6100 Pty Ltd v Ferngrove Pharmaceuticals Australia Pty Ltd

Supreme Court of NSW|2023-03-08|Before: Hammerschlag CJ

Solicitors: Kerrs Law (Plaintiff) Juris Cor Legal (Defendant) File Number(s): 2021/00132909

INTRODUCTION

Ethyl alcohol, to which a chemical (such as the bitter agent Bitrex) is added so as to render it unfit for human consumption, is described as being "denatured." Denatured alcohol is not taxable as consumable alcohol.
This case is about the proceeds of a consignment of denatured alcohol (alcohol) of which the plaintiff (6100) claims to have been the owner and over which the defendant (Ferngrove) claims to have had a warehouseman's lien.
Pursuant to an Interim Agreement (Interim Agreement) between the parties, the alcohol was sold and the proceeds paid into Court pending the outcome of these proceedings.

The Protagonists

6100 manufactures and sells alcoholic drinks, primarily gin. Mr Julian Moss (Moss) is its Managing Director.
Ferngrove manufactures pharmaceutical products, including hand sanitiser. Its principal place of business is 5 Ferngrove Place, South Granville, but it also operates a storage facility at 40 Bellona Avenue, Regents Park (Bellona Storage). Mr Wei (William) Tang (Tang) established Ferngrove and is its Director and Secretary. Mr Terry Zhou (Zhou) was Ferngrove's Account Manager from July 2015. In 2018, he became a Project Manager responsible for managing the accounts of particular customers.
Medispec and Pegasus Australia Developments Pty Limited (Pegasus) are companies incorporated in Australia. Both Medispec and Pegasus appear to have some connection with one Mr Ken Tan (Tan), although the nature of the relationship is not clear. Company searches do not show him as a shareholder in or a director of either. There is no objective material which throws light on the nature of his relationship to either. An ASIC search reveals that the Director and a shareholder of Medispec is one Dou Dou, born on 10 January 1998.
Medispec and Pegasus each also appear to have some connection with one Mr Tony Hyun (also known as He) (Hyun) but that connection, too, is opaque.
Both Medispec and Pegasus were customers of Ferngrove. From time to time, their names were used interchangeably in dealings with Ferngrove.
Medispec was deregistered on 21 August 2022. Pegasus was wound up on 22 September 2021.
Tan's present whereabouts are unknown to the parties. The last communication from him was by email, dated 9 December 2020, ostensibly from Mexico City.

Ferngrove's Business

Ferngrove manufactures pharmaceutical products from materials supplied by customers.
About 90% of the time, the customer places a Purchase Order (PO) for the manufacture of a particular product and then delivers the raw materials to Ferngrove, which uses them to manufacture. Manufacture usually occurs within one month of the PO. In these instances, Ferngrove does not charge any storage fee.
The rest of the time, customers deliver raw materials (and in some cases packaging materials) to Ferngrove before placing a PO, in the expectation that they will place one. In these instances, Ferngrove offers one-month free storage but, after that, will charge storage fees at an agreed price, which takes into account the particular materials required to be stored. Usually, the customer will place a PO within one month after supplying materials and Ferngrove will therefore not charge for storage.
Ferngrove uses a standard form contract containing its terms and conditions of sale. The standard form does not contain any provisions relating to storage services or charges for such services. Its contractual arrangements for charging for storage are entered into ad hoc.
Zhou says that Ferngrove charges storage fees only once or twice a year. It was not suggested that Ferngrove offers storage facilities where there is no arrangement or anticipated arrangement for manufacture.

The Supply Agreement

An ISO tank is a storage tank which complies with the specifications laid down by the International Organization for Standardization. It holds 22,000 litres. An Intermediate Bulk Container (IBC) is one which holds 1,000 litres.
In April 2020, 6100 purchased 240,000 litres of alcohol from a company in the Netherlands. The alcohol was shipped from China to Australia in April and May 2020.
Moss says that on 1 June 2020, 6100 and Medispec, represented by Tan, entered into an agreement on the terms of a written instrument entitled Supply Agreement (Supply Agreement) for the supply by 6100 to Medispec of 229,196.81 litres of alcohol at a price of $2.35 per litre plus GST.
In an affidavit dated 10 September 2021, Moss gave evidence that: 16 On 1 June 2020, 6100 and Medispec reached an agreement under which Medispec agreed to purchase 229,196.81 litres of ethyl alcohol from 6100 (Supply Agreement). The sale price for the ethyl alcohol under the Supply Agreement was AUD$2.35 per litre (plus GST), together with a 10% return on investment, within 60 days of the date of an invoice being issued by 6100 to Medispec. 17 A copy of the Supply Agreement dated 1 June 2020 is at pages 18 to 23 of Exhibit JDM-1.
The Supply Agreement relied on by 6100 is in evidence. Clause 4.1 provides: 4.1 The seller and the buyer agree that ownership of the goods shall not pass until: (a) The buyer has paid the seller all amounts owing to the seller in respect of the Goods; and (b) The buyer has met all of its obligations to the seller in respect of the Goods. I shall refer to this clause as the RoT clause.
It is not in dispute that, at the request of Tan, purporting to act on behalf of Medispec, 6100 procured the delivery in June and July 2020 of five ISO tanks and 134 IBCs containing a total of 206,196.81 litres of alcohol to Ferngrove at Bellona Storage.
On 17 July 2020, 6100 invoiced Medispec for $533,018.75 (including GST) for the alcohol, with a due date for payment of 14 September 2020. Needless to say, no part of the invoice was ever paid.

The Pegasus Agreement

In June 2020, Pegasus and Ferngrove entered into an arrangement under which Pegasus agreed to deliver alcohol to Ferngrove to be used to manufacture hand sanitiser. There is in evidence a document on Ferngrove letterhead which purports to be an agreement between Pegasus and Ferngrove, but which is only signed by Tang on behalf of Ferngrove. Pegasus is referred to in it as Party A and Ferngrove as Party B. It is in the following terms: Party A agree to supply Party B 100 tonnes of alcohol with isotanks delivered to 40 Bellona Ave, Regents Park, NSW 2143. Party B agree to use the alcohol to make Party A's products only and be responsible for loss or stolen of alcohol.
It is not necessary to determine whether this document embodies the terms of their agreement, but it is not in issue that the alcohol was delivered to Ferngrove for the stated purpose.
In mid-July 2020, Zhou had text message communications with Tang about Pegasus placing a PO for the manufacture of hand sanitiser on terms that Pegasus would pay a 30% deposit upon order and the balance of 70% before delivery.
On 16 July 2020, Pegasus placed a PO on Ferngrove for 100,000, 1 litre bottles of gel sanitiser at $2.50 per bottle plus GST (making a total price of $275,000).
On 22 July 2020, Zhou messaged Pegasus (Tan and Tang) telling them that Ferngrove's warehouse was overloaded. Zhou agreed to store five ISO tanks until the end of August 2020 and requested Pegasus to pick up the IBCs in July. Pegasus did not respond. In the first half of August, however, Ferngrove received (apparently from Pegasus) 70 pallets of bottles to be filled with the manufactured hand sanitiser.
On 17 August 2020, Zhou asked Tan to pay the deposit (for manufacture) by text message here instead. No response was received.
On 31 August 2020, a person called Adem (apparently on behalf of Pegasus) asked Ferngrove to take delivery of another 40 pallets of bottles which Zhou, on behalf of Ferngrove, declined.
On 31 August 2020, Ferngrove invoiced Medispec (not Pegasus) for $170,500, being the 30% deposit payable for the 16 July 2020 PO.
On 4 September 2020, Ferngrove told Tan by email that it intended to charge a storage fee of $50 per ISO tank per day, from September 2020. On the same day, Ferngrove invoiced Pegasus for a storage fee for 75 IBCs from 1 to 31 August 2020 at $5 per day. In the email, Ferngrove informed Pegasus that, once an order was received, it could offer an extra 30 days free storage for the amount of alcohol to be used.
On 11 September 2020, $51,000 was paid by electronic transfer into Ferngrove's bank account, presumably by Pegasus.
On 14 September 2020, Ferngrove notified Pegasus by email that, in light of the order for 100,000 bottles of sanitiser, there would be no storage fee for 75 IBCs as per the 4 September 2020 invoice and that the storage fee had been credited to Pegasus in Ferngrove's system. Ferngrove informed Pegasus that, because it did not have an order to use the alcohol in the ISO tanks, the storage fee for September 2020 would be invoiced in early October 2020.
On 21 September 2020, 6100 procured the registration on the Personal Properties Securities Register maintained under the Personal Property Securities Act 2009 (Cth) (PPSA) of its claimed interest in the alcohol. It described its collateral as "The Ethyl Alcohol 96% with Bitrex supplied to the Grantor by the Secured Party under the Supply Agreement between the Grantor and the Second Party dated 1 June 2020."
Between that time and 4 December 2020, there was a series of dealings between Ferngrove and Medispec or Pegasus (which it is not necessary to recount) which culminated in Ferngrove manufacturing 9,588 500ml bottles and 9,517 1 litre bottles of gel sanitiser. Ferngrove invoiced Medispec (not Pegasus) accordingly.
On 4 December 2020, the manufactured bottles of gel sanitiser were collected. Ferngrove received full payment for the manufacture.
The result was that Ferngrove was left holding five ISO tanks and 57 IBCs of alcohol.

A Dispute Arises

On 23 November 2020, in an email to Ferngrove and 6100, Hyun claimed to own the alcohol.
On 25 November 2020, 6100's solicitors wrote to Ferngrove invoking the RoT clause and claiming to be the owner of the alcohol. The letter did not demand delivery up, but said, "We otherwise look forward to receiving confirmation that the Ethyl Alcohol has been released to 6100."
On 22 December 2020, 6100's solicitors wrote to Ferngrove's solicitors demanding delivery of the ISO tanks by 30 December 2020.
On 18 January 2021, Ferngrove's solicitors wrote to 6100's solicitors asserting that the five ISO tanks and 15 IBCs were stored in Ferngrove's warehouse and that it had no wish to be involved in the dispute but had incurred storage fees of $84,507 of which $50,909 was outstanding and was prepared to accept $40,727, against which it would release the alcohol. Ferngrove sought a release and indemnity.
On 15 October 2021, the parties resolved the standoff about possession of the alcohol by entering into an agreement, which is embodied in correspondence between their respective solicitors. Ferngrove agreed to make the alcohol available for collection by 6100. 6100 agreed, at its expense, to take all reasonable steps to sell it as soon as practicable at its market value, and to pay all proceeds of it into Court to be held pending, and to abide, the determination of the entitlements of the parties, the subject of the proceedings. On 17 August 2022, the following Consent Order was made by the Common Law Registrar: Direct the plaintiff to pay all net proceeds from the sale of any of the ethyl alcohol the subject of the proceedings into Court, pursuant to UCPR 25.3(3), to be held pending the determination of these proceedings pursuant to UCPR Part 41.
It will be observed that whilst the Interim Agreement required the payment into Court of the full proceeds of the alcohol, the Consent Order required the payment of all net proceeds.
Between 29 June and 9 August 2022, 6100 sold the alcohol for a total including GST of $113,772.55. From this, 6100 deducted a total of $39,773.75 for "transport, delivery, lifting and decanting costs" as well as a sum of $4,999.50 paid to a consultant retained by it to assist with sales and market opportunities regarding the sale of the alcohol.
6100 paid the balance of $73,998.62 into Court. Ferngrove complains that 6100 breached the Interim Agreement by wrongly deducting claimed expenses and paying less than the full net proceeds into Court. Ferngrove maintains that the shortfall is $39,773.75.

THE STORAGE LIENS ACT

Sections referred to below are, unless the context otherwise indicates, to sections of the Storage Liens Act 1935 (NSW).
Section 3 provides: 3 Declaration of storer's lien (1) Subject to the provisions of section 5, every storer shall have a lien on goods deposited with him or her for storage, whether deposited by the owner of the goods or by his or her authority, or by any person entrusted with the possession of the goods by the owner or by his or her authority. (2) A storer's lien over property has priority over any other interest in the property and may be enforced accordingly. (3) Section 73 (2) of the Personal Property Securities Act 2009 of the Commonwealth is declared to apply to a storer's lien.
Section 2 defines "Goods" and "Storer" respectively as follows: Goods shall include personal property of every description that may be deposited with a storer as bailee. Storer means a person lawfully engaged in the business of storing goods as a bailee for hire.
Section 4 provides: 4 Charges covered by lien The lien shall be for the amount of the storer's charges, that is to say - (a) all lawful charges for storage and preservation of the goods, and (b) all lawful claims for money advanced, interest, insurance, transportation, labour, weighing, coopering, and other expenses in relation to the goods, and (c) all reasonable charges for any notice required to be given under the provisions of this Act, and for notice and advertisement of sale, and for sale of the goods where default is made in satisfying the storer's lien.

THE ISSUES

In the manner in which the trial was conducted by both combatants, only the following issues arise for determination: 1. Did 6100 retain ownership of the alcohol by operation of the RoT clause? This turns on whether 6100 has established that it contracted with Medispec on the terms of the Supply Agreement. 2. Did Ferngrove have a lien on the alcohol under s 3(1)? This turns on whether Ferngrove was engaged in the business of storing goods as a bailee for hire and whether the alcohol was deposited with it for storage. 3. Did 6100 breach the Interim Agreement by paying less than the net proceeds of the sale of the alcohol into Court? This question only becomes relevant if Ferngrove establishes a lien because, in that event, Ferngrove will be entitled to the money in, and that should be in, Court pursuant to the Interim Agreement.
Thus, the contest involves the amount of $73,998.62 (plus any interest accrued) in Court and a potential further $39,773.75.

The RoT Clause

To take advantage of the RoT clause, 6100 must establish that it was a term of its agreement with Medispec.
It has failed to do so.
6100 has not shown that Tan (if he was purporting to act on behalf of Medispec) had any authority - actual or ostensible - to bind it.
6100 has failed to establish that Medispec agreed to the terms of the Supply Agreement. 6100 adduced no evidence of any conduct on behalf of Medispec (even if one includes Tan) which would have led a reasonable person in the position of 6100 to believe that Medispec bound itself to the terms of the Supply Agreement: see L'Estrange v F Graucob Ltd [1934] 2 KB 394; Toll (FGCT) Pty Limited v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52 at 179 [40].
The Supply Agreement was not executed by or on behalf of Medispec. It makes provision for Tan to sign it and describes him as a director, but he was not one.
The evidence does not extend to establishing that Medispec, or anyone on its behalf (even if one includes Tan), even knew of the existence of the Supply Agreement. The instrument was, on its face, brought into existence by 6100 and the evidence does not extend to establishing that anyone else ever saw it. There is no evidence of Medispec having performed any of the obligations imposed on it.
Moss' affidavit is silent on the entire subject of knowledge on the part of, or assent by, Medispec to its terms. It may be inferred that his evidence would not have assisted 6100: see Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 418.
It follows that 6100 fails in its contention that it retained ownership of the alcohol on the basis of the RoT clause. No other basis for a contention that it retained ownership (assuming it was the owner to begin with) of the alcohol was pleaded or motivated.
It further follows, to the extent that it is relevant, that 6100 did not have the collateral described in its PPSA registration.

Lien

Ferngrove argues that it was engaged in the business of storing goods as a bailee for hire within the definition of "Storer" in s 2 and that the alcohol was deposited with it for storage, so that it had a lien on it by virtue of s 3(1).
6100 argues that Ferngrove was not in the business of storing goods as a bailee, but in the business of manufacturing pharmaceuticals and that its storage of raw materials is for the purpose of that business only and not as a bailee for hire.
6100 further argues that the alcohol was not deposited with Ferngrove "for storage," but for manufacture.
I uphold both of 6100's submissions.
The thrust of ss 2, 3 and 4 is to give a professional warehouseman, that is, a person whose business it is to store goods for remuneration, a lien over goods which, are deposited for storage.
Whilst Ferngrove does physically store goods and charge storage fees in certain circumstances, I do not think it can properly be said that it is (or was then) engaged in the business of storing goods as a bailee for hire.
In no case does it set out to take a deposit of goods for hire. As part of its business activity, it does store goods. However, it does this because to manufacture products from raw materials supplied by its customers, it must hold them, in every case, for some period of time. When the period for which it holds the goods exceeds that contemplated at the time the goods were delivered, Ferngrove may (and sometimes does) charge storage on an ad hoc basis but it is not in the business of storing goods as a bailee for hire.
Section 3(1), read with the definition of Storer in s 2, is directed at activity which constitutes engaging in the business of storing goods as a bailee for hire, not to engaging in the activity from time to time of charging for goods already stored with it. Because on an ad hoc basis it may charge storage fees when it holds goods where no PO has yet been made, does not translate into it being in the business of storing goods as a bailee for hire: see Fearnley v Finlay [2014] 2 Qd R 392; [2014] QCA 155 at 395-396 [10]-[15]; Forge Group Power Pty Ltd (in liq) (rec and mgr apptd) v General Electric International Inc [2016] NSWSC 52; (2016) 305 FLR 101 at 111 [50]. Some additional support for this is provided by the fact that 6100's standard conditions make no provision for storage or for charging for it.
The alcohol was delivered to Ferngrove, not for storage required by s 3, but for conversion into hand sanitiser.
Finally, at the time the alcohol was delivered to Ferngrove, there was no arrangement for it to charge for any bailment. Any bailment was therefore not for hire.
I find that Ferngrove has not established that it had a lien on the alcohol.

Breach of the Interim Agreement

Because I have found no lien, it is not necessary to determine whether 6100 short-paid the net proceeds of sale. The parties said very little about the nature of the deductions. It suffices to say that at least, with respect to the consultancy fee paid by 6100, I have significant doubt that it was a justifiable deduction.

CONCLUSION

Both parties fail.
They are to bring in Short Minutes reflecting the outcome.
I will deal with costs should it be necessary. I will stand the matter over to a convenient date for directions and for the parties to inform me as to any other issues that are required to be dealt with, including as to how to proceed with respect to the money in Court.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 22 March 2023

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