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This case highlights the importance of contracts being drafted clearly and precisely.
A business sale deed contained reciprocal obligations to supply and purchase goods and services, which (in the judges’ words) were so “very poorly drafted” that the parties argued over who in the Amcor group of companies was bound by those obligations. The courts’ judgements (at first instance and on appeal) demonstrate a classic application of the ‘reasonable business person’ test in the construction of contracts to avoid commercial nonsense.
Amcor Limited v Barnes is the latest instalment in a series of mega-litigation involving the Amcor group of companies, a multinational organisation that operates as a packaging manufacturer and distributor. In 2003, one of the companies in the Amcor group sold its business to corporate entities associated with that business’ general manager. As Ferguson CJ observed, together with Beach JA and Whelan JA, in the Victorian Court of Appeal’s judgement:
"These events have led to over 15 years of litigation. There have been two major trials on different issues, culminating in first instance judgments of respectively 1,795 and 1,741 paragraph in length".
Their Honours then proceeded to add another 751 paragraphs to the saga.
Australian Corrugated Box Co Pty Ltd (ACB Vendor) operated a specialty packaging business in New South Wales (the ACB Business). On 2 June 2003, two companies associated with the general manager of that business entered into a sale of business agreement with ACB Vendor. The two companies were ACB Australia Pty Ltd (ACB Purchaser) and Achilla Pty Ltd (Achilla).
Five other Amcor executives held, or planned to hold, a financial interest in the ACB Business after its sale; which raised issues concerning their fiduciary duties. One of the executives had his employment terminated by the Amcor parent company and, in 2004, he commenced proceedings concerning his dismissal against a number of Amcor companies. All of those Amcor parties commenced separate proceedings in 2007 concerning the sale of the ACB Business against the five executives and the three companies involved. In those subsequent proceedings, Achilla brought a counter-claim concerning the supply and purchase obligations under the sale agreement, against ACB Vendor and another Amcor company (Amcor Packaging (Australia) Pty Ltd (APA) – the corporate vehicle for Amcor’s Australasian operations). APA had six internal divisions, one of which (AFP) manufactured corrugated cardboard products.
The sale agreement contained two clauses drafted in near-identical terms, under the headings ‘Supply by Purchaser’ and ‘Supply by Vendor’ respectively.
These clauses were problematic in a number of ways. On the face of it, the sales agreement required the parties to buy and sell the same Products to and from each other. More fundamentally, after the sale of its business and all its assets to Achilla, ACB Vendor was a shell of a company that never had any need to acquire Products for itself.
Subsequently, the parties to the sales agreement entered into a Deed of Accession with APA, which gave effect to a corporate restructure of the Amcor group; whereby APA would take the place of ACB Vendor (which would be released from its obligations) as party to the sales agreement, from the Accession Date (21 March 2005). Importantly, APA had a substantial need to acquire Products for its AFP business. However, from September 2005 onwards, there was a marked decrease in the volume of work given to Achilla; that was instead performed by other suppliers.
Achilla amended its counter-claim several times. Initially, Achilla argued that ACB Vendor had breached its obligation to acquire Products from Achilla for the entire 5 year period. Next, Achilla joined APA and argued ACB Vendor was in breach until the Accession Date after which APA was in breach for the remainder of the 5 year period. Then, Achilla dropped its claim against ACB Vendor and argued instead that APA was obliged to acquire Products from Achilla for the entire 5 year period, by an implied contract or an estoppel (based on a common intention or assumption that APA was bound to the supply and purchase obligations of the sale agreement). The question of which party was subject to the obligation affected the quantum of damages claimed by Achilla, as APA had a far greater need for the Products than ACB Vendor.
In its defence, APA denied the existence of the alleged common intention or assumption giving rise to an implied contract or estoppel, and argued a construction of the contracts that produced a commercial outcome; namely, that any obligation on APA to acquire Products from Achilla had to be confined to the period after the Accession Date and by reference to the nature of the ACB Business prior to the sale.
The courts, at first instance and on appeal, rejected the implied contract and equivalent estoppel arguments advanced by Achilla. The courts held that the express terms of the contracts made clear that APA was not a party to the sales agreement and was only bound to its supply and purchase obligations on and from the Accession Date; which was ‘demonstrably at odds’ with Achilla’s proposition that APA had been the contracting party throughout. While the Deed of Accession was entered into after the alleged formation of an implied contract, the Court of Appeal relied on established authorities to admit evidence of post-formation conduct disproving the existence of the alleged contract.1
Instead, the courts upheld a commercial construction of the contracts that represented ‘business as usual’ for the ACB Business. The trial judge accepted evidence from the solicitor who drafted the sales agreement of his instructions as to the intended meaning of the supply and purchase obligations: “It’s going to be the same – it’s going to be business as usual…exact trading relationship as currently pertains between the entities or within the Amcor group”.
Further evidence proved that, immediately after the completion of the sale, ACB Vendor continued to route the same sorts of jobs that the ACB Business had been doing (for various entities in the Amcor group), to Achilla pursuant to the sales agreement. This included some (but not all) of the AFP work for APA. Accordingly, the courts held that Achilla was only entitled to claim damages from APA for the remainder of the 5 year period after the Accession Date in respect of the “business as usual” work that, in the ordinary course of events, should have been part of the ACB Business.
The trial judge appointed an independent expert to identify which of the jobs that APA gave to other suppliers were ‘business as usual’ for the ACB Business and therefore should have been given to Achilla. The courts rejected APA’s arguments that Achilla bore the burden of proving those jobs did not fall within the ‘carve out’ (regarding Achilla’s ‘inability to supply’). Instead, the courts construed these provisions as an exception (as opposed to a qualification) to the obligation, upon which APA sought to rely but for which APA had not adduced any evidence.2 At the same time, the courts rejected Achilla’s alleged entitlement to all of APA’s work (including the totality of its AFP business) as the evidence showed only some of it was ‘business as usual’ for the ACB Business. Accordingly, the trial judge applied (and the Court of Appeal upheld) the pricing formula that the parties’ commercial managers had agreed pursuant to the sales agreement, to each of the ‘business as usual’ jobs as identified by the independent expert; in order to quantify Achilla’s damages. In doing so, the courts rejected APA’s argument that Achilla was only entitled to the amounts actually paid to those other suppliers (if these jobs were not carved out on the basis of price); instead, giving effect to the express terms of the contracts following APA’s failure to prove the exception applied.
This case illustrates how important it can be for your contracts to be drafted clearly and precisely. Vague or formulaic expressions will inevitably lead to difficulties in applying a contract in practice and potentially give rise to protracted disputes. In such cases, the courts will search for a construction that best fits the commercial purpose of the contract. However, there is no guarantee that it will be the interpretation that best matches your own intention.
In delivering the court’s judgement in Amcor Limited v Barnes, Ferguson CJ was highly critical of the problematic wording in the supply and purchase provisions of the sales agreement. Her Honour was more critical still of the manner in which the parties conducted the litigation, which incurred extensive delays over the span of 15 years:
"All of this highlights why litigants and their legal representatives must constantly give attention to conducting court proceedings realistically; pursuing procedural matters only when there is real substance to them; confining themselves to the real issues in dispute; cooperating in the conduct of the proceeding and not taking every possible point merely because an argument is capable of being articulated".
You should always take the opportunity to ensure that your contracts are drafted clearly and express terms that accurately and comprehensively communicate the intended meaning of each provision. This should be done not only in pre-contractual negotiations, but whenever the term of a contract is extended or there is another cause to review the contract (such as frequent or significant disagreements between the parties over the intended meaning).
1 The authorities are reviewed in the relevant context in Danbol Pty Ltd v Swiss Re International SE  VSCA 274, –,  n 55 (McLeish, Niall and Sifris JJA).
2 The test is whether the ‘carve-out’ qualified the entire primary obligation or whether it merely excluded from the operation of the promise particular classes of matters which, but for the exception, would fall within it. See McLennan v Insurance Australia Ltd  NSWCA 300, in which the New South Wales Court of Appeal endorsed the approach of Jordan in CJ Kodak (A/asia) Pty Ltd v Retail Traders Mutual Indemnity Insurance Association (1942) 42 SR (NSW) 231.
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