England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		21/11/2008

Sir Edward Evans-Lombe :

1. In this case the Claimant, Arla Foods UK plc, is one of the largest milk processing companies in the United Kingdom and a subsidiary of Arla Foods Amba, the largest dairy co-operative in Europe. I will hereafter refer to the Claimant as "Arla". The Fourth Defendant, Withgill Farm Limited ("the Company") is the tenant of an 800 acre farm ("the Farm") near Clitheroe in Lancashire. The Third Defendant, David Barnes ("Mr Barnes"), is the sole director and shareholder of the Company. The First Defendant, George Barnes, and the Second Defendant, Mary Barnes, are the parents of Mr Barnes who were trading as farmers in partnership with Mr Barnes from the Farm before the incorporation of the Company. The land comprising the Farm was actually owned by two companies controlled by Barnes family members. Before the incorporation of the company it was let to the First to Third Defendants and after such incorporation to the Company under a farm business tenancy for a number of years of which a number are unexpired.
2. The case concerns the sale, on 18 June 2007, of a milk production unit ("the Dairy") occupying premises extending over approximately 3.7 acres of the Farm to the Fifth Defendant, Peter Willes ("Mr Willes"). The Dairy is one of the largest milk-producing enterprises in the country. The cows are not put out to graze but are fed from cattle food of all different types brought to the Dairy, some produced on the Farm and some purchased from outside. A general farming operation is conducted on the remainder of the Farm by the Company. Mr Willes is the owner of three substantial milk-producing units in Devon. In his turn he is one of the largest individual producers of milk in the country. There are only five defendants, the Sixth Defendant being a trading name of Mr Willes.
3. Express Milk Partnership Investments Limited was a company set up in 2003 as a vehicle for the purchase, by the producer members of Arla Foods Milk Partnership Limited of the shares of Express Dairies plc. In October 2003 Express Dairies plc merged with Arla Foods Amba. Arla's claim is for breach of a contract ("the Contract") made between Express Dairies plc of the first part, Express Milk Partnership Investments Limited of the second part, and the Defendants of the third part. It is not in issue that Arla has succeeded to the right to enforce the terms of the Contract against the Defendants. It is further not in issue that, notwithstanding what appears on the face of the Contract, the Company was a party to the Contract. It is the Defendants' contention that the Company was, in the circumstances which I will describe, the sole counterparty to Arla. Arla denies this. There is a further issue of precisely when and in what circumstances the Contract was signed on behalf of the parties to it, but nothing appears to turn on this.

The background facts

4. Prior to January 2002 the first three defendants carried on a farming business, including the Dairy, in partnership on the Farm. On 11 January 2002 the Company was incorporated. On 29 January the Company purchased from that partnership all fixed assets, cattle stock and crop belonging to it and the partnership was dissolved. Thereafter the farming business was conducted from the Farm by the Company. It was the unchallenged evidence of Alison Barnes, Mr Barnes' sister, that Express Dairies plc, which was already buying milk from the partnership, were notified, soon after the event, that the Company had taken over the production of milk on the Farm from the partnership.
5. The Contract was made in early 2003, by clause 5, to take effect from 7 April 2003. By its heading the parties of the third part are described as "the Producer" and Express Dairies Plc as "the Company". The Contract comprised a one-page document, with attached to it, 11 pages of detailed "terms and conditions" expressly incorporated into it by clause 1. I will refer to these as the "Terms and Conditions". Clause 2 of the Contract provided as follows:

"2. The Producer agrees to sell to the Company [Arla] and the Company agrees to purchase from the Producer subject to the Terms and Conditions all of the milk produced by the Producer on the production units unless the parties mutually agree otherwise in writing from time to time."

6. By the definitions provisions in clause 1 of the Terms and Conditions "production unit" is defined as:-

"The premises at which the Milk is produced or stored and/or the cows from which the milk is produced are kept, as listed in the schedule to the contract to which these terms and conditions apply."

The schedule to the Contract shows the Farm as the production unit.

7. At all material times the production of milk in the UK has been governed by the European quota system under which Member States of the EC have been allotted quotas for production which they must not exceed on pain of penalties. The Member States then apportion to individual producers a share of the national quota which, if exceeded, attracts a levy. Quota is referred to in the Terms and Conditions and defined at clause 1 as "the quantity of Milk which the Producer may produce in a quota Year without being liable to pay a levy."
8. The price payable by the purchaser of milk supplied under the Contract is defined at clause 6 of the Terms and Conditions as follows:-

"6.1 The prices payable for the Milk shall, without prejudice to clause 17 and 18 [not material for the purposes of this judgment], be calculated in accordance with Appendix 1 hereto as amended by the Company [the purchaser] from time to time upon prior written notice to the Producer … ."

Appendix I to the Contract under the heading "milk prices" provides:-

"The prices payable by the Company [the purchaser] for the Milk pursuant to clause 6 of the Terms and Conditions shall be the basic price calculated in accordance with paragraph A below ("the Basic Price") adjusted in accordance with the provisions of paragraph B C and D below."

Paragraph A contains detailed provisions for arriving at "the Basic Price" for a particular supply of milk. Paragraph B under the heading "quality and hygiene price adjustments" provides:-

"The basic price payable per litre of milk supplied by the Producer during each month shall be adjusted as follows:

1. Total Bacterial Count as measured by bactoscan (TBC):

2. The monthly TBC shall be calculated using the geometric mean of the TBC Valid Test Results undertaken by the Company [the purchaser] or its agents during each month together with the previous month's TBC Valid Test Results and the basic price per litre of milk will be adjusted in the light of the aforesaid TBC Valid Test Results according to the TBC Price Adjustment Table published by the company from time to time."

Paragraph E of Appendix 1 under the heading "valid test" provides:-

"1. The Company [the purchaser] will arrange at its cost, for samples of milk to be taken from time to time each month from each Production Unit and tested for composition, hygiene, somatic cell count, extraneous water and antibiotics/inhibitory substances. A test will be a valid test for the purposes of this Appendix 1 only if the following conditions are met (as appropriate):…"

There are then set out seven conditions of which condition (g) provides: "the sample was representative of the milk collected."

9. In accordance with paragraph B.2, at all material times Arla, or its predecessors, had published a schedule showing how the price payable for milk supplied by producers was to be adjusted as a result, inter alia, of the "Bacterial Count" found upon the taking of a "valid test" in accordance with paragraph E. The producer of the milk was entitled to a bonus payment over the basic price if the milk supplied contained a bacterial count less than a certain figure and suffered a price reduction if that count exceeded a certain figure.
10. The Defendants have a counterclaim based on the allegation that the tests to which the milk supplied over a period preceding the termination of the Contract applied, were not "Valid Tests" because the samples taken by Arla were not "representative of all the milk collected".
11. The taking of test samples under paragraph E is governed by paragraph 10 of the Terms and Conditions where, under the heading "farm tanks/mobile farm tanks and ancillary/measuring equipment", it provides:-

"10.1 The Producer undertakes at all times to keep and maintain, at his own cost, on each Production Unit in good and hygienic working order and in compliance with the statutory regulations…

10.1.3 Such ancillary equipment and services as may be reasonably required by the Company or its agents or sub-contractors to collect and/or take samples representative of the milk in each farm tank…"

12. At clause 8 of the Terms and Conditions under the heading "milk supply information" it is provided:-

"8.4 The Producer shall, acting in good faith, notify the Company of the Producer's estimated future milk production on each production unit for a period up to 12 months as and when requested by the Company from time to time."

13. Termination of the Contract is dealt with at clause 19 of the Terms and Conditions and empowers the Producer to terminate the Contract on 31 March or 30 September of any year by serving 18 months' prior written notice on the purchaser. The clause further empowers the purchaser to terminate the Contract by 7 years' notice to expire on the same dates.
14. Under the heading "general" at clause 22.3 it is provided that:-

"22.3 The benefit and burden of this agreement is personal to the parties and may not be assigned by one party without the prior written consent of the other which shall not be unreasonably withheld or delayed."

15. At clause 22.5 it is provided that:-

"22.5 Without prejudice to clause 22.3 this agreement shall be binding upon each party's successors, assigns and personal representatives (as the case may be)."

16. At clause 22.4 and 23 an arbitration procedure is provided by which any unreasonable refusal of consent to assign the benefit and burden of the Contract by the purchaser can be overruled.
17. Finally, it is provided at clause 22.17 that:-

"22.17 The person signing this agreement agrees that if he has signed it on behalf of a producer he has due authority to do so and that such person will be bound accordingly and be deemed to have given the obligations, confirmations, warranties and undertakings contained in this agreement."

18. It is an important factor in this case that there is no provision in the Contract that the Producer would supply Arla with a minimum quantity of milk over any defined period and, in particular, any period of notice by the Producer to terminate the Contract.
19. On 9 August 2002 the Rural Payments Agency wrote to Express Dairies plc notifying them that the Company had been registered with Express Dairies as a supplier of milk to that company. Under the quota scheme it is only permissible to sell milk wholesale to a purchaser authorised by the Rural Payments Agency.
20. On 20 April 2004 George Barnes and Mary Barnes transferred their shareholdings in the Company to David Barnes and on 30 July 2004 the remaining shares in the Company not already transferred to Mr Barnes were transferred to him. After this date Mr Barnes was the sole shareholder of the Company.
21. On 2 March 2006 Arla wrote to the Company on the subject of a new milk supply profile scheme. From this date there appear in evidence a number of letters in which Arla are to be seen dealing with the Company as the supplier of milk to it. In the course of submissions I was not directed to any letter or other document in which Arla is to be seen dealing with any of the first three defendants.
22. Audited accounts of the Company for the year ended 31 March 2006 show an operating profit of £529,139.00 but a loss of £481.00 after deduction of an exceptional item, namely, a loss on disposal of milk quota of £529,620.00. The Director's Report appearing on these accounts describes the Company's principal activity as "dairy farming". Although there is no direct evidence on the point, I was told, without objection, that the Company's dairy farming activities were split between the Farm and a secondary and much smaller operation on a farm in Scotland.
23. On 18 October 2006 a meeting took place between Mr Peter Walker, the Business Group Director for milk procurement of Arla and Mr Barnes which is recorded, without challenge, in paragraph 35 of Mr Walker's witness statement. At that meeting Mr Barnes informed Mr Walker of his intention to expand the number of cows at the Farm by 1,000 with a view to supplying a new processor with "Omega Three" milk to the exclusion of Arla. Mr Walker described Mr Barnes as optimistic about the prospects for the Company's milk supply business but had to be reminded by him of the provisions for notice on termination of the Contract. It is not clear whether there was an increase in the number of cows by the full 1,000 mentioned by Mr Barnes, but it is not in issue that there was at this time a substantial increase in cow numbers by at least 600 cows.
24. On 31 January 2007, pursuant to the provisions of clause 8 of the Terms and Conditions, Graeme Surtees, the Company's Secretary, wrote to Mr Hydari, Arla's Finance and Strategic Planning Manager for milk procurement, copied to Mr Barnes, informing Arla that the average daily volume of milk produced at the Farm would be between 54,000 and 59,000 litres from 1 April 2007 until March 2008.
25. On 22 March 2007 Mr Barnes wrote to Mr Ian Cameron, Arla's Group Farm Services Manager, giving 12 months' notice of termination of the Contract to take effect on 31 March 2008. It is accepted that by reason of the provisions of clause 19 of the Terms and Conditions this notice must be taken as taking effect on 30 September 2008. It was Mr Barnes' evidence that his notice was intended to keep his options open and that at this time he had not finally decided to terminate the Contract and might subsequently have withdrawn the notice if permitted to do so by Arla. It was common ground that giving notice to terminate in this way by farmers supplying milk to Arla who had not finally decided to terminate their contracts was a reasonably frequent occurrence. It was also common ground that Arla almost always permitted the withdrawal of such notices if the farmer concerned changed his mind.
26. In early June 2007 the Company failed to be included in a scheme, organised by Arla, for the direct supply of milk to Tesco which would have resulted in the Company receiving an extra 2p. per litre for its milk. This was a great disappointment to Mr Barnes. It was his unchallenged evidence that at this time, because of depressed milk prices, the Dairy was losing 1p. on every litre of milk sold.
27. On 12 June 2007 a Mr Gary Hoerty, a farming consultant who had been advising Mr Barnes, wrote to him:-

"I write further to our meeting yesterday afternoon and have to say that I was sorry to learn that your expansion of Withgill Farm has not gone as smoothly as you would have liked and that this, together with your disappointment at missing out on supplying milk to Tesco, has given you cause to undertake a major review of your farming business.

When we met we discussed the pros and cons on the various options that are open to you and I would summarise these as follows:

1. You informed me that you were in discussions with another farmer who was interested in buying the dairy herd from you and employing you as a manager and continuing to milk at Withgill Farm.

Pros - You will no longer have the financial burden of the business. You will presumably be suitably remunerated by the farmer involved on a no risk basis.

Cons - You will still have the burden and stress of operating the enterprise and managing the workforce.

2. Cease all farming activity, dispose of the cattle and seek consent for alternative uses of the buildings for sale or to let.

Pros - Potentially good rental income, less work and no stress associated with farming in the current climate. Release of significant capital sum from sale of dairy herd. Release of large capital asset in buildings if the buildings are sold.

Cons - Not guaranteed that the planning authority will approve a planning application for change of use. However as you are aware three neighbouring farms, including one of your own, are in non-agricultural principle to be acceptable. Less favourable tax treatment of income if let. Large capital gains tax bill if sold.

3. Scale back the dairy herd to a level that can be sustained, predominantly from home grown forage and be less reliant on bought in feeds. We discussed a reduction to 750 head of cattle, which would still free up some buildings for non agricultural use.

Pros - A more manageable system, less reliance on purchased feeds, reduced staff requirement "less stress". Non farm income from alternative use of buildings. Reduced slurry output and therefore problems associated with NVZ requirements. Release of significant capital sum from the part sale of herd.

Cons - Still farming and dealing with issues associated with this. Reliant on planning consent for non-agricultural use.

4. Scale back cow numbers and convert to organic production. Unlike reducing numbers on a conventional basis you will no longer be able to operate on a flying herd basis but will need to rear your own dairy replacement. This would mean cow numbers would be reduced to circa 480 head plus followers.

Pros - A far less intensive farming system offering potential for higher margins per cow with fewer cattle and consequently lower labour requirement. Grant aid to convert to organic payable over a five year period. Reduced slurry output and therefore problems associated with NVZ requirements. Non farm income from alternative use of buildings. Release of significant capital sum from the part sale of herd.

Cons - Strict rules. 2 year conversion period. Whole new farming system to learn. Still running a farm business.

It is clear that there are a number of options open to you and ultimately it will be down to your personal preferences which one you follow. However the prospect of converting the buildings to a non agricultural use for business units or general storage would appear to be quite attractive.

I would of course be quite happy to prepare business plans for the latter three options for you and would be able to commence work on this sometime during the course of next week. I would estimate the cost of this to be in the region of £3,000.00 …"

28. On 18 June 2007 the Company by Mr Barnes entered into an agreement with Mr Willes recorded on a document of that date in the following terms:-

"Agreement between Withgill Farm Ltd and D H Willes & Partners

1. Withgill Farm Ltd to sell all cows to D H Willes & Partners at £720/head subject to valuation.

2. Withgill Farm Ltd to rent D H Willes & Partners the farm buildings at approximately £380,000/annum subject to valuation.

3. Withgill Farm Ltd to sell the necessary machines to D H Willes & Partners subject to valuation.

4. D H Willes & Partners to employ the current workforce.

5. D H Willes & Partners to employ David G Barnes as consultant, terms to be agreed.

6. Withgill Farm Ltd to sell forage to D H Willes & Partners at commercial value.

7. Withgill Farm Ltd to spread all manure for D H Willes & Partners at commercial rates.

8. Withgill Farm Ltd to have a formal agreement drafted by Burges Salmon (lawyers) as soon as possible.

9. Payment to be made no later than 14 days after production of the above formal agreement."

Mr Barnes and Mr Willes had been known to each other for some years prior to this agreement by reason of their membership of a farmers' group. It was Mr Willes' unchallenged evidence that from time to time he and Mr Barnes had discussed the poor returns from dairy businesses as a result of the low prices obtainable for the milk produced.

29. Between paragraphs 6 and 15 of his first witness statement Mr Willes describes the events leading up to the agreement of 18 June and thereafter as follows:-

"6. In early June 2007, during a telephone conversation with David, he told me that he could no longer continue in the dairy business having failed to be successful in gaining a milk contract with Tesco which seemed to have been the final straw for him. He told me that he felt he had no option but get out of dairy farming, sell up the cattle and consider other ways to try and make a profit for example by looking into converting his farm buildings.

7. At this time, David was being paid about 20 pence per litre by Arla. Prices across the industry were very poor, but I thought that the market would tighten and prices would rise. When David mentioned that he was planning to sell up, I saw an opportunity to expand my dairy business on a very good farm unit. I thought that if I bought his cows and rented his buildings, I would be very well positioned to obtain a premium milk contract and good return on my investment.

8. I told David that I would be interested in buying the cows and renting the buildings. I told him that I would be willing to buy the stock at full market value. I also told him that I would take on all of his existing employees and would also like to employ him as the farm manager. Everything would be at market rates. I knew that I needed to secure good management for the farm to ensure a smooth transition from one owner to another. In effect, I was putting together the same deal as had been done with Parkham Farms in Wales, the significant difference being that I would be renting Withgill Farm rather than purchasing it. I felt that the rental proposal would be more attractive to David than an outright purchase as it could preserve any longer-term plans he had to develop the farm.

9. I persuaded David that my proposal made sound commercial sense for him. He would get a regular income, both as farm manager and as landlord, and would also get a substantial lump sum from the sale of the cows and machinery. My proposal represented a return on the investment that David had made in the farm. After sleeping on it, David agreed to my proposal and together we started to draw up an agreement and finalised an agreement that we were happy with between ourselves on 18 June 2007 when I signed it.

10. We agreed that the transfer of all the assets would take place on 20 June 2007 and the lease commenced then. I travelled up to the farm so that I could introduce myself. We also arranged for a full stock-take to be carried out so it was absolutely clear what livestock and deadstock I was taking on as at that date.

11. After signing the agreement, David decided to instruct his solicitors to draw up full documentation recording the agreement we had reached on 18 June. I felt that I did not need to instruct a solicitor myself because I was already familiar with the procedures from Parkham Farm's dealings in Wales. We signed the full legal documents on 7 July 2007. I was very confident of my actions and thought I was making a good business decision.

12. Initially the milk produced by D.H Willes & Partners was sold to Parkham Farms Ltd and then sold on to Meadow Foods which are a processing company based in Cheshire. I did not sign a contract with them but we have regular trading with their company and when a price for a period is agreed they fax us a confirmation of that agreement and there are never any issues with the execution of our agreement. Meadow Foods commenced buying my milk on 20 June. I initially agreed a price for 20 June 2007 until 30 September 2007 and in September I agreed a price from 1 October 2007 until the 31 March 2008. During this period I had many discussions and meetings resulting in a long term contract being signed between D H Willes & Partners and another third party purchaser.

13. I was telephoned by Ian Cameron of Arla Foods on the 19^th June 2007 and asked if I would like to supply milk to Arla. I explained that I had already agreed to sell the milk to Meadow Foods. He continued to offer premium prices for the volume of milk that I would be producing and tried to persuade me to renege on my agreement with Meadow Foods. I explained to him that the agreement had been made and I would not go back on my word with Meadow Foods. I did explain to Ian Cameron that the initial agreement was only until 30 September 2007 and if a premium contract was offered by Arla I would consider it from 1 October. Despite me trying to contact Ian Cameron again at a later date no offer of a contract has ever been offered to D H Willes and Partners.

14. Since setting up D H Willes and Partners at Withgill Farm, I have monitored it closely and taken it forward with further large investments in 600 cows and new equipment. I speak to David most days and I am fully informed of how the business is progressing and totally responsible for it. I get up to Clitheroe at least once a month to meet with David and the other staff and to see how the operations are going on the ground. In the meantime, David is required to produce regular update reports, so that I am fully up-to-speed with the milk production figures and the business finances.

15. I review the performance of David and I am aware that I have the ability to serve three months' notice on him. I would do so if I felt that was appropriate in the interests of the business. However, to date, Withgill Farm Limited has performed well and it has clearly been the right management decision for me to retain Withgill Farm Ltd as the contractor. "

30. In his second witness statement between paragraphs 18 and 27 Mr Willes describes the changes he introduced to the dairy business being conducted at the Farm following his purchase of the assets of that business as follows:-

""Nothing has changed in practice"

18. In paragraph 58 of his statement, Mr Walker says that "nothing has changed in practice" between when Withgill Farm Ltd produced the milk and when I took over. That statement is completely wrong. Also Mr Walker says that "Barnes is still in charge". This statement is completely wrong.

19. I saw a business opportunity in buying Withgill Farm Ltd's cows and milking them on the site. David Barnes managed and ran the business in a particular way which produced certain results. I was confident that I could manage and run the business in a different way and produce better results. David Barnes was managing his business at low cost and high output. As a result, he and his 12 employees were stressed and all the assets of the business were stretched. I saw that with more investment and increased costs, the cows' performance could be raised and profitability greatly improved.

20. Firstly, I have changed the workforce by hiring three extra workers. The additional workers taken on did not increase costs considerably, as the hours which the existing workers were doing were cut back in order to spread the work around between the whole workforce. However, tasks are now completed more quickly, with an overall increase in efficiency and profitability (so for example a task such as feeding would have taken 8 or 9 hours previously might now take only 6 or 7, leaving more time for the staff to focus their attention elsewhere).

21. Secondly, I also decided to work closely with the vet within the first month of my involvement so that a full health and fertility report was produced and thereafter decided to implement checks on a regular basis, often 3 times per week 2 or 3 days after calving, which is about 2 weeks sooner than had been done when David was running the business, so that any issues with health or fertility would come to light sooner and could be dealt with more efficiently. Further additions to the health and fertility treatments which I decided to instigate were introducing improved protocols at drying off to help hygiene standards, scanning pregnancies at 32 days rather than 45 days as had been the case when David was running the business (this has the effect of tightening the calving index from the 395 days which it was at under David's management), putting the cows into a heat synchronization protocol in the event that the cow has not been seen on heat by 60 days post calving and trimming the cows' feet 3 times each lactation and foot bathing the cows 3 times a day as they come to be milked to improve general hygiene.

22. Thirdly, another aspect of the business which was fundamentally changed was the nutrition of the cattle. I was aware that there had been previous problems with achieving the necessary butterfat targets in the milk. This is a common problem of significantly increasing the volume of milk being produced. By increasing the investment in nutrition, the cattle were in better health and were likely to produce milk with significantly better butterfat yields.

23. Fourthly, another key improvement has been to introduce Holstein semen in order to allow the possibility of moving away from a flying herd to have young stock contract reared and thus diversify the farm's business.

24. Fifthly, I have increased the size of the herd by 150 cattle from 1850 to 2000. This was fully implemented within 3 months of my involvement. It was evident from the outset that the farm was capable of dealing with more cattle than it currently had.

25. Finally, I have made a large investment in the machinery for the farm. In the time since I took over the farm, I have purchased a new straw chopper (for £12,500), a new cattle trailer (£3,430), ordered a new weighbridge (£16,500), entered new hire contracts for two telescopic handlers for the tractors (£16,900 and £12,000 per annum), a new tractor (£18,000 per annum) and a large feed wagon (£14,400 per annum). These sums, together with the costs of a new identification system (£16,550) and the purchase of additional cattle (646 cows (including replacement stock) at a price of £965,000.00), represent a massive increase in investment in this sector.

26. David Barnes is in charge of the day to day management of the business and he implements my business plan and now runs the farm to my direction. I speak to him daily about the management and running of the farm as well as visiting him and the senior staff regularly to check the implementation of my management decisions.

27. In conclusion, it is very far from the truth to say that my taking over at Withgill Farm has not changed anything."

31. Mr Willes was not challenged on the evidence set out in the passages from his first and second witness statements which I have just set out.
32. It was Mr Willes' evidence under cross-examination that before entering into the agreement of 18 June 2007 he was aware that the Company was subject to a contract to supply milk to Arla but had no knowledge of the detailed terms of that contract. He said that he did not want to take over the obligations of the Company under the Contract and would not have bought the Company's dairy business if he had been compelled to do so. In taking over the dairy business he did not regard himself as bound by the Contract with Arla with whom he had had no contact or relationship. With regard to the provision at clause 5 of the agreement of 18 June providing for the employment of Mr Barnes as a consultant, Mr Willes' evidence under cross-examination was that initially Mr Barnes did not want the job but ultimately was persuaded to take it on.
33. Returning to my chronological description of the background facts, on 19 June 2007 Mr Barnes left a message on the voicemail of Beverley Hull, Arla's Northwest Partnership Support Manager, informing her that he had sold his cows and that the last collection of milk from the Farm going to Arla would take place that evening. On the same day Arla's head of its legal department wrote to Mr Barnes:-

"You advised us by telephone on 19 June 2007 that by reason of the disposal [of the Dairy] referred to above, as from 20 June 2007 milk would not be available for collection and that it would be supplied to a third party. If you have or if you propose to dispose of the Production Unit unless there is a mutual agreement in writing to the contrary, it must be on the basis that milk produced at the Production Unit continues to be supplied to Arla Foods UK plc in accordance with the terms of the contract. As there is no mutual agreement in writing to the contrary, the failure to supply milk is a clear breach of the contract and you are (and remain) liable for any losses Arla Foods UK plc may suffer as a result of the non-supply or any breach of the contract.

You must immediately resume or procure the resumption of the supply of milk to Arla Foods UK plc in accordance with the terms of your contract."

34. The agreement of 18 June was replaced by three agreements dated 7 July 2007 made between the Company and Mr Willes under the name D.H.Willes & Partners whereby, (i) the premises occupied by the Dairy were let under a farm business tenancy for a period of three years commencing on 20 June 2007 at a rent of £360,000 per annum; (ii) an agreement for the sale and purchase of the assets of the Dairy business for a purchase price of £1,308,903.00 apportioned as to £1,282,400.00 to the livestock and as to £22,602.00 to plant and machinery; and (iii) whereby Mr Willes trading as D.H.Willes & Partners and described as "the farmer" employed the Company "to carry out all managerial responsibilities associated with the Dairy business as the farmer may reasonably require in accordance with the Farming Policy" upon payment to the Company, monthly, of £15,000.00. It is clear, therefore, that it was the intention of the parties to these agreements that the sale of the Dairy business should take effect from the date of commencement of the farm business tenancy on 20 June 2007, supplies to Arla having ceased on the evening of the previous day.
35. Meanwhile on 6 July 2007 Messrs. Browne Jacobson, Arla's solicitors, wrote to all the Defendants indicating their intention to commence proceedings for "compensation for the loss suffered by our client as a result of your breach of the agreement to supply milk to Arla."
36. On 9 July 2007 Messrs. Burges Salmon, solicitors instructed by the Company, responded informing the Claimant's solicitors that the farming partnership of the first three defendants was dissolved in 2003 and continuing:-

"…Please identify the contract to which it [the Company] is a party. Withgill Farm Ltd no longer produces milk in Lancashire and your assertion that it is under an obligation to produce and supply milk to Arla is denied. Please specify the exact amount of milk you assert it was obliged to produce and supply to Arla and particularise the contractual provision upon which you rely."

37. As a precursor to the counterclaim on 11 July Messrs. Burges Salmon wrote to Browne Jacobson that they were "instructed to make clear that should your client withhold any payment due to our client for milk which has been supplied, then this would be in breach of the contract between the parties".
38. On 26 July 2007 DEFRA confirmed that D.H.Willes & Partners was the registered keeper of the herd of cows which it had purchased as part of the assets of the Dairy business pursuant to the contract of 7 July. On 17 August 2007 DEFRA confirmed the registration of Mr Willes as the food business operator of the Farm.
39. These proceedings were commenced by claim form issued on 31 October 2007.

The parties to the Contract

40. The Contract shows the parties of the third part as being GB, MC & DG Barnes of Withgill Farm Limited ("the Producer"). On its face, therefore, the parties of the third part are the First to Third Defendants. However, both parties are agreed that the Company was a party to the agreement. The issue is whether the first three defendants are also parties.
41. It was Mr Barnes' evidence that when he signed the Contract "for and on behalf of the Producer" he had written in Withgill Farm Limited because by that time the previous partnership had been dissolved and it was the Company which was carrying on the business of farming at the Farm. He was unable to explain why he did not cross out the reference to himself and his parents as individual contracting parties. Nonetheless, I have come to the clear conclusion that the party of the third part was the Company alone. Arla cannot have it both ways. If it insists on the strict wording of the Contract, the Company is not a party. However, Arla's entire case is presented on the basis that, at the time of the sale of the Dairy to Mr Willes, the Company was carrying on that business as the successor to the previous partnership of the First to Third Defendants. At paragraph 14 of their opening skeleton argument counsel for Arla say, "following the entering into of the Contract the Fourth Defendant [the Company] began supplying milk to the Claimant pursuant to the same."

The issues

42. In their written submissions, handed up to me as part of their closing address, counsel for Arla summarise the issues with which I have to deal as follows:-

"(1) Whether or not Withgill Farm Limited has "produced" milk on the Farm since 20 June 2007 and, accordingly, is liable to Arla under the express terms of the Contract.

(2) Whether or not Mr Willes is the "successor" to Withgill Farm Limited and accordingly is liable to Arla under the express terms of the Contract.

(3) Whether or not it was an implied term of the Contract that Withgill Farm Limited would not dispose of the dairy farming business (namely, the business of producing milk from the production units at Withgill Farm) without also seeking to assign the Contract and/or otherwise procuring that the party acquiring the dairy farming business and/or its assets became bound by the same.

(4) Quantum (so far as appropriate)

(5) The counterclaim."

43. I will deal with these issues in that order.

(1) Was the Company the "producer" of milk produced from the Farm from the 20 June 2007 until the expiry of the notice to terminate the Contract on 30 September 2008 under clause 2 of the Contract?

44. This issue turns on a construction of clause 2 of the Contract and the words "produced by the producer" in that clause. Inserting the relevant dramatis personae in the governing sentence of the clause, the Contract was one by which "the Company agrees to sell to Arla all of the Milk produced by the Company on the Farm…". The question is whether it is possible to construe those words so that the Company is to be treated as continuing to produce milk after 20 June 2007 notwithstanding that it had sold to Mr Willes all the means of production whereby it previously produced milk, including granting him a tenancy of the premises from which it had been produced.
45. In the course of his evidence under cross-examination Mr Barnes accepted that after 20 June 2007, pursuant to the Company's management agreement with Mr Willes, he continued to be responsible for the day to day management of the Dairy but under the overall control of Mr Willes who was frequently on the telephone to him and who visited the Farm monthly. He said that Mr Willes was a highly experienced and skilful dairy farmer with his own substantial dairy business from whom, even an experienced dairy farmer such as himself, could learn. I have set out above the unchallenged evidence in Mr Willes' witness statement in which he describes the changes to the operation of the Dairy business which he introduced after June 2007.
46. It was Mr Pickering's submission for Arla that the Company continued to produce milk pursuant to the Contract because through Mr Barnes it continued to manage the Dairy business albeit as an employee of Mr Willes. He submitted, and I accept, that it is possible for a party to enter into a binding contract of sale of goods which the party did not own or control so as to render himself liable in damages in the event that he was, at the time fixed for delivery under the contract, unable to deliver those goods. He drew my attention to Black's Law Dictionary definition of the word "produce", namely "to bring into existence; to create…." He also drew my attention to certain EC regulations whose effect, he submitted, was to equate a "producer" with a farmer who manages production units [i.e. farms] within a Member State. It was Mr Pickering's submission, therefore, that, notwithstanding that he accepted that Mr Willes after 20 June 2007, as the owner of the cows, produced the milk, he was not the only person who could be said to do so because, by reason of his important position as Mr Willes' manager, Mr Barnes, and through him the Company, was also a producer of milk within the provisions of the Contract.
47. I am quite unpersuaded by these submissions. It seems to me that the Contract only contemplated one producer of milk at any one time and the only question is whether, after disposing of the means of production of milk on the Farm to Mr Willes, the milk produced on the Farm was still "produced by the Company". The answer to that question must be no.
48. Before leaving this point it was at one stage suggested that the fact that the Company did not transfer its milk quota to Mr Willes was significant. As the evidence emerged it became clear that Mr Willes had used quota which was already his to produce milk on the Farm after 20 June 2007.

(2) Was Mr Willes a successor to the Company within clause 22.5 of the Terms and Conditions and so bound by the terms of the Contract to sell milk produced on the Farm to Arla under the terms of the Contract during the notice period?

49. It was Mr Willes' evidence that, whereas before purchasing the Dairy he knew that the Company was supplying milk to Arla under a supply contract, he was not aware of its detailed terms. He had had no commercial relationship with Arla prior to entering into the agreement to purchase the Dairy business from the Company. He said he would not have purchased that business if it had been a requirement that he enter into a supply contract with Arla. I accept this evidence. No evidence was introduced by Arla of any representation by the Company or Mr Willes to Arla, express or implied, that would estopp Mr Willes from denying that he was, after June 2007, producing milk subject to the terms of the Contract. Clause 22.5 is expressly without prejudice to clause 22.3 which provides that the Contract was "personal to the parties and may not be assigned by one party without the prior written consent of the others". Clause 22.3 is plainly inconsistent with any such process of automatic "succession" such as is suggested by Arla. In my view, clause 22.5 is intended to deal with such matters as succession on death or bankruptcy of a party. In my judgment, Mr Willes cannot be held liable as a "successor" under the Contract because there was no privity of contract between him and Arla.

Implied term

50. At paragraph 17 of the particulars of claim Arla plead:-

"17. Further or alternatively, it was an implied term of the Contract that the First, Second, Third and Fourth Defendants would not sell or otherwise dispose of the dairy farming business and/or its assets without also assigning (or seeking to assign subject to the consent of the Claimant) the benefit and burden of the Contract and/or otherwise procuring that the party acquiring the dairy farming business and/or its assets became bound by the same."

51. I have already set out the provisions of the Terms and Conditions dealing with termination of the Contract. In summary, Arla was bound to provide seven years' notice of termination to a producer and a producer could not terminate save on 18 months' notice terminating on specified dates which meant that the notice period was likely to be nearer to 2 years. It was Arla's submission that these lengthy notice periods were intended to give, on the one hand, to a Producer a secure market for the sale of his milk production and, on the other hand, to Arla security for its supplies of milk to meet the requirements of its onward supply contracts to its customers.
52. It was Arla's submission that it was contrary to the clear purpose of paragraph 19 of the Terms and Conditions that the Company should be able to sell its dairy business to a purchaser who would thereafter simply continue the previous business of the Company on the Farm and that a term should therefore be implied, as pleaded in paragraph 17 of the particulars of claim. The actions of the Company being in breach of such implied term, it was submitted, Arla were entitled to recover compensation by way of damages for their loss consequent on such breach.
53. It was submitted by Arla that the requirement of such an implied term was further supported by the provisions of clause 8.4 of the Terms and Conditions, which placed a duty on the producer to provide from time to time an estimate of future milk production extending to a period of 12 months. It was submitted that this provision underlined the importance to Arla of security of supply.
54. It was further submitted by Arla that paragraphs 22.3, 22.4 and 22.5 also supported the requirement of such an implied term. Whereas I can understand the submission in relation to paragraph 22.5, I am unable to see how clauses 22.3 and 22.4 assist Arla. The effect of those clauses is only to give protection to Arla from finding itself with a supplier which it has not approved. They have no bearing on the ability or otherwise of the producer to abruptly terminate supply by disposing of his dairy business.
55. The principles upon which a court will imply a term into a contract are summarised in the opinion of the Privy Council in BP Refinery (Westernport) Pty. Limited v President, Councillors and Ratepayers of Shire of Hastings 1978 52 ALJR 20 delivered by Lord Simon of Glaisdale at page 26 where he says:-

"Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express. In their view for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that "it goes without saying"; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract."

56. I was referred by Mr Pickering to the decision of the House of Lords in Equitable Life Assurance Society v Hyman [2002] 1 AC 408. That case concerned the exercise of a discretion in the directors of a life assurance society, to award terminal bonuses payable to policyholders on the maturity of their policies. A large number of the society's policyholders held policies the terms of which gave them a right, on maturity, to convert their policies into an annuity of which the level was guaranteed by the society. From a time when the current annuity rate fell below the rate guaranteed by such policies, the directors declared, in relation to such policies, a lower final bonus to policyholders who chose to take an annuity at the guaranteed rate than to policyholders who elected to take one of the alternative options. In the result, the House of Lords found that the exercise by the directors of their discretion was to be governed by a term implied into the policy that such exercise would not take away from those policyholders the benefit of a guaranteed annuity rate which it was their reasonable expectation that they would receive. In his speech at page 459 of the report Lord Steyn said this:-

"If a term is to be implied, it could only be a term implied from the language of Article 65 read in its particular commercial setting. Such implied terms operate as ad hoc gap fillers …"

Lord Steyn then refers to the decision of Luxor (Eastbourne) Limited v Cooper [1941] Appeal Cases 108 and the speech of Lord Wright in that case where he says:-

"But a case like the present is different because what is sought to imply is based on an intention imputed to the parties from their actual circumstances."

57. Lord Steyn continues:-

"It is only an individualised term of the second kind which can arguably arise in the present case. Such a term may be imputed to parties: it is not critically dependent on proof of an actual intention of the parties."

58. Then, later on the same page, Lord Steyn continues:-

"In my judgment an implication precluding the use of the directors' discretion in this way is strictly necessary. The implication is essential to give effect to the reasonable expectation of the parties. The stringent test applicable to the implication of terms is satisfied."

59. Thus in the Equitable Life case it may be said that the definition of the requirements for the implication of terms into contracts, by the Privy Council in the BP Refinery case, is extended to include cases where one of the parties might have answered the question that such an implied term "goes without saying" with the answer "no". Nonetheless a court may imply such a term to give effect to what the court sees as having been a reasonable expectation of the parties at the time the agreement was made. Thus the implication of terms does not depend, necessarily, on the parties' intention in the sense that they might not all of them have regarded the implied term as obvious at the time the contract was made. The court will impute such an intention to a dissenting party because, viewing the contract as a whole, it is reasonably necessary to imply it to give effect to the overall purpose of the contract.
60. In Philips Electronique Grand Public SA & anr v British Sky Broadcasting Limited 1995 EMLR 472 the Court of Appeal was considering a case where a substantial broadcasting company had entered in to an agreement with a manufacturer of television receivers that the latter should manufacture, and in consequence incur the costs of investment in manufacturing capacity, a large number of television receivers which were adapted to receive television signals from a satellite that the broadcaster was going to procure to be launched. However, the broadcaster was unable, after making the contract and after the manufacturer had incurred substantial expense, to obtain a sufficient market for its method of transmitting television pictures for which the proposed receivers were uniquely suitable. The commercial promotion of the broadcaster's scheme was a flop. The broadcaster merged with its principal competitor which was promoting an alternative method of transmission from a different satellite. In the result, the manufacturer obtained virtually no returns from its substantial investment and it sued the broadcaster for breach of contract, alleging six implied terms of which the broadcaster was in breach. The Judge found that only one of the six implied terms could properly be implied into the contract, namely a term that the broadcaster "would not commit any act which would tend to impede or render impossible the marketing of the receivers and/or render the receivers useless or unmarketable", and that the broadcaster was in breach of that implied term entitling the manufacturer to damages. The Court of Appeal allowed the appeal, finding that only two of the proposed six implied terms could properly be implied, which did not include the term implied by the Judge, and those terms did not assist the manufacturer. The leading judgment was given by the Master of the Rolls, Lord Bingham, who on the fifth page of the report, having cited two paradigm cases for the implication of a term in an agreement, namely, a term that a surgeon will exercise proper care and skill when employed to operate on a patient, and a term to be implied into a sale of unseen goods that they should be of merchantable quality, answer to their description and conform with sample, continued:-

"But the difficulties increase the further one moves away from these paradigm examples. In the first case, it is probably unlikely that any term will have to be expressly agreed, except perhaps the nature of the operation, the fee, and the time and the place of operation. In the second case, the need for implication usually arises where the contract terms have not been spelled out in detail or by reference to written conditions. It is much more difficult to infer with confidence what the parties must have intended when they have entered into a lengthy and carefully drafted contract but have omitted to make provision for the matter in issue. Given the rules which restrict evidence of the parties' intention when negotiating a contract, it may well be doubtful whether the omission was a result of the parties' oversight or of their deliberate decision; if the parties appreciate that they are unlikely to agree on what is to happen in a certain not impossible eventuality, they may well choose to leave the matter uncovered in their contract in the hope that the eventuality will not occur.

The question of whether a term should be implied, and if so what term, almost inevitably arises after a crisis has been reached in the performance of the contract. So the court comes to the task of implication with the benefit of hindsight and it is tempting for the court then to fashion a term which will reflect the merits of the situation as they then appear. Tempting but wrong. …

In the familiar cases already mentioned there could be little room for doubt what the parties' joint answers would have been had the question been raised at the outset. There would, almost literally, have been only one possible answer but this may not be so when the contract is novel, known to involve more than ordinary risk and known to be more than ordinarily uncertain in its outcome. And it is not enough to show that had the parties foreseen the eventuality which in fact occurred they would have wished to make provision for it, unless it can be shown either that there was only one contractual solution or that one of several possible solutions would without doubt have been preferred."

61. Cut down to its bare essentials the proposed implied term pleaded at paragraph 17 of the particulars of claim is that "the…Defendants would not sell or otherwise dispose of the Dairy or its assets without… procuring that the party acquiring the Dairy or its assets would become bound by the Contract."
62. I have come to the clear conclusion that it is impossible to imply into the Contract the implied term proposed in paragraph 17 of the particulars of claim. I have arrived at that conclusion for the following reasons:-

(i) The justification for implying such a term was the requirement of Arla for a secure source of supply of milk to meet its customers' requirements which, it was submitted the producer – the Company – must be taken to have acknowledged by making itself subject to an agreement including paragraph 19 of the Terms and Conditions which provides for a substantial notice period where a producer wishes to cease to be bound by the Contract. The difficulty with this contention is that the Contract, even if the proposed implied term were included in its provisions, in fact gives no protection to Arla against a producer peremptorily ceasing to supply. This is primarily because the Contract contains no minimum production requirement by the Company either from cows kept on the Farm or at all. The provisions of paragraph 8.4 of the Terms and Conditions providing for advance notice of forecast milk production do not bind the producer to honour its forecast even approximately. Its only requirement is that the forecast be bona fide at the time it is given which does not preclude the producer later changing his mind as appears to have happened in this case. To be implied the term "must be so obviously required that it goes without saying" that it is "necessary to include it to give business efficacy to the contract" by giving protection to Arla's requirement of security of supply. The proposed term does not give this protection or only if the producer behaves in a particular way.

(ii) Contrary to some of Mr Pickering's submissions, Mr Walker, Arla's leading witness, accepted that it would not be a breach of contract for the Company to cease producing milk altogether while remaining bound by the Contract. In particular he conceded that the conduct suggested by Mr Hoerty in his letter to Mr Barnes of 12 June 2007 at paragraphs 2, 3 and 4 would not constitute breaches of the Contract. Each of those suggestions would either have terminated milk production altogether on the Farm or substantially reduced it below the figure forecast by Mr Barnes in his letter to Arla of 22 March 2007. Mr Walker accepted that farmers frequently ceased supplying milk on very short notice, usually between 2 and 6 months, particularly in recent years, as a result of the fall in the profitability of dairy farms. It is not in issue that by June 2007 the provisions of the Contract allowed Arla to pay significantly less for milk to suppliers subject to the terms of the Contract than they would have had to pay on the spot market. That this was the case is fundamental to Arla's damages claim.

(iii) I am prepared to assume that the words "the dairy farming business" in the proposed implied term mean the dairy farming business on the "Production Unit" to which the Contract applies. Thus in the context of these proceedings they mean the dairy farming business of the Company being conducted on the Farm. Let it be assumed that the Contract includes the proposed implied term. In addition to the suggested courses of action in paragraphs 2, 3 and 4 of Mr Hoerty's letter of 12 June, which Mr Walker concedes would not be breaches of the Contract, there are other ways in which a producer, without breaching the Contract, could summarily terminate or substantially reduce supplies of milk to Arla. Thus a producer might sell the assets of his dairy business, including the cows, off the land comprising the Production Unit and thereafter give a farm business tenancy to another farmer to come on the land with his own cows and supporting equipment and produce milk which he could freely sell to processors other than Arla. Indeed such a producer need not actually sell his cows and equipment but might simply transfer them to another farm, either belonging to him or rented to him, where he could produce milk which would not be covered by the Contract while granting a tenancy to another farmer to produce milk from the Production Unit. It follows that the proposed implied term does not protect Arla from the summary termination or substantial reduction of milk produced from the Farm during the notice period.

(iv) As will have been seen, the Contract with its attached detailed Terms and Conditions is a substantial document. It is common ground that it is the product of past negotiations between Arla and representatives of its farmer Producers. There is no evidence that Mr Barnes played any part in the negotiation of the terms of the Contract. There are a number of ways in which the Contract could be amended so that Arla's sources of supply could be given effective protection from summary interruption or reduction. These are features of this case which led the Court of Appeal in the Philips case to refuse to imply terms into the contract in that case.

(v) Contrary to the submissions of both parties, it seems to me that as against the Company and Mr Barnes, Arla is proferens the Contract which, following the contra proferentem rule should be construed against Arla where there is doubt as to the effect of its provisions.

Quantum

63. On my conclusions thus far the claim fails, but I should deal shortly with the question of quantum of damage in the event that any of my conclusions are reversed on appeal.
64. On the basis that my conclusions that Company did not continue as Producer under the Contract after 20 June 2007 and that Mr Willes was not a "successor" bound by the terms of the Contract after he purchased the Dairy business of the Company at the Farm are reversed, subject to questions of mitigation of damage, the measure of Arla's damage will fall to be calculated under s. 51 of the Sale of Goods Act 1979 and will be the difference between what Arla would have paid for the milk produced on the Farm during the notice period under the provisions of the Contract and what it actually had to pay, or would have had to pay, to purchase the same quantity of milk of the same quality from other suppliers or on the spot market for milk.
65. Dealing with the question of mitigation, Mr Willes' evidence, confirmed by Mr Cameron of Arla, was that Mr Cameron sought to persuade Mr Willes to sell the milk he was producing from the Farm to Arla from the moment he took over on 20 June 2007. Mr Willes told Mr Cameron that because he had committed his milk to another processor until the end of September 2007, he could not do so immediately but would consider any offer by Arla to take his milk after that date. Mr Cameron said he passed this information on within Arla but when Mr Willes sought to contact Mr Cameron at a later date to discuss a contract to supply Arla, he received no response. It was Mr Willes' unchallenged evidence that he would have been prepared to do a short-term deal with Arla up to the following March at 32p. per litre or, alternatively, a longer-term two-year deal at 29p. per litre which would have covered the remainder of the notice period. Both of these offers would have undercut the prices at which Arla actually bought milk to replace the production from the Farm. It was Mr Willes' evidence that it would obviously have been sensible for Arla to enter into a long-term contract with him to buy his milk from the Farm because the Farm was "local" and transport costs would be lower.
66. Mr Morgan of Arla, when asked in cross-examination why, after 30 September 2007 they did not take up Mr Willes' offer to supply Arla, answered that it was not their policy to deal with farmers with whom they were in dispute.
67. I agree with Mr Hollander's submission that this constituted a failure to mitigate Arla's loss. There was no reason not to deal with Mr Willes. Until they, wrongfully as I have found, joined him as a party to the litigation they were not in dispute with him. He was a stranger to them until the events of June 2007. Arla has expressly disavowed any suggestion that the arrangement between the Company and Mr Barnes on the one hand and Mr Willes on the other hand was any sort of a sham transaction or that Mr Barnes has in some way obtained some benefit from Mr Willes arising from that transaction which he has not disclosed. It follows, in my judgment, that in any inquiry as to damages consequent on a successful appeal from my conclusions on the first two issues, with which I have dealt above, the inquiry should take into account such failure to mitigate by Arla.
68. I turn to consider the question of the quantum of damage on the basis that, contrary to my conclusion, the implied term proposed in paragraph 17 of the particulars of claim is to be treated as a term of the Contract which the Company has breached.

Damages for breach of the proposed implied term

69. Under this head it is to be presumed that the Contract contained a term that the Company "would not sell or otherwise dispose of the dairy farming business [on the Farm] without procuring that the party acquiring the dairy farming business and/or its assets became bound by [the Contract]". It was submitted by Mr Hollander that damages for breach of this term would fall to be assessed on the basis that the Company, during the notice period, had a number of choices of what it could do on the Farm. Because it was open to it, without breach, to choose not to produce milk on the Farm, with the result that Arla was deprived of the milk it would have produced during the notice period had it continued its dairy business as before, no damages would be recoverable. This would be an application of the principle that where a defendant is subject to a duty to perform certain obligations under a contract and has a multiple choice of how to perform those obligations but fails to do so, damages are assessed on the basis that the defendant would have chosen the method of performance least burdensome upon itself.
70. I am not persuaded that this principle for the assessment of damage would have been applicable in the present case had I held that the proposed term was properly to be implied into the Contract. The disposal of the Dairy business on the Farm to Mr Willes, which resulted in his continuing such business thereafter, albeit over time with alterations to its methods and scale of production, would have been a direct breach of the proposed term. As was pointed out in the course of submissions, the term in question, by contrast with the cases being considered in Butterworth's Communal Series – "The Law of Damages" edited by Andrew Tettenborn between paragraphs 19.08 and 19.13 to which I was referred, was not a term placing upon the Company a positive obligation to produce milk but was effective to restrain the Company from selling its dairy business at the Farm other than to a purchaser willing to submit himself to the terms of the Contract. In the result, in breach of the proposed term the Company has sold its dairy business at the Farm to a purchaser who was not prepared to become bound by the Contract but has produced milk there during the remainder of the notice period. In those circumstances it seems to me that Arla would be entitled to damages on the basis that it has been deprived of that milk which would have been available to it at the prices prescribed by the Contract up to a quantity which the court found would have been produced had the dairy business continued on the scale pertaining at the time of Mr Willes' purchase. It seems to me that in making this assessment the court dealing with the inquiry as to damage would be likely to be guided by Mr Surtees' assessment of milk production between 1 April 2007 and March 2008 sent to Arla on 31 January 2007. It goes without saying that the same mitigation of damage that I have found to be necessary would apply here.

Conclusion on the claim

71. In my judgment the claim fails.

The Counterclaim

72. The Company counterclaims £53,425.00 and interest being the amount which it alleges it was underpaid for supplies of milk between November 2006 and April 2007.
73. Clause 6.1 of the Terms and Conditions (set out above) provides that the price payable for milk supplied under the Contract should be calculated in accordance with Appendix 1. Appendix 1 (also set out above) provides at paragraph A for the calculation of a basic price to be adjusted in accordance with the succeeding paragraphs B, C and D. The price of milk was to be determined monthly in respect of that month's supply. We are concerned with paragraph B, namely, with adjustment dependent on the bacterial content of that milk as measured by "bactoscan". That figure is the product of the average figure for bacterial content so found as a result of "valid tests" conforming with paragraph E of Appendix 1 (above) during that month and the immediately preceding month.
74. The relevant facts are not in dispute. In the premises used by the Company's Dairy was a refrigerated milk storage silo into which milk produced during each day was poured. A tube protruded from the silo which ended with a nozzle. It was by opening this tube that samples were taken of milk in the silo. After a sample had been taken and the tube closed there would remain milk in the nozzle which did not have the benefit of the refrigeration of the silo which controlled the growth of bacteria in the milk stored in it. The result was that in the period between taking samples there was a build-up of bacteria in the residue of milk in the nozzle as it warmed up. Milk was collected from the Farm by tankers. The capacity of the tankers was insufficient to empty the silo when full. However, that capacity was sufficient so that the silo was empty after the third collection taken at approximately 7.00 p.m. each day. After the tank was emptied it would be cleaned including the sample-taking pipe and its nozzle. After the cleaning the process of filling the tank would start again. The quality of the milk should have been tested three times a day at the time each tanker collected from the silo. The first test, therefore, was of milk taken from the silo through a clean nozzle which, therefore, contained no milk from the nozzle having an unrepresentative bacterial content. However, because the tanker taking the first delivery was usually not able to empty the silo so that the tube and nozzle could be cleaned with the silo, when the second and third deliveries were made in the late afternoon and evening and samples were taken, they were taken from the nozzle which had not been cleaned since the previous evening and thus contained unrefrigerated milk with a bacterial content unrepresentative of the bulk in the silo.
75. Adjustments to the price resulting from bacterial content were made in accordance with figures produced by Arla. At all material times these were that a bacterial content which averaged less than 50 over the material two months produced an increase of 0.80p per litre over the basic price; between 51 and 75 an upward adjustment of 0.20p per litre; between 76 and 100 no adjustment and between 101 and 200 a reduction of 1p per litre.
76. It is common ground that the difficulty in producing valid tests and the cause of that difficulty as I have described it, had been known for some time and was acknowledged by Arla. Over the period in question, from November 2006 to April 2007, the Company suffered a reduced price for its milk supplied to Arla if that milk ought to have been consistently priced at .80p per litre above the basic price, amounting to a reduction of £71,267.94. During that period Arla had made a compensatory payment, not intended to be full compensation, of £17,842.94. These figures are derived from Mr Barnes' letter to Arla of 25 November 2007 and its supporting enclosures summarising his case. I do not understand the content of this letter to be challenged by Arla.
77. The Company accepts that the burden of proof rests on it to establish, on the balance of probabilities, that the milk it delivered to Arla during the relevant period was all of the highest quality thereby entitling it to be recouped the balance of £71,267.94, namely, £53,425.
78. In my judgment the Company has discharged that burden. I have arrived at that conclusion for the following reasons:-

1. The Company's basic case that the cause of some of the tests taken of its milk delivered during the material period showing high bacterial content was contamination of tests taken after the first delivery in any day from the residue of milk in the nozzle, is borne out by the fact that the vast majority of the tests taken of milk which had been poured into the silo immediately after it was cleaned and before the first delivery was taken out had a bacterial content of 50 or less. I accept that to the extent that this did not occur in any particular early sample that result would have been averaged out by the other first sample tests taken in the month being priced and the previous month.

2. Arla accepts that tests taken later in each day were liable to be invalid as a result of contamination from the residue of milk left in the sampling nozzle.

3. It was Mr Barnes' uncontradicted evidence that it was unlikely that the bacterial content of milk given by cows later in any milking day would vary from milk taken early in the milking day.

79. Arla's answer to the counterclaim was to point to the provisions of clause 10.1 of the Terms and Conditions which placed upon the Company an obligation to keep "such ancillary equipment and services as may be reasonably required by the company or its agents or subcontractors to collect and/or take samples representative of the milk in each farm tank…in good and hygienic working order…".
80. It does not seem to me, in the face of the accepted facts, that this provision assists Arla. There was nothing wrong with the silo or the testing pipe and nozzle. They were cleaned whenever it was possible to clean them. Unfortunately, because the size of the silo was insufficient to take a full day's production and the capacity of the tankers was insufficient to empty the silo of its contents at the first delivery, it was only possible to have access to the testing pipe and nozzle to clean it when the tank was finally emptied after the third delivery. In any event, the state of the pipe and the nozzle is immaterial to the issue of whether the tests were or were not valid.
81. Arla's second counter-argument was that the inaccuracy of the tests taken later in the day resulted from the inability to clean the testing pipe and nozzle after the first test and this was caused by the lack of silo capacity which meant that after the first tanker was filled the silo contained milk until the final delivery thus preventing it being cleaned. For the same reasons this does not seem to me to afford a defence to the counterclaim. The issue is whether the Company has discharged the burden of proof that its milk supplied to Arla during the relevant period was, on the balance of probabilities, all of a quality sufficient to justify the maximum upwards adjustment of the price. Deficiencies, if they existed, in the equipment of the Farm are irrelevant to that issue.

Conclusion on the counterclaim

82. In my judgment the counterclaim succeeds.