Accolade Wines Australia Limited v Pernod Ricard Winemakers Pty Ltd

The Court is called on to determine a narrow question of construction of a commercial agreement.

On 17 July 2024, the first plaintiff (AUS Purchaser) and the second plaintiff (NZ Purchaser) (collectively, Purchasers) entered into a written Business and Asset Sale Agreement (BASA) with the first defendant (AUS Seller) and the second defendant (NZ Seller) (collectively, Sellers) under which the AUS Seller sold to the AUS Purchaser and the NZ Seller sold to the NZ Purchaser, respectively, wine distribution businesses in Australia and New Zealand.

The Purchasers are part of a group of companies, headquartered in Adelaide, South Australia, which operates a global wine business known as Accolade Wines. Accolade Wines is a substantial business in the Australian and United Kingdom wine markets. Its operations overseas are smaller.

The Sellers are companies related to Pernod Ricard SA (Pernod Ricard), an international wine and spirits producer and wholesaler which owns wine brands through subsidiaries including the Sellers.

Pernod Ricard has a substantially larger business than Accolade Wines in New Zealand and outside Australia generally.

The BASA makes provision for a transitional distribution arrangement, potentially until 31 December 2025, under which Pernod Ricard will distribute wine products for the Purchasers in specific Territories where the Sellers have been distributing their wine products. The provisions are contained in Schedule 6 to the BASA which is headed “Transitional Distribution Agreement Principal Terms” (Schedule 6). Schedule 6 is reproduced as Annexure A to this judgment (with figures redacted).

References to clauses are, unless otherwise stated or the context indicates differently, to clauses in the BASA. The paragraphs or clauses of Schedule 6 are not numbered.

In summary, Schedule 6 provides for the appointment of Pernod Ricard as distributor in three phases covering different periods, referred to as “Phase 1”, “Phase 2” and “Phase 3” respectively.

Relevantly, Phase 1 is the four months after the “Closing Date”, defined in clause 1.1 to be the day which is 30 days after a series of “Conditions” set out in clause 4 are fulfilled. The present anticipation is that the Closing Date will be 31 March 2025.

Under the heading “Territories”, Schedule 6 provides:

The reference to “the Suppliers” is a reference relevantly to the Purchasers and Amphora Finance Limited, which is not a party to the BASA or these proceedings but is contemplated to be a Supplier.

The BASA includes Schedule 22, which is entitled “Incentive Contingent Consideration”. It identifies a series of Territories and specifies target net sales (in euros) for each of them as 95% of a figure specified as net sales. Paragraph 2 of Schedule 22 is headed “Determination of Incentive Contingent Consideration”. It provides that if the total actual net sales for the financial year ending on June 30, 2025 is equal to at least 95% of the total target net sales, the Purchasers shall pay to the Sellers a specific (and not insubstantial) amount in euros. Paragraph 2.2 of Schedule 22 provides:

The effect is that Pernod Ricard gets the benefit of a presumption, for Territories where it is not appointed a distributor, that 100% of the total target net sales has been met. This is no doubt to ensure that Pernod Ricard is not deprived of the benefit of the Incentive Contingent Consideration by not being appointed distributor for a particular territory.

On 4 December 2024, the Purchasers gave Pernod Ricard the following notice:

On 12 December 2024, Pernod Ricard gave written notice to the Purchasers that it rejected the notice, because it includes New Zealand in the Territories that shall apply to the Phase 1 distribution period.

Clause 21 of the BASA is headed “Employment” and makes provision for the Sellers to give information about people employed by the Sellers in New Zealand and for the Purchasers to offer those employees individual employment on certain conditions including that the employment offer must commence on the Closing Date and the terms must not be materially less favourable overall than the current terms applicable to the relevant employee.

Some years before the entry into the BASA, in 2015, the Purchasers entered into a Distribution Agreement (Distribution Agreement) with an entity now called Hancocks Wine, Spirits and Beer Merchants Limited (Hancocks) for the distribution in New Zealand of the Purchasers’ beverage products. The Distribution Agreement was on foot at the time of the BASA.

The Distribution Agreement gives Hancocks a right of first refusal to distribute all the Suppliers’ additional products proposed to be distributed in New Zealand and provides for the parties to negotiate in good faith the terms of distribution and a marketing plan.

It is not in dispute that as at the date of the BASA, New Zealand was a Territory in which Pernod Ricard (or affiliates) distributed products.

The question for determination is whether under Schedule 6, the notification for Phase 1 can (as the Purchasers contend) include New Zealand as one of the Territories to which the transitional distribution arrangements apply or cannot (as the Sellers contend) include New Zealand.

Put another way, is it at the Purchasers’ option to include New Zealand or not in the Phase 1 interim distribution arrangements?

By their Summons filed 19 December 2024, the plaintiffs seek declarations that on the proper construction of the BASA:

The BASA is a commercial contract which is to be given a business-like interpretation. Interpreting it requires attention to the language used by the parties, the commercial circumstances which it addresses, and the objects which it is intended to secure. The meaning of the words chosen is determined objectively by reference to its text, context, and purpose, the question being what a reasonable businessperson would have understood them to mean. Preference is given to a construction supplying a congruent operation to the various components of the whole, so as to avoid commercial inconvenience. Where language is open to more than one construction, the Court will prefer a construction which avoids consequences which are capricious, unreasonable, inconvenient or unjust (see Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109; McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at [22]; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22]; Zhu v Treasurer of the State of New South Wales (2004) 218 CLR 530 at [82]; Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 at [15]; Electricity Generation Corporation Ltd v Woodside Energy Ltd (2014) 251 CLR 640 at [35]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at [47]-[51]).

The Sellers argue that where Schedule 6 says certain Territories must be included (subject to stated exceptions), this means only those Territories can be included. They argue that because the notice “must” include certain Territories, it can only include them. They argue that the provision should not be construed as giving the Purchasers any option because it does not include option terminology. I interpolate that they sought, in my view, contrary to orthodox canons of construction, to pray in aid provisions in earlier drafts of the BASA not ultimately agreed in the BASA in an endeavour to demonstrate the development of the provision and motivate an argument that where the parties intended to give an option, they clearly said so.

Both sides led evidence of pre-BASA negotiations in relation to the terms ultimately agreed as Schedule 6, in particular as to discussions concerning the Purchasers’ arrangements with Hancocks and whether the Sellers were told that because of those arrangements, Pernod Ricard could not be appointed distributor for New Zealand. Ultimately, neither party (correctly in my view) seriously pressed a suggestion that this evidence has any relevance, let alone material relevance, to the construction of the BASA. It is not in issue that the Sellers did not know of the actual terms of the Distribution Agreement. Their evidence rose no higher than to an assertion that they were told that Pernod Ricard could not be appointed for New Zealand.

The Sellers argue that the Phase 1 provisions in effect “incorporates its own definition” of inability to appoint Pernod Ricard by referring to regulatory reasons or restrictions that apply under any other contractual arrangements to which the Purchasers are party as at the date of the BASA. The effect is, they argue, that any restriction on the appointment of Pernod Ricard is to be equated with an inability to appoint it, and there was such a restriction by virtue of the Distribution Agreement.

This submission has a number of difficulties in its way.

The words in the Phase 1 provision after the words “New Zealand” are not a reference back to New Zealand. New Zealand is excepted in its own right. As a matter of simple language, inability is not a synonym for “any restriction”. The Distribution Agreement provided only for a right of first refusal, which Hancocks might never have taken up even if they had been made an offer and, notwithstanding the parties’ obligation to negotiate in good faith, an agreement might never have been reached on the terms. It is far from clear that the existence of the Distribution Agreement rendered the Purchasers unable to appoint Pernod Ricard as distributor for New Zealand.

Finally, the Sellers argue that the inclusion in the BASA of provisions enabling the Purchasers to employ the Sellers’ employees in New Zealand is inconsistent with a right in the Purchasers to require Pernod Ricard to provide distribution services because there is a potential for it to have no (or not enough) employees to do so if the Purchasers employ them. This argument is unsustainable. The same considerations would apply to Phases 2 and 3, and the BASA makes express provision for the possibility that Pernod Ricard would provide distribution services long after the Closing Date. It also assumes the unlikely scenario that the Purchasers will act economically irrationally by requiring Pernod Ricard to do the distribution services in New Zealand with the Purchasers employing staff there at the same time. The provision is as much for the benefit of Sellers as it is for the Purchasers because it will take the employees off the Sellers’ hands, effectively at the Purchasers’ expense.

For the following reasons, the Sellers’ construction is unsustainable and the Purchasers’ one correct.

First and foremost, the words concerned, on their plain English meaning, do not say what the Sellers would have them say. The words require the inclusion of certain Territories but do not require the Territories the subject of the exceptions to be excluded. Missing are any words requiring such exclusion. The word “must” is directed to what the notice must include. It is not directed to what the notice cannot include. The words neither say nor imply that the exceptions to the mandatory inclusions are mandatory exclusions.

Second, if the exclusions are mandatory, there is no rational reason for the requirement to give any notification of what they are. The exclusions would operate without more.

Third, by not saying or implying that the exclusions cannot be inclusions, the words convey the clear implication that the exclusions are not intended to be mandatory.

Fourth, Schedule 6 expressly contemplates the possibility of distribution services in New Zealand for Phase 2 and/or Phase 3 if any Supplier wishes to include it. Adopting the Sellers’ construction would have the illogical outcome that New Zealand cannot be included for Phase 1 but might be for Phases 2 and 3.

Fifth, Schedule 22 includes the words “(including New Zealand)”. This brings with it the clear and obvious implication that Pernod Ricard might be appointed as the distributor there. The period for calculating the Incentive Contingent Consideration is the financial year ending 30 June 2025 which would include at least part of Phase 1. To construe Schedule 6 as excluding New Zealand from Phase 1 arrangements would render its operation incongruent with Schedule 22.

Finally, from a commercial perspective, it is for the Suppliers to determine whether they wish to take any commercial or regulatory risk in including New Zealand or a Territory where there is a regulatory or contractual problem in Phase 1. Either way, such a problem is the Purchasers’ rather than the Sellers’. The clause operates to give the Purchasers an election to include New Zealand by including it in the notice. That the word “option” is not used is of no moment.

It follows that the plaintiffs are entitled to the declarations they seek. The parties are to bring in short minutes of order.

I provisionally order that the defendants are to pay the plaintiffs’ costs of the proceedings. This order will solidify after seven days unless either party informs the others and my Associate in writing that some other order is sought, specifies the order and provides brief reasons for it, in which event this order will not take effect and I will make directions for the resolution of the issue of costs.