EXECUTIVE SUMMARY
In Sanmik Food Pvt Ltd v Alfa Laval Australia Pty Ltd1 the NSW Supreme Court of Appeal decided that a broadly drafted release clause in a settlement deed did not preclude a supplier from asserting title over delivered components where title had not passed to the purchaser pursuant to the initial contract.
The Court also decided that the supplier was permitted to attribute the prior work (the delivered components) to new supply arrangements agreed in the settlement deed.
The case of Sanmik v Alfa is an instructive example of disputes arising over the interpretation of a settlement deed (or replacement contract) in respect of prior supplies or prior work where further work is required to be carried out. Such disputes can be avoided by the parties properly considering interests and clearly specifying rights, obligations and liabilities in respect of any prior supplies or work.
RELEVANT FACTS
On 12 April 2018, Sanmik Food Pvt Ltd and Sanmik Natural Food Pty Ltd (Sanmik or the Purchaser) and Alfa Laval Australia Pty Ltd (Alfa Laval or the Supplier) entered into a supply contract for two coconut milk production plants in Sri Lanka and the Philippines (Initial Contract).
The supply included a homogeniser and an aseptic filler which were delivered to Sanmik’s warehouse in Sri Lanka in 2019 (Delivered Components).
Sanmik only paid an initial part of the purchase price and no further components were delivered.
Under the Initial Contract, title to each plant only passed to the Purchaser on payment of the full purchase price.
In 2021, the Supplier initiated legal proceedings alleging that the Purchaser had breached the Initial Contract.
On 22 March 2023, the dispute was agreed to be resolved by a settlement deed which provided for a release of claims and disputes in respect of the Initial Contract and agreed terms for a new supply of the two production plants by Alfa Laval (New Supply).
However, the parties failed to make express provision in the settlement deed for the Delivered Components.
The settlement deed included a broad release on the following terms:
- Clause 3.2(a) – The ‘parties have no further obligations in respect of’ the Initial Contract.
- Clause 3.2(b) – The Purchaser is released ‘from all Claims and actions arising from or in connection the Settled Matters‘, where:
‘Claim’ was defined as including ‘any claim, action or liability of any kind’;
‘Settled Matters’ included ‘all claims and disputes between [the parties] which were the subject of, or in any way related to,’ the Initial Contract and supply of the plants.
After entering the settlement deed, Alfa Laval asserted that it was entitled to attribute the Delivered Components to the New Supply and be paid for them pursuant to the settlement deed
NSW SUPREME COURT
In February 2024, Sanmik initiated further proceedings in the NSW Supreme Court,2 claiming that the terms of the settlement deed prevented the supplier Alfa Laval from asserting title over the Delivered Components and it was not entitled to use the Delivered Components in the New Supply.
Neither party asserted the fact that the Delivered Components were physically located in Sri Lanka had any bearing on the legal principles and they proceeded on the footing that the general law of Australia applied.
The NSW Supreme Court held that:
- the release in the settlement deed did not extinguish Alfa Laval’s title to the Delivered Components; and
- Alfa Laval could attribute the Delivered Components to the New Supply.3
NSW COURT OF APPEAL
The Purchaser’s appeal to the NSW Court of Appeal was dismissed by Griffiths AJA and McHugh JA (including an interesting analysis of the law of bailment) with Adamson JA in dissent.
The Court held that on termination of the Initial Contract, title in the Delivered Components remained with the supplier, Alfa Laval, physical possession of those goods remained with the purchaser, Sanmik.
While the Court determined that the parties had no further obligations under the Initial Contract, it was held that Sanmik continued to hold the Delivered Components as bailee and Alfa Lavel had a right as bailor to have those goods re-delivered to it.4
The Court analysed the language of the release (particularly the use of past tense ‘were’ with respect to ‘Settled Matters’) and cited Reid v Commonwealth Bank of Australia5 in support of the longstanding approach to construing releases at law as follows:
‘releases are to be construed narrowly, with general words confined to those things which were “specially in the contemplation of the parties at the time when the release was given”…a dispute that had not emerged, or a question which had not at all arisen, cannot be considered as bound and concluded by the anticipatory words of a general release.’6
The Court found that Alfa Laval’s title in the Delivered Components and its right to re-delivery arose independently of any claims or demands released by the settlement deed. Therefore there was no ‘release’ of Alfa Laval’s claim to title in those goods and no release of the right as bailor to have the goods returned.7
The Court further held that, subject to the terms of the parties’ agreement, Alfa Laval was entitled to discharge its New Supply obligations by using any equipment available to it which included the Delivered Components.
In interpreting the settlement deed, the Court considered surrounding circumstances which were known to both parties having regard to what was said by French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd8 (footnotes omitted):
[46] The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose. [47] In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract. [48] Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning. [49] However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’. It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.
The Court held that these surrounding circumstances all point to the likelihood, objectively viewed, of the parties agreeing to the Delivered Components being utilised in the new supply contract rather than effectively being rendered redundant and ‘replaced’ by two new identical customised items of equipment.9
The Court referred to the requirement to give a contractual provision ‘a commercial and business-like operation‘ and noted there are important limits to this notion, for example, in Jireh International Pty Ltd t/as Gloria Jean’s Coffee v Western Exports Services Inc, Macfarlan JA10 (with whom Young JA and Tobias AJA agreed) said:
‘…So far as they are able, courts must of course give commercial agreements a commercial and business-like interpretation. However, their ability to do so is constrained by the language used by the parties. If after considering the contract as a whole and the background circumstances known to both parties, a court concludes that the language of a contract is unambiguous, the court must give effect to that language unless to do so would give the contract an absurd operation. In the case of absurdity, a court is able to conclude that the parties must have made a mistake in the language that they used and to correct that mistake. A court is not justified in disregarding unambiguous language simply because the contract would have a more commercial and businesslike operation if an interpretation different to that dictated by the language were adopted.’
The Court held that the objective logic of the relevant matters leans against a construction of the documentation which would result in the Alfa Laval having to transport and ship two identical items for the purposes of the new supply contract, leaving the other two items idle unless it was able to sell them for spare parts (presumably at a discount and possibly having to have them refabricated or redesigned given that they were customised) or incur what might reasonably be expected to be significant transport costs in shipping them elsewhere.11
KEY TAKEAWAYS
Often parties to a contract dispute will agree to resolve matters regarding prior work and may agree ongoing obligations in respect of further work.
In these situations, we recommend carefully specifying the rights and obligations of the parties with respect to prior work, including payment and warranties and rights to incorporate any prior work in further work.
As this case illustrates, failing to do so can lead to disputes, particularly if the parties are not aligned as to how prior work is to be treated.
This article was written by Kevin Lock, Partner, and Angelo Lin, Solicitor.
1 [2025] NSWCA 7 (‘Sanmik v Alfa [2025]‘).
2 Sanmik Food Pvt Ltd v Alfa Laval Australia Pty Ltd; Alfa Laval Australia Pty Ltd v Sanmik Food Pvt Ltd [2024] NSWSC 698.
3 Ibid [165] (Stevenson J).
4 Sanmik v Alfa [2025] (n 1) [125] (McHugh JA).
5 (2022) 109 NSWLR 149; [2022] NSWCA 134, [33] (Leeming JA).
6 Sanmik v Alfa [2025] (n 1) [132] (McHugh JA).
7 Ibid [135] (McHugh JA).
8 (2015) 256 CLR 104; [2015] HCA 37, [46]-[49].
9 Sanmik v Alfa [2025] (n 1) [150] (Griffiths AJA).
10 [2011] NSWCA 137, [55].
11 Sanmik v Alfa [2025] (n 1) [151] (Griffiths AJA).
