moreover, it is difficult to see what consideration is provided by Rehau for the requirements in clause III of the Supply Agreement if Rehau was under no obligation ever to order the articles from AAP.

24. [49]

    The effect of the Defendant’s arguments is that Rehau was under no obligation to order any of its products from AAP despite the obligation of AAP to keep a two months’ supply of each of the nine articles set out in clause I of the agreement. If Rehau was entitled to order from other suppliers it must, in the absence of any obligation at least to order some quantities of each of the articles from AAP, be entitled not to order any. The parties could not have intended that that would be the result of entering formally into an agreement and no commercial purpose would be served by such an agreement. Such an interpretation would not be a businesslike interpretation on the assumption that the parties intended to produce a commercial result. Such a construction, and the consequential failure to imply a term of exclusivity, would be making a commercial nonsense of the agreement.

25. [50]

    I do not consider to be of any relevance in a determination of this issue the evidence of Mr Sarapuu (a) that he did not see the Supply Agreement until 2010 and he simply acted in accordance with prior policy, and (b) that he understood that AAP was just one of a number of manufacturers globally who supplied to Rehau. The principal reason is, of course, that post-contractual conduct is not to be considered when construing a contract. Nor can Mr Sarapuu’s understanding, belief or actions constitute admissions or any form of estoppel against AAP. Mr Sarapuu was the operations manager. He cannot be equated with AAP. Even if he could, his understanding or belief could not amount to an admission. As to his actions, Rehau does not suggest that it acted on the basis of anything Mr Sarapuu said or did when it ordered from other suppliers.

26. [51]

    It is necessary to say something about the decision in Colonial Ammunition Co. v Reid. Mr Heath for Rehau submitted that the agreement in that case was very similar to the Supply Agreement. It was an agreement between an ammunition company and the Crown for the supply of ammunition.

27. [52]

    Clause 1 said this:

28. [53]

    Clause III said that the ammunition was to be delivered in such quantities at such times as may from time to time be directed by an order in writing (from the State). Clause IV gave the government the right to purchase elsewhere, essentially if the company was not able to provide what was required within a stipulated period. Clause IX provided that in the case of ammunition supplied pursuant to an order being rejected on account of being unable to pass the tests referred to in the agreement within a certain period of time the government had the right to purchase ammunition elsewhere at the company’s expense.

29. [54]

    The question in the case was whether the government had breached the contract by purchasing different ammunition elsewhere without giving a formal notice as clause IV contract provided.

30. [55]

    The Chief Justice (whose view was agreed by Owen and Cohen JJ although in separate judgments) said this:

31. [56]

    Although the contract in Colonial Ammunition has some similarities to the Supply Agreement there are significant differences. The obligation in Colonial Ammunition was for the company to supply and deliver ammunition that was ordered by the government. So much is noted in the Chief Justice’s judgment where he said (at 347):

32. [57]

    Secondly, the agreement in Colonial Ammunition did not contain a number of the provisions to which I have made particular reference including the period of the agreement, the production capacity, the buffer stock and the remedy of Rehau for failure to meet deadlines. These matters appear to me to mean that the Supply Agreement is significantly different from the contract in Colonial Ammunition, and that that case does not require the result for which Rehau contends.

33. [58]

    I am comfortably satisfied from the express terms of the agreement that, as a matter of construction, the agreement obliges Rehau only to order the articles from AAP and not from any other supplier or from internal resources. In those circumstances, it may not be necessary to imply a term of exclusivity but, to the extent that the authorities suggest that a term is implied by reason of the proper construction of the contract, I consider that a term of exclusivity is so implied in this contract.

34. [59]

    The requirements in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 are satisfied. When AAP is required to reserve production capacity and (effectively) raw materials, and to hold two months buffer stock, it is entirely equitable and reasonable to imply the term. As to business efficacy, in New South Wales v Banabelle Electrical Pty Limited (2002) 54 NSWLR 503; [2002] NSWSC 178 Einstein J said:

35. [60]

    The requirement of obviousness is said by Einstein J in Banabelle at [50] to overlap considerably with business efficacy. The requirement is also made out because I have held that, on a proper construction of the contract, exclusivity operates. Rehau does not dispute that the term is capable of clear expression.

36. [61]

    I do not consider that the implied term is inconsistent with any express terms of the Supply Agreement. Rehau points to what is said in clause I about the only terms applying being those stated in the Agreement. However, such a clause cannot be used in a blanket way to prevent a term being implied if it is otherwise necessary and appropriate to do so. The requirement for no inconsistency is more specifically directed to the substance of the term being implied. The question that should be asked is whether there is any term which tends to suggest that Rehau has the right not to buy from AAP. The answer to that question is clearly in the negative.

37. [62]

    In those circumstances, it is not necessary to resort to a consideration of post-contractual conduct, and to do so may be dangerous in the sense that, as has already been pointed out, the authorities suggest that such conduct may not be taken into account when construing the terms of a contract. I would merely observe that the matters relied upon by AAP, that is, the ongoing provision of complete information by Rehau of its Australian requirements relating to the brass articles in the Supply Agreement, and the notice in 2010 that it intended replacing some of the articles with polymer articles, is at least consistent with the implication of such a term. Those actions do not compel the conclusion that a term should be implied because they are explicable for other reasons as well. For example, the information concerning Rehau’s requirements may have been limited to its requirements for supply from AAP rather than the entirety of its requirements. The notice it gave in relation to polymer articles might be explicable by commercial courtesy given the obligations that AAP had to reserve production capacity and maintain buffer stock for Rehau.

38. [63]

    In that way, the conclusion I have reached about the implication of a term of exclusivity for the Supply Agreement is not dependent upon the assessment of post-contractual conduct.

39. [64]

    In Byrne v Australian Airlines Ltd (1995) 185 CLR 410 McHugh and Gummow JJ (at 442):

40. [65]

    In County Securities Pty Ltd v Challenger Group Holdings Ltd [2008] NSWCA 193 Spigelman CJ said:

41. [66]

    Although, as Byrne makes clear, it may be easier to imply terms, it is also necessary to look first at the express terms of any informal contract to see if the suggested term should be implied.

42. [67]

    In the present case all that the evidence makes clear is that quotes were sought for what in some cases were identified as annual demand but in other cases could be inferred as annual demand, of seven articles which were not covered by the Supply Agreement.

43. [68]

    In the absence of the express terms in the Supply Agreement which, I have concluded, point strongly towards an exclusive purchase arrangement, it is difficult to see the basis upon which a term of exclusivity would be implied into the Further Supply Agreements. There was, for example, no obligation on AAP’s part to hold buffer stock of the items in the Further Supply Agreements. There were no terms that dealt with the obligation to maintain deadlines, nor was AAP required to set aside production capacity so that the articles the subject of the Further Supply Agreements could be made available as Rehau required them.

44. [69]

    The implication of a term of exclusivity would fail at a number of points. The term was not reasonable and equitable in the absence of the obligations I have identified on AAP’s part, the contract had business efficacy without the term and it was not so obvious that it went without saying. The parties were free at any time to amend the Supply Agreement simply by adding the further articles for which supply was required by Rehau. They chose not to do that but to operate on the informal arrangement that the documents identify.

45. [70]

    AAP places considerable weight on the course of conduct between the parties in relation to the Further Supply Agreements. AAP points in particular to the evidence of the formation of the Further Supply Agreements and the material contained in paragraphs 40-49 of Mr Sarapuu’s affidavit dealing with specifications, sampling, quality assurance and auditing. However, those matters are consistent with an ordinary contract of supply whether formally or informally made. They say nothing about whether the purchaser was obliged not to go elsewhere to buy the products. They deal only with the way the products had to be manufactured if products were ordered by Rehau.

46. [71]

    If AAP felt that it had to reserve production capacity or have buffer stock on the expectation that Rehau would keep ordering the articles the subject of the Further Supply Agreements from it, it was open to AAP to have the Supply Agreement amended to include the further articles. However, nothing obliged it to do those things. For that reason, as well, Reahu had no obligation to order these articles from AAP.

(2) How did the Agreements come to an end?

1. [72]

   AAP contended that in July 2013 no further orders were placed by Rehau with AAP and as a result Rehau evinced an intention no longer to bound by the Supply Agreement and the Further Supply Agreements. In that way Rehau repudiated those Agreements entitling AAP to terminate them and to claim damages. AAP submitted that it did so by the letter of 2 June 2014. AAP submitted further that no notice of termination of the Supply Agreement was given by Rehau to AAP pursuant to clause XI of the Supply Agreement. Nor did Rehau give reasonable notice of termination under the Further Supply Agreements.

2. [73]

   Rehau submitted that the email of 6 July 2012 ([14] above) made it clear that production of the specified articles should not continue. That email, it was submitted, constituted written notice of termination of the Supply Agreement for the purpose of clause XI of the Supply Agreement. Rehau submitted that it also constituted notice to cease production of the articles the subject of the Further Supply Agreements if the Court found an implied term of notice for which AAP contends. Rehau submitted that the Further Supply Agreements contained no expiry date because the Agreements came into being when purchase orders were presented. There was no fixed term or termination date in the Further Supply Agreements.

3. [74]

   I do not consider that the email of Mr Teo of 6 July 2012 amounted to notice under the Supply Agreement. What that email did was ask for a temporary pause in production until a number of matters were resolved. The expectation in the email was that production would resume. So much is clear from the words “in the interim” and from the requirement of “possible price reductions”. If production was not to be resumed at all there would have been little point in seeking price reductions.

4. [75]

   The email did not indicate with any clarity that it was a notice of termination as clause XI required. It is significant that the Subject of the email was “Stocks”. That was principally what the email concerned itself with.

5. [76]

   In any event, Rehau kept ordering from AAP. On 22 August 2012 an email sent from David Watts at Rehau to Mr Sarapuu said:

6. [77]

   On 29 August 2012 Shawn Teo from Rehau sent an email to Mr Sarapuu asking for an updated table of articles showing stock in hand and orders placed by Rehau for the next three months.

7. [78]

   On 24 September 2012 David Watts sent an email to Mr Sarapuu for Rehau’s “December order”. Four of the items were articles referred to in the Supply Agreement. Thereafter similar emails were sent for further orders on 17 December 2012, 10 April 2013 and 11 July 2013.

8. [79]

   Moreover, clause XI required any notice of termination be given at least three months before the date of expiry of the Supply Agreement. The Supply Agreement must be taken to have been made on 29 September 1999 because that was the date on which the second party (AAP) executed the agreement. Accordingly, any notice of termination would have been require to be given prior to 29 June 2012 for the contract to have been brought to an end on 29 September 2012. The email required production to cease immediately, and not even at the expiry of three months after its date. If the email was a notice of termination it would only have had effect on 29 September 2013. If, as Rehau asserts, it was purporting to terminate the agreement, the email itself amounted to a repudiation because of the requirement to cease producing immediately.

9. [80]

   The combination of that email and the failure of Rehau to place orders with AAP after 11 July 2013 amounted, as AAP asserts, to a repudiation of the Supply Agreement. For the reasons I have given, the highest position that can be asserted by Rehau is that the Supply Agreement came to an end on 29 September 2013 by reason of the email of 6 July 2012 and clause XI of the Supply Agreement. In the meantime and from a much earlier time, however, Rehau had breached the Supply Agreement by failing to order from AAP and in that way had repudiated the Agreement.

10. [81]

    The letter from AAP’s solicitor to Rehau dated 2 June 2014 makes no mention of the email of 6 July 2012. The letter makes reference to the email from Ms Lemke of 17 August 2010 ([11] above) and said that there had been no notice from Rehau that it had changed its position since that email, and no notice of termination of the Supply Agreement had been given. The assertion in the letter of 2 June 2014 was simply that Rehau had breached the Supply Agreement by failing to order and purchase products from AAP pursuant to that Agreement. Those were the products specifically identified in the Supply Agreement. The letter said that AAP accepted Rehau’s repudiation of the Supply Agreement, gave notice of the termination of the Agreement and sought damages for the repudiation. There was no mention in the letter of the other products ordered under what at the trial were described as the Further Supply Agreements.

11. [82]

    The statement in the email of 6 July 2012 that production should not continue “in the interim” with the resumption of ordering from August 2012 leads me to the conclusion that the email of 6 July 2012 was not a notice terminating the Supply Agreement. That email did not bring the Supply Agreement to an end. Rather, it was brought to an end by AAP’s letter of 2 June 2014 accepting Rehau’s repudiation of that agreement by ordering the articles the subject of that Supply Agreement elsewhere.

12. [83]

    Rehau submitted that if it was the letter of 2 June 2014 that brought the Agreement to an end the expiry of the Supply Agreement was 2 September 2014, presumably because of the second paragraph of Clause XI. That seems misconceived for two reasons. First, the letter of 2 June 2014 was not a notice under Clause XI. It was an assertion that Rehau had breached the contract to the point of repudiating it. The acceptance of that repudiation brought the contract to an end forthwith, not on any anniversary date as provided by the contract. Secondly, if, contrary to that view, the letter was such a notice, the Supply Agreement would be brought to an end, not on a date three months after the letter but on the expiry of the Agreement which was on the anniversary of its making. The “date of expiry” was on each such anniversary.

13. [84]

    In my opinion, the acceptance of the repudiation meant that the Agreement came to an end on the date of receipt by Rehau of the letter of 2 June 2014. The first paragraph of clause XI reinforces that. “Good reason”, which includes breach of obligations under the Agreement, produces immediate termination. That, as the Defendant submits, has implications for the calculation of damages, to which matter I shall return presently.

14. [85]

    It is arguable that Rehau breached the Supply Agreement when it announced at the meeting of 1 July 2010 that three of the articles in the Supply Agreement were to be replaced with polymer fittings – AAP could not produce such fittings. Strictly speaking, Rehau should have given notice before the date three months prior to 29 September that year that either the whole Supply Agreement was being terminated because of that change or, more likely, that Rehau wished to vary the agreement to removed reference to those three articles. AAP did not complain of this matter either at the time or in the proceedings. It is not, therefore, necessary to say anything further about the matter.

15. [86]

    Rehau submitted in its supplementary submissions that counsel for AAP in opening said that the Plaintiff was not suing on the articles which were changed over to polymer in July 2010 but complained that a claim was still maintained for those articles. I can see nothing anywhere in AAP’s counsel’s remarks that suggested no claim was being made for the articles changed over to polymer.

16. [87]

    As far as the Further Supply Agreements are concerned, those Agreements can be regarded as ad hoc arrangements whereby an order was placed and the goods were supplied. There was no agreement, express or implied, that a further order in any case would be placed. Rehau was free to place a further order or not as it chose. The Further Supply Agreements did not, therefore, come to an end in the way the Supply Agreement did. No breach was involved by any decision of Rehau not to place a further order in respect of those articles. The letter of 2 June 2014, as I have said, did not mention these Further Supply Agreements.

(4) What loss has been suffered?

1. [88]

   In the light of my earlier determination concerning whether a term of exclusivity was to be implied, the questions of loss and damage can be conveniently considered together.

2. [89]

   AAP claims three heads of loss being:

3. [90]

   Prima facie, by reason of the breaches of the Supply Agreement, AAP has suffered loss represented by the three heads identified. In relation to each of those heads Rehau submits that it is necessary to separate matters between the Supply Agreement and the Further Supply Agreements. This, it is said, applies to buffer stock as well as raw material. The damages calculated by Mr Vella proceed on the assumption that the articles the subject of the Further Supply Agreements are to be treated in exactly the same way as the articles the subject of the Supply Agreement. That includes the provision of two months buffer stock. Rehau’s submission should be accepted.

4. [91]

   In the light of my determination that there was no term concerning exclusivity in relation to the Further Supply Agreements or even that there was a term or period during which the Further Supply Agreements existed, the figures put forward by AAP are no longer relevant. That means it is not possible to calculate damages on the evidence available to me. The parties accepted during submissions that, in the event that I found a distinction between the Supply Agreement and the Further Supply Agreements, the parties would need to recalculate losses that flowed.

5. [92]

   The best I can do on the material is to indicate a number of matters by way of principles or guidelines for the proper calculation of damages.

6. [93]

   AAP claims damages to 31 December 2015. The basis for this was never satisfactorily explained.

7. [94]

   In Johnson v Perez (1988) 166 CLR 351 Mason CJ said (at 355-356):

8. [95]

   Brennan J said (at 371):

9. [96]

   In the present case Rehau breached the Supply Agreement at various times from 2007 to the time its repudiation thereby was accepted in June 2014. That acceptance marked the last date at which it is appropriate to assess the damages.

10. [97]

    In Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 Mason CJ and Dawson J said:

11. [98]

    AAP is entitled to the loss of profits it would have made if all of the articles the subject of the Supply Agreement had been ordered from it and not from elsewhere. It should be noted, however, that the proceedings commenced by the filing of a Statement of Claim on 12 December 2014. The period of the loss of profits is limited to commence on 13 December 2007. That affects a number of items and totals in Schedule 3 to Mr Vella’s report. That Schedule claims for units ordered from other plants for both the 2007 and 2008 financial years and for units ordered from internal suppliers from 1999 to 2013.

12. [99]

    Mr Vella’s calculation relating to finished goods on hand at $99,118 is in turn based on Mr Sarapuu’s calculation of the cost of manufacturing that stock.

13. [100]

    In Mr Sarapuu’s affidavit that calculation was derived from a table showing the costs to produce each of the numbered articles. If only the articles referred to in the Supply Agreement were considered the figure would be $62,293. However, what the table does not identify is whether the number of units of each article equated only to two months of stock or whether the number of units identified simply happened to be the number that were at hand on 1 July 2015 which was the first day of the financial year following the letter accepting the repudiation of 2 June 2014.

14. [101]

    The obligation was to hold buffer stock of two months for each article. That would, no doubt, involve a small additional margin so that the two month period could be continuously complied with. On the other hand, Rehau would not be liable simply because AAP happened to have manufactured and retained a quantity of a particular article that exceeded the two month supply together with a small margin.

15. [102]

    Rehau submits that the only obligation on AAP was to maintain a minimum two months of buffer stock of the articles the subject of the Supply Agreement. Rehau said there was no obligation to maintain raw materials. Whilst that is true in terms of what the Supply Agreement obliges AAP to do, it is difficult to see how AAP could constantly maintain a buffer of two months stock if it did not maintain a measure of raw material to enable that buffer stock to be available. Further, clause I says that one of the reasons the Agreement is made is “for AAP… to plan the raw material necessary to ensure that deadlines are met”. Clause IV provided that those deadlines were “absolutely binding”.

16. [103]

    Mr Sarapuu calculated the loss from the value of the raw material on hand at that time to be $266,280.00, reduced by $141,629.00 being the quote from Southern Cross Metals Pty Ltd of 4 August 2015. That figure was adopted by Mr Vella for his calculations. Ultimately those figures were reduced so that, taking into account what was realisable for scrap value the loss by reason of raw materials on hand was said to be $75,059.00.

17. [104]

    There are two difficulties with this head of damage. First, there is no division between the raw materials required to produce the articles the subject of the Supply Agreement and those that were the subject of the Further Supply Agreements. Secondly, and similarly to the point made about finished product, it is not clear to what extent the raw materials simply happened to be in stock as opposed to being required absolutely to maintain the minimum two month buffer stock under the Supply Agreement. Mr Sarapuu’s evidence suggested that there was more than two months’ stock remaining.

(5) Failure to mitigate

1. [105]

   On 4 August 2015 AAP received an offer from Southern Cross Metals to purchase scrap brass. Mr Sarapuu said that he did not accept that offer. It is clear, however, that Mr Vella has made an allowance in his calculations for what could have been obtained from Southern Cross in that regard.

2. [106]

   Rehau submits also that AAP failed to mitigate because it could have disposed of completed articles by selling them through the factory in Estonia or, indeed, other places such as New Zealand. Mr Sarapuu said that he did not do that because it would not be appropriate to sell a product made for the customer. He said also that there was the difficulty that the products were hard stamped with Rehau’s name and logo. Whilst it would have been possible to remove that name and logo by a machine it would have been a massive cost.

3. [107]

   The onus is on a defendant who alleges that the injured contractual party has failed to mitigate its loss. I am not satisfied that Rehau has discharged that onus in circumstances where the articles concerned were engraved with Rehau’s name with the necessity for an expensive process to be employed to remove that name and logo resulting in a less than perfect product for sale.

Conclusion

1. [108]

   In the light of my conclusions on liability it will be necessary for the parties to re-calculate the damages that flow to AAP.

2. [109]

   The parties should bring in Short Minutes to reflect my reasons and to provide for a judgment in AAP’s favour for an agreed sum. I will hear the parties on costs if agreement cannot be reached.