In the recent decision of Chinatex (Australia) Pty Limited v Bindaree Beef Pty Limited [2018] NSWCA 126, the NSW Court of Appeal has affirmed the current state of the law around the contract concept of frustration.
In 2015, Chinatex (Australia) Pty Limited (Chinatex) entered into a contract referred to as a Service Kill Agreement (SKA) with with the big Inverell-based abattoir operator, Bindaree Beef Pty Limited (Bindaree).
Initial negotiations had commenced between Bindaree and Shenzhen Lianhua Enterprises Development Co Ltd (SLED), a China based meat wholesaler. There was an established connection between SLED and Chinatex in the Australia-China meat trade. Chinatex Corporation, a Chinese state-owned corporation (the parent company of Chinatex) was involved in negotiations from an early stage. At a time when it was proposed that SLED be the contracting party, Bindaree said it would require Chinatex to be a guarantor of SLED’s obligations. The final contract was between Bindaree and Chinatex for a three-year term commencing on 18 August 2015.
Relevant clauses of the SKA provided that:
Bindaree would receive a Total Product Fee including a Service Kill Fee of $405 per head and the Carcass Cost, being the average price paid by Bindaree to acquire cattle as specified in the SKA.
Bindaree was to acquire and deliver 900 cattle per week for the payment of the Service Kill Fee, and the Service Kill Fee was to be provided in advance on the first business day of each Service Kill Week.
Bindaree was not obliged to acquire cattle unless this fee had been paid.
Chinatex’s failure to pay the Service Kill Fee would be a breach of a fundamental term and Bindaree’s obligation to acquire Service Kill Cattle would cease.
Chinatex had entered into a sales agreement with Australia Uniwell Group Pty Ltd (Uniwell) a subsidiary of SLED. Chinatex did not make any payment to Bindaree as it was obliged to do from the commencement of the SKA. Uniwell had decamped from its agreement with Chinatex. Six weeks into the SKA, Chinatex commenced payment for several consecutive weeks, having found another company Chongqing Hondo Agricultural Group Co (Hondo) to purchase the product. Payment then ceased for a subsequent 19 weeks before Bindaree issued a notice of termination of the SKA on 31 May 2016.
Bindaree commenced proceedings against Chinatex in the Supreme Court. Bindaree claimed that Chinatex had breached the contract by failing to pay the Total Product Fee during the non-performance periods despite Bindaree having carried out the Service Kill or being ready, willing and able to do so. Bindaree alleged that Chinatex had breached a fundamental term or repudiated the contract, entitling Bindaree to terminate the SKA.
Chinatex claimed that no damages could be awarded as the respondent had not obtained Chinatex’s authorisation before proceeding with each Service Kill. It claimed that the contract was frustrated or abandoned because the parties contracted on the common fundamental assumption that SLED or a company arranged by SLED such as Uniwell would take the whole output from Chinatex. It also contended that Bindaree’s claim was truly in debt and not damages, but Bindaree was not entitled to claim in debt because it had not performed the contract.
The primary judge upheld Bindaree’s claim, finding that Bindaree was entitled to damages of approximately $32 million. The damages were calculated for each non-performance period equivalent to the Total Product Fee for each week of that period minus the proceeds of Bindaree’s sales to other customers of the products that Chinatex should have taken in the week (by making those sales, Bindaree appropriately mitigated its loss).
In dismissing the appeal, Barrett AJA affirmed at [44] the current state of the law, consistent with the High Court's longstanding position in Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, and as summarised by the Victorian Court of Appeal in oOh! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd (2011) 32 VR 255, namely that a contract is not frustrated unless a supervening event:
confounds a mistaken common assumption that some particular thing or state of affairs essential to the performance of the contract will continue to exist or be available, neither party undertaking responsibility in that regard; and
in so doing has the effect that, without default of either party, a contractual obligation becomes incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.
His Honour found that the SKA did not, in terms, contemplate, even indirectly, the on-sale of the meat products by Chinatex to any stranger to the contract (whether SLED, Uniwell or anyone else) or the existence of any such stranger as a person willing to take those products. It was, quite simply, a contract between two arm’s length commercial parties one of which had some kind of business connection with SLED and expected SLED to take the total output. Bindaree, for its part, knew that SLED was a major participant in the meat trade. It also knew that Chinatex was active in export-import. It may well have suspected at the time the SKA was entered into that some arrangement existed between Chinatex and SLED concerning the products (it did become aware, after the SKA was entered into, of the underwriting contract between Chinatex and Uniwell). But Bindaree’s declared unwillingness to contract with SLED unless Chinatex guaranteed SLED’s performance showed that Bindaree had no intention of exposing itself to the risk of non-performance by SLED unless Chinatex undertook to protect it from the financial consequences of that non-performance.
His Honour said that an alternate finding that Bindaree intended that the subject matter of the contract should be regarded as having fallen away to nothing once SLED failed to take the total output from Chinatex would impute to Bindaree a willingness to succumb to the very consequence that it had been astute to avoid by requiring that Chinatex enter into a direct contractual relationship with it.