AFA Electronics Pty Ltd v Strathfield Group Wholesale Pty Ltd [2001] VSC 289

Supreme Court of Victoria|2001-08-24|Before: Mandie J

CONTRACT - sale of goods by company in receivership - claim for balance of price and counterclaim for damages - dispute as to terms of contract - whether breach of implied warranty of merchantable quality - measure and assessment of damages - ss.19(b),59,61 Goods Act 1958 (Vic.) TRADE PRACTICES - whether company or receiver engaged in misleading and deceptive conduct - dispute as to what representations made orally or by conduct including non-disclosure

In this proceeding the plaintiff ("AFA") claims the sum of $120,766 being the balance of the agreed price of $725,000 for telecommunications goods sold to the defendant ("Wholesale") in 1998. Wholesale counterclaims against AFA for substantial damages, in the region of $490,000, allegedly suffered by it because the goods were defective. Wholesale's causes of action include breach of express terms of the contract, breach of the implied warranty as to merchantable quality and misleading and deceptive conduct relating to the condition or quality of the goods. Wholesale joined as defendants to the counterclaim the Receiver and Manager of AFA, Paul Anthony Pattison ("Pattison") and his company, Pattison Consulting Pty Ltd ("Pattison Consulting").

AFA was and had been since late 1991 conducting the business of an importer and wholesaler of telecommunications goods, including telephone answering machines, cordless telephones and telephone clock radios. It had premises at 1B Trent Street, Moorabbin, Victoria. In December 1997 AFA had two directors, Andrew Weber ("Weber") and Ann Borg. Weber had been involved in the industry since 1984. On 8 December 1997, a secured creditor appointed Pattison, who is a chartered accountant and official liquidator, as a Receiver and Manager of the assets and undertaking of AFA.

Shortly after his appointment, Pattison attended AFA's premises in Moorabbin.

During his visit he noted that AFA's premises contained many pallets, a number of which were covered in plastic. Weber informed Pattison that, on those pallets and throughout AFA's premises generally, there were approximately 21,000 units of telecommunications goods.

Weber also informed Pattison that a large number of the pallets that he saw at AFA's premises contained goods which had been returned from "K-Mart" during the course of 1997. Weber told Pattison that in early 1997 AFA had completed a large order with "K-Mart" for the sale and delivery of a range of telecommunications goods, including goods sold under the brand name "Telephone Tech".

Weber told Pattison that the goods had been delivered to "K-Mart" and the order had been completed by AFA. Shortly thereafter, "K-Mart" had returned the goods to AFA. I accept the following evidence concerning what Weber told Pattison as going to Pattison's state of mind, insofar as relevant, but not as to the truth of the information conveyed. Weber informed Pattison that AFA had had a dispute with "K-Mart's" buying officer, but this dispute had nothing to do with the quality of the goods. In fact, according to Weber, "K-Mart" had returned the goods to AFA without even inspecting them and the pallets that were delivered to "K-Mart" had been returned to AFA. Weber also informed Pattison (and this was common ground) that some of the pallets had been in AFA's premises for nearly one year. Weber showed Pattison a sample of the returned "K-Mart" goods. The "K-Mart" logo appeared on the packaging.

Shortly after his appointment, Pattison instructed a member of his staff, Mr Chris Lilley ("Lilley") to conduct a stock-take of the goods at AFA's premises and to compile a list of the various goods sold by AFA as well as a list of the permits which had been issued in respect of those goods, if any, by Austel (the Australian Telecommunications Authority). In due course, Lilley provided Pattison with a list of permits issued by Austel. Also, Pattison caused AFA to employ Weber for reward to assist AFA in the sale of its stock and assets. I interpolate here (because it is an issue raised by the pleadings) that I find that Weber did not act as a servant or agent of Pattison or Pattison Consulting nor was he held out by them as such servant or agent.

Pattison decided that if AFA were to sell the returned "K-Mart" goods, the goods would need to be repackaged in packaging that did not bear the "K-Mart" logo. Moreover, because some of the goods had been stored at AFA's premises for up to one year, Pattison decided, and gave instructions accordingly, that all of the goods at AFA's premises should be unpacked, tested and, if necessary, fitted with new batteries (to replace those batteries which had been in the goods for up to one year) and that any loose componentry should be tightened and that the goods should also be cleaned, if required, and, once in working order, repackaged. Pattison so acted in reliance upon advice given to him by Weber.

Subsequently, Pattison instructed Lilley to obtain quotations for replacement packaging and also instruction manuals for the goods.

In January 1998 Pattison instructed Lilley to employ a number of casual staff to unpack, clean and repack the goods at AFA's premises. Up to 30 people were subsequently employed by AFA on a casual basis. Between January 1998 and June 1998 various orders were placed by AFA with overseas suppliers, including Winfair Electronics Company and Newtronic International Co Ltd, in Hong Kong, and, during that period, AFA received the supply of replacement packaging and instruction manuals for the goods which were subsequently sold to Wholesale. On 19 February 1998 Weber provided a written report to Pattison that stated, inter alia, that, in Weber's opinion, by the end of February all goods would have been cleaned and the majority tested but with a huge backlog of packing to be done. AFA staff opened and cleaned the goods. Weber and one or more technicians employed full-time by AFA tested the goods. Finally, AFA staff repackaged the goods using the replacement packaging and instruction manuals that AFA had purchased.

On 9 June 1998 Weber called, and had a telephone conversation with, one Andrew Kelly ("Kelly") whom he knew from previous transactions with AFA. Kelly was in 1998 the Managing Director of Wholesale and of its holding company, Strathfield Car Radios Pty Ltd. Kelly had commenced a business in 1980 selling car radios as a sole trader and he built it into a large corporate enterprise retailing telephonic equipment and the like, with 58 shops and purchases, in 1998, running at a level of $10 million per month. Strathfield Car Radios Pty Ltd is now called Strathfield Group Limited, a listed public company, but I will refer to it as "SCR". The headquarters of SCR and of Wholesale were in New South Wales. It is convenient for present purposes to ignore which Strathfield group entity is referred to in any particular document and simply to refer either to "Wholesale" or to "Kelly" because it was common ground that Kelly should be treated as acting on behalf of Wholesale for the purpose of entering into the agreement with AFA which is the subject of this proceeding. It will be necessary later in this judgment to distinguish between the two companies having regard to issues which arise in relation to damages.

Kelly testified, and I accept, that it was the general practice of the Strathfield group that all purchases of goods for resale were made by Wholesale in the first instance.

In their 9 June conversation, Weber said to Kelly, in substance, that a receiver had been appointed to AFA, that he had a lot, or substantial levels, of stock to sell and that he would be able to give Kelly a good price, or very competitive prices. Weber mentioned that the receiver was Paul Pattison. Weber said that he would send a list with indicative prices. Weber on behalf of AFA then sent a fax to Kelly on the same day (with Pattison's approval) offering to sell a number of product lines. The first page of the fax read in part as follows:

"FURTHER TO OUR TELEPHONE CONVERSATION OF TODAY, I AM PLEASED TO SUBMIT TO YOU FIRM PRICING AND PRODUCT DETAILS FOR YOUR CONSIDERATION. ALL PRODUCTS OFFERED ARE COVERED FULLY UNDER THE FOLLOWING TRADING TERMS: 1. PAYMENT - STRICTLY 90 DAYS FROM STATEMENT. 2. WARRANTY - STRICTLY 12 MONTHS REPLACEMENT WARRANTY REPAIR OR REPLACEMENT GUARANTEED WITHIN 14 DAYS. (PLEASE NOTE: ALL RETURNS MUST BE SENT VIA MCPHEE TRANSPORT ONLY.) 3. DELIVERY - STRICTLY DIRECT TO STORE ON A FREE INTO SITE BASIS AUSTRALIA WIDE. ANDREW, SAMPLES, IF REQUIRED CAN BE SHIPPED OVERNIGHT TO YOU WITH GUARANTEED FIRM DELIVERY ON ALL PRODUCTS EFFECTIVE FROM 15/06/98. I TRUST THAT OUR OFFER IS TO YOUR SATISFACTION WITH THE VIEW TO RE-ESTABLISHING AN ACTIVE TRADING RELATIONSHIP WITH STRATHFIELD..."

The following pages of AFA's fax listed a number of products offered for sale with various details including model number, description, price excluding sales tax, features, accessories included (adaptors, plugs, brackets, manuals and the like), quantity available from stock and recommended retail prices. Kelly read the material and in a second conversation, probably on the same day, he said to Weber that, if he could get a cheaper price, he would "buy it all".

The next day (10 June 1998), Kelly was in Melbourne and visited AFA's premises in Moorabbin and there spoke to Weber. At a meeting in Weber's office, which lasted for about forty minutes, Weber showed Kelly sample units of some or all (it is not clear which) of the models offered for sale. The sample units were "in brand new cartons", as Kelly testified. Kelly unboxed some of those samples and inspected them. Some were plugged in and tested. They all appeared to him to be "brand new and complete". Weber referred to some stock being in bond. Kelly testified, in his witness statement, that Weber told him that "a lot" of the stock was in bond but I am not satisfied that Weber used that expression or conveyed more than that "some" stock was in bond. I note that, in cross-examination, Kelly went further and said that he asked Weber "could I inspect them [the products] and he said the products are not here, they are in bond". I do not accept that evidence if it was intended to refer to more than one product line. The fact remains that Weber did not inform Kelly of the unpacking, cleaning, repairing, testing and repacking process which most of the goods had undergone nor did Kelly see this process taking place. I note here that a former general manager for Victoria of SCR was called by Wholesale, one Eddie Muto. He gave evidence that he was present at the meeting between Weber and Kelly and as to what happened. This evidence, after hearing his cross-examination, was in my view totally unsatisfactory and I disregard it.

Later on 10 June 1998, after his meeting with Kelly, Weber sent to Pattison a facsimile in which he mentioned Kelly's interest in purchasing goods from AFA and confirmed that he was sending samples to Kelly. In the fax, Weber said to Pattison that their biggest problem in selling the stock was "not pricing, quality or other issues" but "rather the concern that retailers have for warranty and ongoing products support".

By fax dated 11 June 1998 from Kelly to Weber, he offered to buy from AFA specified quantities of identified models with total prices for each model. The grand total price offered was $642,850 (inclusive of tax). A model number and description identified each product line. The model numbers had letter prefixes: TE for telephone, TCR for telephone clock radio, AM for answering machine and CT for cordless telephone. Weber then telephoned Kelly and told him that this price was not acceptable to Pattison. Kelly received the samples sent by Weber after his 11 June fax and passed the samples on to one Ken Aitken (the Strathfield group's General Manager) for testing. By fax dated 12 June 1998 from Kelly to Weber, Wholesale's offer was increased to $665,000 ($700,000 "less 5% quick payment within 30 days from delivery"). On or after Friday 12 June 1998 Weber told Kelly that his increased offer was unacceptable to Pattison and that, if Kelly wanted to negotiate a deal, he should speak to Pattison.

Weber also suggested that Kelly put in a formal order, so, on or about Tuesday 16 June 1998, although no agreement on price had yet been reached, Kelly instructed one McCulloch, Strathfield group's "National Products Manager - SOHO" to fax to Weber, and McCulloch faxed to Weber, an official order from Wholesale to AFA for the goods, but without any prices, listing the same models and quantities together with some 48 pages setting out the addresses of various Strathfield group retail stores and the quantity of each ordered model to be delivered to each store.

According to Kelly, in his witness statement, he had "a number of telephone conversations between 12 June and 19 June 1998" with Pattison in the course of which Pattison said words "to the effect" as follows:

* "The stock is all new." I do not accept that evidence. I find that Kelly believed at all times, after seeing Weber's samples, that the goods were new but that this was never expressly stated to him by Pattison (or, for that matter, by Weber).

* "There is stuff that has been returned from retailers and repaired that you can use for spare parts and warranty changeovers. We'll give you these at no cost." I accept that evidence to the extent mentioned below (at para. [19]).

* "The stock is in bond. We have to get it out." I do not accept that evidence. I find that this evidence may relate to a particular model or product line (probably AM110) mentioned by Weber, and perhaps also mentioned by Pattison, but that Pattison did not state or convey that all, or the bulk, of the products offered were in bond.

* "The failure rates are very low." As to this evidence, see paras [27] to [32] below.

Although I cannot exclude the possibility that there were conversations between Kelly and Pattison before 19 June 1998, the evidence is unsatisfactory and I am not satisfied that there were any such conversations. However I find that shortly prior to 8.33 am on Friday 19 June 1998, Pattison and Kelly had a telephone discussion the substance of which was as follows. Kelly offered the sum of $620,000 plus tax for the goods saying this was their "budget amount". Pattison said this was unacceptable. I interpolate that, according to the evidence, sales tax overall on this transaction was about 12%, so this offer was worth about $694,000. Kelly raised the suggestion of a discounted purchase price on the basis that Wholesale would assume all warranty obligations and in return AFA could also make available some spare parts. I am satisfied that, at some point in this conversation, Pattison said to Kelly, in substance, that there was stuff that had been returned which could be used for spare parts and warranty changeovers which AFA would give Wholesale at no cost_._ Kelly replied that, if AFA gave him all the goods AFA was holding for exchange or repair, he would purchase the stock for $620,000 plus tax and take over the warranties. Pattison asked Kelly, and he agreed, to put it in writing. There may have been one additional aspect of this conversation which concerned the topic of "failure" or "default" rates - this aspect is dealt with in paras [27] to [36] below.

At 8.33 am on 19 June 1998 Kelly faxed a letter to Pattison which stated:

"As discussed, I am putting my thoughts on paper. [diamond] The total goods add up to $693,140 plus tax. [diamond] We believe that to take all the goods we should get some sort of discount, as there are some models that will not sell fast. [diamond] We will pay $620,000 plus tax for the goods. [diamond] Dealing with multiple dealers will drive up delivery costs, warranty costs, communication costs etc. [diamond] If some goods do not get sold now they will eventually be sold for less as some models are now outdated. Finally we believe there is a better solution for all: 1. Strathfield buys goods for $620,000, plus tax. 2. Strathfield, through its own service department, will carry out all repairs. 3. As part of the total package, Strathfield could take over your warranty liability and AFA would supply free of charge to Strathfield all goods AFA are holding for exchange and repair, so there is no further liability above and beyond. 4. Strathfield still intend to purchase the fax machines, maybe we can buy the non-tangible assets being the approvals etc. 5. Strathfield's expertise with Asia extend back to the early 1980's, so we are capable of continuing the business. Further we would consider employing staff that AFA employ." (Emphasis added)

Pattison responded at 3.37 pm on 19 June 1998 by faxed letter as follows:

"Reference is made to our telephone discussions and in particular your facsimile dated 19 June 1998. In reply I advise that on the following terms I will deliver the goods identified by you as per your purchase order dated 16 June 1998... 2. Sale Price $775,000 (inclusive of sales tax). 3. Strathfield to assume responsibility for all warranty liability for the goods purchased. 4. Payment within 30 days from the date of agreement between the parties. 5. In the event that payment is not made by the due date, penalty interest at the rate of 10% per annum calculated daily will be charged on the outstanding invoice amount. ... This offer remains open until 4.30 pm today."

Kelly replied by faxed letter dated 19 June 1998 stating:

"We have gone to great depths to make this deal work. However, you have pushed the deal slightly beyond our acceptable risks. We cannot afford to pay more than $725,000 including tax and we need the replacement/swap over units you are holding to honour warranty arrangements. Payment terms can be cash on delivery. Should you not be able to complete this deal, we would be happy to continue negotiations on fax machines. Offer valid until 5 pm Monday 22 June 1998."

Kelly and Pattison had a further telephone conversation on Monday 22 June 1998 in the afternoon. Pattison told Kelly that his offer was acceptable.

By fax dated 22 June 1998 Pattison (for AFA) accepted Kelly's offer:

"Reference is made to your facsimile dated 19 June and our conversation of this afternoon. Your offer of $725,000 is accepted."

Wholesale confirmed the agreement by official order dated 23 June 1998 setting out the models, quantities, prices and total price. The order was sent by McCulloch for Wholesale to Weber for AFA. The order bore two written endorsements. One said "Subject to spare parts inspection". The other said "Confirmation of allocation previously sent". On the same date Kelly wrote to Pattison about negotiations on a possible further transaction and also said that "we would like an inventory list of spare parts and units that have been held back to carry out repairs".

The agreed models, quantities ordered and the allocated purchase prices were as follows:

Before continuing with the history, it is necessary to deal with the evidence as to what was said about the "failure rate" of the goods. This evidence was both confused and confusing and needs to be dealt with separately. I will deal first with what Weber is alleged to have said and then with what Pattison is alleged to have said. I note that this allegation is first mentioned at an early stage in a letter from McCulloch to Pattison of 5 August 1998 in which McCulloch refers to "your quote of a 1% failure rate". It is not clear whether "your" refers to AFA or to Pattison personally. Pattison's reply of the same day did not directly deal with the allegation.

In its Defence and Counterclaim of 7 December 1998, Wholesale alleged that in June 1998 Weber represented that "the stock had less than a 1% failure rate". In Wholesale's Further and Better Particulars of 13 May 1999, it was alleged that Weber "stated that the electrical goods had approximately 1% failure rate and Mr Pattison agreed with him". This was alleged to have been said between 14 June 1998 and 22 June 1998 in a number of discussions, including a meeting in Sydney during which Pattison, Kelly, Weber and Aitken were present. These Particulars did not engender confidence in Wholesale's allegation because the prime conversations between Weber and Kelly were on 9 and 10 June 1998 and the only meeting in Sydney was after the contract had been made.

Wholesale's second Amended Defence and Counterclaim of 27 August 1999 incorporated amended Particulars which alleged (more correctly) that the conversations between Weber and Kelly were at the AFA premises on 10 June 1998 and by telephone between 11 and 14 June 1998.

When it came to Kelly's evidence, the following was said by Kelly in direct examination concerning Weber's reference to a failure rate:

"MR ROBERTSON: Do you recall further conversations with Mr Weber between 10 June and 14 June 1998?---Yes. In the course of those conversations did you discuss the goods that were being offered by AFA to Strathfield at that time?---Yes. Do you recall did Mr Weber make any statements about the goods?---Yes. Can you tell the court what those statements were?---That the goods were to be sold at a substantial discount, that the goods were to be sold with a warranty as per the agreement on the offer and that the goods were in - were to be priced as per the price list ..... and that the goods had a very low failure rate and that they were - they were all to be sold by Mr Pattison. When Mr Weber mentioned that the goods had a very low failure rate, did he mention any figure?---I did ask him the question and he said that 1 per cent was the trend that he had experienced."

Weber denied that he had told Kelly that the goods had less than a 1% failure rate but seemed to wish to testify that he had shown Kelly some written record which might have caused Kelly to believe that the goods had a very low failure rate. Given Weber's most unimpressive demeanour throughout his evidence and the enmity which he displayed (for whatever reason) towards AFA, or towards those litigating on AFA's behalf, I am not much assisted by Weber's evidence on this aspect.

In the end I am satisfied to this extent, notwithstanding the variations both within the pleadings and particulars and between those documents and the evidence, that Weber conveyed to Kelly in substance that a 1% failure rate was the trend which had been experienced with goods of these models in the past. That was Kelly's evidence, in effect, and it is consistent with McCulloch's letter of 5 August 1998.

Turning to the alleged representation by Pattison as to a failure rate, Wholesale's Defence and Counterclaim of 9 December 1998 alleged that Pattison told Kelly in June 1998 that "the stock had a very low failure rate". The Further and Better Particulars of 13 May 1999 alleged that on or about 12 June 1998 Pattison stated to Kelly "that Mr Weber had assured him that the failure rate on the equipment is low" and that Pattison informed Kelly "that AFA had a very low failure rate with the goods". In the second amended Defence and Counterclaim dated 27 August 1999, the representation becomes "that failure rates for the goods were very low".

In cross-examination Kelly answered as follows:

"I suggest to you that Pattison never suggested a figure to you of one per cent?---He didn't - he did make that assumption that the, m'mm, repairs - the failure rate of the products was very low. He never said to you that he was telling you that there was a particular failure rate of one per cent?---There was a discussion, so - and - there was a discussion of, m'mm, industry acceptable levels."

On the other hand, according to Pattison (who emphatically denied Kelly's version), it was Kelly who on or about 19 June 1998 raised the topic of "default rates" for the goods and Pattison then said to Kelly that, in calculating a price at which AFA was prepared to sell, he had already allowed a discount of 10% to take into account any possible default rate. I was not persuaded by Pattison's version because, if for no other reason, the allowance of a discount of 10% did not accord with the evidence given of the amounts offered in the negotiations. However, I found Kelly's evidence equally unpersuasive on this aspect. I am not satisfied that Pattison told Kelly that the stock had a low or very low failure rate. It is possible, I think, if Pattison said anything, that he told Kelly that Weber had informed him of something about low failure rates as was suggested in the particulars of Wholesale dated 13 May 1999.

However I find on the evidence that the representation by Pattison as alleged is not made out in substance or effect.

I now return to the chronological account. On 29 June 1998, as part of a fax from Pattison (for AFA) to Kelly (for Wholesale) concerning some other proposed transaction, Pattison stated that "[a] list of spare part items will be forwarded to you later this week".

By fax from McCulloch to Pattison sent on 29 June 1998, in the course of making an offer for further stock, McCulloch said:

"We still have not seen the spare parts list that was promised to us last week and require the list before any stock is shipped to our stores."

As part of a fax dated 1 July 1998 from Pattison to McCulloch, Pattison said that "[a] listing of spare part items will be forwarded to you later this week". By letter dated 2 July 1998 Pattison forwarded to McCulloch what he described as "spare parts schedule as requested".

A large part but not all of the goods purchased by Wholesale from AFA were delivered to the Strathfield group's retail stores throughout Australia in or about the period from 2 July 1998 to 6 July 1998. There were further deliveries during the rest of July 1998.

By letter dated 9 July 1998 from Pattison to McCulloch, AFA sent an invoice to Wholesale in the sum of $725,000 for the goods.

On 21 July 1998 Pattison received a letter from McCulloch, making complaint as follows:

"... I have had Numerous reports of damaged and DOA problem from our stores Nation wide i.e. Richmond, from the 60 CT632 cordless phones received 12 had bent antenna's. I also had reports of damaged boxes (marks were stickers had been removed), missing parts and scratched stock. This is an unacceptable level from the Telephone Tech products purchased. We have received the spare parts list from you, items on the list include capacitor, resistors etc. We were under the understanding that the parts would cover cases, antenna's, cords, plugs, etc. I did however see in the list (batteries), but there is only 13. This will not cover the DOA and repairs for the 7000 cordless phones we purchased, and I am unable to locate a local importer for this battery (rare clover leaf style). Is there another parts list? And if so can it be forwarded to me, as we were promised over $100,000 worth of useable spare parts."

I note that there was no evidence to support the making of a representation or a promise on behalf of AFA as to $100,000 worth of useable spare parts.

By letter dated 27 July 1998, McCulloch said to Pattison:

"I refer to the purchase for $725,000 of Telephone Tech products on order No 49997. As of Friday 24/7/98 not all stock has been received, we are still waiting for AM100, AM101 and AM444's. We are experiencing problems with the following stock. TCR88 Clock Radio Phone's (circuit board on handset moves and cuts of the phone on all units. TC630/632 cordless Phone (Battery's not charging in more then 30% of the units sold. Broken, bent and wrongly fitting antenna's supplied We have received stock witch [sic] looks second hand, damaged and marked boxes and stock received with no retail packaging. Also we still have not seen an accurate list of spare parts. We will send you a check for $500,000. Balance will be paid when a resolution to the above mentioned issues."

I note that the evidence did not disclose what McCulloch meant when he said that he had not seen an "accurate list of spare parts".

McCulloch faxed a letter to Pattison on 5 August 1998 saying:

"I refer to our previous correspondence dated 14th and 27th July 1998, relating to problems with merchantable quality of cordless phone and clock radio phones. We at Strathfield Group Limited take pride in our commitment to our customers by supplying quality reliable products. The problems we are experiencing with the Telephone Tech cordless phones, have now reached epidemic proportions[. Y]our quote of a 1% failure ra[t]e is clearly an oversite on the true facts. We will be reconciling the total stock holding during the course of next week and returning to you all unsold and customer returned stock. Until the reconciliation takes place we cannot validate how much we owe you for stock sold but not returned. We will therefore have no alternative but to send back all remaining cordless phones and clock radio phones..." (Emphasis added)

Pattison replied on the same day by faxing a "without prejudice" letter, stating:

"Reference is made to your facsimile dated 5 August 1998. Your are advised that the goods sold to your company were sold without warranty and as such I hold your company liable for the full payment of the invoice being $725,000. You are further advised that when these goods left the premises of AFA they had been tested under the supervision of Mr. Andrew Weber and to my knowledge AFA staff had individually tested and checked those items. Under no circumstances will I accept the return of any of the items sold to your company. In order to assist you in regard to any warranty claims, Mr. Weber and representatives of AFA and my office attended your South Melbourne branch today to inspect goods in store. I am informed that the items inspected were of saleable condition. I note you have raised concerns about aerials and batteries. To resolve your outstanding concerns I am pleased to provide you with the following as spare parts at no charge to your company; 300 aerials identical to those used on the CT632's supplied; and 300 of 3.6V, 170ma batteries. ... As discussed with your Mr. Ken Aitken, General Manager on Monday 3 August 1998 Strathfield will not be permitted to abandon its agreement with me. As the goods delivered were sold C.O.D. it is requested that the balance of those money be directly deposited into my account by 4pm Thursday 1998. I advise that your company has placed me in an intolerable position. Unless this issue is resolved forthwith I have no alternative other than to take whatever action I consider appropriate to protect the interest of AFA."

By "without prejudice" letter faxed on 6 August 1998, Pattison increased his offer in relation to spare parts to 600 aerials and 1500 batteries. Further correspondence from Pattison followed in which he sought to resolve the problem by providing further batteries and, at the same time, another proposed transaction of no present relevance was being discussed.

By 12 August 1998 AFA had received payment from Wholesale of $604,223.11. Due to a large number of complaints concerning the AFA goods which were being received from the managers of Strathfield stores, Aitken became involved with the problem in about mid-August 1998

By letter dated 19 August 1998, McCulloch raised reports of further quality problems:

"In relation to the $120,768 we are holding from the original order. The TCR 88 Clock Radio Phone, is obviously not suitable for resale. If this product cannot be brought up to a saleable standard we will return it to you. The remaining $100,000 we will release only when we have all the spare parts, batteries and aerials. This is so we can feel safe with the purchase we made two months ago that are still of questionable quality. We purchased this stock in trust and good faith, with the understanding that the products were of good quality. We now find that the various products are coming through with numerous faults from poor sound on the answering machines to faulty power supplies, bad batteries, faulty aerials, missing display tapes, missing parts and poor reception. This has caused unrest with our sales staff and Store Managers. It has also left doubt in our customers minds on whether Strathfield would be a good place to shop. Of the $725,000 (original purchase) Ken Aitken wanted to keep more than the $100,000 because of the growing lack of trust caused by the continual misleading information received from the company you represent. As earlier discussed today, Ken will be available at Bayview on the Park at 8am on Friday to finalise this matter."

Pattison next made a further unsuccessful attempt to resolve the matter in conjunction with a further sale of assets of AFA.

On 21 August 1998, a Strathfield group representative collected from AFA 500 batteries and 100 aerials (all for CT630 and CT632 cordless phones).

On 24 August 1998 Aitken wrote to Pattison as follows concerning the quality of the goods:

"The worsening nature of our product purchases grows. As I move around the countryside (Brisbane yesterday), our staff complain of melting answering machines (wrong power supply), cordless phones set to the wrong channels. Mr. Bruce Riley from our Toowoomba store has tested 35 cordless phones of which he could only sell 4 (you can contact him, if you wish). We were promised good quality products with low return and what we have is a possible epidemic which may require some legal redress. The following are thoughts of possible solutions:- a. Return all goods for a full credit; b. Retain all goods using currently short paid ($120,000.00) to fund damages; c. As per b. but still seek legal solutions or; d. Surrender everything that you have in your warehouse including spare carcases, spare parts, finished goods, goods to be reworked and we will go it alone with the products and the inherited problems. Gentlemen, while these options may appear to you unpalatable, we were guaranteed reasonable quantity and good quality assurance. This obviously did not happen. We certainly were not told that we were to receive repacked second hand batteries in many of our cordless phones. The goods at the prices we paid were supposed to be brand new and we do not think that they were! We must work together to resolve this mess. I will try and contact you today. You have my thoughts."

On 25 August 1998 Aitken wrote again to Pattison as follows:

"Further to our correspondence of yesterday, we are going to go down two roads. The first road, stock will be sent to a testing facility. Should the stock meet satisfactory testing levels, we will pay the outstanding $120,000.00 and the matter will end. The second road, should the stock fail the satisfactory tolerance levels, we will seek legal advice to recover our purchase price. Subject to the above we will make a final offer. The final offer will consist of the following:- $90,000.00 for finished goods $20,000.00 for broken items. I await your reply."

Pattison replied by fax to Aitken on the same day saying that Aitken's offer was not accepted. Aitken then advised Pattison that the products would be tested.

In August 1998 one Stergiotis was employed as a consultant by SCR. He randomly selected samples of the AFA goods from SCR's Sydney stores and arranged for further samples of various models to be provided by some interstate SCR stores on the pretext that they were required for some advertising photographs. On 31 August 1998 these (or some of these) samples were sent for testing to a business called "Beyond 2001 Communications", where the samples (401 units) were tested by a technician, Mauro Rotundo. Rotundo gave evidence as to the results of these tests. Rotundo's test results may be broadly summarised by the following table:

On or about 3 September 1998, AFA's solicitors demanded payment from Wholesale of the balance of the price, $120,776.89, but no further payment was made by Wholesale.

When Aitken saw the test results he instructed that all units should be recalled from the retail stores. All recalled units that were returned to SCR by its retail stores were stored at warehouses of Trans-Pac Logistics Pty Ltd ("Trans-Pac"). The goods that were stored with Trans-Pac arrived in bulk from each store in answer to the initial recall but there were subsequently piecemeal additions to the stock when the stores sent back goods that had been returned by customers.

On 14 September 1998 Aitken sent a copy of Rotundo's results to Pattison. On or about 16 September 1998, at Pattison's request, Aitken arranged for the units which had been tested by Rotundo to be forwarded to AFA.

The writ herein was filed on behalf of AFA on 9 October 1998 in the County Court and the proceeding was later transferred to the Supreme Court.

In my opinion, the contract of sale of goods between AFA and Wholesale was wholly in writing. It was comprised of the following documents, working backwards:

(i) Pattison's fax of 22 June 1998 accepting Kelly's offer of $725,000[1] (as contained in document (ii));

(ii) Kelly's second fax of 19 June 1998 offering $725,000 upon specified terms;[2] but which must be read together with document (iii);

(iii) Pattison's fax of 19 June 1998,[3] except for the sale price but including the terms therein contained, save to the extent modified by document (ii) and incorporating by reference the identification of the goods contained in Wholesale's "purchase order" dated 16 June 1998.[4]

These conclusions are essentially in accordance with para. 2(b) and (c) of Wholesale's second amended defence and counterclaim dated 10 September 1999.[5]

In my opinion, Kelly's first fax of 19 June 1998 [6] does not form part of the contract, although it is arguable that the paragraphs marked 3 and 4 in that fax form part of the terms of the contract relating to Wholesale taking over all "warranty liability" (or, perhaps, as part of the matrix, those paragraphs help to explain what was later agreed).

It may be that the contract is also comprised of Wholesale's order dated 23 June 1998[7] but I do not consider that anything turns on this.

It is unnecessary to decide whether the contract was made in New South Wales or in Victoria. Again, nothing turns on this and the parties were content to treat Victorian statutory provisions as applicable, where relevant.

Wholesale pleaded in the alternative that the contract was partly oral arising out of conversations between Pattison and Kelly and also alleged that it contained oral terms that "the goods were new" and that "the goods had a failure rate of less than 1%". I find that the contract did not contain these terms because it was wholly in writing. I have further rejected Kelly's evidence as to those aspects of the relevant conversation or conversations.[8]

Wholesale also pleaded that it was a term of the contract that a certain quantity of spare parts for the goods would be provided by AFA to Wholesale at no cost (and that this term was broken by AFA). There was certainly a term in the contract dealing with this subject but it is unnecessary to consider the precise content and interpretation of that term, or whether it was broken by AFA, because in the end Mr Robertson, who appeared as counsel for Wholesale, had to concede that the only remedy for breach lay in damages, and that there was no evidence of any damage suffered by Wholesale as a result of the alleged breach of this term. I say nothing as to whether Wholesale's pleadings were adequate on this point in any event.

Finally, Wholesale alleged that it was an implied term of the contract that the goods should be of merchantable quality, by virtue of s. 19(b) of the Goods Act 1958 (Vic) ("the Goods Act"). I am satisfied that Wholesale bought the goods by description from the vendor (AFA). The goods were bought by the description contained in Wholesale's "purchase order" dated 16 June 1998 as incorporated by reference in Pattison's fax of 19 June 1998. It is irrelevant, as argued by AFA, that Pattison did not deal in goods of that description. The vendor was AFA and it did deal in goods of the description sold.

It was submitted by Mr Jones, who appeared as counsel for AFA, that, if there would otherwise have been an implied condition of merchantable quality, that implication had been negatived or varied by express agreement of the parties, as permitted by s. 61 of the Goods Act. This submission was based upon Wholesale's agreement "to assume responsibility for all warranty liability for the goods purchased" (see Pattison's fax of 19 June 1998). The submission also placed reliance upon the statement in Kelly's preceding fax of the same date that Wholesale would take over AFA's warranty liability and "AFA would supply free of charge... all goods AFA are holding for exchange and repair, so there is no further liability above and beyond."

In my opinion, the reference to "all warranty liability" in this context is a reference to such liability as AFA might incur to the retail purchaser or consumer, either under the general law (eg by collateral warranty) or under the Trade Practices Act[9] or other legislation. It is not a reference to any warranty liability of AFA to Wholesale. Even assuming that the statement in Kelly's fax (quoted above) formed part of the contract, I do not think that this adds any strength to AFA's submission. The quoted statement in essence meant, in my opinion, that AFA was to have no obligation to provide a warranty service of exchange and repair to retail customers, beyond providing to Wholesale all goods it was holding for such exchange or repair. The agreement with Wholesale had the effect of an indemnity from Wholesale in respect of AFA's liability to consumers. I do not consider that, by indemnifying AFA as to those warranty responsibilities, Wholesale thereby negatived or excluded any warranty of quality otherwise given by AFA to Wholesale.

I conclude that, by virtue of s. 19(b) of the Goods Act, it was an implied condition of the contract that the goods should be of merchantable quality.

It is convenient to refer to this question under the heading of "breach of warranty" because Wholesale did not plead and, in the end, did not contend, that it had rejected or was entitled to reject the goods for breach of condition. Wholesale conducted its case on the basis that it was treating any such breach as a breach of warranty.

AFA denied that Wholesale had proved that the goods were not of merchantable quality and positively contended that certain models were shown on the evidence to be of merchantable quality (namely models TE22, TCR88 and AM120).

The evidence of Rotundo[10] showed that a substantial proportion of the goods which he tested (401 units in all) were not fully functional and/or exhibited generally poor performance. The only model which he tested that tested satisfactorily was model AM120.

I note that Rotundo did not test model TE22 and, indeed, that model was not included in Wholesale's counterclaim. Aitken testified that model TE22 operated satisfactorily and continued to be sold after other models were recalled by him. There was also other evidence that models TE22 and TCR88 were returned to the stores after the recall and continued to be sold.

Zoran Mate was a service manager with some years of experience in relation to telecommunications equipment who was sub-contracted by Panaquip Business Centre Pty Ltd. He gave evidence that he tested another 108 units of the goods in September 1998 to see if they would perform their normal functions as would be expected by a consumer. These units were part of the samples randomly selected by Stergiotis in August 1998. The samples included 10 models TE22 and 10 models AM120 which were found to be all fully functional. Of the balance of 88 units only about 50% of each model was found to be fully functional, and overall about 50% of the 88 units tested[11] were not fully functional.

Anish Prasad, an electronics technician employed in the telecommunications department of ADI Limited, testified that in May 1999 he tested samples of models CT630 and CT632. These samples had been randomly selected by Stergiotis from unopened stock which had by then been recalled and warehoused. Prasad found that of 49 models CT630, 17 had a "low ringer volume" and 31 had other faults; of 47 models CT632, eight had a "low ringer volume" and 18 had other faults.

In November 1999, Ian John Monro, a qualified electrical engineer with expertise in relation to the relevant equipment who was called by AFA to give evidence, tested random samples taken by AFA from the recalled goods with the following results, in summary:

Leaving aside the models AM120 (which all tested satisfactorily) and model TE22 (which is not included in the counterclaim), nearly 50% overall of the other models tested by Monro were not fully functional. The only model which tested satisfactorily was the CT632. Overall, 43% of the total sample was not fully functional.

I am satisfied that a large proportion of each of the models comprised in the goods sold (other than models TE22, TCR88 and AM120) were not capable of performing the tasks for which they were designed or were otherwise so defective as to be unsaleable by retail at a profit, or even at cost, and thus were not of merchantable quality at the time of delivery. I am satisfied, even taking into account models TE22, TCR88 and AM120, that a large proportion of the goods sold were not of merchantable quality at the time of delivery. I am so satisfied on the basis of the whole of the evidence, especially as to the tests conducted. I am comforted in reaching that conclusion by two further matters.

The first matter is that after the units tested by Rotundo were forwarded to AFA on or about 16 September 1998, Pattison arranged for them to be tested again by AFA and a considerable number of them were tested by AFA's own technician. The records of those tests are to be found in evidence (Court Book pages 814-830) but AFA did not seek to lead evidence to explain these results nor did AFA contend that they contradicted Rotundo's evidence.

The second matter is that Weber gave evidence, which I found credible, that the stock from which the goods were to be selected to be sold to Wholesale were not of merchantable quality. The relevant parts of his evidence were as follows:

"Mr Weber, it was your view in 1998, certainly in October 1998 that the goods that had been delivered to Strathfield were in fact not of merchantable quality, wasn't it?---It was, in October 1998. And it was your view in June 1998?---It was. And it was your view in May 1998?---It was. ... In May 1998 you held the view that the stock from which the goods were to be selected to be sold to Strathfield were not of merchantable quality?---Correct. The respects in which they were not of merchantable quality, what were the respects in which you considered they were not of merchantable quality?---Probably the least offensive would be the fact that they weren't new. ... MR ROBERTSON: In what respects did you consider they were not of merchantable quality?---They weren't new. Were there other respects in which you considered they were not of merchantable quality?---Many. And were those applicable to the bulk of the stock or to a smaller proportion?---Of the 27,000 pieces of inventory that were in the warehouse, probably less than 6,000 pieces were new... ... HIS HONOUR: What do you mean by not new?---Just what I'm saying, not new. What does that mean to you?---They're not new, they've been in the field once and been returned, they started off as being new and that they'd been returned from wherever, predominantly K-Mart. MR ROBERTSON: Mr Weber, the question I was asking was what proportion of the stock that was not new suffered from other defects?---I think a lot of the defects that you were probably trying to get to were actually caused in the process of refurbishment from January 1998 through to when the goods were actually forwarded to Strathfield. And you considered that refurbishment was not properly supervised?---Far from it. And it was carried out by unqualified casual staff?---Definitely. You consider that they were very sloppy in the way they carried out that job?---Yes. ... You say they didn't comply with the technical standards?---The goods actually did comply with the technical standards. I think actually what's done to the goods rendered a lot of them inoperable, I think is the words that they would use. ... MR MACAULAY: I will ask that one more time, Mr Weber. If the percentage of stock which you now say was defective had been removed from stock available for sale in 1998, you would not have achieved $900,000 - worth of sales would you?---As I said, the question is irrelevant. In hindsight, we can all do lots of different things. We need to actually - - - Do you agree with the proposition?---No, I don't. You say there was - - - ?---Because as I said, it's irrelevant. Does it follow then, Mr Weber, that it was your view that despite the - notwithstanding the amount of defective stock, which you now say was there in 1998, there was sufficient good stock which was not defective in order to achieve $900,000 - worth of sales?---Actually, I'll tell you something, the goods became defective through the cleaning process. If I filled your phone up with Nifty and water I promise you after a short period of time it won't function very well. By June 1998 then, do you say that the percentage of stock which you now say was defective for whatever reason had been removed from stock available for sale, you could not have achieved $900,000-worth of sales?---The question you are asking, I will make it a lot clearer, is irrelevant because the problem of defective stock was actually created by the process that the receiver and manager employed. Do you understand, Mr Weber - - - ?---The goods returned in the warehouse were primarily returns from K-Mart which was shipped back to AFA in new condition... ... By whatever process the goods became defective, do you say that by June 1998 the percentage of stock which had become defective was such that if it had been removed from stock available for sale, you would not have been able to achieve $900,000-worth of sales. Do you understand that question?---I understand the question. What is the answer?---The question is irrelevant. Yes, thank you, Mr Weber?---The problem was created by the receiver in the process that they went on refurbishing the stock. ... MR MACAULAY: ... Prior to 8 December 1997, that is back in September and October and November of 1997, there was a process going on of refurbishing stock?---Correct. On a very limited basis. As you have told His Honour this morning, having looked at the daily refurbishment work sheets, you accept that at least some scratched machines, units, were being put into location 1, which I think you will correct me if I am wrong, was back into stock?---Correct. Available for sale?---Correct."

I have omitted from the above extracts, among other things, Weber's evidence that he conveyed to Pattison and/or to Pattison's staff both orally and in writing his belief that the goods to be sold to Wholesale were defective and not of merchantable quality. While I am satisfied that Weber held that belief and held it on good grounds, I reject his evidence that this was conveyed to Pattison or to his staff either orally or in writing, as Weber was anxious to assert.

Having regard to the conclusion that a large proportion of the goods was not of merchantable quality at the time of delivery, does it follow that AFA was thereby in breach of the implied warranty as to merchantable quality in relation to the goods as a whole or only in relation to those units which were unmerchantable, and does that distinction (if valid) make any difference in relation to the issues in this proceeding?

Mr Robertson referred to Jackson v Rotax Motor and Cycle Company[12] in which Farwell LJ said this: [13]

"The official referee has found that both the tubes and the horns were in fact unmerchantable, but that the goods as an entire consignment were not unmerchantable. That requires a little consideration. Of the tubes in question more than half were defective, and of the horns also a very considerable number were defective, so that a very large number of the aggregate were in fact unmerchantable. It may well be that in the case of a single horn out of hundreds or a tube or two out of hundreds the rule de minimis would apply, and it would be open to the jury, or to the official referee, to find that, notwithstanding the fact that one or two items were unmerchantable, the consignment as a whole, treating the contract as for a consignment, was merchantable; but the official referee has not taken that view, and, as I understand his finding, I think it is untenable. `True it is,' he says, `that I find that each individual horn of, say, half the consignment is unmerchantable, so that the purchasers could not be compelled to take it, but I do not find that the amount of injury or bad workmanship or the like is sufficient to make it very unmerchantable, and therefore, if one half only of the horns comprising the consignment are unmerchantable, I think the buyers must take the whole.' In my opinion that is not what is meant by `merchantable' as applied to a consignment. If the individual horns are to any appreciable extent unmerchantable, it is not open to the official referee or any one else to say `Although you would not be bound to take one horn because it does not answer the description of being merchantable, still you must take the whole because more than half are merchantable.' I do not think that is the meaning of de minimis, and on no other ground do I see how it is possible to hold that a consignment can be merchantable when the individual articles making it up, or a large number of them, are not merchantable. I find therefore on the facts before me that the articles are unmerchantable."

86 Jackson v Rotax Motor was a case involving questions of the right to sue for the price and the right to reject the goods. However, in my opinion, the reasoning supports a conclusion in the present proceeding that the goods sold by AFA were, taken as a whole, not of merchantable quality. Alternatively, Wholesale has at least established that a large proportion of the goods were delivered in breach of the implied warranty as to merchantable quality. On either view, the question to be decided is what damage resulted from the breach or breaches and, in deciding that question, I will take into account, so far as appropriate, that not all of the goods and not all of the models were unmerchantable.

Damages for breach of warranty of merchantable quality

Section 59(1) of the Goods Act entitles a buyer to set up a breach of warranty in diminution or extinction of the price, or to maintain an action against the seller for damages for breach of warranty. However, as s. 59(4) makes clear, the fact that the buyer has set up the breach of warranty in diminution or extinction of the price does not prevent him from maintaining an action for the same breach of warranty if he has suffered "further damage", which I take to include a case where there is damage in an amount more than that required to extinguish the price.[14] A buyer can divide his cause of action. Wholesale's claim for damages is in the region of $640,000, or about $520,000 after giving credit for the balance of the price.

Section 59(2) of the Goods Act provides that the measure of damages for breach of warranty is the estimated loss directly and naturally resulting in the ordinary course of events from the breach of warranty and s. 59(3) provides that in the case of breach of warranty of quality such loss is prima facie the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had answered to the warranty.

For reasons which will later appear, the maximum value that the goods would have had to Wholesale if they had answered to the warranty was their purchase price plus 1.1%, ie $725,000 plus 1.1% = $732,975. The best evidence here of the actual value of the goods at the time of delivery is arguably the receipts from sales of the goods, namely $109,744 representing retail sales (net after returns) and $60,785 being bulk sales to dispose of the recalled goods (a total of $170,539).

Wholesale's calculation of damages may be stated as follows:

AFA submitted, as I understood it, that the damages (if any) suffered by Wholesale as a result of unmerchantable goods should be restricted to the specific units found by the tests to be unmerchantable. AFA submitted that the test results did not justify the decision to recall stock from the stores. I do not accept that submission. In my opinion, it was reasonable to recall stock from the retail stores having regard to the many consumer complaints, the large proportion of goods which were, based on the tests of Rotundo, likely to be unmerchantable and the legal advice received by SCR. Indeed the recall was in the circumstances unavoidable. That is not to say that an assessment of damages should not take into account such matters as any stock that was later returned to the retail stores or continued to be sold, or any models which were not shown to be unmerchantable. I will return to those matters later below.

AFA put a number of further arguments in relation to damages the most fundamental of which was based upon the contractual relationship between Wholesale and SCR pursuant to a Trading Agreement dated 6 September 1994.[15] In that agreement, Wholesale is referred to as "SGW".

The Trading Agreement contains the following relevant terms:

"1. SUPPLIES OF GOODS FROM SGW TO SCR 1.1 SGW shall supply goods exclusively to SCR. SGW will act as an indent buyer for SCR and will obtain goods only in response to a purchase order from SCR. 1.2 SGW will make all goods ordered by SCR available on consignment to SCR. 1.3 The consignment of goods from SGW to SCR will commence at the time the goods are delivered to SCR's warehouse or retail outlets and will terminate immediately before, and on the same day, that the goods are sold by SCR. Property in the goods will pass from SGW to SCR at the time the consignment terminates. 1.4 SCR will provide SGW with a report for each trading period detailing all goods sold by SCR during the trading period. The report will indicate the circumstances in which the goods were sold by SCR. 1.5 SGW will be responsible for arranging and will incur all costs in relation to delivery of goods to SCR's warehouse or stores. ... 1.7 SCR will be responsible for any costs incurred in relation to all goods from the time that they are received by SCR at its warehouse or stores. 1.8 Claims by SCR for goods received from SGW damaged or lost in transit to SCR's warehouse or stores will only be accepted by SGW when made within thirty (30) days of delivery or anticipated delivery. All goods supplied by SGW to SCR are supplied on a no-return basis, unless otherwise agreed in any particular case. ... 3. PRICE AND PAYMENT TERMS 3.1 All goods shall be sold by SGW to SCR for an amount equal to SGW's cost of goods (inclusive of freight into SCR's warehouse and net of all rebates, subsidies and discounts) plus 1.1% (`the Price') or such other amount as may be agreed from time to time. ... 3.3 SGW will invoice SCR after the close of each trading period for all goods sold by SGW to SCR during the previous trading period. 3.4 SCR shall credit SGW's account with the Price of the goods plus any applicable sales tax within the time provided in any invoice provided to SCR in respect of the goods."

It was common ground that the goods purchased by Wholesale from AFA were purchased by Wholesale as an indent buyer for SCR pursuant to the Trading Agreement (cl. 1.1) and made available by Wholesale on consignment to SCR (cl. 1.2). The consignment commenced when the goods were delivered by AFA's carriers to SCR's retail stores (cl. 1.3).[16]

AFA submitted that, as a result of the terms of the Trading Agreement, Wholesale had suffered no loss at all. All stock had been sold either to the public, or in bulk or was unaccounted for. As to bulk sales, AFA relied upon evidence which showed that SCR had sold 5000 units to H & K Enterprises Pty Ltd ("H & K Enterprises") and 7157 units to Oracal International Pty Ltd ("Oracal"). AFA argued that Wholesale supplied the goods to SCR on a no-return basis and that no goods has been returned but instead all had been sold by SCR. Upon such sale, property passed to SCR and Wholesale became entitled to be paid under cl. 3.1 (cost of goods plus 1.1%). AFA said that there was no evidence of any variation of the Trading Agreement by Wholesale and SCR, or of any agreement to the contrary between them. Therefore, it was submitted, Wholesale had suffered no loss.

Before considering that submission, it is necessary to set out some of the evidence led by Wholesale concerning the sales of the goods by retail and in bulk and, to the extent that evidence was provided, how sales by SCR and transactions between SCR and Wholesale were recorded both generally and in this case.

Stephen Thomas Parks ("Parks") and Brett Joseph Vandermaal ("Vandermaal") each gave relevant evidence. Parks was at all relevant times the financial controller of SCR but his role included managing the accounts of Wholesale. Vandermaal was at all relevant times the National Manager, Logistics and Information Technology of SCR and his responsibilities included the oversight of the information technology systems for both SCR and Wholesale, including the mode of recording of all transactions. On the basis of their evidence or by inference therefrom, I find as follows.

There is one computerised inventory system for Wholesale and SCR. When goods are purchased by Wholesale they are entered in the inventory at cost. Every sale by a retail store is entered in the inventory as a sale from SCR to the customer and, at the same time, the system records in the inventory a sale from Wholesale to SCR. Once the sale is recorded, of course, the goods are no longer part of the inventory stock. It is obvious, with this system, that all goods in the inventory must be the property of Wholesale. If an item is returned to a retail store by a customer and is accepted back with a credit to the customer, the sale entry is reversed in the inventory and the returned goods again become part of Wholesale's stock recorded in the inventory.

The accounting system is a separate system. The ordinary process adopted as between SCR and Wholesale is that a summary of all goods sold or returned for credit through SCR's retail stores is produced at the end of the month and this is used as the basis for recording the net sales for the month from Wholesale to SCR at cost plus 1.1% plus sales tax. An invoice is then raised from Wholesale to SCR for the appropriate amount and a journal entry is made to record payment of that invoice by SCR. The transactions between Wholesale and SCR are dealt with in the accounts by way of an inter-company balance which sets off, inter alia, monies due to Wholesale by SCR for goods sold against monies due to SCR by Wholesale for payments by SCR to Wholesale's creditors.

With respect to the present case, at first the goods purchased by Wholesale from AFA were recorded in the inventory in the usual way and the usual process followed in relation to sales and returns, both in relation to the inventory and the accounting systems. However, after the goods were recalled in September 1998, all AFA stock placed in the Trans-Pac warehouse was written out of the inventory. This was done by writing each model out of the inventory at the average cost price (ie the same price at which it had been entered). This occurred on or about 27 October 1998.

SCR's consultant, Stergiotis, was used by SCR to sell the recalled AFA goods. On or about 30 September 1998, Stergiotis arranged the sale of 348 units of model AM101 at $50 each (a total of $17,400). In mid-1999 Stergiotis arranged for the sale of 5000 "answering machines" (part of the AFA goods). The 5000 answering machines were sold in the name of H & K Enterprises, a Stergiotis company. The answering machines were sold to a business called "Go-Lo" at $11 per unit.[17] SCR later invoiced H & K Enterprises for these goods, by invoice dated 24 November 1999, in the sum of $55,000.

The remaining recalled goods were moved from the Trans-Pac warehouse to a warehouse operated by Oracal (another company associated with Stergiotis). In October 1999, which was some time after the sale to Go-Lo, there was a stocktaking of the recalled goods in the Oracal warehouse. In November 1999, a stocktaking of the goods in the Oracal warehouse was instigated by Pattison on behalf of AFA. The records of that stocktaking show a greater number of each model of the goods (bar one model) than was recorded in the October stocktaking. No explanation was offered for the discrepancy.

After the November 1999 stocktaking, in the same month, SCR (at Stergiotis' instigation) sold to Oracal 3578 cordless phones at $5 per unit ($17,890) and 3579 answering machines at $5 per unit ($17,895), resulting in total sales proceeds for 7157 units of $35,785. These sales would seem to have disposed of all stock in the Oracal warehouse and the numbers sold correspond closely, but not exactly, with the November 1999 stocktaking numbers. In November 1999, Vandermaal arranged for the production of two SCR invoices, one to H & K Enterprises for $55,000 (referred to above), and one to Oracal for $35,785. Because the write-off in October 1998 had removed the goods from the inventory, Vandermaal re-entered the goods sold by SCR in the inventory, without any official purchase order from SCR to Wholesale and without identification of the various model numbers. Vandermaal testified that he recorded a notional purchase of the stock by Wholesale at a cost of $4.94 per item.

Parks confirmed Vandermaal's evidence and said that when SCR's sales to H & K Enterprises and Oracal were recorded, a corresponding prior sale from Wholesale to SCR was also recorded. He added that those sales would have been included in the monthly summary of transactions between SCR and Wholesale.

I am satisfied on the basis of the evidence of Vandermaal and Parks, including a certificate from Parks (Exhibit "26") admitted pursuant to s. 55B of the Evidence Act 1958, together with a copy of the invoice, that the answering machines sold to Oracal (product code "ANSWER") and the cordless phones sold to Oracal (product code "CORDLESS") were entered in the inventory at a cost to Wholesale of $4.94, a price to SCR of $4.994 (ie ($4.94 plus 1.1%) and a recommended retail price of $5. It would seem that the same evidence was intended to cover and did cover the sale of 5000 answering machines to H & K Enterprises at $11 per unit. However Mr Robertson proffered the concession that there should be a reduction of the damages claimed by Wholesale for the full proceeds of this sale ($55,000 rather than $25,000).

In relation to the sale of AFA goods in SCR's retail stores, records were tendered which, in summary, showed the following:

The value to Wholesale of the net sales of 4452 units (cost plus 1.1%) was $109,743.68.

The column in the above table headed "% Returned" contains my own calculations. Neither side sought to rely upon calculations of this kind. There was no evidence of the reasons for the returns. There was some evidence as to "normal failure rates" but no evidence as to "normal return rates". However I consider that it is no coincidence that of the four models with return rates under 20%, two models (TE22, TCR88) were treated as merchantable by SCR and one model (AM120) generally tested satisfactorily. Obviously failure to function properly or fully would be the major reason for the high rate of consumer returns experienced with all the other models.

Returning to AFA's submission that Wholesale suffered no loss, I am satisfied that the bulk sales by SCR to H & K Enterprises and to Oracal were treated by Wholesale and by SCR as resulting in immediately prior sales by Wholesale to SCR at $4.994 per unit ($4.94 plus 1.1%) and not as resulting in immediately prior sales by Wholesale to SCR at Wholesale's true costs plus 1.1%. Clearly, with this proceeding pending, it would have been irrational to do otherwise. The Trading Agreement permitted sales by Wholesale to SCR at "such other amount as may be agreed from time to time" (cl. 3.1). The evidence shows conduct and records consistent only with agreement between the two companies to the cost of $4.94 adopted. Having regard to the commercial reality that Wholesale was an entity whose business and records were utilised and controlled by SCR and SCR's officers and employees, nothing more formal was in my view required. I consider that it is of no avail for AFA to point to the Trading Agreement, and to the absence of formal documentation, a Board resolution or other written instructions. I am satisfied that, subject to some other points taken by AFA which next require consideration, Wholesale suffered a real loss in relation to these sales, being the difference between the amount paid to AFA in relation to the goods ultimately sold to H & K Enterprises and Oracal (plus 1.1%) less the amount payable by SCR to Wholesale (at $4.94 per unit plus 1.1%), or rather, having regard to Wholesale's concession, the actual amount of SCR's sale proceeds.

AFA submitted that because the model TE22, which was not included in the counterclaim, and the model TCR88 continued to be sold in SCR's retail stores, and indeed were returned to the stores after the recall, no allowance for damages for breach of warranty as to merchantable quality should be made in respect of those models. In my opinion that submission is correct. The amount involved is $7346.[18]

AFA submitted that because the evidence did not show that model AM120 was of unmerchantable quality (rather the contrary), no allowance for damages should be made in respect of that model. I accept that submission. The amount involved is $69,220.16.[19]

AFA said that the evidence of returns of the goods to the retail stores did not show the reasons for the returns and contended that it was not demonstrated that such units were scrapped. It is reasonable to infer, as I have said, that a large proportion of returns would have been made because the units would not function or would not function properly or fully and that the units returned were scrapped and were not held for further sale. In addition, AFA generally criticised Wholesale's records and its failure to fully account for the goods sold by AFA in its figures as to sales and returns, goods recalled and sold, goods used for testing purposes and the like. Mr Robertson valiantly attempted to reconcile all the figures in evidence and, to a considerable extent, he did so, but a number of discrepancies remained. Doing the best I can, I will make a lump sum adjustment of $4,000 in favour of AFA for the possibility that some units returned were not scrapped but held for future retail sale and for miscellaneous discrepancies.

AFA next challenged Wholesale's claims for consequential costs. There was considerable debate about how to calculate or estimate the freight costs incurred by SCR for the recalled goods. I am satisfied that a reasonable estimate for freight costs would be $22,000, based on calculations submitted during argument on behalf of Wholesale. Storage costs incurred by SCR were agreed at $38,463. Testing costs incurred by SCR were $8,704. However AFA submitted that Wholesale had failed to prove that it, rather than SCR, had incurred those costs and had failed to prove that those costs had been charged to Wholesale. I accept that submission. I am not satisfied that the consequential costs claimed were incurred by Wholesale, or on its behalf, or were charged to or paid by Wholesale. In that regard, I consider that the evidence of Hannah, the secretary of Wholesale and of SCR, who baldly stated that these costs were incurred by SCR "on behalf of Wholesale" is admissible but inadequate. No supporting accounting entries were produced.

I assess the damages to Wholesale caused by AFA's breach of warranty in the sum of $464,469. After extinction of the balance of the price, the damages recoverable by counterclaim are $343,702. The calculation is as follows:

By para. 11 of its second amended defence and counterclaim ("the Counterclaim") and the particulars thereto, Wholesale alleged that AFA, by its servant or agent Weber, had made oral representations to Kelly that the stock was brand new and that the stock had less than a 1% failure rate. I am not satisfied that Weber made either of these representations and I have found against Wholesale on these allegations.[20]

By paras 12 and 13 of the Counterclaim and the particulars thereto, Wholesale alleged that Pattison on behalf of AFA had made express representations by telephone to Kelly on behalf of Wholesale:

(i) that the stock was new;

(ii) that the stock had a very low failure rate;

(iii) that he guaranteed that the stock was new and of merchantable quality;

(iv) that AFA had a quantity of spare parts available for the stock which he would deliver to Wholesale for no extra cost.

I am not satisfied that Pattison made any of the first three representations and I have found against Wholesale on these allegations.[21] As to the fourth alleged representation, I am satisfied to the extent set out in para. [19] above that the representation was made but I am not satisfied that it was misleading and, in any event, no resulting damage is alleged.

Paragraph 12A of the Counterclaim was abandoned.

By paras 12B, 12C and 13 of the Counterclaim, Wholesale alleged that AFA by its servant or agent Pattison had represented to Wholesale that the stock was new and could be expected to have a low failure rate and that this alleged representation was constituted by Pattison's failure at any time before the sale to disclose to Wholesale that the stock was not new or had been returned from other retailers. I am satisfied that Pattison did not inform Wholesale at any time before the sale that the stock was not new or had been returned from other retailers. The question is whether the failure to do so in all the circumstances amounted to engaging in misleading conduct as alleged or constituted the making of a representation as alleged.

Silence or non-disclosure by a person needs to be assessed in all the relevant circumstances in order to objectively determine whether that person has engaged in misleading or deceptive conduct. Silence may convey a representation. Circumstances may give rise to a reasonable expectation that if particular matters exist they will be disclosed.[22] It is a relevant question whether a person complaining of alleged misleading conduct was reasonably entitled to believe that a particular matter or state of affairs affecting him or her would, if it existed, be communicated, because that person would then be reasonably entitled to infer from the absence of any such communication that that matter or state of affairs did not exist.[23] The next question would be: did that person in fact draw that inference?

In my opinion, Pattison's silence or non-disclosure was not in all the proven circumstances reasonably capable of conveying to Kelly, and I find that it did not in fact convey to Kelly, that the stock was new or could be expected to have a low failure rate. Further, Kelly had no reason to so believe based upon Pattison's failure to say anything to him about the condition or quality of the goods. Kelly had spoken to Weber about the goods, had seen and spoken to Weber at the AFA warehouse, had been shown samples by Weber and had asked for samples to be sent to Wholesale. It was evident to Kelly that Weber was the man with knowledge of the stock and Kelly had no reason to think that Pattison, as receiver, had any special knowledge or expertise in relation thereto. Kelly was himself an experienced businessman with high expertise in the relevant market. I am satisfied that Kelly's assessment of the goods was made, and his decision that the goods were appropriate and suitable to be purchased by Wholesale was formed, prior to his negotiations with Pattison and were not induced, affected or influenced by Patttison's conduct.

I find that AFA did not, by its agent Pattison, engage in any misleading or deceptive conduct as alleged. I would add, if it is at all relevant, that Pattison did not know what had happened when Kelly visited the AFA warehouse or what Weber had informed Kelly about the goods on that or any other occasion.

I should mention that there was debate about whether it would have been misleading or deceptive to describe the goods as "new". That question need not be decided.

It is arguable that a case of misleading conduct against AFA was open to be found, based upon the conduct of Weber, namely, that Weber's showing of the "brand new" boxed samples to Kelly, without informing him of the process that most of the products had undergone after return from another retailer, was misleading and deceptive. However Mr Robertson said that that case was neither pleaded nor pressed. In any event, the damages which have been awarded against AFA for breach of warranty are in all probability a little larger than any damages which might have been awarded against AFA for misleading and deceptive conduct.

Misleading and deceptive conduct by Pattison and Pattison Consulting

I find that Pattison was acting in all relevant respects on behalf of AFA and not on behalf of Pattison Consulting. No liability of Pattison Consulting can arise in this proceeding as a result of the conduct of Pattison (or of Weber).

Wholesale alleged that Pattison was himself directly liable for misleading and deceptive conduct, under the Trade Practices Act (Cth) because the offending conduct took place both in interstate trade and by telephone, and that, in any event, Pattison would be directly liable for misleading conduct under the Fair Trading Act (Vic). The allegations made against Pattison personally are those contained in paras 12, 12B and 12C of the Counterclaim to which I have referred. For the reasons already stated, I am satisfied that Pattison did not engage in any conduct which was misleading or deceptive as alleged.

For the foregoing reasons, the following orders will be made:

1. Judgment for the defendant on the plaintiff's claim.

(a) judgment for the plaintiff by counterclaim against the first defendant by counterclaim for damages in the sum of $343,702, together with interest in a sum to be calculated;

(b) judgment for the second and third defendants by counterclaim against the plaintiff by counterclaim.

Subject to any submissions as to costs, it is proposed to further order:

3. Plaintiff to pay the costs of the defendant of the proceeding including reserved costs.

4. Defendant to pay the costs of the second and third defendants to counterclaim including reserved costs.

1. The calculation in relation to models TE22 and TCR88 is as follows:

Less net sales of 1747 units @ $9 plus 1.1% (already allowed by Wholesale in its claim)

Less net sales of 709 units @ $22 plus 1.1% (already allowed by Wholesale in its claim)

2. The calculation in relation to model AM120 is as follows:

Less net sales of 71 units @ $38 plus 1.1% (already allowed by Wholesale in its claim)

sold to H & K Enterprises at $11 (already allowed by Wholesale in its claim)

Less 228 units (estimated) sold to Oracal at $5 (already allowed by Wholesale in its claim)

[5] I note that Wholesale abandoned any contention that Pattison was personally a party to the contract as there pleaded.

[8] See paras [18] and [33-36] above.

[9] See s. 74A Trade Practices Act 1974 (Cth).

[11] Models CT630, CT632, AM100, AM101, AM110, AM222, AM420, AM444.

[14] See Benjamin's Sale of Goods (5th ed., Sweet & Maxwell) para. 17-047 and note 68; see too Davis v Hedges (1871) LR 6 QB 687,692; Halsbury's Laws of England (4th ed.), vol. 41, para. 884. Alternatively, a buyer can rely on the principles of equitable set-off or upon Order 13.14 of the Supreme Court Rules.

[15] The main purpose of the Trading Agreement was to defer payment of the wholesale sales tax.

[16] The cost of delivery to SCR's stores was paid by AFA so that Wholesale did not incur the costs contemplated by cl. 1.5 of the Trading Agreement.

[17] I do not accept AFA's contention that the price was $12.50.

[18] See para. 1 of the Schedule to this judgment.

[19] See para. 2 of the Schedule to this judgment.

[20] See paras [14], [18] and [27] to [32] above.

[21] See paras [18] and [27] to [36] above.

[22] See Demagogue Pty Ltd v Ramensky [1992] FCA 557; (1992) 39 FCR 31, 32 per Black CJ. See too General Newspapers Pty Ltd v Telstra Corporation [1993] FCA 473; (1993) 45 FCR 164, 177-8.

[23] See Winterton Constructions Pty Ltd v Hambros Australia Ltd [1992] FCA 582; (1992) 39 FCR 97,114 per Hill J.

[24] The evidence shows that an estimated 2322 models AM120 were held prior to the sale to H & K Enterprises and 228 units after that sale.

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