BP Chemicals ANZ Pty Ltd v Manildra Starches Pty Ltd [1997] FCA 1046

FEDERAL COURT OF AUSTRALIA INJUNCTIONS - application for interlocutory injunction to restrain the respondent from terminating distributorship agreement - consideration of relevant standard of satisfaction for grant of injunction - whether high degree or assurance required - whether relief sought is mandatory in character - whether there is a serious question to be tried - whether damages are an adequate remedy - consideration of the balance of convenience - whether applicant has repudiated the contract. State of Queensland v Australian Telecommunications Commission (1985) 59 ALJR 562, distinguished Ean Duncan Cameron v Unilever Australia Ltd (unreported, Supreme Court of New South Wales, Santow J, 15 May 1997), cited Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438, considered BP CHEMICALS ANZ PTY LTD - v- MANILDRA STARCHES PTY LTD VG 542 OF 1997 TAMBERLIN J SYDNEY (Heard in Melbourne) 10 OCTOBER 1997 (Reasons Published)

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY VG 542 of 1997

BETWEEN: BP CHEMICALS ANZ PTY LTD

(ACN 006 444 720)

Applicant

AND: MANILDRA STARCHES PTY LTD

(ACN 000 295 992)

Respondent

JUDGE: TAMBERLIN J

DATE: 10 OCTOBER 1997

PLACE: sydney

heard: MELBOURNE

REASONS FOR JUDGMENT The applicant, BP Chemicals ANZ Pty Ltd ("BP"), seeks an interlocutory injunction to restrain the respondent, Manildra Starches Pty Ltd ("Manildra"), from terminating an arrangement whereby BP was appointed as Australian distributor and representative of Manildra in relation to ethanol manufactured by Manildra. The agreement is said to be partly written, partly oral and partly implied. The terms of the arrangement are alleged by BP to include a provision that Manildra would not terminate the agreement without first giving BP at least six months' notice in writing. This requirement is put in two ways. First, it is said to be an express term of the arrangement. Second, it is claimed that there is an implied term to that effect arising from the nature of the arrangement and the circumstances in which it was made and from the way it operated over the past five or six years. Ethanol is an industrial alcohol. It may be produced naturally or synthetically. The respondent's ethanol is produced from natural fermentation methods. BP commenced trading in ethanol in 1986. It employs 40 full time staff and operates offices in all States of Australia with its registered office in Melbourne. The business is relatively large. It currently sells approximately 12 million litres of ethanol each year and has a gross turnover of approximately $10 million. In 1991 discussions took place between BP and Manildra. At that time Manildra was in the process of building a plant to manufacture ethanol. On 1 March 1991 Mr Honan, Chairman of Manildra, wrote to the General Manager of BP in these terms: "Dear Barry Further to your visit to our Nowra site on Thursday the 21st February, 1991, and following our subsequent telephone conversations, we wish to confirm as follows. Our Company (Manildra Group) is prepared to enter into an agreement with BP Chemicals ANZ Pty Limited (BP Chemicals), for BP Chemicals to exclusively represent Manildra Group in the sale of industrial alcohol to the Australian domestic market. We agree with the proposal that you put forward, as follows: 1. 10 cents per litre for product delivered direct to client from Nowra - BP Chemicals to pay freight. 2. 22 cents per litre for product though your Sydney warehouse - BP Chemicals to pay freight. 3. 26 cents per litre for product through your Melbourne warehouse - BP Chemicals to pay freight. May we suggest that we operate on this basis for one year from the commencement of the agreement, with both parties to assess at the end of this period as to whether this agreement is working satisfactorily in meeting each parties' requirements. In reaching a formal sales agreement between the parties, a clause will need to be inserted incorporating performance - this will need to be discussed at a later stage, prior to finalisation of any agreement. As you are aware, the plant has a capacity of some 17 million litres of alcohol per year. The current feed-stock, that we have available, is equivalent to 10 million litres of alcohol per ..... Obviously we need to obtain this volume quickly in order to obtain a suitable return on the investment that has been put into .... plant. You may accept this letter as agreement that we have now reached a firm understanding with one another, and you may act upon it in advising your potential clients that you have now reached an agreement with Manildra Group. I will be away from Australia from the 3rd to 8th March. Please feel free to speak to Peter Simpson regarding what documentation you now require to have completed between the parties. Kind regards, MANILDRA GROUP" In 1992 Manildra commenced to manufacture ethanol at Nowra and BP began to sell and distribute ethanol supplied by Manildra. Before the arrangement was entered into, BP had imported its ethanol requirements from overseas as there was only one other ethanol manufacturer in Australia. In 1993 the parties signed a document in the following form: "BP CHEMICALS, MANILDRA & ETHANOL The Perfect Partnership BP Chemicals is the largest producer of Ethanol in Europe and it was only natural that we expand our activities into the Australian market. In 1989 we began importing Ethanol and subsequently formed a relationship with the local manufacturer Manildra. We saw this as being synergistic with our direction and a partnership that the market would truly benefit from. BP Chemicals vision was to become a major supplier of Ethanol to the Australian market. This has since been achieved and facilitated by the partnership between BP Chemicals and Manildra. The result is two companies who are totally committed to the markets they service. Upon commissioning of the plant it immediately produced Ethanol to capacity, in fact producing Ethanol exceeding specification. It is now over a year since BP Chemicals was provided with sole distribution rights for Manildra's Ethanol, and in that time BP Chemicals has gained a considerable share of the Australian market. The Ethanol plant, situated in Nowra, is based on state of the art technology complying with all current and foreseeable future health, safety and environmental regulations and controls. The partnership between BP Chemicals and Manildra has had the affect of stabilising prices in the market place and keeping Australian companies competitive and in some cases provided the incentive for manufacturing based companies to remain in Australia as opposed to moving offshore. BP Chemicals and Manildra, together, are committed to providing continued quality Ethanol and service to you on a long term basis. We would like to take this opportunity to thank you for your valued business and look forward to your continued support in the future. Signature Signature Martin J. Kirwan J.T.(Dick)Honan Business Manager Chairman BP Chemicals ANZ Pty Ltd Manildra Group" (Emphasis added) In 1994 Mr Kirwan, the Business Manager of BP, met with Mr Honan and handed him a document headed "Letter of Intent" which reads as follows: LETTER OF INTENT "BP Chemicals has an effective solvent and Chemical distribution network throughout Australia. The Manildra Group produces high quality Ethanol in Australia. It is therefore the intention of BP Chemicals ("BP") and the Manildra Group ("Manildra") to enter a commercial relationship having the following characteristics. · BP will be the sole distributor in Australia for Manildra Ethanol into the non-fuel market. · This sole distributionship will be for five years from the date of signing. Thereafter the arrangement will remain 'evergreen' until cancelled by either party giving at least six months notice in writing. · Ethanol will be sold to BP on a consignment stock basis. · The selling price to BP will be as per the currently existing matrix (attached). This may be varied at any time by mutual consent. · Payment terms by BP to Manildra will be 30 days from the end of the month of settlement. This may be varied at any time by mutual consent. · Manildra agrees to supply product which conforms to specifications and agrees to provide a certificate of analysis with each delivery. For Manildra Group./For BP Chemicals ANZ Pty Ltd."

Mr Kirwan, in an affidavit sworn 23 September 1997, said that he stated to Mr Honan that the document was intended to form the basis of the relationship between the parties and that Mr Honan said that a signed agreement was unnecessary because his word was his bond. Mr Honan does not agree that these statements were made. In an affidavit sworn 29 September 1997 he says that he specifically disagreed with the first two provisions of the letter which relate to sole distributorship and duration respectively and that he refused to accept the document as providing the basis for any future relationship. Mr Kirwan says that BP was the sole distributor in Australia for Manildra ethanol. He says that there were, however, two exceptions to the exclusive relationship, namely that BP accepted that Manildra desired and was entitled to sell ethanol to Amcor Limited ("Amcor") for its internal use only and to Ajax Chemical for repackaging. Mr Kirwan further says that he always believed and understood BP's distributorship agreement would not be determined prior to 1999 or at least without first receiving six months' written notice. He asserts was that BP has taken steps on that belief and understanding by developing a customer base of approximately 140 customers, many of whom hold long-term supply arrangements with BP. He annexes to his affidavit two "long-term" supply agreements made by BP and states that without some assurance of supply BP could not have entered into these agreements. He says that BP has promoted Manildra's product since 1991 and that it has organised whatever testing was required by potential customers to convince them to buy from BP. It established quality control procedures facilitating standards approval. On 11 September 1997, Mr Honan wrote to Mr Kirwan in these terms: "Dear Martin, I wish to inform you that Manildra Group is terminating its Arrangement with BP Chemicals as distributor of Manildra Group's ethanol. This change has been brought about by the forming of a Strategic Alliance with Amchem. As you are aware Amchem is a division of Amcor Trading, Manildra Group sells a wide range of products to Amcor and they are Manildra's largest customer. Please note, we shall be informing customers that the termination of our arrangement will take place on Monday 22nd September 1997. I also wish to advise you that we will make an announcement of this change on Friday 12th September. Representatives from both Amchem and Manildra will be calling on customers over the next week to address any issues arising from the change. I would like to take this opportunity to thank you for the association that we have had with BP Chemicals over the past years, but it remains in Manildra's best interest to make this change and due to the relationship we have with Amcor this Alliance must take place. Yours sincerely MANILDRA GROUP" On 12 September 1997 Mr Kirwan replied as follows: "Dear Dick I refer to your letter of 11 September. The commercial arrangements between our companies have been in place since about 1992 and as you know we have been totally reliant on your company for the supply of ethanol. I am advised that to terminate our long-standing arrangements on anything less than six months' notice will constitute a breach of contract and breach of the Trade Practices Act. Unless you confirm to us forthwith that announcement of the change will be postponed and termination of our arrangements not be effective until 12 March 1998 (or earlier if we specifically agree), we shall regrettably have no option but to take urgent injunctive proceedings against you and AMCOR, as well as proceedings for damages against yourself for breach of contract and AMCOR for conducing such breach. We are also aware that you have possession of BP Chemicals customer list and would remind you that it is the property of BP Chemicals and to be treated as strictly confidential. In particular you do not have BP Chemicals' permission to release that customer list to any third party - and AMCOR and its divisions in particular. Yours faithfully Signature Martin Kirwan" On the same day, namely 12 September 1997, Mr Honan replied to Mr Kirwan as follows: "Dear Martin, I refer to your letter and our telephone conversation today. In order to accommodate you and to assist in the changes of arrangements, I confirm that I have agreed to postpone both the announcement and the effective date of the.... I have deferred the announcement until next week and postponed the termination until 12 October 1997. I think that one full calendar month is more than reasonable in the circumstances. Although you say that anything less than 6 months' notice will be a breach of our arrangements, this is not the case. You will recall that there was a draft Heads of Agreement circulated back in 1992 which contained a 6 months' notice clause. We specifically rejected this and our arrangements have operated on an informal basis which I believe either party could terminate at any time. Despite that, I am postponing termination for a month as a sign of good faith and in light of our good relationship to date. Our arrangements operate on a daily delivery basis, although we do not invoice you until the end of each calendar month. Although I believe we would be entitled to terminate on a day's notice, and that in my letter of 11 September 1997 I had given fair notice. I think that in all the circumstances one months' notice is an appropriate concession to Manildra's right to terminate. Yours sincerely MANILDRA GROUP" On the hearing of the interlocutory application before me the relevant orders, as amended, sought by BP were as follows: "Upon the applicant by its counsel undertaking to pay to any party adversely affected by the orders made herein such compensation (if any) as the Court thinks just, in such manner as the Court directs. And upon the applicant by its counsel undertaking to use its best efforts to obtain alternate supply of ethanol for its business conducted in Australia as soon as practicable and to notify the respondent in writing when such alternate supply is available. THE COURT ORDERS THAT: 1. Until the trial of this proceeding or further order the respondent is restrained howsoever from terminating the agreement referred to in paragraph 3 of the statement of claim in this proceeding ("the Agreement") until 11 March 1998, provided that the respondent may terminate the Agreement at any time prior to 11 March 1998 upon receipt at the Melbourne offices of its solicitors, Baker & McKenzie, of written notice from the applicant of the fact that the applicant has obtained alternate supply of ethanol for its business in Australia. 2. Subject to paragraph 3 below, the respondent is restrained howsoever from persuading or inducing, or seeking to persuade or induce, any customer or client of the applicant from purchasing or acquiring howsoever ethanol from the respondent, or any person associated with the respondent (such person to include Amcor Limited and any of its related entities), until the termination of the Agreement. 3. The order contained in paragraph 2 above shall not prevent the respondent from selling ethanol to: (a) Amcor Limited, for its internal use only; (b) Ajax Chemical, for repackaging; (c) Schwarzkopf Pty Ltd; (d) Aerosol Supplies Australia; (e) Mauri Brothers ..." Relevant approach The accepted test in deciding whether to grant an interlocutory injunction is whether there is a serious question to be tried. If that question is answered affirmatively, then the Court proceeds to consider whether the balance of convenience favours the grant or refusal of the injunction: see State of Queensland v Australian Telecommunications Commission (1985) 59 ALJR 562 at 563. Manildra contends, however, that the proper characterisation of the relief sought in this case is that it is in substance a mandatory injunction. This is said to be so because by it BP effectively seeks to compel Manildra to supply goods for a further six month period. This leads to the same result as if a decree were made for specific performance of the arrangement in the terms contended for by BP. The consequence of this characterisation as mandatory relief is that a higher standard of satisfaction is required on the part of the Court than is the case where the relief claimed is a prohibitory injunction. In the Australian Telecommunications case, the applicable standard for an interlocutory mandatory injunction was expressed as being that the Court must feel "a high degree of assurance" that at the trial it will appear the injunction was rightly granted. This is said to be the relevant standard to apply in the present case. See further Redland Bricks Ltd v Morris [1970] AC 652; Halsbury's Laws of England vol 24, par 948; Shepherd Homes Ltd v Sandham [1971] 1 Ch 340 at 351; Australian Telecommunications at 563. In my view the above authorities are distinguishable from and are not controlling in the present case. In Australian Telecommunications the injunction claimed sought to require Telecom to provide maintenance services. This was a positive act calling for services to be carried out. In Redlands the orders sought required the respondents to restore support to their land within six months. Again, a positive act of construction was required. In Shepherd Homes the injunction sought was to pull down and demolish a fence. All these cases provide clear examples of positive mandatory orders which require some continued supervision on the part of the Court of work to be done or of personal services to be provided. They compelled positive action to be taken at an interlocutory stage to alter the status quo rather than to preserve it until hearing. By contrast, in the present case, the injunction is directed to restrain the termination of a supply arrangement presently in existence, except in accordance with the alleged terms of the arrangement in respect of which there is a dispute. The order does not require a change in the status quo but merely seeks to continue existing supply arrangements. This relief cannot be said to be analogous to enforcement of a contract to perform work or to supply personal services. It would not call for ongoing court supervision over a long period: cf Dataforce Pty Ltd v Brambles Holdings Ltd [1988] VR 771. Counsel referred me to an unreported decision of Santow J in the Equity Division of the Supreme Court of New South Wales, Ean Duncan Cameron v Unilever Australia Ltd (unreported, 15 May 1997). In that case his Honour refused to vary an injunction, previously granted by Cohen J, which restrained the defendants from refusing to supply goods to the plaintiff. The case concerned a dispute as to termination of a contract to supply goods on the ground that reasonable notice of six to twelve months notice of termination had not been given. It appears that Cohen J considered that there might be an arguable case on the question of whether reasonable notice was required in respect of termination of the trading relationship there under consideration. That approach supports the view that the appropriate degree of satisfaction is that of an "arguable case" or "serious question" to be tried and not the "high degree of assurance" required for an interlocutory mandatory injunction. I note in passing the observation by Santow J that the orders sought in the case though negative in form were mandatory in effect. In my view, for the above reasons, the relevant standard in the present case is whether there is a serious question to be tried and not whether there is shown to be a high degree of assurance of success at the trial. Is there a serious question to be tried? The position taken by BP is that the eleven days notice of termination, later extended to one month, was in breach of the arrangement between the parties. BP firstly points to the letter from Manildra of 1 March 1991 which confirms the proposal to enter into an arrangement with BP on the terms set out in that document. Ethanol was later supplied to BP pursuant to that letter. The letter specified a basis of supply and proposed that the arrangements should operate for one year from commencement of the agreement. Prices were specified. The letter contemplates that parties would then consider whether the arrangement was working satisfactorily. The letter confirmed that the plant had a capacity of 17 million litres of alcohol per year and that the current feed stock was equivalent to 10 million litres per year. The "Perfect Partnership" document executed by both parties in 1993, took the form of a public announcement. This contained several references to the "partnership" between the parties and their "commitment" to continue provide quality ethanol and service to customers on a long-term basis. This language tends to support the conclusion that both parties perceived themselves as having a close commercial relationship analogous to a partnership on a continuing long-term basis and were making a mutual commitment to Australian customers. Importantly, the above announcement states: "It is now over a year since BP Chemicals was provided with sole distribution rights for Manildra's Ethanol and in that time BP Chemicals has gained a considerable share of the Australian market." (Emphasis added) Another relevant matter is that, on Mr Kirwan's version of events, which is disputed by Mr Honan, Mr Honan is alleged to have in substance agreed to the terms of the Letter of Intent. It is not, of course, possible to decide between conflicting versions of the discussions between parties at this interlocutory stage in the absence of cross-examination and presentation of all relevant evidence. However, on the evidence of Mr Kirwan, there is at least a serious question to be tried as to the effect of the discussions concerning the Letter of Intent and whether there was an express term as to a requirement of six months' notice of intended termination. In addition, it seems to me that, the nature of the agreement and the quantity of the supply when considered in the context of the continuing relationship of the parties over more than five years indicates that there is a serious question as to whether reasonable notice was required and whether six months is the appropriate notice period. In forming this view I have taken into account the discussion of the relevant principles concerning reasonable notice by McHugh JA in Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438, especially at 443-448. That case was concerned with the question whether six months' notice of termination was reasonable in the circumstances. It concerned final and not interlocutory relief. At 444 his Honour said: ".... In principle, the better view would seem to be that, although there is a presumption against implying a term that an agreement is terminable, ordinarily the nature of a commercial agreement will lead to the conclusion that the parties must have intended it to be terminable on notice... Whether a contract is terminable on reasonable notice instead of at will also depends on the existence of an implied term ..... That question is to be determined by the circumstances existing at the date of the contract .... However, the reasonableness of the period of notice depends upon the circumstances existing when the notice is given ... When a contact is terminable on reasonable notice, the period of notice must be sufficiently long to enable to recipient to deploy his labours and equipment in alternative employment, to carry out his commitments, to bring current negotiations to fruition and to wind up the association in a business-like manner ...." On these principles, in the present case, given the contemplated closeness of the relationship; the volume of supply; the sums involved; the five years duration of the dealings, and the fact that the parties clearly saw themselves in a co-operative relationship jointly providing service to the Australian market, I am persuaded that there is a serious question as to whether a six month notice period is required for termination. Of course, as in all interlocutory applications in matters of this type, the evidence is at an early and incomplete stage and an assessment needs to be made as a matter of urgency in an imperfect evidentiary matrix. My conclusions are therefore to be seen against this background. Are damages an adequate remedy? This is not a case where relief should be refused because damages would be an adequate alternative remedy. Mr Kirwan gave evidence that the applicant has about 30% of the Australian ethanol market. If Manildra terminates the agreement, BP will be without an available supply of ethanol. As a result BP would suffer loss of market share and damage to its reputation. It would also be exposed to claims by its customers for failure to supply. He says that BP has developed a customer base of about 140 customers, many with long-term supply arrangements, although copies of only two such contracts were produced in evidence. The evidence is consistent with the inherent probability that BP has a substantial number of customers with whom it has supply contracts over varying terms. The disruption and exposure to claims, and loss of commercial reputation, which on present evidence could be consequential, if the one month notice of termination were to be implemented, are sufficient to persuade me that damages are not an appropriate remedy. Repudiation Manildra submitted that BP had accepted the notice of 11 September 1997 as an repudiation according to the affidavit of Mr Kirwan. Manildra contends that BP thereby treated the contract as at an end with the consequence that its only remedy lay in a claim for damages because there was no longer any subsisting supply obligation to be protected by injunction. I cannot accept this argument. The three letters between the parties on 11 and 12 September 1997 makes it clear that the notice has not been accepted as a repudiation which terminated the contract. Rather, they indicate that BP proposed to seek injunctive relief to preserve the existing arrangement in order that the dispute could be duly and properly resolved. Balance of convenience Mr Kirwan has furnished evidence, referred to earlier, of the likely disruption and damage to BP's reputation which might flow from the termination of the arrangement without proper notice. There is said in effect to be a network of supply contracts with BP customers. Mr Kirwan also points to difficulties associated with obtaining supplies from overseas. He says that if Manildra is not restrained BP will not be able to import sufficient ethanol to meet its short-term requirements. By contrast, there was little in the way of substantial evidence from Manildra as to hardship or inconvenience which would arise if it was restrained except, of course, for the obvious restrictions on its freedom to enter into other firm arrangements. Mr Honan asserts a belief that BP is the largest synthetic ethanol producer in the world and it is sought to be suggested that BP should therefore be able to readily obtain ethanol alternative supplies form overseas. However, these assertions are largely speculative on the present evidence. I find that the balance of convenience favours BP. At a late stage in the proceedings an application was made by Manildra to lead some further evidence from Mr Honan as to hardship but I refused this application. My reason was that the application for relief was made in urgent circumstances. It came on for early hearing. It was simply not appropriate in my view to allow further evidence which BP was clearly not in a position to meet. Mr Honan had a full opportunity to present all evidence of hardship in his affidavit. It is imperative that an interlocutory application such as this should be resolved expeditiously and should not be unduly prolonged by last minute applications to expand upon or elaborate the basic evidence. This can be done at trial. It would, in my view, have been quite unfair to BP to allow such further material to be adduced without any prior notice to BP especially having regard to the late stage at which the further material was sought to be addressed. In the circumstances, it is obvious that this dispute should be determined as expeditiously as possible. There is force in the submission of Counsel for Manildra that if the matter is not heard before 11 March 1998 BP will have effectively obtained a favourable outcome, which on a final hearing may not prove to have been justified. Although this is not of itself sufficient to warrant refusal of any interlocutory relief it is a cogent consideration in favour of an early hearing. Conclusion The appropriate questions to be determined in the present case are whether there is a serious question to be tried and where the balance of convenience lies. In relation to both matters I am persuaded that BP has made good a sufficient case for the interlocutory relief granted. I made orders, in this matter, on 3 October 1997. I will not repeat them here. I did not consider it appropriate to grant an order up to 11 March 1998 as sought. My orders are directed to ensure preservation of the status quo until further order so as to accommodate the possibility of an early hearing and determination prior to the expiry of the six month period in dispute. I certify that this and the preceding fourteen (14) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Tamberlin

Associate: Dated: 10 October 1997 Counsel for the Applicant: Mr J D Elliott

Solicitor for the Applicant: Corrs Chambers Westgarth

Counsel for the Respondent: Mr P J Bick

Solicitor for the Respondent: Baker & McKenzie

Date of Hearing: 30 September 1997

Date of Judgment: 30 September 1997

Date of Publication of Reasons 10 October 1997