Many commercial disputes arise when businesses order their affairs without completing the essential documentation. This is often because, at the time, the parties felt there was a clear ‘mutual understanding’ of each others’ obligations.
A recent case arising out of the Supreme Court is a clear example of the dangers of non-documentation – and the problems it can create!
Background of the case
KNZA and Colyer were competitors in the tallow industry (tallow is a by-product of the meat industry and is used as an ingredient in various commodities including soaps and lipstick and for the production of bio-fuels).
In the mid 1990’s, the director of Colyer had discussions concerning the purchase of tallow from KNZA, and it appears they came to an agreement. However, the terms of that agreement were never reduced to writing. Subsequently, when the relationship between the parties broke down, Colyer sued KNZA for breach of the agreement.
The Court was required to consider the terms of the agreement, including the amount of tallow to be purchased and non-exclusivity provisions.
The key issues
Unfortunately, the evidence given in Court by the two parties involved conflicted at times quite considerably, for example:
- Colyer alleged that the agreement was made over the phone, whereas KNZA said it was reached over dinner;
- Colyer alleged it would pay a “commission” for about 30,000 tonnes of tallow each year, whereas KNZA believed between 15,000 to 30,000 tonnes per year would be purchased;
- Colyer said no discussion was had as to exporting opportunities, whereas KNZA alleged Colyer had agreed not to export tallow whether in drums or bulk.
So, how did the Court determine the actual terms of the agreement?
When an agreement is not in writing, surrounding circumstances and contractual principles are examined to establish the terms, including:
- The history of the relationship between the parties
- Their conduct prior to the making of the agreement and at the time it was entered into
- The evidence of what was said and not said
- Evident commercial aims and expectation of the parties
- Subsequent conduct (“the course of dealings”) between the parties
- Whether the obligations of the parties are effective and operational
- What is “reasonable and equitable”
- Whether the terms bring “business efficacy to the contract”
After nine days of a Hearing before the Supreme Court, including significant documentation provided by the parties and evidence from various witnesses, the Court found Colyer to be unsuccessful in its claim.
The main terms of the agreement (which were laid out in a Judgment spanning over 30 pages) included:
- Colyer was to be the ‘exclusive’ supplier of tallow to KNZA, given the evidence that even when KNZA acquired tallow from other suppliers it still paid the commission of $5 per tonne to Colyer.
- Colyer could export tallow as the evidence showed that KNZA was aware Colyer was exporting food grade tallow to another company.
What lessons can be learnt?
During any commercial negotiations or discussions, it is important for all parties to realise the importance of properly recording their Agreements in writing.
This should also occur where terms are to be later amended or reviewed. Each party should carefully consider the terms of the written agreement made and ensure that they properly reflect their intentions – and remove any ambiguity or potential for dispute at a later date.
Considerable time and expense can result from misunderstandings between parties. The Court, as an independent arbitrator, must put aside the subjective beliefs of the parties and determine what is consistent with the actions and intentions of the parties, and which terms are reasonable and operational. This process takes the decisions out of the control of the parties involved and what may have seemed like a good idea and a saving of expense at the time, can later end up in tears.
To stay in control of decisions being made and dealings with other parties, you should always ensure agreements are in writing and accurately reflect your understanding of a situation. Expert legal advice at the time of drafting an agreement, or reviewing one prepared by another party, will also help to ensure that the terms are legally binding, clearly worded and leave no room for confusion.
For more information on documenting commercial agreements, or for expert legal representation in a dispute, contact the Coleman Greig team on 02 9635 6422 or Caroline Hutchinson.