Arla Foods UK Plc v Barnes & Ors

A contractual milk producer does not remain the producer merely because it retains a management role after selling the dairy business and granting possession of the production premises to another operator. A successor clause will not automatically bind the purchaser where the contract is personal to the parties and assignment requires consent. A term requiring the seller to procure that any purchaser becomes bound by the supply contract will not be implied where the contract remains effective without it, the proposed term fails to secure the stated commercial objective, and several alternative contractual protections were available. A claimant must also mitigate loss by accepting a commercially reasonable replacement supply. Where milk-price testing is shown to be unrepresentative, the supplier may recover the contractual price adjustment.

Arla claimed damages from the Barnes defendants and Peter Willes after Withgill Farm Limited sold its dairy business, leased the dairy premises to Mr Willes and ceased supplying milk to Arla. Arla contended that the Company remained the contractual producer, that Mr Willes was its successor, and that the contract contained an implied term preventing disposal of the dairy business without procuring that the purchaser became bound by the supply obligations.

The Company counterclaimed for underpayment caused by bacterial-count tests taken from a contaminated sampling nozzle. The issues concerned contractual construction, privity and succession, implication of terms, damages and mitigation, and whether the tests were valid.

1. The claim was dismissed. On the proper construction of clause 2, the contract contemplated one producer at a time. After the Company sold the cows and equipment and granted Mr Willes a tenancy of the premises, the milk was not produced by the Company. Its continuing management role did not alter that conclusion.
2. Mr Willes was not a successor bound by clause 22.5. Clause 22.3 made the agreement personal to the parties and prohibited assignment without consent. Clause 22.5 was directed to matters such as succession on death or bankruptcy. There was no privity of contract, and no representation giving rise to estoppel.
3. The proposed implied term could not be inserted. Applying the principles stated in BP Refinery (Westernport) Pty. Limited v President, Councillors and Ratepayers of Shire of Hastings 1978 52 ALJR 20, and considering the guidance in Equitable Life Assurance Society v Hyman [2002] 1 AC 408 and Philips Electronique Grand Public SA v British Sky Broadcasting Limited 1995 EMLR 472, the term was neither necessary for business efficacy nor so obvious that it went without saying.
4. The proposed term would not secure Arla’s alleged need for continuity of supply. The contract imposed no minimum production obligation, and a producer could reduce or cease production, or move its dairy assets elsewhere, without breach. The detailed negotiated contract also offered several possible ways of protecting supply, and any doubt was to be construed against Arla as proferens.
5. Had liability been established, damages would have been assessed under Sale of Goods Act 1979, section 51, subject to mitigation. Arla failed to mitigate by refusing to contract with Mr Willes for milk which he was willing to supply at prices below its replacement costs.
6. The counterclaim succeeded. On the balance of probabilities, the later daily samples were contaminated by unrefrigerated milk remaining in the sampling nozzle and were not representative. The Company established entitlement to the outstanding price adjustment of £53,425.