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
The Court was required to consider the terms of the agreement,
including the amount of tallow to be purchased and non-exclusivity
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
When an agreement is not in writing, surrounding circumstances
and contractual principles are examined to establish the terms,
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
Whether the obligations of the parties are effective and
What is "reasonable and equitable"
Whether the terms bring "business efficacy to the
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
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 could export tallow as the evidence showed that KNZA was
aware Colyer was exporting food grade tallow to another
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
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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