Philips Electronics Australia Limited v Insight Oceania Pty Limited [2009] NSWCA 124

New South Wales Court of Appeal

CITATION: Philips Electronics Australia Limited v Insight Oceania Pty Limited [2009] NSWCA 124

HEARING DATE(S): 5 & 6 March 2009

JUDGMENT DATE: 28 May 2009

JUDGMENT OF: Tobias JA at 1; Campbell JA at 2; Macfarlan JA at 61

(1) Leave to appeal granted. DECISION: (2) Appeal dismissed with costs. (3) Matter remitted to the Commercial List of the Equity Division of the Supreme Court for determination of any outstanding issues.

CATCHWORDS: CONTRACTS – general contractual principles – construction and interpretation of contracts – whether contract was validly terminated when right of termination was conditional on the appellant failing to meet a sales goal – proper construction of the sales goal – whether an order could count towards the sales goal when the distributor did not have a pre-existing customer order – commercially sensible construction of the contract – CONTRACTS – general contractual principles – incorporation of terms – whether a definition contained in earlier agreements but not contained in amending document formed part of the contract – proper approach to determining whether a term forms part of a contract – subjective intention of the parties not relevant – CONTRACTS – general contractual principles – construction and interpretation of contracts – meaning of "best efforts" and "best endeavours" clauses – WORDS AND PHRASES – "best efforts" – "best endeavours"

CATEGORY: Principal judgment

Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 CASES CITED: Insight Oceania Pty Ltd v Philips Electronics Australia Ltd [2008] NSWSC 710 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 Transfield Pty Ltd v Arlo International Ltd (1980) 144 CLR 83

PARTIES: Philips Electronics Australia Limited (Appellant) Insight Oceania Pty Limited (Respondent)

FILE NUMBER(S): CA 40254/08

COUNSEL: IM Jackman SC; MR Elliott (Appellant) J Gleeson SC; P Silver (Respondent)

SOLICITORS: Deacons, Sydney (Appellant) Johnson Winter & Slattery, Sydney (Respondent)

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S): 50241/07

LOWER COURT JUDICIAL OFFICER: Bergin J

LOWER COURT DATE OF DECISION: 23/7/08

LOWER COURT MEDIUM NEUTRAL CITATION: Insight Oceania Pty Ltd v Philips Electronics Australia Ltd [2008] NSWSC 710

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40254/08 SC 50241/07

TOBIAS JA CAMPBELL JA MACFARLAN JA

28 MAY 2009 PHILIPS ELECTRONICS AUSTRALIA LTD v INSIGHT OCEANIA PTY LTD Judgment 1 TOBIAS JA: I agree with Campbell JA. 2 CAMPBELL JA:

Nature of the Case 3 The Appellant ("Philips") is a company in the international Philips group of companies. It has the right to market and distribute various medical products, including nuclear medicine products, in Australia and New Zealand. The Respondent ("InSight") was the exclusive distributor of certain nuclear medicine products in Australia and New Zealand, on the terms of a particular Distribution Agreement. 4 In 2007 Philips came to be of the view that it would prefer to distribute the nuclear medicine products in Australia and New Zealand itself, and set about seeking to terminate the Distribution Agreement with InSight. 5 It made two attempts, on two different grounds. The first attempt, by a notice dated 18 December 2007 ("the December 2007 notice") relied upon a clause in the Distribution Agreement entitling Philips to terminate if the parties had not reached agreement by 15 December on a sales target for the following year. The second attempt, by a notice dated 23 January 2008 ("the January 2008 notice"), relied on a contractual provision that entitled Philips to terminate if InSight had not reached its sales target during the 2007 year. 6 InSight challenged the validity of both notices in proceedings in the Commercial List of the Equity Division of the Supreme Court. Bergin J held that both notices were invalid, and made orders restraining Philips from relying on either of them: Insight Oceania Pty Ltd v Philips Electronics Australia Ltd [2008] NSWSC 710. Questions of damages arising from the invalidity of the two purported terminations were stood over to be decided separately. 7 While the judgment of Bergin J was a final determination of the validity of the two notices of termination, the orders made were interlocutory because they did not dispose of all questions at issue in the proceedings. The present application is an application for leave to appeal from her Honour's decision concerning the January 2008 notice, and a concurrent hearing of that appeal if leave to appeal is granted. There is no application for leave to appeal against her Honour's decision concerning the December 2007 notice. 8 Towards the end of 2007 relevant medical staff at Royal North Shore Hospital, Sydney ("RNSH") had decided to buy one of the products of which InSight was the distributor, namely a Philips TF/64 time-of-flight PET/CT scanner (a "TF/64 Scanner"). Senior members of the RNSH medical staff had communicated that decision to various people including representatives of both InSight and Philips. However RNSH had not placed an order with InSight to purchase such a scanner. On 31 December 2007 InSight placed an order with Philips to purchase a TF/64 Scanner. Philips declined to accept the order. 9 It is common ground that if InSight's order of 31 December 2007 counts towards the 2007 sales goal InSight would have exceeded its 2007 sales goal, and that the January 2008 notice would in consequence be invalid, but if the order did not count towards the sales goal then InSight would have fallen short of its 2007 sales goal, and the January 2008 notice would have been valid. While there was complex evidence about how the negotiations for sale of the TF/64 Scanner proceeded, on the view I take of construction of the Distribution Agreement it is not necessary to go into those negotiations in any greater depth than I have done in the previous paragraph. 10 By its proposed Notice of Appeal Philips attacks the reasoning by which her Honour arrived at the conclusion that the 31 December 2007 order counted towards the sales goal. InSight defends her Honour's basis of reasoning, and also, by a proposed Notice of Contention, seeks to support by several different processes of reasoning the result at which her Honour arrived.

Leave to Appeal 11 While the decision below does not deal with all matters in dispute in the proceedings, it is a final decision concerning the questions with which it dealt. Whether it will be necessary to have any further hearings on the question of damages hinges on whether the decision concerning invalidity of the purported terminations is correct. As well, Philips would still prefer to distribute nuclear medicine products in Australia and New Zealand itself, so it is important for both Philips and InSight to know as soon as possible whether Philips has successfully terminated the relationship on the basis of the January 2008 notice. It is appropriate to grant leave to appeal.

The Distribution Agreement

The Distribution Agreement as Originally Entered 12 The Distribution Agreement was entered on 24 November 2004 between InSight (referred to in the agreement as "DISTRIBUTOR") and a related company of Philips referred to in the agreement as PMSA. On 4 April 2005, before the events that are subject of dispute in this litigation, PMSA assigned the benefit and burden of the Agreement to Philips. 13 The Agreement appointed InSight as PMSA's exclusive distributor of certain defined products in Australia and New Zealand for an Initial Term that ended on 31 December 2005. It included the following provisions: "3.02 …This AGREEMENT shall be automatically renewed for additional one-year terms (each such 12-month period, a "Term") at such time, if any, as the parties agree in writing to a SALES GOAL for such additional Term(s). If the parties fail to reach such agreement within thirty (30) days prior to the expiration of the Initial Term or if the Agreement has been renewed the then current Term, this AGREEMENT shall expire automatically at the end of such Term. … 4.01 DISTRIBUTOR agrees to use its best efforts to sell, or procure sales contracts for, the PRODUCTS in the TERRITORY. During the Initial Term, DISTRIBUTOR agrees to sell or procure sales contracts for such number of PRODUCTS as enable DISTRIBUTOR to meet or exceed the sales goals agreed by the parties for each Measurement Period (the "SALES GOAL"). The SALES GOAL for the period 1 January 2005 to 31 December, 2005 is set forth in Appendix A hereto. No later than sixty (60) days prior to the expiration of the initial or any subsequent Term, the parties shall commence discussions of the appropriate SALES GOAL for the next Term. If the parties agree in writing to a SALES GOAL for the next Term, such agreed SALES GOAL shall be the SALES GOAL for such next Term. … 5. DUTIES OF DISTRIBUTOR In addition to all other duties herein set forth, DISTRIBUTOR shall have the following material obligations under this AGREEMENT: 5.01 Solicitation of Orders Etc. DISTRIBUTOR shall use its best efforts to solicit orders for and sell PRODUCTS to customers in the TERRITORY, … 5.02 Prompt Payment DISTRIBUTOR shall promptly comply with all the terms and conditions of sale described hereunder, including without limitation, prompt payment of the purchase price for the PRODUCTS and any spare parts sold to DISTRIBUTOR by PMSA. Unless otherwise agreed in advance in writing by PMSA, payment for all PRODUCTS and spare parts shall be made by means and on terms and conditions as more fully set forth in Appendix A . … 5.07 Sales Reports Every four (4) weeks DISTRIBUTOR shall provide PMSA with a report on the expected sale and distribution of PRODUCTS and DISTRIBUTOR's business activities concerning the promotion and distribution thereof, together with information on the market situation in the TERRITORY, including: (a) Names of active sales prospects and status of sales, … (d) Prices at which PRODUCTS and components are sold to end-users, (e) Sales forecasts, including product type and expected purchase price, for the next four (4) calendar quarters, and (f) All available market data for the TERRITORY with regard to volume of similar products purchased within the TERRITORY and average selling price for same. … 6. TERMS AND CONDITIONS OF SALE 6.01 Shipment Terms PMSA shall sell PRODUCTS to DISTRIBUTOR DDP Sydney warehouse as that term is defined in Incoterms 2000. 6.02 Changes in Pricing Notwithstanding the provisions of Section 4 above, PMSA may upon written notice to DISTRIBUTOR change the prices and discount percentages set forth in such Section and Appendix B hereto. Any such change shall be effective thirty (30) days after the date of said notice to DISTRIBUTOR. In the event that DISTRIBUTOR has bona fide outstanding bids to its customers that would be affected by any price increase, PMSA will honor the previous price to DISTRIBUTOR for those bids for a period not to exceed ninety (90) days from the date of notice of the price increase. … 6.05 Title and Risk of Loss Title to and risk of loss for each shipment of PRODUCTS and spare parts shall pass to DISTRIBUTOR upon delivery pursuant to Section 6.01. 6.06 Orders for Products (a) All DISTRIBUTOR orders for PRODUCTS shall refer to this AGREEMENT and state the required PRODUCTS, quantities, shipment dates, purchase prices, destination, carrying method, consignee at destination and other shipping instructions. Each order shall be subject to acceptance by PMSA, which shall not be unreasonably withheld, and shall be binding upon PMSA when accepted. (b) If the shipment date requested in a purchase order cannot be met, PMSA shall notify DISTRIBUTOR with the expected shipment date. DISTRIBUTOR may choose either to cancel the purchase order or accept PMSA's proposed shipment date … … 6.09 PMSA prices are quoted in U.S. currency and all payments due PMSA hereunder shall be made in Australian Dollars calculated by applying the spot selling rate for the purchase of the foreign currency at the Westpac Bank at the close of business on the day of order placement or it that day is a Bank Holiday in New South Wales, the following trading day. … 18. RELATIONSHIP OF PARTIES The relationship of DISTRIBUTOR to PMSA hereunder is that of vendee and vendor. Nothing herein contained shall be deemed to create any agency, joint venture or partnership relationship between the parties hereto. It is understood and agreed that DISTRIBUTOR is not, by this AGREEMENT or anything herein contained, constituted or appointed the agent or representative of PMSA for any purpose whatsoever, nor shall anything herein contained be deemed or construed as granting to DISTRIBUTOR any right or authority to assume or create any obligation or responsibility, expressed or implied, for, in [sic] behalf of, or in the name of PMSA, or to bind PMSA in any way or manner whatsoever. DISTRIBUTOR shall do no act or make any statement inconsistent with this Article 18. … 26.02 In the event of any occurrence that prevents DISTRIBUTOR from making prompt payment(s) to PMSA for the PRODUCTS or any parts, it is agreed that interest shall accrue against all past due payments at the rate of one and one-half percent (1.5%) per month or the maximum rate permitted by law, whichever is less." 14 Clause 28 permitted termination by either party upon notice, in certain defined circumstances. Clause 29 set out various agreed consequences in the event of such termination, including: "29.03 PMSA shall have the option to repurchase all PRODUCTS, or any portion thereof, including spare parts, owned by DISTRIBUTOR at the effective date of termination or expiration excluding only those PRODUCTS needed to fill orders received by DISTRIBUTOR prior to the date of notice of termination, and at prices not to exceed the purchase price paid by DISTRIBUTOR to PMSA for such PRODUCTS." 15 Appendix A to that agreement defined the Territory and the Initial Term, and continued:

SALES GOAL FOR EACH PRODUCT LINE FOR CALENDAR YEAR 2005

System Booking Quantity Average Value (USD) Total (USD) Nuclear Products: Skylight 6 Unit 418k 2,508k Forte 5 Unit 270k 1,350k RTP Products: Pinnacle Server 1 Unit 197k 197k Pinnacle Client 6 Unit 40k 240k

PET Products: Gemini-16 1 Unit 1,650k 1,650k

A "booking" is defined as a binding written commitment by a customer in the TERRITORY to purchase PRODUCT PAYMENT TERMS: PRODUCTS: 100% due 75 days from shipping of system. Spare Parts: Net 60 days after shipment." 16 "Incoterms 2000", referred to in clause 6.01, is a publication of the International Chamber of Commerce that defines various terms used in international commerce. In it, "DDP (… named place of destination)" means, "delivered duty paid". Incoterms 2000 makes more precise provision about the exact types of charges that each of the vendor and purchaser must bear, but that detail is not relevant for present purposes.

The January 2006 Renewal 17 By a letter dated 24 January 2006 the parties agreed as follows: "We confirm that the distribution agreement between Philips and Insight dated 24th November, 2004 shall be renewed for an additional one year term expiring on 31st December, 2006[.] Pursuant to article 3.02 of the agreement the sales goals for the renewed term is as follows: Modality System Quantity Average Unit Price (USD) Total (USD)

PET/CT Gemini GXL 6 3 1,176,659 3,529,977

SPECT/CT Precedence 2 550,240 1,100,480

VAR Angle SPECT Forte 6 186,450 1,118,700 Skylight 2 229,240 458,480 Cardio MD 2 170,750 341,500

RTP Pinnacle Server 1 197,000 197,000 Pinnacle Client 6 40,000 240,000

6,986,137

18 While the table included in Appendix A of the original Distributor Agreement contained a definition of a "booking" immediately below the table that appeared under the heading "Sales Goal For Each Product Line For Calendar Year 2005", the letter of 24 January 2006 contained no such definition, and in the letter of 24 January 2006 the heading of the third column was "quantity", not "booking quantity".

The June 2006 Amending Deed 19 The Distribution Agreement forbade InSight from assigning the agreement without consent, and deemed a transfer of a controlling interest in InSight to be an assignment. In March 2006 InSight sought the consent of Philips to a transaction that would have resulted in a change of control of InSight. Philips provided that consent, on terms that certain amendments were made to the Distribution Agreement. Philips and InSight executed an Amending Deed dated 16 June 2006. Amongst the amendments it made was deleting clause 3.02, and replacing it with a clause reading: "Subject to DISTRIBUTOR's compliance with its obligations hereunder, this AGREEMENT shall continue in full force and effect for the term set forth in Appendix A (the "Term"). This AGREEMENT shall be automatically renewed for additional one-year periods (each such 12-month period, a "Term") provided that if DISTRIBUTOR fails to meet the SALES GOAL for a Term PMSA shall be entitled to terminate this agreement by giving 90 days written notice to DISTRIBUTOR. Such notice must be given not later than 28th February in the year following the Term in which the SALES GOAL was not met. In determining whether a SALES GOAL has been met consideration will be given to the total sales target rather than the individual modality targets". 20 Clause 4.01 was also deleted, and replaced with a clause reading: "DISTRIBUTOR agrees to use its best efforts to sell, or procure sales contracts for, the PRODUCTS in the TERRITORY. During the Term, DISTRIBUTOR agrees to sell or procure sales contracts for such number of PRODUCTS as enable DISTRIBUTOR to meet or exceed the sales goals agreed by the parties for each Term (the "SALES GOAL"). The SALES GOAL for the period to 31 December, 2006 is set forth in Appendix A hereto. No later than 1st November, in any Term the parties shall commence discussions to set the appropriate SALES GOAL for the following Term. If the parties agree in writing to a SALES GOAL for the following Term, such agreed SALES GOAL shall be the SALES GOAL for such Term. If the parties have not agreed in writing to a reasonably achievable SALES GOAL for the following Term by 15th December in any Term Philips may elect to terminate this agreement by giving 90 days written notice to Insight provided such notice is given before 31 December in the year in question." 21 The Amending Deed made some amendments to Appendix A of the Distribution Agreement. The definition of "Initial Term" was amended by replacing "31 December 2005" with "31 December 2006". As well: "… (b) the entire text under the heading "SALES GOAL FOR EACH PRODUCT LINE FOR CALENDAR YEAR 2005" – (including the table), up to but not including the heading "PAYMENT TERMS", is replaced with:

"SALES GOAL FOR EACH PRODUCT LINE FOR CALENDAR YEAR 2006 Modality System Units Average Unit Price (US$) Total (US$)

PET/CT GEMINI GXL 6 1 $1,275,000 $1,275,000 GEMINI GXL 16 1 $1,475,000 $1,475,000

SPECT/CT Precedence 0 $ –

Var. Angle SPECT Forte 3 $260,000 $780,000 Skylight 1 $280,000 $280,000 Cardio MD 1 $185,000 $185,000

RTP Pinnacle Server 1 $197,000 $197,000 Pinnacle Client 6 $40,000 $240,000

Other Other $100,000

Total $4,532,000

A "booking" is defined as a binding written commitment by a customer in the TERRITORY to purchase a PRODUCT." …"

No amendment was made to the portion of Appendix A that defined the Territory, or set out the Payment Terms. 22 The Amending Deed also provided: "5.1 The Agreement as amended by this Deed contains the entire agreement and understanding between the parties on everything connected with the subject matter of the Agreement. Each party has entered into this Deed without relying on any representation by any other party or any person purporting to represent that party." 23 Under the original Distribution Agreement, the second sentence of clause 4.01 created a contractual obligation on InSight concerning its Sales Goal, but no specific consequence was agreed to arise if InSight did not comply with that term. The new clause 3.02 conferred on Philips a contractual right of termination if InSight failed to meet its obligation concerning the Sales Goal for a particular Term.

The 2007 Sales Goal Agreement 24 By letter dated 30 November 2006, signed by both Philips and InSight, it was provided: "Pursuant to article 4.01 of the agreement, the sales goals for renewed term is as follows: Modality System Units Average Unit Price (US$) Total (US$) PET/CT GEMINI GXL 6 1 $1,475,000 $1,475,000 GEMINI TF 16 1 $1,900,000 $1,900,000 SPECT/CT Precedence 1 $748,000 $748,000 Var. Angle SPECT Forte 4 $280,000 $1,040,000 Skylight 0 $280,000 - Cardio MD 2 $185,000 $370,000 RTP Pinnacle Server 1 $197,000 $197,000 Pinnacle Client 7 $40,000 $280,000 Total $6,010,000

Should the Variable angle camera Brightview not available for delivery before July 2007, the targets shall be reduced by $520,000." 25 That letter made no mention of any definition of "booking".

Construction of the Agreement re 2007 Sales Goal

The Trial Judge's Construction 26 Philips submitted, both before the trial judge and in this Court, that, even though the definition of "booking" did not appear below the table that was adopted to define the Sales Goal for the 2007 Term, (a) it was clearly the intention of the parties that it be included, and (b) it was the intention of the parties that the "units" in the 2007 Sales Goal should be the same as a "booking". On that basis, a "unit" could count towards the Sales Goal only if it was the subject of "a binding written commitment by a customer in the TERRITORY to purchase a PRODUCT". Concerning the TF/64 Scanner, Philips submits there was no binding written commitment by RNSH in the 2007 year, and thus the order lodged by InSight on 31 December 2007 for a TF/64 Scanner did not qualify for the Sales Goal. 27 The trial judge accepted that it was the intention of the parties that InSight's Sales Goal would be measured by the "binding written commitments" InSight received from customers in the particular year that was the subject of measurement. Her Honour said (at [252]): "… If that were not so, all the plaintiff would have to do would be to forward orders to the defendant at any time during the year for equipment that made up the total dollar amount of the sales goal. That would mean that the plaintiff would be able to stockpile equipment, a process that I am satisfied the parties did not intend." 28 Her Honour held, however, that a "binding written commitment" was not necessarily a written purchase order, or a written contract for purchase (at [255]-[256]): "… So long as the plaintiff had something in writing by which the customer pledged or "committed" itself to purchase the product from the plaintiff, the plaintiff was entitled to have the dollar equivalent of the products that were the subject of the commitment considered when ascertaining whether its sales goal had been achieved. The context in which the word "commitment" appears satisfies me that the parties used it intentionally to accommodate the way in which the nuclear medical equipment market operates. First of all the defendant must have product available or know that it has to manufacture the product to be available for the customer who has made a commitment to purchase it. From the customer's point of view there is a need to prepare a site for the installation of a PET machine including building works to accommodate the equipment. There needs to be advance planning and there may be different time frames from the date a party commits to purchasing product to the date the party places a formal purchase order for the product. The plaintiff did not have to wait for this latter event to place its order on the defendant." 29 The trial judge held that, notwithstanding that there was no contract for RNSH to purchase a TF/64 Scanner, an email that a senior officer of the hospital wrote on 21 November 2007 to a very large number of recipients, announcing that "we have decided to purchase" the scanner amounted to a pledge or a commitment by RNSH to purchase the product, and thus InSight's order for the TF/64 Scanner counted towards the 2007 Sales Goal.

Argument on Appeal Concerning Construction 30 While InSight submitted on the appeal that her Honour's decision was correct in both its construction of the agreement and the application of that construction to the facts, it raised an alternative argument on construction by Notice of Contention. That argument was, in essence, that the words "binding written commitment by a customer" have no role to play in deciding what counts as the Sales Goal for the 2007 calendar year, and that the items that should be added up to see if the Sales Goal was met in 2007 are orders that InSight placed on Philips. 31 Deciding whether the correct construction of the agreement is that adopted by the trial judge, or that proposed by InSight in its Notice of Contention is logically the first matter that should be decided in this judgment.

Was a "Binding Written Commitment by a Customer" Necessary in 2007? 32 In the Distribution Agreement as originally entered, and in each year thereafter, the Sales Goal was fixed as an amount in US dollars. As clause 6.09 of the Agreement made clear, the prices that Philips quoted to InSight were in US dollars, though InSight was required to pay Philips in Australian dollars, with the currency conversion taking place at the rate appropriate on the day of order placement. The trial judge held, and it was not disputed on the appeal (and is in my respectful view correct) that the prices to be taken into account for the purpose of deciding whether a Sales Goal has been met are, in all the various manifestations of the Sales Goal, prices charged by Philips to InSight, not prices charged by InSight to a customer who purchased one of the Products from it. 33 Mr Gleeson SC, for InSight, argued that it was relevant to whether a "binding written commitment" from a customer was needed before a sale counted towards the 2007 Sales Goal that Philips had no contractual right to be informed of whether any such "binding written commitment" had been received. While it is true that there was no obligation that stated in so many words that InSight was required to inform Philips when a binding written commitment was received, it seems to me that InSight's obligations under clause 5.07 (quoted at para [13] above) would be likely to have the practical effect that Philips was given information that would enable it to determine whether a "binding written commitment" had been received from a customer, wherever on the continuum from tepid interest to binding contract a "binding written commitment" might lie. 34 In my view more assistance can be gained, in deciding whether a "binding written commitment" was needed before a sale counted towards the Sales Goal in 2007, from tracing through the various changes that were made to the Sales Goal that applied under the Agreement. 35 Under both the original clause 3.02, and the replacement clause 3.02 inserted by the Amending Deed, a Sales Goal applied for a 12 month period only. Both the original clause 4.01, and the replacement clause 4.01 inserted by the Amending Deed required the Sales Goal agreed for any year to be agreed in writing. Once a calendar year had come to an end, the Sales Goal that had been agreed for that year had ongoing relevance, after the Amending Deed, in only three ways. The first was that the replacement clause 3.02 gave Philips a contractual right to terminate the Agreement (impliedly, within a reasonable time of the end of the calendar year in question) by giving a 90 day notice of termination if the Sales Goal had not been met. The second was that Philips was entitled to sue InSight for damages if InSight breached its obligation in clause 4.01 to "sell or procure sales contracts for such numbers of PRODUCTS as enable DISTRIBUTOR to meet or exceed the sales goals …". The third was that the Sales Goal would also have some evidentiary value if there were to be a dispute (as happened in the present case) about whether a particular Sales Goal proposed for the following term was "reasonably achievable" within the meaning of the replacement clause 4.01. None of those three ways concerns how one should construe the Sales Goal that has been agreed for a subsequent year. 36 In the Distribution Agreement as originally entered, the definition of "booking" had work to do, because Appendix A to that Agreement defined the Sales Goal for the year 2005 by reference to a certain "booking quantity" for each type of Product. The column heading "booking quantity" in Appendix A was the only occasion when the word "booking" was used in the entire agreement. 37 The column heading "booking quantity" did not appear in any Sales Goal that was agreed for calendar years after 2005. The word "booking" did not appear anywhere in the Amending Deed, apart from in the definition of "booking" that appeared in the amended Appendix A. 38 Thus, the Amending Deed deleted from Appendix A of the Distribution Agreement the entire text under the heading "Sales Goal for each product line for calendar year 2005" and replaced it by a new heading, a table, and a definition of "booking", but that definition of "booking" did not relate to any term that was used in the Agreement. As well, while it said that a "booking" "is defined as" (a particular expression) it did not say whether that definition was an exhaustive or inclusive definition. It is not necessary, for the purposes of the present case, to decide what construction would, in light of these peculiarities, be placed on the Sales Goal for 2006. 39 In my view, the letter dated 30 November 2006 replaced the entirety of that portion of Appendix A that defined the Sales Goal, including the definition that had no work to do. The letter dated 30 November 2006 states what the Sales Goal is for the renewed term, and makes no mention of either the term "booking" or any definition of "booking". The Sales Goal for 2007 thus does not include any definition of "booking", and the concept of "binding written commitment" thus does not enter into the Sales Goal that was contractually binding in 2007. 40 In reaching that conclusion it is of some importance that the 2007 Sales Goal was adopted by writing signed by each party. In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at 182, [47] the joint judgment of Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ said: "Legal instruments of various kinds take their efficacy from signature or execution. Such instruments are often signed by people who have not read and understood all their terms, but who are nevertheless committed to those terms by the act of signature or execution. It is that commitment which enables third parties to assume the legal efficacy of the instrument. To undermine that assumption would cause serious mischief." 41 The orthodox approach to contractual construction is as stated in the joint judgment in Toll v Alphapharm at 179, [40]: "… What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction." (citations omitted) 42 In my view the conclusion that the reasonable observer would arrive at by reading the Distribution Agreement, the Amending Deed, and the various letters by which Sales Goals were agreed, is that the parties in their letter of 30 November 2006 had agreed to drop the redundant definition of "booking".

The Sales Goal for 2007 43 Mr Jackman SC, for Philips, drew our attention to evidence that was admitted about the process of negotiation of the Amending Deed. On 29 May 2006 Mr Chalmers, of Philips, emailed Mr Walstab, of InSight, saying, amongst other things: "Appendix A is being recalculated and will be submitted to you shortly. Note that Sales Goal shall include a statement that a sale is recognised when Philips issues its invoice to InSight." 44 That was in substance an attempt to have a sale recognised for the purpose of the Sales Goal only at the comparatively late stage, in the progress of a sale from initial negotiation to actual delivery, when Philips issued its invoice to InSight. 45 Mr Walstab replied to Mr Chalmers on 6 June 2006, saying: "It is not possible to agree to your addition of the sales goal clause, the sales goal has always been based on a customer booking, this represents a material change to our ability to perform our duties of the agreement." 46 There are two reasons why these communications do not enter into construction of the 2007 Sales Goal. The first is that they relate to the Sales Goal that was adopted for 2006, not that adopted for 2007. The second is more fundamental, namely that these communications concerning the negotiation are not admissible as an aid to construction as they are evidence of the subjective intentions of the parties: Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 352. 47 It is clause 4.01 that incorporates the notion of a Sales Goal into the Agreement, and thus clause 4.01 is a sensible place to start in deciding what sales count towards the Sales Goal. But the operation of clause 4.01, as replaced by the Amending Deed, needs to be considered in light of other provisions of the Agreement. Clause 18 makes clear that the relationship between Philips and InSight is that of a vendor and purchaser of goods. The "payment terms" part of Appendix A requires InSight to pay 100% of the price of the goods 75 days from the date of shipment of the system. Clause 26.02 requires InSight to pay interest, at a significant rate, on any overdue payments. Clause 6.09 has the effect that InSight bears the risk of fluctuation in the exchange rate between Australian dollars and US dollars between the date InSight places its order and the date of actual payment. Clause 6.05 provides that title to, and risk of loss of goods, passes to InSight upon delivery. Thus, once InSight has placed an order, it is its problem if any end-user is not ready to take delivery of goods when they are delivered to InSight, does not pay InSight at the time the end-user agreed to pay InSight, or is prepared to purchase from InSight only if it is obliged to pay InSight for the goods on some date that is later than 75 days from shipping of the system. In all these respects, InSight was merely a purchaser of Philips' Products. That, together with it being the US dollar price at which Phillips sells to InSight that is the means by which the Sales Goal is measured, supports the relevant "Sales" that count towards the Sales Goal being sales that Philips makes to InSight. 48 However it must be recognised, in construing the agreement, that InSight has significant obligations to Philips concerning the marketing of Products to end-users. InSight's obligation, under the first sentence of the replacement clause 4.01 "to use its best efforts to sell, or procure sales contracts for, the PRODUCTS in the TERRITORY", (and the similar obligation under clause 5.01) creates an obligation that binds InSight to exercise a "high degree of activity and effort" (Transfield Pty Ltd v Arlo International Ltd (1980) 144 CLR 83 at 93-94 per Stephen J). In Transfield v Arlo at 101 Mason J said: "A 'best endeavours' clause thus prescribes a standard of endeavour which is measured by what is reasonable in the circumstances, having regard to the nature, capacity, qualifications and responsibilities of the licensee viewed in the light of the particular contract." 49 Wilson J in Transfield v Arlo at 107 said that a company bound by a best endeavours clause: "… was obliged to do all that could reasonably be expected of it having regard to the circumstances of its business operations". 50 The obligation to use its best efforts bound InSight during the entire time the Distribution Agreement was on foot, and bound it even if in any particular year it had already reached its Sales Goal. 51 InSight had various obligations under provisions of the Agreement that I have not set out above. Under clause 5.05 it was obliged to "have adequate facilities and personnel or agents … to market, distribute, install and support the PRODUCT effectively." Clause 5.05 also obliged InSight to "fully train its sales and service personnel with respect to all pertinent aspects of the PRODUCTS". Under clause 13, Philips agreed to provide "applications training for designated representatives" of InSight "in the theory and operation of the PRODUCTS at PMS headquarters or other mutually agreed location". Philips also agreed that it "will provide applications training at [InSight's] or a customer's site" for a fee of US$6,000 for a five day course. All these obligations related to InSight's activities of on-selling, and providing after sales service for, the Products. 52 Given the technically sophisticated nature of the Products, it is within the reasonable contemplation of people in the position of the parties that best efforts to sell a Product might in some circumstances require a potential customer to be given a demonstration of the Product before the customer decided to purchase, which might in turn require InSight to have, at least so far as the less expensive items were concerned, a sample on hand that could be demonstrated to the customer. 53 That InSight might sometimes purchase Products other than for immediate on-sale to a customer is expressly contemplated by clause 29.03 of the Agreement, giving Philips an option (but not an obligation) to re-purchase all Products owned by InSight at the effective date of termination, excluding only Products needed to fill orders received by InSight prior to the date of the notice of termination. 54 In both these ways, the working through of the terms of the Agreement has the consequence that it could sometimes happen that InSight had ordered, paid for, and received delivery of a Product (thereby becoming the owner of the Product) in circumstances where InSight had not acquired the Product for the purpose of fulfilling an order from a customer. It would be commercially odd if Products that InSight acquired in such circumstances did not count towards the Sales Goal. 55 As well, there are other circumstances where it could be commercially sensible for InSight to place an order with Philips even if InSight did not have any corresponding order from a customer. This could happen if InSight was hopeful, or had reason to believe, that it would enter into a contract to sell the Product to a particular end-user in due course and wished to be in a position to make delivery promptly without the lag time involved in the Product coming from overseas; or if it wished to lock in a price or protect itself from a feared unfavourable exchange rate movement by placing an order with Philips. It is foreseeable that best efforts to sell a Product might sometimes require InSight to take such steps. Again, it would be commercially odd if Products that InSight acquired in such circumstances did not count towards the Sales Goal. 56 The obligation created by the second sentence of the replacement clause 4.01, for InSight "to sell or procure sales contracts for such number of PRODUCTS as enable [InSight] to meet or exceed" the appropriate Sales Goal needs to be considered in the context of the matters I have been discussing. The activity of selling or procuring sales contracts that InSight agrees to carry out is selling to, or procuring sales contracts with, potential end-users. However the Sales Goal is measured by a reference to the "units" involved in sales that Philips makes to InSight. The force of "as enable" in that expression is, as a matter of ordinary language, the same as "as make it possible for", or "as give it the means to". In other words, InSight's obligations to sell or procure sales to end users is one that it is to perform for the purpose of meeting or exceeding its Sales Goal. However, there is nothing in the language that says that InSight's Sales Goal can be achieved by no means other than sales or sales contracts to customers. 57 I conclude that on the proper construction of the agreement, the 31 December 2007 order counted towards achievement of the Sales Goal. 58 It follows from the argument so far that in my view the judge's construction of the Sales Goal for 2007 is mistaken, but the Respondent succeeds in upholding the result at which the trial judge arrived concerning the 2008 notice by virtue of the argument of construction arising under its Notice of Contention.

Other Matters Arising 59 InSight raised various other matters by its Notice of Contention. These other matters were all put forward on the basis that the argument of construction it raised by the Notice of Contention was not accepted. The other matters included the manner in which any requirement for a binding written commitment operated in construction of the agreement, a submission that a different email to the one the judge relied on was a binding written commitment, that the judge ought to have found that Philips was in breach of an implied term through using the contractual right of termination for an ulterior purpose, and that Philips was estopped from asserting that calculation of the Sales Goal was carried out other than as InSight contended. In light of the conclusions to which I have come concerning construction, it is not necessary to consider any of those other matters.

Orders 60 I propose the following orders:

(1) That leave to appeal be granted.

(2) That the appeal be dismissed with costs.

(3) That the matter be remitted to the Commercial List of the Equity Division of the Supreme Court for determination of any outstanding issues. 61 MACFARLAN JA: I agree with Campbell JA. **********

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