ACI Operations v Berri [2005] VSC 201

What the court decided

ACI and Berri were parties to a supply agreement dated 30 May 2001 under which Berri had to buy all its requirements for defined plastic bottles and closures from ACI for an initial five year term [4]. By necessary inference Berri was also obliged to buy products "substantially the same as or substitutable for any Products" only from ACI, subject to clauses 3.3, 5.5 and 4.8 [12]. Clause 4.8 gave ACI a right of last refusal to match a "bona fide arm's length offer" from a third party for such products [10].

Berri accepted two earlier Brickwood offers, the first concluding a contract dated 27 January 2004 [18]. On 25 June 2004 Habersberger J held that neither earlier offer fell within the relevant clause [22]. On 3 December 2004 Berri terminated the Brickwood contract and told Brickwood it had a duty to mitigate [33]. At a meeting that day, Berri's chief executive handed Brickwood an invitation to treat dated 3 December 2004 [34], [35]. Brickwood initially required payment of $476,000 per month under a side deed before making an offer, which Berri rejected [230]. The Brickwood offer received on 16 December 2004 was open for acceptance only until 21 December 2004 [64]. Concerned that ACI could not respond in so short a time, Berri proposed monthly payments of $476,000 to Brickwood, in reduction of Brickwood's loss, if the offer were extended [68]. Brickwood agreed to extend the time for acceptance until 30 June 2005 on the terms offered by Berri [69]. ACI sought declaratory and injunctive relief restraining Berri from accepting the Brickwood offer [1].

Adopting Habersberger J's analysis, her Honour held that a "Product" was an item exactly matching the specifications and technical drawings agreed from time to time [114], [115]. She rejected ACI's primary construction, that items with the same volume, weight and material type as a Product were not "substantially the same" [122], [134]. Even a small difference with a real commercial, marketing, functional or aesthetic purpose would distinguish an item from a Product, but a merely colourable distinction would be ineffective [140]. Each of the ten disputed bottles had minor differences that served some perceived genuine purpose or conferred some advantage [167]. All the offered bottles were therefore "substantially the same" as the corresponding ACI bottles [168].

Neither an implied duty of good faith (if applicable) nor a requirement of good faith in clause 4.8 confined Berri to passively receiving third party offers [190]. Berri had a legitimate interest in obtaining competitive prices and terms, and ACI's protection lay in the requirement of a "bona fide arm's length" offer [191]. A new Brickwood contract was Berri's preferred outcome, but her Honour was not satisfied that Berri devised the invitation to treat to defeat ACI's right to match [197]. Nor could she conclude that Berri improperly manipulated the circumstances or terms of the offer to defeat ACI's right to put a matching bid [199]. The alleged want of good faith was therefore not established [200].

Her Honour held that "arm's length" adverts to the relationship and dealings of the parties as well as the offer [201]. Where parties are not in an arm's length relationship, the inference may be drawn that they did not deal at arm's length, though related parties may in some circumstances displace it [225], [226]. Berri and Brickwood were not at arm's length, having been parties to a rival contract and then potential litigants with a common interest in minimising damages through a replacement contract [227], [228], [229]. It was not disputed that real bargaining had occurred, and it was not established that Brickwood acquiesced in Berri's dictation of the terms [230]. However, the offer as extended provided for payments to Brickwood of up to almost $2.5 million representing its estimated damages, in addition to the product prices [237]. That liability to pay a sum of "dual character" was incompatible with the requirement that the offer be "arm's length" [239]. The parties' dealings were throughout permeated and dominated by the mutual claims arising from the breach, confirming the inference that they were not dealing at arm's length [241]. The relationship, the dealings and the terms of the offer as extended were therefore not arm's length, so the offer was not a valid clause 4.8 offer which Berri was entitled to accept [244], [245]. Her Honour found it unnecessary to decide whether and by what date ACI could put a matching offer [246].

Why it matters

The decision shows that, under a clause of this kind, a customer may solicit and specify a competing offer to trigger a supplier's right to match without a want of good faith, if it pursues its legitimate commercial interests and does not contrive the timing or terms to defeat that right. The "arm's length" requirement, however, looks at the parties' relationship and dealings, and an offer bound up with resolving the customer's own liability to the offeror may fail it even where there was real bargaining. The good faith result was a single judge's finding that she was "not satisfied" on the evidence, and parties should ask whether an offer depends on anything particular to the customer's dealings with the offeror.

Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.