Commercial notes No. 12

No. 12
29 November 2004

This issue

Toll (FGCT) v Alphapharm
Equuscorp Pty Ltd v Glengallan Investments

Kenneth Eagle

Kenneth Eagle Senior Executive Lawyer
Australian Government Solicitor
T 03 9242 1290
F 03 9242 1481
kenneth.eagle@ags.gov.au

Sarah Sefton

Sarah Sefton Lawyer
Australian Government Solicitor
T 03 9242 1310
F 03 9242 1481
sarah.sefton@ags.gov.au

Two recent decisions of the High Court, Toll and Equuscorp,
are timely reminders for anyone entering into a contract
to 'read the small print'. The decisions
represent both a warning and a comfort to agencies. On
the one hand, the cases suggest a 'hard line' will
be taken in relation to any claim by a party that they
did not read or did not understand the importance of
a document that they signed. At the same time, they provide
some comfort to parties that they can rely on their written
and executed agreements – even where prior oral
discussions may have been inconsistent with the arrangements
ultimately set down in the final document.

The decision
in Toll also addresses some interesting issues concerning
agency – in particular, it confirms that
where a party enters into a contract on behalf of another
party, that other party will be bound by the terms of that
contract. It also highlights the possibility of an otherwise 'innocent' act
of an employee having significant consequences. Agencies
should therefore ensure that their personnel, as well as
any agents, consultants and contractors, are aware of the 'limits' of
their authority. Agencies should also have in place arrangements
to monitor compliance.

Toll (FGCT) Pty Limited v Alphapharm
Pty Limited
[2004] HCA 52 (11 November 2004)

Facts

The case concerned batches of Fluvirin, a flu vaccine,
that had been damaged as a result of not being stored at
the correct temperature. While the case involved a number
of different parties, the facts were simplified because
very little of the evidence was in dispute. The High Court
also delivered a unanimous verdict.

In summary, Ebos Group
Limited (Ebos), a New Zealand company, was the distributor
in the South Pacific for Fluvirin.
Ebos appointed Alphapharm Pty Ltd (Alphapharm) to be its
Australian distributor. Broadly speaking, the arrangements
between Ebos and Alphapharm involved Ebos delivering amounts
of the vaccine to Alphapharm, who then sold and distributed
it throughout Australia. Delivery of the vaccine to Alphapharm
was arranged by Richard Thomson Pty Limited (RT), a general
wholesaler of medical supplies and a wholly owned subsidiary
of Ebos.

The arrangement entered into was for the 1998 'flu
season' and was continued into the next year. In
February 1999, RT reached agreement with Finemores (a company
that was subsequently acquired by Toll – for ease
of reference, all courts continued to refer to the party
as 'Finemores') for the vaccine to be delivered
into the Finemores warehouse. To save costs, RT suggested
to Alphapharm that Alphapharm also use Finemores for storage
and distribution of the vaccine to Alphapharm's customers.
Alphapharm agreed with this suggestion and RT made the
necessary arrangements with Finemores.

Discussions and correspondence
occurred between Finemores and RT personnel concerning
these arrangements – setting
freight rates, loading of pallets etc. On 17 February 1999,
RT's operations manager, Mr Gardiner-Garden, met
with the transport manager for Finemores, Mr Cheney. At
that meeting, an 'Application for Credit' was
signed by Mr Gardiner-Garden on behalf of RT. The application
for credit required certain information to be provided
concerning the 'Customer' – presumably
to enable Finemores to determine whether the Customer would
be provided with credit. The application also noted that
any storage or transport of goods would be subject to Finemores' standard
Conditions of Contract. Immediately above the place for
signature appeared the following:

Please read 'Conditions
of Contract' (Overleaf)
prior to signing.

Mr Gardiner-Garden gave evidence that
he did not read the Conditions of Contract and that they
were not mentioned
in the course of the discussion between himself and Mr
Cheney.

The Conditions of Contract contained the following
provisions:

  • a warranty that the Customer
    was entering into the contract on its own account and
    as agent for the 'Customer's
    Associates' (defined to include the owner, sender
    or receiver of the goods) (clause 5)
  • a very broad exclusion of liability in favour of Finemores
    in relation to any loss suffered by the Customer or
    the Customer's
    Associates (clause 6)
  • an indemnity
    from the Customer in relation to any claim brought
    by the Customer or any of the Customer's
    Associates (clause 8)
  • acknowledgement
    that it is the Customer's responsibility
    to arrange insurance to cover both its and the Customer's
    Associates' risks (clause 9).

In March 1999, Alphapharm
received orders from Queensland and NSW for vaccine. RT
arranged for Finemores to transport
the vaccine and deliver it to Alphapharm's customer.
In both cases, at some point during storage or transport,
the vaccine became too cold and was rejected by the customer.

The claim

Alphapharm sued Finemores in negligence, among
other things. It appears that all parties agreed that Finemores
had been
negligent in allowing the vaccine to be stored at too low
a temperature. Finemores' defence was that Alphapharm
was precluded from suing in negligence by clause 6 of the
Conditions of Contract. Finemores also counterclaimed against
RT, on the basis that in the event Alphapharm was not bound
by clause 6, RT was required to indemnify Finemores under
clause 8. There were other claims and cross-claims, but
these are not relevant for present purposes.

At first instance

The primary judge found that there was
no contract between Alphapharm and Finemores, therefore
there was nothing to
prevent Alphapharm making its claim against Finemores.
In relation to the cross-claim by Finemores against RT,
the primary judge found that the exclusion clause and the
indemnity provision did not form part of the 'contract' between
RT and Finemores and therefore RT was not bound to indemnify
Finemores.

Finemores appealed to the NSW Court of Appeal.

NSW Court
of Appeal

The Court of Appeal looked first at the contract
between RT and Finemores. Both Young CJ in Eq and Bryson
J referred
to statements made by Mellish LJ in Parker v South Eastern
Railway Co (1877) 2 CPD 416 at 421:

In an ordinary case,
where an action is brought on a written agreement which
is signed by the defendant, the agreement
is proved by proving his signature, and, in the absence
of fraud, it is wholly immaterial that he has not read
the agreement and does not know its contents.

However, the
Court of Appeal decided that this was not the 'ordinary
case', and confirmed the primary
judge's decision that the exclusion clause and the
indemnity did not form part of the contract between Finemores
and RT.

In particular, the reasoning put forward by the
Court of Appeal focused on the fact that the exclusion
and indemnity
clauses were included on the back of a document that was
titled 'Agreement for Credit', and a 'reasonable' person
would not expect to find such conditions on the back of
such a document. The Court of Appeal took the view that,
because of this, Finemores needed to have done what was 'reasonably
sufficient' to give RT notice of the existence or
content of the conditions if it wanted to rely on them.
The Court found that Finemores had not done so and that
therefore these provisions did not form part of the contract
between Finemores and RT.

Bryson J also noted that the
agreement for credit was one of a number of documents setting
out or otherwise dealing
with the basis upon which Finemores would transport the
vaccine, not all of which were consistent. In this situation,
Bryson J suggests that just because a document is signed,
it does not mean that the parties intended that it form
part of the 'contract' between them.

It was
not strictly necessary for the Court of Appeal to decide
whether there was a contract between Alphapharm
and Finemores – as the same reasoning would preclude
the exclusion clause from being part of any such contract.
However, the Court of Appeal addressed this issue, deciding
that there was no contract between Alphapharm and Finemores – that
is, RT had not been acting as Alphapharm's agent
when it entered into the agreement with Finemores for the
delivery of the vaccine to Alphapharm's customers.
Therefore Alphapharm was not bound by clause 6.

Finemores
appealed to the High Court.

The High Court's
decision

The High Court (Gleeson CJ, Gummow, Hayne, Callinan
and Heydon JJ) upheld Finemores' appeal. In doing
so the Court took a much stricter view than the lower courts
on what was 'relevant' or admissible to the
issues at hand – whether or not there was a contract
and what were the terms and conditions of that contract.
The Court was also less than complimentary concerning the
lawyers involved in the preparation and submission of 'irrelevant' material
concerning subjective understandings of the parties [35].

The Court quoted Mason J in Codelfa Construction Pty
Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 352:

We
do not take into account the actual intentions of the parties
and for the very good reason that an investigation
of those matters would not only be time consuming but it
would also be unrewarding as it would tend to give too
much weight to these factors at the expense of the actual
language of the written contract.

The Court noted that it
was not in dispute that Mr Gardiner-Garden was authorised
to sign the application for credit on behalf
of RT and that, when he signed that document, he did so
intending that it would affect the legal relations between
RT and Finemores. The Court noted that the document 'invited' Mr
Gardiner-Garden to read the terms and conditions on the
reverse before signing and that he chose to sign it without
reading it. It was not as though Finemores had set out
to conceal the terms and conditions on the document, or
to encourage Mr Gardiner-Garden not to read them [39].

The
Court referred to one of its recent decisions, Pacific
Carriers Ltd v BNP Paribas (2004) 78 ALJR 1045; 208 ALR
213 which stated at [40]:

It is not the subjective beliefs
or understandings of the parties about their rights and
liabilities that govern
their contractual relations. 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 ...
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.

The Court went on to say:

It should not be overlooked that
to sign a document known and intended to affect legal relations
is an act which
itself ordinarily conveys a representation to a reasonable
reader of the document. The representation is that the
person who signs either has read and approved the contents
of the document or is willing to take the chance of being
bound by those contents ... whatever they might be. That
representation is even stronger where the signature appears
below a perfectly legible written request to read the document
before signing it. [45]

In most common law jurisdictions,
and throughout Australia, legislation has been enacted
in recent years to confer
on courts a capacity to ameliorate in individual cases
hardship caused by the strict application of legal principle
to contractual relations. As a result, there is no reason
to depart from principle, and every reason to adhere to
it, in cases where such legislation does not apply, or
is not invoked. [48]

The Court then looked at the decisions
of the primary judge and the Court of Appeal, which it
summarised as being premised
on the following propositions:

  • in
    order for the exclusion clause and the indemnity to
    be made part of the contract between Finemores and RT,
    it was necessary for Finemores to establish that it
    had
    done what was reasonably sufficient to give RT notice
    of the terms and conditions; and
  • Finemores
    had not done what was reasonably sufficient to give
    RT such notice [51].

The High Court noted that it would be
sufficient for it to disagree with the second proposition
for it to find
for Finemores – asking what more could Finemores
be expected to do than include above the signature block
a direction to read conditions overleaf.

However, the Court
also addressed the first proposition, noting that the lower
courts appeared to have based their
decisions on the fact that the relevant clauses are exclusion
clauses, or possibly onerous or unusual exclusion clauses.
The Court disagreed with this approach, stating 'there
is no apparent reason why the principle, if it exists,
should apply only to them' [54]. The Court also stressed
the difference between signed and unsigned documents – the
importance of which the Court felt the primary judge in
particular had failed to take due account.

The Court did
not consider the fact that the conditions were on the back
of an 'application for credit' was
important, noting that the conditions were common in the
transport industry and that it was also common for an application
for credit to include the general terms of contract. The
Court also noted that all parties understood the particular
requirements in relation to insurance of the goods.

The
Court decided that the printed conditions on the application
for credit applied to the contract for storage and transportation
between RT and Finemores.

The Court then turned its mind
to the issue of agency – had
RT also entered into the contract with Finemores as agent
for Alphapharm? The Court stated at [70]:

'(I)n any ordinary case the question whether one
person authorized another to do an act or series of acts
on his
behalf is best answered by considering for whose benefit
or in whose interest it was intended it should be done.' [Press
v Mathers [1927] VLR 326 at 332 per Dixon AJ]. Such a
consideration may not be conclusive, but it is a useful
practical starting
point.

The Court noted that Finemores was not aware of the
relationship between Ebos and Alphapharm and could not
know about the
arrangements concerning ownership and risk between Ebos,
RT and Alphapharm, stating at [72]:

The commercial purpose
of ... the Conditions of Contract, and the provisions
concerning the "Customer's
Associates", is clear. It was to cover exactly
the kind of situation that existed in the present case
...
Its conditions were expressed to bind all who had an
interest in the goods, and it required the customer to
warrant that
it had authority to act as their agent as well as on
its own behalf.

The Court did not accept the contention accepted
in the lower courts that RT was agent for Ebos but not
for Alphapharm,
suggesting that the lower courts may have felt this way
because RT was a subsidiary of Ebos and was being paid
an administration fee by Ebos. The Court found this distinction 'unconvincing' [78] – it
was clear Alphapharm required transport services, it decided
to use Finemores' warehousing and transport services
and it left it to RT to make arrangements with Finemores.
RT had 'accepted' Finemores' standard
terms and conditions, which, in the context and noting
Alphapharm had not placed any 'restrictions' on
RT, was within the scope of the authority given to RT by
Alphapharm.

The Court therefore found that Alphapharm was
bound by the Conditions of Contract and the exclusion clause
prevented
Alphapharm from having any claim against RT. In this context,
the indemnity from RT to Finemores was no longer relevant.

Equuscorp
Pty Ltd v Glengallan Investments Pty Ltd
[2004] HCA 55 (16 November 2004)

Facts

Less than a week after reaching its decision in Toll,
the High Court again had cause to consider the issue of
signed,
written contracts and whether they are binding on the parties
that signed them.

The Equus cases (of which there were
six heard together) involved a complex investment structure,
under which, in
very broad terms, 'loans' were made by one
company (Rural Finance) to investors to enable them to
buy units in a limited partnership. Rural Finance in turn
assigned the loans to Equuscorp.

The limited partnership
was part of a complex structure that had the ultimate purpose
of investing in the farming
of freshwater crustaceans in Queensland. It would appear
that the investments and the complexity of the structure
were in part driven by taxation considerations – the
people 'marketing' this arrangement also operated
a similar arrangement relating to blueberries.

For present
purposes, the relevant issue is that the investors argued
that, prior to executing the loan agreements, they
each orally agreed with Rural Finance that the loans were 'limited
recourse' – that is, the investors would only
be required to repay part of the loans, with the income
generated by the limited partnership being applied to extinguish
the loans. The written agreements entered between the investors
and Rural Finance did not reflect a 'limited recourse' arrangement,
and required each investor to repay the full amount of
the relevant loan.

The primary judge found for the investors
on this point – the 'operative' agreement
between each investor and Rural Finance was that which
had been agreed orally between the parties prior to signing
the written documents. The Court of Appeal of the Supreme
Court of Queensland disagreed with the primary judge, and
overturned the finding that the terms of the loan were
those that were agreed orally.

The High Court's decision

The High Court agreed with
the Court of Appeal and held that the relevant agreement
between the investors and Rural
Finance was recorded wholly in the written loan agreements.
The Court again stressed that, having executed a written
loan agreement, each investor is bound by it [33]. The
Court went on to state at [36]:

If there was an earlier,
oral, consensus, it was discharged and the parties' agreement
recorded in the writing they executed.

The Court, as in
Toll, again referred to the fact that a court will hold
a party to the obligations it assumes
in a written agreement 'unless relief is afforded
by the operation of statute or some other legal or equitable
principle applicable to the case' [35].

Conclusion

It is important to note that the High Court
is not saying that it will never 'look behind' the
words set out in a signed document. In both decisions,
the Court
notes that a party could still argue that there was an
error in the final document, or that there had been some
fraud, mistake or misrepresentation associated with the
finalisation or signing of the document (see, for example,
[32] and [33] of Equus). In addition, there may have been
conduct after the execution of the agreement that could
give rise to an estoppel argument or other equitable action.
It is also important to note that, in Toll at least, the
Court took notice of the fact that each of the parties 'is
a substantial commercial organisation, capable of looking
after its own interests' [29].

These decisions should
not be seen as a panacea for sloppy contract management,
disorganised or rushed contract negotiations
or 'sharp' business practices.

Text of the decisions
is available at:
<http://www.austlii.edu.au/au/cases/cth/high_ct/2004/52.html> (Toll)
<http://www.austlii.edu.au/au/cases/cth/high_ct/2004/55.html> (Equuscorp).

Tips
for clients

  • Always read the small print, on both sides of the page.
  • Be wary of any purchase orders, consignment notes
    etc. that seek to incorporate other documentation 'by
    reference' – always seek to have all
    relevant documentation prior to signing anything.
  • Where a standing
    offer or other form of contract has already
    been signed with a service provider, ensure that
    any subsequent documentation (for example,
    purchase orders or invoices) does not seek to introduce
    new or
    additional
    terms and conditions.
  • Ensure that any written documentation
    fully and accurately sets out the agreement reached
    between the parties – don't
    rely on 'understandings' reached prior to
    contract signature or 'handshake agreements'.

Kenneth Eagle is a Senior Executive Lawyer practising
in the areas of commercial law, including competitive tendering
and contracting, contract drafting, risk allocation and
management, as well as intellectual
property, including technology development and licensing
agreements. In addition, he has gained expertise in the
handling of complex legal issues and processes through
his involvement in major privatisation and corporatisation
projects.

Sarah Sefton is a Lawyer practising in commercial
law, including competitive tendering and contracting
and contract
drafting. Sarah brings considerable public sector experience
to her position
at AGS having held management roles in state government
where she also worked on privatisation and outsourcing
projects.

AGS contacts

For further information on the notes in this
issue please contact the authors or any of the lawyers
listed below:

National

John Scala

03 9242 1321

Canberra

Linda Richardson
John Snell

02 6253 7207
02 6253 7025

Sydney

John Berg
Simon Konecny

02 9581 7624
02 9581 7585

Melbourne

Paul Lang
Lynette Lenaz

03 9242 1322
03 9242 1358

Brisbane

Robert Claybourn

07 3360 5767

Perth

Lee-Sai Choo

08 9268 1137

Adelaide

Vesna Vuksan
Nic Giannantonio

08 8205 4512
08 8205 4287

Hobart

Peter Bowen

03 6220 5474

Darwin

Ashley Heath

08 8943 1444

ISSN 1443-9549 (Print)
ISSN 2204-6550 (Online)

The material in these notes is provided
to AGS clients for general information only and should
not be relied upon for the purpose of a particular
matter. Please contact AGS before any action or decision
is taken on the basis of any of the material in these
notes.

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