APS Satellite Pty Ltd (formerly known as "SkyMesh Pty Ltd") v IPSTAR AUSTRALIA PTY LTD

Supreme Court of NSW|2016-11-24|Before: Rein J

Background

The background which I set out below is taken from the plaintiff's closing submissions ("PCS"), and with which Mr Donaldson took no issue.
SkyMesh's business activities in the relevant period were affected by the Australian Broadband Guarantee Program ('ABGP'). The ABGP was an Australian Government initiative, which subsidised the cost of provision of internet services in rural and regional areas of Australia. In return for receiving various government subsidies, approved Internet Service Providers ("ISPs") such as SkyMesh entered into contractual arrangements with the Commonwealth pursuant to which the terms of their contracts with their customers were regulated. This included a requirement to provide customers for three years with a satellite service that met specified conditions: D10/6442 , 6455, 6491-6496.

The Defective Goods Claim

SkyMesh claims indemnity and/or damages in respect of Ipstar products' claimed unfitness for purpose and unmerchantable quality for two distinct periods (to deal with the introduction of the ACL in place of the TPA): 1. Products supplied in the period prior to 1 January 2011 in breach of the TPA; 2. Products supplied in the period subsequent to 1 January 2011 in breach of the ACL.
The transitional provisions of the Trade Practices Amendment (Australian Consumer Law) Act (no. 2) 2010 (Cth) provide that the TPA continues to apply in relation to acts or omissions that occurred before the commencement of the ACL.
Following negotiations between the parties in 2010, Ipstar, on 26 November 2010, confirmed to Paul Rees, a director of SkyMesh, that its legal advice was that a statutory warranty did exist and that it was therefore prepared to pay for parts and labour for three years from the date the equipment was installed at the end-user customer's premises. The substance of the discussion is confirmed in an email sent after the meeting on 28 November 2010 (see First Affidavit of Paul Rees sworn 27 September 2010 [29]; Exhibit D3/1944).
After Ipstar indicated its acceptance of obligations pursuant to the TPA there followed correspondence, which I summarise as follows: 1. Ipstar indicated that it would need to consider individually each of SkyMesh's claims. 2. There was discussion about the form in which information would be provided by SkyMesh to Ipstar. 3. SkyMesh did provide information to Ipstar about the claims in the form of schedules. 4. Ipstar examined the schedules. Mr Leeflang, Ipstar's Director of Operations, considered that some of the claims met the criteria for payment and many others did not because the actual unit that had been replaced had not been returned to Ipstar or other information was incomplete. The requirement that allegedly defective goods must be returned to Ipstar had been in place as between Ipstar and SkyBridge and APN. SkyMesh had not been a party to that agreement. 5. Mr Supoj Chinveeraphan, who was in charge of Ipstar's operations in Australia, instructed Mr Leeflang not to pay any of SkyMesh's claims 6. None of the claims were paid to SkyMesh by Ipstar until the commencement of these proceedings, following which a relatively small number were paid by Ipstar. Those items for which payment of approximately $60,000 was made by Ipstar to SkyMesh have been removed from the SkyMesh claim. 7. Some claims relating to SkyMesh customers were paid by Ipstar to SkyBridge - those claims have been the subject of payment by SkyBridge to SkyMesh (also after commencement of these proceedings). SkyMesh accepts that if it is successful on all of its claim an amount of $400,000 must be deducted, being the total amount that it has received from SkyBridge relevant to the extant claims.
After SkyMesh had lodged its claims and at a time that SkyMesh was seeking a response and payment by Ipstar the Bandwidth Agreement fell due for renegotiation. Ipstar in January 2011 informed SkyMesh of its new pricing for bandwidth. I shall deal with the unconscionabilty claim separately below.
I should note that the Court Book consisted of some 38 volumes (D1-38) to which were added some further volumes. It was agreed that the Court had no need to pay regard to any document not the subject of specific mention by Counsel for either party, but in any event much of the documentary material became superfluous when agreement was reached in respect of a sampling process which I describe below at [40].
SkyMesh's defective goods claim is made up of 4000 individual claims for which there are more than 20,000 documents. Thankfully the parties agreed that it was not appropriate for the Court to have to examine each one of those 4000 claims and a sample of 102 claims was chosen. The parties agreed on a batching process and asked me to select at random 99 cases from the different batches. The parties then agreed that a further three samples should be added to the 99 randomly chosen by me. The documentation in respect of those 102 claims was tendered and became Exhibits O1, O2, and O3 and I shall refer to these as "the 102 Representative Items." Later a schedule was prepared by SkyMesh's solicitors summarising the content of the documents (Exhibit U). The parties agreed that the Court was to apply to such of the 102 items as are found not to be of merchantable quality or not fit for purpose a dollar value as follows: "The parties agree that to the extent that the Court is required to resolve the plaintiff's claims in respect of goods that were not of merchantable quality and/or not fit for purpose as set out in schedules AB and D to the Third Further Amended Commercial List Statement (Product Claims) by an assessment of individual claims, the Court shall adopt the following process: 1.The Court shall determine whether the defendant is liable to the plaintiff in respect of each of the 102 claims comprising the random sample selected by Rein J from MFI 2 (Sample Claims). 2. The plaintiff's entitlement to damages/indemnity from the defendant in respect if the whole of the plaintiff's Product Claims is to be assessed by the application of the following formula: Step 1 SCR x PCV = PRC SCV Step 2 PRC - Credit = Verdict Where: Credit means the $400,000 Skybridge amount. SCR (Sample Claim Recovery) means the total value of the amounts awarded by the Court to the plaintiff in respect of the Sample Claims. SCV (Sample Claim Value) means the total value of the Sample Claims. PCV (Product Claim Value) means the total value of the plaintiff's Product Claims. PRC (Plaintiff's recovery on Product Claims) means the plaintiff's recovery on the Product Claims before the application of the Credit. Verdict means the verdict in relation to the Product Claims
The approach to the 102 Representative Items is the subject of dispute to which I shall return. It is also not the only way in which SkyMesh seeks to establish that the Ipstar kit was neither of merchantable quality nor reasonably fit for purpose. The three levels of the SkyMesh case are: 1. The Ipstar kit was prone to failure and therefore not reasonably fit for purpose and not of merchantable quality. This 'prone to failure' case is limited to the water ingress problem of the ODUs and the modem firmware issue causing drop out. 2. The kits which included the equipment the subject of the 102 Representative Items failed and therefore were not reasonably fit for purpose and or not of merchantable quality (or acceptable quality). 3. If SkyMesh does not succeed on (1) or (2) it contends that it can establish on the balance of probabilities that the kit was not working and that it should be able to recover for each item unless Ipstar can establish that the cause of failure was not something inherent in the ODUs or modems themselves when shipped: see PCS92.

Ipstar's Threshold Arguments

I propose to consider at this stage what might be viewed as the threshold arguments advanced by Ipstar. Ipstar contends that even if it is established by SkyMesh that the Ipstar kit (or parts of it, such as the modem and the ODU) was (or were) not reasonably fit for purpose within the meaning of the TPA/ACL or not of merchantable quality (TPA) or not of acceptable quality (ACL), SkyMesh cannot succeed in recovering from Ipstar under the TPA or the ACL because: 1. s.74B and s.74D of the TPA are not available to SkyMesh, as a matter of construction, 2. the payments made by SkyMesh to SkyBridge were voluntary payments, and so s.74H (TPA) and s.274 (ACL) do not apply.
Dealing first with [42] (1) Ipstar argues that even if the goods were not fit for purpose or of merchantable quality s.74B and s.74D are remedies for consumers not intermediate sellers. There is agreement by Ipstar that the first three subsections of s.74B (and s.74D) are met because: 1. Ipstar is a corporation which in trade or commerce supplied goods manufactured by Ipstar to another person (SkyBridge) who acquired goods for resupply: (1)(a), 2. SkyMesh supplied the goods to consumers (1)(b), 3. the goods were acquired by the consumer for a particular purpose (i.e. to access the Ipstar satellite broadband service) (1)(c), but even assuming it is established that the goods were not reasonably fit for that purpose (or not of merchantable quality) within the meaning of s.74B(1)(d) and s.74D(1)(d), s.74B and s.74D are not applicable because of the last part of these sections.
Ipstar contends that "that other person" in the last part of subs (1) is a reference to "a person who acquires the goods from, or derives title to the goods through or under the consumer," and not to the person referred to in (1)(a) as "another person who acquires the goods for resupply."
Thus Ipstar contends, a corporation is liable to compensate the consumer and "persons who acquired the goods from or derived title to the goods from the consumer" and has, by operation of s.74B or s.74D no obligation to compensate the intermediate seller.
In my view the construction for which Ipstar contends is clearly correct. This view is reinforced by two matters: 1. S.74H is a section specifically designed to enable intermediate sellers to sue the manufacturer, and there is therefore no need for s.74B and s.74D to deal with sellers' claims against manufacturers. 2. If "that other person" meant the intermediate seller then persons who acquired goods through the consumer would have no remedy. The construction advanced by Ipstar is far more in tune with the remedial aspect of the TPA.
It follows that in my view SkyMesh has no claim against Ipstar under s.74B or 74D of the TPA.
The only section of the TPA which is relevant to the defective goods claim therefore is s. 74H. S.274 is the equivalent provision of the ACL.
Turning now to the voluntary payment argument. Ipstar contends that if the goods were not of merchantable quality or not reasonably fit for purpose then SkyMesh should not have paid SkyBridge any amount for the visit or the replacement equipment since SkyBridge was bound to meet its obligations under the TPA. Mr Donaldson says that the situation is similar to SkyMesh paying SkyBridge $5000 for a service call and modem replacement that should have cost only $1000. He submits that SkyMesh could not in those circumstances claim pursuant to the indemnity the additional $4000 from Ipstar. He also submitted that it is not a question of whether SkyMesh acted reasonably in endeavouring to deal with the complaints of customers to whom, on this assumption, SkyMesh was liable because it had sold them goods that were defective. If SkyMesh's conduct was to be determined by the yardstick of reasonable conduct then in my view what it did was entirely reasonable. It arranged, after SkyMesh and SkyBridge help desks could not solve the customers' difficulties, for SkyBridge to send a technician to assess the problem and fix the problem by whatever means SkyBridge could do so including replacement of ODUs and modems where appropriate. SkyMesh was under pressure from the industry Ombudsman and the department responsible for administering the ABGP to which SkyMesh customers were also directing their complaints and it is hardly surprising that SkyMesh sought to deal with its customers' lack of access to the internet without engaging in some protracted legal dispute with SkyBridge. There is no suggestion that the amount charged by SkyBridge for the service call or the replacement parts was excessive.
I think the answer to Ipstar's contention is to be found in the words of s.74H. S.74H has these components: 1. SkyMesh was liable to the consumer and is therefore the seller referred to in s.74H(a). 2. Ipstar is the manufacturer who was liable to the consumer in respect of the same loss or damage i.e. the costs of replacing the defective goods. 3. Ipstar is the manufacturer liable to indemnify SkyMesh "in respect of the liability of the seller to the consumer." 4. The seller is entitled to indemnify for its liability to the consumer as if there was a contract of indemnity made between SkyMesh and Ipstar.
The liability of the seller to the consumer was the liability of SkyMesh to replace the defective goods and it met that liability by organising the service call and the replacement of the goods, for which it then paid SkyBridge. It had paid those monies to solve the consumer's problems and in my view it is not relevant to the statutory inquiry for the purposes of s.74H to examine whether SkyMesh might have had a right to claim against SkyBridge either under contract or under statute. The statute, by its specific wording, does not introduce any qualification to the indemnity which the statute grants the seller. Even if SkyMesh had a right to claim against SkyBridge contractually or under statute (which has not been demonstrated) it had a right to claim from Ipstar and was entitled to choose which of the two parties liable to it to pursue. It has exercised that choice. If the voluntary assumption of a burden had any role to play it would be as between SkyMesh and the consumer but that is not what is asserted.
In relation to s.274 ACL the position is the same save that s.274 requires that the seller "incurs costs." Mr Donaldson submits that SkyMesh did not 'incur' costs because it was not liable to SkyBridge. In my view, whilst SkyMesh may have had a basis to seek to recover the costs of an invoice from SkyBridge (a basis not established in this case) once it was confident that it could prove the sort of matters that it seeks to prove against Ipstar in this case I do not think it is correct to say that when it requested SkyBridge to attend and implicitly to replace equipment found to be faulty with no prior agreement that it would be undertaken by SkyBridge under warranty, that it did not incur a cost. Another way of looking at it is to say that had it been sued on the invoices by SkyBridge it may have had a defence of set off- or cross claim. I do not accept that the payment of SkyBridge's invoices was voluntary in any relevant sense or that it did not incur a cost by virtue of requesting SkyBridge to attend at the consumer's home or premises and replace defective equipment.

The Defective Goods Claim: Beyond the Threshold

It is appropriate before returning to the detail of the claims to outline the general considerations relating to the terms 'reasonably fit for purpose,' 'merchantable quality,' and 'acceptable quality'.
The liability imposed by s.74B arises where the goods are not reasonably fit for a purpose made known to the seller and the liability imposed by s.74D arises where the goods are not of merchantable quality. These concepts are well known in English and Australian Law see s.19(1) and s.19(2) of the Sale of Goods Act 1923 (NSW), see Suttons' Sales and Consumer Law, (4th ed 1995, LBC Information Services), pp. 238-242, 274-292 Grant v Australian Knitting Mills (1935) 54 CLR 49; [1936] AC 85, Ashford Shire Council v Dependable Motors Pty Ltd (1960) 104 CLR 139; [1961] AC 336, Rogers v Parish (Scarborough) Ltd [1987] QB 933 and Bristol Tramways & Carriage Company Ltd v Fiat Motors Ltd [1910] 2 KB 831, p.837 in which it was held that buses manufactured by the defendant which were too slightly built for heavy city traffic were both not fit for purpose and not of merchantable quality.
S.74D provides that for goods to be of merchantable quality they must be as fit for the purpose or purposes for which goods of that kind are commonly bought as it is reasonable to expect having regard to the description, price and all other relevant circumstances. This definition moves away from the restrictions of the previous law surrounding s.19(2) Sale of Goods Act 1923 (NSW) and its analogues.
In Peterson v Merck Sharpe & Dohme (Australia) Pty Ltd (2010) 184 FCR 1; [2010] FCA 180 [962] -[968], Jessup J, in dealing with s.74B, held that fitness for purpose of goods is to be measured against what it was reasonable to expect at the time of supply of the goods to the consumer. On appeal the Full Court in Merck Sharp & Dohme (Australia) Pty Ltd v Peterson (2011) 196 FCR 145; [2011] FCAFC 128 per Keane CJ Bennett and Gordon JJ described s.74B as containing an objective test [174] of reasonable fitness.
In Medtel Pty Ltd v Courtney (2003) 130 FCR 182 at [81] Branson J (with whom Jacobson J agreed) said that the test in s.74D requires the goods in question to be measured against what is objectively reasonable to expect in terms of fitness for purpose.
So far as the facts of this case are concerned there appears to be no real point of practical difference between the liability imposed by s.74B and 74D, and hence what is sought to be passed on to the manufacturer by s.74H.
S.54 of the ACL does not use the term "merchantable quality" but rather "acceptable quality." For present purposes s.54(2) of the ACL adds a specific requirement that the goods were free from defects as well as not fit for the purpose for which they were commonly supplied.
In my view it must follow that if the goods are not reasonably fit for purpose under s.74B of the TPA they cannot be of acceptable quality under s.54 of the ACL, and are not reasonably fit for purpose under s.55 of the ACL.
There is no dispute that Ipstar knew the purpose of the ODUs and IDUs supplied to the consumer. Ipstar did not dispute that an ODU which had suffered water ingress was not fit for purpose and not of merchantable quality or acceptable quality.
The real dispute in this case seemed to centre on whether SkyMesh had established that the equipment the subject of the 4000 claims was, when purchased, in fact not fit for the purpose intended.
The question of what it is in this case that is said to be unfit for purpose (or unmerchantable) caused some controversy. Mr Williams emphasised that the equipment was sold as a kit and the failures occurred at the latest within a few years of purchase, well within the expected life of the equipment. If the ODU was not working the kit was not working and was not fit for purpose. The same applied if it was the modem that was not working. Mr Donaldson pointed out that if the ODU was defective that did not mean the modem was defective. If the ODU is defective the kit is not fit for purpose but it does not follow that the modem is defective. In none of the claims was a customer seeking to return the entire kit because the ODU or the modem or both were not functioning. What the customer required was to be able to log into the internet. The point may have some significance where the UT is not working and it is not clear whether it is the modem or the ODU which is the cause. The technician is required to ensure that the UT is working not merely a part of it.
The scale of the problem of water damaged ODUs can be demonstrated by the fact that: 1. Ipstar paid out to SkyBridge a total of $2.9 million in claims for water ingress failures of the ODUs: T295-T296. That amount includes payment for some of the units that ended up with SkyMesh customers. Ipstar paid in the order of $3 million to APN, which received its equipment directly from Ipstar, in respect of water damaged ODUs: see T292. 2. Ipstar had a policy as between itself and SkyBridge and APN that all ODUs that were removed from customers' premises due to a concern that they had been damaged by the ingress of water had to be returned to Ipstar who would then forward the ODU to Thaicom in Thailand for testing. Thaicom used a company called Antech to test the ODUs. In the period of October 2009 and November 2012 Ipstar received some 9485 ODUs thought to be water damaged. Mr Chinveeraphan told Mr Rees, that based on the statistics he got from Thaicom "for every 100 ODUs shipped back for water ingress testing 72% confirmed leaking, 8% ODU failure, 18% no fault found" see Exhibit D3/1962. The failure rate for water ingress represented 12% of the total numbers of ODUs deployed by Ipstar in Australia: D3/1860. The units which did not fail the leak test but did fail the other tests had defects in the LNC and BUC components of the ODU: see T413 and Exhibit D3/ 1873-1876, 1926, 1944, and 1196. 3. There were by 2010 some 65,000 Patriot ODUs in the fleet (T303.15-50). There were 27360 units deployed in 2008 of which 3772 had failed due to water ingress (Exhibit D3/1862). This equates to 12% of the total fleet but there were estimated to be likely to be failures totalling, for example, 36% of the 2008 stock: T374.21-375.4. There was some dispute between the parties as to whether the 65,000 were all first generation Patriots or not. Exhibit D3/1562 does not give any detail as to that. What is known is that new Patriots were first introduced in Australia in March 2009: Exhibit D3/1708 but Mr Leeflang accepted that old style Patriots appear to have been sold as late as January 2011: T511.21-31. 4. Ipstar also set up a field audit to attempt to assess the problem: see Exhibit D3/1864. According to that audit 29 out of 50 sites had water ingress problems with equipment Exhibit D3/1889. 5. Ipstar arranged a forum of ISPs and SkyBridge to discuss the problem (in February 2010)- see Exhibit D3/1558-1605. 6. Mr Wonish's evidence was that Ipstar ODUs regularly suffered from water ingress problems that would cause them to fail often after heavy rain: para 21 Exhibit D10/6366; he estimated that 50% of the calls related to water damage in the ODUs: T211.15-22. 7. Mr Burns' evidence at Exhibit D6/3510 is that the Patriot ODU was not of acceptable quality because: 1. the two piece Patriot OMT had a design which, based on his experience, could allow water and moisture to enter the RxTx (send and transmit) feed assembly and, 2. the original plastic feed horn cover appeared to deteriorate when exposed to the elements to the point that it allows water to enter the front of the feed horn 1. Ipstar's own document records: "Investigations by IPA [Ipstar] Thaicom and the manufacturers, Patriot, found that it [water ingress problems] was due to the OMT:" see Exhibit D6/3510 1. Ipstar regarded the failure rate of the Patriot ODUs as unacceptable and Mr Leeflang told Mr Chinveeraphan who was aware of the problem: T285-T286, T306.48-T307.17. The rate of failure was not acceptable to Ipstar: T359.39. 2. It was the complaints by service providers that led to the February 2010 forum (see T302.29) and later Ipstar entered into a memorandum of understanding ("MOU") with APN and SkyBridge. 3. Mr Leeflang accepted that low signal level, log offs and 'hang' were symptoms of ODU water ingress and would render the equipment not fit for purpose: T312-T313 and see T278-9. 4. Even the second and third generation Patriots had water ingress: see T315-317, T386 and T389-394.6 and see Exhibit G and Ravens made by a different manufacturer as the replacement for the Patriots also had problems: see T399, and Exhibit L. 5. Evidence of oxidation in the ODU was, contrary to the suggestion in some Ipstar documentation, evidence of a water ingress problem: T336-337. 6. Even in 2015 Mr Kevin Johns an operational assistant was spending three to four days a week between January 2015 and January 2016 testing the IDUs and ODUs that were perceived to be faulty: T577. The ODUs included Ravens as well as Patriots. 7. Ipstar developed what is described as a proactive replacement program for first generation Patriot ODUs although it was limited to APN: T344.45. Under the MOU with APN there was some 6000 ODUs to be made available as buffer stock: T403-407. 8. Ipstar terminated supply from the Patriots' manufacturer and switched to Ravens.
Mr Johns recorded the results of testing: T577 and Thaicom did an analysis of the received Patriots T310.45. The test results for the ODUs and IDUs were not put in evidence by Ipstar. Tests performed by Thaicom on later generation ODUs were not in evidence: see T333-336.
I have referred to testing of ODUs in Thailand by Antech. The experts retained by SkyMesh and Ipstar respectively, Mr Burns and Dr Hamilton, were agreed that the testing performed by Antech was not adequate to detect all the water ingress problems because the tests would not detect water ingress through the feed horn cover seal or the joint connecting the feed horn to the rest of the ODU assembly and because the focus was on the OMT and its interface with the BUC and the LNB and not the ODU generally see Exhibit S1 at 25915.51 and see T657.21-658.12 and T659.
The scale of the modem problem can be demonstrated by: 1. The fact that Ipstar had put up to 10% of its customers as at February 2010 on a service known as Special Class of Service ("SCOS"): see Exhibit D3/1647-1649 and T363.40-43 (Mr Leeflang) SCOS is a very wide bandwidth which when utilised is far easier to access than the normal broadband service. It is costly for Ipstar to use SCOS for that purpose. 2. The February 2010 forum was arranged to discuss that problem as well. 3. That even to this day the problem has not been solved: Mr Cross the director of sales of Ipstar: T542.10-25 Q. Without placing these customers on these special class of service the modem firmware wouldn't operate in the manner in which IPSTAR expected it to; would it? A. No. Q. The special class of service was seen to be an interim solution whilst the problem was sought to be remedied; wasn't it? A. Yes. Q. I hadn't been remedied by, at least, January 2011; had it? A. No. Q. Indeed it still hasn't been remedied; has it? A. To my awareness it has not. 1. Ipstar, in its follow up to the February 2010 forum (dated 16 April 2010), indicated interim responses to the problem but under the heading Long Term Implementation Plan said: "The latest releases of UT firmware for both M2/M3 (image version SG029) and M4 (image version 075) versions aim to be the permanent fixes to the UT hanging problem. The benefits • To fix the root cause of UT Software hang •To improve efficiency of satellite bandwidth utilization by removing UT from SCOS pool •To fix known operational constraints of the current UT firmware in the field" (p.1638) The document notes that amongst APN customers the percentage having more than five per day drop outs decreased from 32% to 3% (see T638) 1. Mr Wonish's evidence was that in his experience the Ipstar white modems with external power supply failed regularly (Exhibit A/6367). 2. Ipstar organised 4000 modems to deal with the demand and which required replenishment T349-T350 and T373.22-36; buffer stock ran out very quickly with customers being left without replacement terminals: T331-332. 3. The following admissions in the cross-examination of Mr Leeflang T278.29-T279.20: "Q. The purpose of the user terminal was to enable the consumer to have stable access to the internet, wasn't it? A. The user terminal being the modem? Is that what you're asking? Q. The product that you were providing A. Yes Q. that you described as the user terminal A. Okay, so the complete kit? Q. The complete kit? A. Okay. Q. --had at its purpose to enable the consumer to have stable access to the internet, didn't it? A. That was the design, yes. Q. That was its purpose? A. Yes. Q. You would accept, wouldn't you, that a user terminal that didn't permit stable access to the internet would not be a product which you would wish to put into the market? A. That would be correct, yes. Q. And you wouldn't wish to put into the market a kit that only enabled intermittent access to the internet, would you? A. That is correct, yes. Q. You wouldn't want to put into the market a kit that permitted internet access but with frequent dropouts? A. That is correct, yes. Q. Because you accept, don't you, that stable access to the internet doesn't involve dropouts occurring? A. That is right, yes. Q. This product was designed and its purpose was to allow consumers to connect to the internet without dropping out? A. Yes, that is right." and see Dr Hamilton's evidence at T657.8-18. 1. Mr Burns said (see Exhibit D6/3514): "My principal concern with the M4 series (iCON) devices was the number of dropouts the IDU experiences. Reconfiguration of the worst affected customers to a Special Class of Service (SCOS) as an interim "work around" measure as proposed by IPA is, in my view, recognition by IPA of the seriousness of the issue. In my experience, VSAT terminal dropouts are rare and usually only occur during extreme rain conditions or when the satellite passes between the sun and the terminal or central earth station. Furthermore, the relatively high number of dropouts allegedly experienced, the release of multiple firmware upgrades that were intended to resolve this issue and comments in the exchange of emails between Malai Perumal (IPA) and Kear Stephens (SkyMesh) suggests that the underlying problem is either not fully understood by IPA or difficult to remedy." 1. The summary of modem problems annexed to Mr Burns' affidavit as Annexure C. 2. The firmware was part of the problem of drop outs: T304.40, T305.45-T306.15. 3. Mr Burns' evidence was that although the modem in other respects appeared to be well made equipment he regarded the number of drop outs as of concern and regarded the SCOS interim work around implemented as recognition by Ipstar of the seriousness of the issue. In his experience VSAT terminal drop outs are rare: Exhibit D6/3514. Mr Burns said that fundamental firmware deficiencies in a mass produced product should have been positively resolved before release to the public or shortly thereafter. Given Mr Cross's evidence it would seem more likely that the problem is one which is difficult to remedy. 4. The evidence of Mr Johns is relevant here too: T577.
I shall now deal with the three levels of the SkyMesh case in connection with s.74H of the TPA and s.254 of the ACL.

The Prone to Failure Case

The "prone to failure case" is based on the ODU water ingress problem and the modem drop out problem.
The first way in which SkyMesh puts its case is based on Medtel. A number of patients who had the Medtel pacemaker fitted had found their pacemakers to be defective. The defect was that yellow solder had been used in the product which had a tendency to develop dendritic connections which, when present, would cause the pacemaker to fail. The applicant, in what was a class action, had had his Medtel pacemaker removed out of concern about the identified dendritic problem but on removal his pacemaker was not found to have a dendritic condition and it was functioning normally. The Trial Judge held nevertheless that the pacemaker supplied to Mr Courtney was not of merchantable quality by reason of the risk of failure arising from the presence of the yellow solder. An appeal to the Full Court was unsuccessful.
Mr Williams contends that the kit that was manufactured by Ipstar was not fit for purpose because it was prone to failure- i.e. because the ODU used by Ipstar had an unacceptably high risk of failure due to water damage, and the modem had an unacceptably high risk of dropout.
Mr Donaldson disputes that Medtel has any relevance to the present case.
The principle judgment in the Full Court was that of Branson J (with whom Jacobson J agreed). SkyMesh relies on the following passages: [58] Before turning to that question, it is important to note that the parties accept that s74D(1) is concerned with the quality of the particular goods, or product, supplied to the consumer who seeks to recover compensation under the section. That is, so far as Mr Courtney's individual claim is concerned, the quality of the particular pacemaker supplied to Mr Courtney. It follows, in my view, that for the purposes of the subsection, it is not appropriate to attribute to Mr Courtney's pacemaker any qualities derived by statistical analysis of the total population, or pool, of pacemakers from which Mr Courtney's pacemaker came. So, for example, while statistical analysis of the total population of pacemakers from which Mr Courtney's pacemaker came might show that pacemakers of that type have a 2 per cent chance of premature failure, that analysis would reveal nothing about the quality of Mr Courtney's particular pacemaker. [59] So far as Mr Courtney's pacemaker is concerned it is not suggested that it was known, or could have been known, at the time that it was supplied to him that it was unmerchantable. On the information then available there was no reason for either the appellant or Mr Courtney to suspect that it was other than fit for its intended purpose, which was the purpose for which pacemakers are commonly bought. That purpose, as the primary judge found at [202], was the purpose of being implanted into a patient on the advice of a medical practitioner so as to restore and maintain a normal heart beat by providing an electrical impulse carried through leads to the heart. [74] I reject the argument that the mere fact that it was known at the time of trial that Mr Courtney's pacemaker had not failed prematurely meant that it could not be demonstrated that Mr Courtney's pacemaker was not of merchantable quality within the meaning of s74D at the time of its supply to Mr Courtney. [78] In my view, having regard to the evidence before the primary judge (see [59] above), no error can be shown to have been involved in his Honour's conclusion that a pacemaker that has only the ordinary or usual risk of premature failure is more fit for the purpose of being used as a pacemaker than a pacemaker that has, by reason of the method of its manufacture, an appreciably higher risk of premature failure. In this case it was reasonable to expect, at the time of the supply to Mr Courtney of his pacemaker, that Mr Courtney's pacemaker had been manufactured in a way which gave rise to only the ordinary or usual risk of premature failure. However, the use of yellow spool solder in the manufacture of Mr Courtney's pacemaker meant that Mr Courtney's pacemaker had an appreciably higher risk of premature failure than the ordinary or usual risk of premature failure to be expected in pacemakers. [79] The above analysis has deliberately been undertaken without reference to the existence or otherwise of dendritic growth in Mr Courtney's pacemaker. What, in my view, made Mr Courtney's pacemaker, at the time that it was supplied to him, less fit for use as a pacemaker than it was reasonable in the circumstances to expect was its method of manufacture (ie that it was manufactured with yellow spool solder). It was that method of manufacture which created, because of the white residue, the 'superadded' risk of dendritic growth. While proof of actual dendritic growth in Mr Courtney's pacemaker at the time of its supply to him would have constituted proof that the pacemaker was not of merchantable quality within the meaning of s74D, absence of proof of actual dendritic growth at that time did not logically lead to the contrary finding.
The third member of the Court, Moore J had the same view and held too that the goods were not fit for purpose saying: [41] That question can, in the first instance, be addressed by reference to the facts as found by the primary judge. The condition of Mr Courtney's pacemaker at the time of supply and acquisition had several features. It had been manufactured using yellow spool solder. It had been manufactured approximately nine months earlier. Because it had been manufactured using yellow spool solder it contained a white residue which might have trapped (or possibly been a source of) ionic contamination. It contained moisture and an electrical bias. While no finding was made that it then had dendritic growth, the conditions existed for such growth to have by then commenced. If dendritic growth had by then commenced, premature failure by battery depletion would be likely to occur. Was a pacemaker in that condition fit for the purpose for which pacemakers were bought? In my opinion it was not, essentially for the reasons given by the primary judge. Because of its physical condition having regard to how it was manufactured, there was a real prospect it would fail prematurely, and the risk of it doing so was greater than might otherwise have been expected. That being so it was not fit for the purpose or purposes for which goods of that kind are commonly bought.
Medtel was considered in Protec Pacific Pty Ltd v Steuler Services GmbH & Co KG [2014] VSCA 338.
As Mr Donaldson pointed out, in Medtel it was accepted that proving that Product A has a statistically high rate of failure does not establish that any particular example of Product A is not fit for the purpose intended. There is no question that a 12% or 20% failure rate in a product is a very high and unacceptable level of failure (Ipstar was hoping for less than 1% failure rate and Mr Paul Burns thought anything above 5% was unacceptable: see Exhibit D6/3518) but the prospect of any particular item randomly selected from the batch failing is not higher than a 12% or 20%- thus without more one cannot conclude on the balance of probabilities that the randomly selected item is likely to fail. The reason that Mr Courtney's pacemaker was not fit for the purpose was because it had been made with yellow solder and the yellow solder was prone to create dendritic conditions which would cause the item to fail. One of the possible causes of failure of the Patriots identified by Mr Burns was that the screws of the outer assembly of the ODU had been over tightened. If an ODU had such over tightened screws that would render it prone to failure even if its defect was not recognised and water had not yet entered the unit.
The present is not a case where the ODUs were removed even without any failure having occurred because there was a concern that they might in the future cease functioning- nor was there a general recall (although SkyMesh sought to have Ipstar embark on such a recall). On the other hand unlike Medtel this is a case where the equipment was not working- that is why the SkyBridge technicians went out to the premises of the equipment owners.
It is clear that sometime in 2009 Ipstar started to sell modified Patriots. An example of a modified Patriot alongside an earlier version can be seen at Exhibit D3/1572 In some documents reference is made to first, second and third generation Patriots although Mr Leeflang raised doubt (see T389-390) as to the precision of these terms. It appears that the third generation Patriots are those that commenced arriving in or after March 2009 and an example of which is on the right in Exhibit D3/1572. I have mentioned the dispute as to whether the 65,000 figure for the ODUs as at February 2010 was only for first generation Patriots. There is sometimes clarity as to which generation Patriot was removed at a particular site but more generally it is not clear unless the removal predates March 2009.
As the Victorian Court of Appeal pointed out in Protec at [528] it must be established that the product carries the inherent risk alleged .
SkyMesh claims that the second and third generation Patriots and the Ravens were also prone to failure at an abnormally high rate but it is not possible to determine what that rate was. SkyMesh also draws attention to the fact that whilst it appears that Ipstar and its parent company conducted tests in respect of second and third generation Patriots and on Ravens the Court should have regard to the failure of Ipstar to adduce evidence that the rate of failure of these later addition ODUs was not abnormally high relying on the principles outlined in Blatch v Archer (1774) 1 Cowp 63; (1774) 98 ER 969, adopted by the High Court in Hampton Court Ltd v Crooks (1957) 97 CLR 367 at 371.
Given that Ipstar does not dispute that first generation Patriots did suffer from an abnormally high rate of failure and that it accepts that water damaged ODUs are claimable (subject to the threshold arguments) the only work that the prone to failure case needs to do in the context of ODUs is provide a reason for removal of ODUs that SkyMesh is unable to establish were water damaged. For reasons which I shall explain below I do not think that SkyMesh has to establish the reason why it was that ODUs that were not apparently water damaged were not functioning and therefore I do not think it is necessary to determine whether SkyMesh can establish that all of the ODUs sold were prone to failure in the Medtel sense.
In relation to modems I am satisfied on the evidence that Ipstar modems were prone to the dropout problem due to firmware. In my view it is more probable than not that when SkyBridge technicians replaced modems that were not functioning but in which no specific defect had been identified they did so because they were aware that Ipstar modems were prone to failure and that a new modem might solve the problem. This perception was demonstrated to be correct: see Mr Burns' evidence at T656.4-34. I say shall more about this issue below.

Ipstar Kit Not Functioning

The second level of the SkyMesh case is to rely on the fact that the Ipstar equipment was not working in all of the 102 Items. SkyMesh contends that it does not have to establish why the ODU or modem was not working simply that it was not functioning and was in fact replaced.
Apart from six of the Representative Items, Ipstar does not dispute that the modem or ODU or both were not functioning leading to the call out of SkyBridge and removal and replacement of the ODU, modem or both.
Ipstar's response to 'the kit not working' claims was that: 1. the only claims which SkyMesh can maintain were claims based on water ingress or modem drop out. I shall refer to this as "the pleading issue," 2. the mere fact that a modem or ODU was not working did not establish that it was not fit for purpose or not of merchantable quality. I shall refer to this as "the sleeping cat issue," 3. in relation to modems it ought not be inferred that the reason for replacement of modems was firmware because a new modem with the same firmware would not solve the problems ("the same firmware point"). 4. Ipstar put many satellite subscribers including customers of SkyMesh on SCOS ("the SCOS issue"), and so far as the customers were concerned the modems were working as expected.
There is authority for the proposition that a purchaser is not required, for the purpose of establishing unfitness for purpose, to establish why it is that the product is not functioning: Emery v Johns Period Furniture [1989] SASC 1624 Bollen J and Thomas v Foreshore Marine Exhaust Systems Pty Ltd [2005] NSWCA 451 at [55] and it has been said that the duty to supply satisfactory goods is strict: see Benjamin's Sale of Goods (9th edition 2014 Sweet and Maxwell) at 11-043 and see Emery p.4. On the other hand the mere fact that a modem, for example, was not working and was the subject of a service call does not lead, without more, to the conclusion that it was not fit for purpose and not of merchantable quality. The reason that is so is because: 1. the equipment after purchase may have been damaged by some extraneous causes or not used in accordance with the manufacturer's specifications, 2. the equipment may not have been working because of a defect in other related equipment not sold by the seller, 3. the equipment may be the subject of a temporary minor fault which can be easily rectified (by pressing a reset button for example), 4. the period of time after which failure may have occurred may be beyond the reasonable service life expectation.
Unless the ODU is a first generation Patriot the plaintiff must establish on the balance of probabilities that the cause of the non-functioning is a cause which rendered the ODU or modem to be unfit for purpose and or not of merchantable quality. If the cause identified is water ingress in the ODU Ipstar accepts that the product was not fit for purpose. Approximately half of the 102 samples involved removal of the ODUs proven, or likely to be, water damaged and they are claims which SkyMesh has made out.

The Pleading Issue

Mr Donaldson submits that SkyMesh's case was, on its pleadings, confined to the water ingress allegation in respect of the ODUs and the drop out problem in respect of the modems. If the ODUs were replaced because the BUC or LNB was not working or the modem was replaced because the power supply unit had failed then, he submits, it is not open to SkyMesh to advance the claim even if otherwise the goods can be characterised as not fit for purpose or not of merchantable quality.
Mr Williams contended that SkyMesh's pleadings should not be read as so confined.
I set out the pleadings in para [9] of the Commercial List Statement. 9. Statutory claims: Fitness for purpose 9.1 Prior to 1 January 2011, IPSTAR supplied goods to SkyMesh (through its agent Skybridge (Australia) Pty Ltd) which were resupplied to consumers, and which were not reasonably fit for the purpose of obtaining internet broadband services by satellite within the meaning of S.74B of the TPA. PARTICULARS The goods supplied prior to 1 January 2011 which were unfit for purpose are particularized in Updated Consolidated Schedule AB (September 2016May2015) and Schedule D hereto. The purpose of the goods (which incorporate an IDU and an ODU) is to enable broadband satellite services in remote areas in Australia which can withstand fair wear and tear in the outdoors. The ODUs were not fit for such purpose in that they were not watertight so that water Ingress occurred, causing the ODUs to be damaged. Water leaked past faulty seals around the feed horn cap of the ODU causing the feed horn to be partially filled with water degrading the unit's performance. Water also leaked into the Orthomode Transducer (OMT), a part of the ODU, causing severe degradation to the performance of the ODU as well as complete failure. In some cases, the water entering the ODU also leaked down the cables to the IDU causing complete failure of the IDU. Modem firmware, the software which facilitates the modem operating and communicating with the network, had,a bug, causing intermittent loss of service (dropouts), which was only partially resolved when consumers were placed onto a Special Class of Service or SCOS (an alternative system). Drop outs are still being experienced till this day.
The pleadings by themselves are broad enough to cover the claims for defective ODUs that were not defective because of water ingress and defective modems that were not defective because of a firmware bug causing dropout. The addition of the particulars identifying water ingress and firmware does however narrow the scope of the case.
Mr Williams however pointed out the following further matters in reply to the pleading point at PCS 213-227: 1. He had opened the case widely making it clear that SkyMesh was claiming that its claim for defective goods was not limited to water ingress or dropout. 2. Ipstar by the Statement of Real Issues for Determination put the issues in dispute relevantly as: "Whether the plaintiff has discharged its onus of proving, on the balance of probabilities, that any of the items of equipment identified, in the schedules to the Third Further Amended Commercial List Statement, as having been replaced were either: a. unfit for the purpose for which they were supplied within the meaning of s.74B of the Trade Practices Act 1974 (TPA); b. not of merchantable quality within the meaning of section 74D the TPA; or c. not in conformity with the guarantee as to acceptable quality provided in section 54 of Schedule 2 of the Competition and Consumer Act 2010 (Australian Consumer Law) (ACL) and if so which such items?" There is no reference to water ingress or modem drop out and the reference to the schedules is not limited. 1. Ipstar, through Mr Leeflang, considered the claims in Schedule A,B and D to the SkyMesh claim and sorted them into 25 different categories (see Leeflang Affidavit 4 March 2016 paras 12-13 and T280.27-282.32). 2. Ipstar has admitted claims that related to ODUs that were not water ingress claims and modems that were not drop out claims see Exhibit K and Exhibit M summarised at PCS 219-220 and including "dead modems" PCS 220. 3. Ipstar admitted 18 claims for dead modems (see Exhibit K and M) and DLA Piper on behalf of Ipstar admitted claims that were not limited to water ingress or drop out. 4. The expert report of Mr Burns was not limited to water ingress and modem dropout. 5. The experts when originally briefed to provide a report (Exhibit S1) were asked by the parties a question which was not constrained by any pleading limitation and which included for example questions about power supplies' adequacy and defects: see Exhibit Q. 6. The Amended Commercial Response of Ipstar responded to the Schedule A,B and D: see Exhibit D1/9. 7. SkyMesh's Reply pleaded that it was not necessary to establish why the goods were not working Exhibit D1/18.
Mr Donaldson's riposte to these points (see: T716.35-717.14) was to rely on the fact that he had agreed to the sampling method, and that what had gone before did not matter because he had at the time of discussion of sampling (see T173-174) made clear that Ipstar did not accept claims for defects that went beyond water ingress and modem drop out.
I accept that by agreeing to the sample method Mr Donaldson did not give up his contention that SkyMesh should be constrained by the pleadings. What I am unable to accept is that by agreeing to the sample method Ipstar's position improved. In other words the issue of whether SkyMesh was precluded from maintaining a case in respect of defects other than the water ingress or modem drop out applied equally to the 4000 claims as to the 102 samples. If SkyMesh could not maintain claims for such defective goods they were precluded whether or not the Court was examining 4000 claims or 102 claims. If SkyMesh was not precluded from running those claims out of the 4000 that were not water ingress ODUs or dropout affected modems then it was not precluded from running those of the 102 samples which were allegedly defective for other reasons.
Pleadings and particulars are important but as the High Court pointed out in Dare v Pulham (1982) 148 CLR 658; [1982] HCA 70 the pleadings and particulars can lag behind the evidence. If I thought that Ipstar had been caught by surprise by the inclusion of the claims for defective goods that were not water ingress or drop out cases I would exclude from consideration any such claims but by reason of the matters set out at [92] I am satisfied that Ipstar was fully aware that SkyMesh's claims were not limited to water ingress and modem drop out and had been since at least 2013. SkyMesh is not precluded from maintaining claims for ODUs and modems that were not affected by water ingress or modem drop out.

The Sleeping Cat Issue

Mr Donaldson draws attention to the evidence of Dr Hamilton that there are many reasons why a modem may fail that do not mean that there was any defect inherent in the modem itself. A modem can be damaged for example by water or coffee being spilt on it, by a chair rolling over it, by a cat sleeping on it (and I assume blocking the air vents and preventing proper ventilation). The Court, he submitted, cannot infer from the mere fact of failure sometime after commissioning, that the product was inherently defective. I have made reference to this aspect in [86] above.
The experts in their second joint report identified the probable causes of failure as one or more of the following: "Defects evident in the 102 claims in the sample set and their probable cause are as follows: 1. Water entering the ODU due to ineffective sealing of the waveguide assembly. 2. Lack of or poor quality received signals output from the ODU due to failure of the LNB. 3. Erratic and/or fluctuations of ALOHA signals transmitted from the ODU due to failure of the BUC. 4. No power available in the UT due to failure of the Power Supply Unit (PSU). 5. Inability to process receive and/or transmit signals due to a hardware failure in the modem. 6. Inability to process receive and/or transmit signals due to a firmware/software failure in the modem. 7. Loss of Tx and Rx signals due to faulty cabling and connectors."
Mr Williams offered a number of responses to this line of argument: 1. The experts, conscious of the possibility that there could be extraneous causes, found no evidence of such other causes in the technicians notes. 2. Mr Burns' evidence was that one would expect components of the type of ODU and modem to last between five to seven years for ODUs and seven to ten years for modems see Exhibit D6/3508. There was no suggestion that any of the goods were more than four years old when they failed and no suggestion that age was the factor in any event. 3. Mr Wonish the only SkyBridge technician to give evidence was not cross examined at all. 4. There is no evidence of any extraneous causes. Dr Hamilton in his schedule had not identified as a cause of failure of the 102 Representative Items any of the theoretical causes: T657. Dr Hamilton and Mr Burns agreed that categories 1-6 set out in [97] above were Ipstar equipment defects: T640.14-27 and see T644.15-T645.36. Only three items were associated with cabling or connectors- Items 43,45 and 46, and these were all admitted ODU failures- see Exhibit U and Exhibit 2. 5. There is much evidence, in the documentation, of known modem firmware and ODU problems recognised by Ipstar itself. 6. There is evidence that Ipstar itself arranged for a significant quantity of ODU and modem buffer stock, to deal with demand for replacement modems and ODUs. 7. The evidence of Mr Leeflang, Mr Johns and Mr Laosawatchai and Mr Nzeukeu who gave evidence on behalf of Ipstar needs to be taken into account in assessing whether on the balance of probabilities, the modems were suffering from an inherent defect and whether ODUs were experiencing water ingress and other problems. 8. The fact that when the technicians replaced an ODU or modem with a new ODU or modem the Ipstar equipment worked.

The Same Firmware Point

Mr Donaldson contended that it did not make sense to replace a customer's modem with a new modem if the new modem had the same firmware as the old modem. There are several matters to be taken into account however and these are: 1. The following exchange between myself and Mr Burns (who gave his evidence concurrently with Dr Hamilton) T654.46-T655: HIS HONOUR: Well the question is and I might be partly responsible for this in the sense that I think I raised a question about this some time ago with one of the other witnesses, if a modem has a firmware problem assuming that there's been yet no upgrading firmware to solve that firmware problem what is the point of replacing one modem with a new modem that has the same firmware? WITNESS BURNS: If that is what is happening probably no point at all, your Honour. HIS HONOUR: Yet the technicians were finding problems with modems or saying they'd found problems and replacing the modem and when they - in some instances when they put in the new modem things worked. WITNESS BURNS: I could also probably explain why that might happen. There is a - all the UT units are not identical in performance in a hardware sense. There's a tolerance in variation between one user terminal and another and it's possible that one user terminal because of those variations in tolerance is in that particular unit work better with the ODU that's in the particular site and it works properly, whereas the other modem because of its adverse tolerance component it doesn't work quite the same. HIS HONOUR: You mean if there was no ODU problem it wouldn't matter? WITNESS BURNS: It wouldn't - if the ODU was okay one modem might work with it while another one may not. HIS HONOUR: And if the ODU is not okay? WITNESS BURNS: Well neither of them will - HIS HONOUR: Neither are going to work. All right. DONALDSON: In any event where you've formed the view that - and I think you've expressed it in this way - the identified problem was consistent with the firmware dropout problem you've said so in your report, haven't you? WITNESS BURNS: I said and I think it was consistent - there's only a small number but I have said it. 1. and at T655.46-T656.34: WITNESS BURNS: This is a very difficult issue because the firmware and the hardware once they get they interact together, they're not things you can separate out, they work together as a combined pair and each of them if there's a problem in the hardware or the hardware is a little different the software may behave differently. So it's very, very difficult without doing lots of testing to actually work out whether it's a pure software problem, a pure hardware problem or a problem involving the two of them, if that makes sense. HIS HONOUR: All right, well is that why a technician might think looks it's just not worth trying to spend hours on this, I'm going to replace both? WITNESS BURNS: He might he's got a limited time I haven't got the tools to look inside the modem to see what's actually going on so I'll take it out and try a new one. If that one works I'm happy and I'll leave the site. That's what I sense is happening when I read these job sheets. HIS HONOUR: And when you hear that and you hear that he changed the modem and it then worked does that make it less likely to be a firmware problem or is it less likely to be a firmware problem of the hanging type of which we've heard some evidence? WITNESS BURNS: I would be unable to draw any real conclusion as to what the actual fault would be until I got that unit back to the lab and tested it properly. It's very hard to do. It's a very intricate the two work together hand in hand and separating out the two is very, very difficult without the right tools. HIS HONOUR: And with the right tools in a laboratory can one precisely determine WITNESS BURNS: You should be able to work out in the laboratory by going through a systematic process where the potential issues might be, yes. HIS HONOUR: And could it be, for example, in the capacitor or something like that? WITNESS BURNS: It could be that the receive signal isn't being amplified enough there for the -the receiver isn't able to decode the information correctly or it might well be that there is actually a software resetting issue. It's very hard to find, your Honour. 1. There is no clear evidence that modems which were exchanged had exactly the same firmware as the existing modems- there are several iterations of the firmware: see Attachment C to Mr Burns' affidavit. 2. The fact that the newly installed modem worked with the rest of the Ipstar kit enabling the SkyBridge technician and the customer to sign off is evidence that whatever problem existed in the old modem was not a problem in the new. If it was a firmware problem the new modem, adopting Mr Burns' explanation, was operating within the required tolerances.

The SCOS Point

Ipstar's 'solution' for some customers was to put them on SCOS which was described by Mr Leeflang (the operations director of Ipstar) as a work around (see T339.4) and an expensive one at that for Ipstar: T336.16 and see T362.10- T364 when he agreed that the number of Ipstar users on SCOS was a very significant proportion (T363.15), and see Exhibit D3/1648-1649.
I do not accept that because Ipstar put some customers on SCOS that establishes that the modems were fit for purpose- they did not work with the equipment and system as intended and had Ipstar sued the actual manufacturer of the modem the actual manufacturer could not have successfully contended the modems were fit for purpose because Ipstar, at its cost, was permitting customers to use the special bandwidth. Customers of SkyMesh were vulnerable to a change of mind by Ipstar- i.e. to be removed from SCOS, whereupon the modems would not function. Recourse to SCOS was an implicit recognition that the modem could not do the task for which it was intended. Another problem with Ipstar's argument is that it would have to establish in which of the 4000 claims the customer was using SCOS- of the 102 samples only three were shown to be on SCOS and the fact that the customer was still in need of a service call undermines Ipstar's contention even further.

Conclusion on Defective Goods Claim based on Non-Functioning

I do not find Henville v Walker (2001) 206 CLR 459; [2001] HCA 52, Watts v Rake (1960) 108 CLR 158 at p.159-160 per Dixon CJ, and Purkess v Crittenden (1965) 114 CLR 164 at p. 164 per Windeyer J, relied on by SkyMesh, of any assistance here. Nor is Christopher Hill Ltd v Ashington Piggeries Ltd [1972] AC 441 relevant- that was a case in which the toxic effect of a feed product was limited to the livestock for which the plaintiff had purchased the feed. The seller had the burden of establishing that the toxic effect was due to something for which the purchaser was responsible: per Lord Wilberforce at pp.492-493.
It is clear that in a number of the 102 Representative Items the experts identified (based on the technicians' notes) a cause for the equipment not working which was neither water ingress in the ODU not modem failure due to the hanging problem. There are, for example, several cases where the modem had a power supply problem. Because the power supply is supplied with the modem the technician swapped the old modem and old power supply unit with a new modem and new power supply unit.
In my view the evidence provides a sufficient basis for the conclusion that it is more likely than not that the modems which were replaced were replaced because the modem was not working due to an inherent defect in it or its power supply rather than damage caused by factors extraneous to the equipment supplied by Ipstar. I frame it this way because a modem may have difficulty communicating with a water damaged ODU and the view of the technician or his supervisor was, on occasions, that both should be replaced to solve the problem, which view proved to have been justified. Ipstar itself when dealing with its own retail customers regarded it as appropriate to send out replacement modems when the customer's modem had a problem according to Mr Leeflang's evidence: T500.26-501.24.
In relation to ODUs there is no dispute that ODUs with evidence of water ingress were not fit for purpose/ not merchantable but there were known problems with the ODUs that did not arise from water ingress or, at least, may not have arisen from water ingress. In my view the evidence supports the conclusion that if the ODU was not functioning it was more likely than not to be as a result of water ingress or some other inherent defect in the equipment.
The matters addressed by Mr Williams and referred to in [98] above which I accept, the evidence of the equipment not functioning, together with the fact that the customer had contacted the SkyMesh helpdesk with its attendant procedures and then the SkyBridge helpdesk with its procedures, the absence of any alternative explanation, the fact that swapping out of the old equipment with new equipment solved the problem, the SkyBridge documentation and the extensive evidence of problems with the ODUs and modems lead me to conclude on the balance of probabilities that in each case where equipment was supplied by Ipstar and found to be not functioning that was so because of an inherent fault in the equipment supplied by Ipstar.
If the equipment manufactured by Ipstar once installed did not permit the consumer to contact Ipstar's satellite for whatever reason it was not fit for the purpose of connecting with the satellite which is what it was designed to do. Mr Leeflang agreed that this was so: T286.41- T287.43, T312.4-T313.48. If the problem could be fixed by a simple reset by the customer that would not of itself indicate that the goods were not fit but it would become a question of degree- how often was the failure and how quickly could the equipment recover. This is not a case which tests those sorts of boundaries because a simple reset did not, and could not, cure the problem and a technician had to be sent to the consumer's home or business premises. Water ingress in the ODU would prevent it from working properly. Even were it the case that an ODU could be made to function again after the water had fully evaporated (Mr Tudor thought it could) an ODU into which water can penetrate is defective and not fit for purpose since rain can disable it. A kit with such an ODU is therefore defective as well, and can only be rendered fit for purpose by replacement of the defective ODU. Similarly with the modems- a modem, the firmware of which causes it to hang, freeze or drop out, is equally not fit for purpose until the firmware is upgraded to make it so. If the firmware upgrade needed is not available the modem is not fit for purpose. A consumer who has been provided with a modem which drops out, hangs or freezes and which cannot be cured by a procedure that can be utilised by the consumer or by a technician with remote access is not fit for purpose and a consumer is entitled to insist on its replacement. Even if remote fixes are available a recurrence of such problems may well render the modem unfit for purpose but once again that is not what occurred here.
Given Mr Donaldson's concession (see 3(d) of the submissions accompanying Exhibit 2 responding to Exhibit U) in almost all of the cases of items replaced the functioning of those items was at the time of the service call "impaired by defect" it is not necessary to go into the detail of the 102 Representative Items other than the six items identified by him (paragraph 3(a) of those submissions) and with which I deal below. It should be noted however that almost half of the items were agreed by the experts to be, or to probably be, claims arising out of the water ingress problems, one had already been admitted as a modem firmware claim, and a number of items 19,20,22, 37, 62, 63, 68, 70, 71, 77, 80, 83, 95,96,97,99 and 101 were not the subject of comment in response by Ipstar to Exhibit U. Further Ipstar admits that items 43, 45 and 46 are claimable even without proof of water damage.
As I have noted there is agreement that the ODU or modem was not functioning due to a defect and that "they were replaced in the course of the relevant service call" in all cases except item 1,11,17,24,69 and 75 (the six anomalies). I therefore need to deal with these items to determine whether SkyMesh has established that the equipment replaced was not functioning due to an inherent defect in the Ipstar equipment. In considering this question, I have regard not only to the experts' views on the Representative Items but also the matters addressed in: [64], [66], [67], [97]-[101], [105]-[106] above. I do not think it is necessary to say anymore in relation to SkyMesh's third head of claim which is really an argument about onus of proof and which I have addressed in consideration of the first and second head of the claim.

Item 1

The "Tech Support Call:1" document records: "Water in ODU Tech is changing ODU due to poor transmit results." (Exhibit O1 Tab 1 p.8829A) The Tech notes (p.11685B) Tab1 Exhibit O1 record that no fault was apparent on arrival to site but that the serviceman was instructed by Tech support to replace the ODUs, following the poor transmission result, and that Ipstar ran a test for "Tx" (i.e. transmit) on completion of the replacement and advised that it was "ok". I understand that Item 1 is one of the items in which the precise cause of defect is disputed by Ipstar but it does not appear to be an item in which the fact of a fault in the ODU is in dispute. That comment also applies to Item 11, 17, 24 and 69.
Mr Burns concluded that the ODU had water damage and that conclusion was at least in part based on the note which I have set out above. Dr Hamilton described the fault as "potential ODU failure" and potential BUC issue and noted that water ingress was suspected. At T632 Dr Hamilton explained that he thought it was an ODU failure and a BUC issue but was not prepared to say more than potentially so. Later he agreed in relation to his use of potential in respect of the items he meant "it's more probable than not" but was not entirely certain: T636.34-44.1, T638.35-T639.13. Having regard to Mr Burns' explanation at T632-633 and Dr Hamilton at T631-T632, I accept Mr Burns' view that the recording of "water in the ODU" is more likely to have been a consequence of the discussion between the technician on site and Tech Support at the SkyBridge base. I do not think that the note is ambiguous as to what is recorded or that the note is affected by the further considerations relevant in Lithgow City Council v Jackson (2011) 244 CLR 352 because unlike the ambulance officer's query in relation to the cause of the accident in that case, assessment of the condition of the Ipstar equipment was very much part of the role of the technician and the base supervisor.

Item 11

Mr Burns noted that the ODU was faulty because both the LNB and BUC appeared to have failed. Dr Hamilton thought it was an ODU problem- potentially the BUC. Dr Burns and Mr Hamilton thought both the ODU and modem had a problem but the ODU problem was not established as water damage and the modem was not established as a firmware problem. Thus if water damage or firmware were required for recovery this item would not be included but it is an item which has been shown on the balance of probabilities to have been due to an inherent defect.

Item 17

This was a first generation Patriot ODU with water ingress. There was a problem with the modem too. It is appropriate to view the problem as both ODU and modem related (but not firmware), and SkyMesh are entitled to recover the costs claimed because the ODU was a first generation Patriot and prone to failure and the modem was not functioning but the modem would not be recoverable if firmware were required.

Item 24

The SkyBridge helpdesk advised that there was an "Rx issue No TOLL suspected water ingress." The decision was made to replace the ODU but on site with testing and the observation of "lots of drop outs" both modem and ODU were replaced. That does not exclude water ingress as a problem. Mr Burns was not able to conclude that the problem with the ODU was water related and was of the view that the modem problem was not firmware related. "No TOLL" is a reference to the continuous signal sent from the satellite hub to all user terminals (T646). This item is recoverable because the ODU and modem were not functioning but would not be recoverable if water ingress or firmware were required.

Item 69

A faulty ODU was suspected but Mr Burns thought it could be either the ODU or modem as did Dr Hamilton. If it was the ODU there is no evidence of water damage and if it was the modem there is no evidence of a firmware problem. The item is still claimable by SkyMesh because it is defective, but it would not be recoverable if water damage or firmware were required.

Item 75

The notes refer to a 'F' connector problem. What is charged for is the service call and the replacement of the ODU and the modem. The experts agreed that there was a faulty Rx cable connector. There is no evidence of water ingress or firmware issue. I think Item 75 ( a total cost of $1341) should be excluded from the claim as the experts did not agree that there was any problem with the modem or the ODU and the technical notes do not assist to permit a conclusion, on the balance of probabilities, that it was either.

Conclusion on the Defective Goods Claim

SkyMesh has established an entitlement to an indemnity in respect of 101 of the 102 items. The amount of $ 1341.00 for item 75 should be deducted. There will need to be an adjustment for the amount already received from SkyBridge.
The parties on 19 December 2016 sent up a note (which I have had marked as Exhibit V) by which they agree that: 1. the total of SkyMesh's claims is $2,292,819.63, 2. the total of the 102 Representative Claims is $56,130.85. 3. $400,000 is the agreed credit.
I have found that the claim for Item 75 should be excluded i.e. an amount of $1341. Thus the plaintiff on my calculation is entitled in accordance with the agreed formula to 97.6% of the amount of $2,292,819.63 i.e. $2, 237,792, less $400,000 on the agreed credit i.e. $1,837,792.

The Wages Claim

Mr Donaldson pointed (Defendant's Closing Submissions ("DCS") 42-52) to a number of obstacles to the SkyMesh wages claim which I shall briefly summarise: 1. Insofar as the help desk wages related to goods sold before 1 January 2011 (and most of them would be he submitted) s.74H does not give any right of indemnity to SkyMesh because the cost of wages is not loss or damage suffered by the consumer. 2. Insofar as the wages related to goods sold after 1 January 2011 no attempt has been made by SkyMesh to establish that calls after 1 January 2011 relate to sales of goods after that date. 3. The plaintiff has not established the assumptions upon which the plaintiff's expert report proceeded. 4. The plaintiff has not established the manner of the operation of its helpdesk. 5. The plaintiff has not adduced any evidence of its actual helpdesk costs.
Mr Williams proffered no reply to these points and I accept them.
SkyMesh has failed to make out its claim for helpdesk wages.

The Unconscionable Conduct Claim

s.21(1) and s.22(1) provide that a supplier must not, in trade or commerce in connection with the supply "or possible supply" of goods or services, engage in conduct that is, in all the circumstances, unconscionable. Both s.21 and s.22 set out matters to which the Court may have regard in determining whether a supplier has contravened subsection (1). Counsel drew to my attention to the fact that s.21 and s.22 as in effect at the relevant time were subsequently transposed by a later amendment. They also took the position that there was no relevant distinction for the purposes of this case between the form of s.21(1) and s.22(1) and attention was therefore focused on s.22(1) and (2). S.22(2) (as it was in 2011) does have a more extensive list of matters specifically identified as matters to which the Court may have regard than s.21 of the ACL.
Mr Williams submitted and Mr Donaldson agreed, that the most useful recent exposition of what is intended by 'unconscionable conduct' is to be found in Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199; [2015] FCAFC 50 per Allsop CJ (with whom Besanko and Middleton JJ agreed). That case concerned, inter alia, s.12CB and s.12CC of the Australian Securities and Investment Commission Act 2001 (Cth) ('the ASIC Act') which is in similar terms to s.21 and 22 of the ACL, and Counsel agreed that the reasoning of the Full Court is equally applicable to the ACL. The agreement that the meaning to be attributed to "unconscionable conduct" in the ACL and the ASIC Act is uniform accords with the approach of Allsop P in Tonto Home Loans Australia Pty Ltd v Tavares; FirstMac Ltd v Di Benedetto; FirstMac Ltd v O'Donnell [2011] NSWCA 389 at [290]. The Full Court's decision in Paciocco was the subject of an unsuccessful appeal (Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28, (2016) 333 ALR 569 ) and nothing was said in the High Court to cast doubt on Allsop J's analysis at [259]- [306] and Keane J cited one part of it with apparent approval.
The most important part of Allsop CJ's analysis of the statutory provisions relates to what is intended by Parliament by the term 'unconscionable conduct' to which I shall return but there are some other important matters which I shall summarise: 1. The provisions incorporate the established unwritten law of unconscionability - that is the principles identified in the High Court in Blomley v Ryan (1956) 99 CLR 362 and Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447; [1983] HCA 14, and also the principles enunciated by Brennan J in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; [1988] HCA 7 and Mason J and Deane J. 2. "Unconscionability" is not constrained by the unwritten law (and see Canon Australia Pty Ltd v Patton [2007] NSWCA 246, Fubilan Catering Services Ltd v Compass Group (Australia) Pty Ltd [2007] FCA 1205 and Tonto [291]). 3. The penal character of the provision must be borne in mind. 4. The conduct which can be impugned is not only conduct between parties to an existing contract or arrangement but includes conduct in the bargaining process.
At [260] Allsop CJ made reference to what had been said by Spigelman CJ in Attorney-General (NSW) v World Best Holdings Ltd (2005) 63 NSWLR 557; [2005] NSWCA 261 [121] i.e. that unconscionable conduct requires a "high level of moral obliquy" and what Allsop CJ himself had said in Tonto at [291] concerning 'moral obliquy.' In Canon Australia Campbell JA (with Harrison J concurring) adopted what Spigelman CJ had said (see [41]-[43]) but Basten JA expressed a different view at [4]. The views of Basten JA obtained support in the more recent decision PT Ltd v Spuds Surf Chatswood Pty Ltd [2013] NSWCA 446 per Sackville AJA with whom McColl JA [1] and Leeming JA concurred [2], Sackville AJA said: [104] Conduct involving dishonesty, sharp practice or conscious wrongdoing is no doubt unconscionable and, equally, is clearly deserving of discredit or detraction. Other less heinous conduct may be more difficult to characterise. For example, the refusal by a large corporation to honour a public (but non-binding) promise made in good faith to a local community by the corporation's previous management may not involve dishonesty or - 45 - conscious wrongdoing, but might still be regarded as unconscionable or deserving of discredit or detraction. It is doubtful whether substituting a test of "a high level of moral obloquy" for the standard of "unconscionability" assists in determining whether the statutory prohibition has been contravened. [105] Perhaps for these reasons, in Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389; 15 BPR 29,699, Allsop P (with whom Bathurst CJ and Campbell JA agreed) suggested (at [293]) that Spigelman CJ in A-G v World Best Holdings may have stated a "too stringent" test, although Allsop P left the issue open. His Honour said that: "What is required is some degree of moral tainting in the transaction of a kind that permits the opprobrium of unconscionability to characterise the conduct of the party." In a subsequent case, the Full Federal Court (Allsop CJ, Jacobson and Gordon JJ) said that the word "unconscionability" means "something not done in good conscience" or "conduct against conscience by reference to the norms of [the] society that is in question": Australian Competition and Consumer Commission v Lux Distributors Pty Ltd [2013] FCAFC 90, at [41]. The formulations in Tonto v Tavares and Lux Distributors have the advantage of adhering closely to the statutory language. [106] The difficulty of imposing a definitive constraint on the meaning of "unconscionability" is illustrated by other comments made by Allsop P in Tonto v Tavares, at [291]: Aspects of the content of the word "unconscionable" include the following: the conduct must demonstrate a high level of moral obloquy on the part of the person said to have acted unconscionably: Attorney-General (NSW) v World Best Holdings Ltd (2005) 63 NSWLR 557; [2005] NSWCA 261, at [121]; the conduct must be irreconcilable with what is right or reasonable: Australian Securities and Investments Commission v National Exchange Pty Ltd (2005) 148 FCR 132; [2005] FCAFC 226, at [30]; Australian Competition and Consumer Commission v Samton Holdings Pty Ltd (2002) 117 FCR 301; [2002] FCA 62, at [44]; - 46 - Qantas Airways Ltd v Cameron (1996) 66 FCR 246 at 262; factors similar to those that are relevant to the [Contracts Review Act 1980] are relevant: Spina v Permanent Custodians Ltd (2009) 14 BPR 26,923; [2009] NSWCA 206, at [124]; the concept of unconscionable in this context is wider than the general law and the provisions are intended to build on and not be constrained by cases at general law and equity: National Exchange at [30]; the statutory provisions focus on the conduct of the person said to have acted unconscionably: National Exchange at [44]. It is neither possible nor desirable to provide a comprehensive definition. The range of conduct is wide and can include bullying and thuggish behaviour, undue pressure and unfair tactics, taking advantage of vulnerability or lack of understanding, trickery or misleading conduct. A finding requires an examination of all the circumstances. (Emphasis added.) (Tonto v Tavares involved ss 12CB and 12CC of Australian Securities and Investments Commission Act 2001 (Cth). The text of ss 12CB and 12CC was borrowed from s 51AC of the TP Act.)
Turning now to the content of what is intended by unconscionable conduct discussed in Paciocco to which I have added references to other decisions on unconscionable conduct : 1. Courts should be wary of attempting to substitute for the phrase used in the statute "unconscionable conduct," other phrases such as 'moral obliquy' and treat those phrases as if that is what the statute provided. 2. The Court needs to consider all the circumstances of a case in order to reach a conclusion on unconscionability. Thus obviously it is not just a question of what is contained in the contract. 3. The statute, by referring to matters to which attention can be given, provides guidance as to what the legislature regarded as conduct which is or might be regarded as unconscionable and see Australian Competition and Consumer Commission (ACCC) v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253; [2000] FCA 1365. 4. The standard of conduct expected as a person in the commercial context is not that of a fiduciary. 5. The enumerated matters are not exhaustive and see: Australian Competition and Consumer Commission (ACCC) v ACN 117 372 915 Pty Ltd (in Liq) (formerly Advanced Medical Institute Pty Ltd) [2015] FCA 368 at [25]. 6. A contracting party is not required to subordinate its interests to those of the other party. 7. Unconscionable conduct is not conduct which is unjust or even unfair, but it need not be dishonest World Best Holdings at [120]-[121] and see Advanced Medical Institute at [39]. 8. At [296] Allsop CJ said: "The working through of what a modern Australian commercial, business or trade conscience contains and requires, in both consumer and business contexts, will take its inspiration and formative direction from the nation's legal heritage in Equity and the common law, and from modern social and commercial legal values identified by Australian Parliaments and courts. The evaluation of conduct will be made by the judicial technique referred to in Jenyns. It does not involve personal intuitive assertion. It is an evaluation which must be reasoned and enunciated by reference to the values and norms recognised by the text, structure and context of the legislation, and made against an assessment of all connected circumstances. The evaluation includes a recognition of the deep and abiding requirement of honesty in behaviour; a rejection of trickery or sharp practice; fairness when dealing with consumers; the central importance of the faithful performance of bargains and promises freely made; the protection of those whose vulnerability as to the protection of their own interests places them in a position that calls for a just legal system to respond for their protection, especially from those who would victimise, predate or take advantage; a - 88 - recognition that inequality of bargaining power can (but not always) be used in a way that is contrary to fair dealing or conscience; the importance of a reasonable degree of certainty in commercial transactions; the reversibility of enrichments unjustly received; the importance of behaviour in a business and consumer context that exhibits good faith and fair dealing; and the conduct of an equitable and certain judicial system that is not a harbour for idiosyncratic or personal moral judgment and exercise of power and discretion based thereon." 1. At [347] Allsop CJ said: "In all the circumstances, in particular, the lack of any proven predation on the weak or poor, the lack of real vulnerability requiring protection, the lack of financial or personal compulsion or pressure to enter or maintain accounts, the clarity of disclosure, the lack of secrecy, trickery or dishonesty, and the ability of people to avoid the fees or terminate the accounts, I do not consider the conduct of ANZ to have been unconscionable. To do so would require the court to be a price regulator in banking business in connection with otherwise honestly carried on business in which high fees were extracted from customers." 1. In relation to good faith this requires an obligation on the parties to cooperate in achieving the contractual objects, compliance with honest standards of conduct, and standards of conduct that are reasonable having regard to the interests of the parties and conduct which unreasonable, unfair, harsh, oppressive and wanting good faith may constitute, having regard to the relationship between the parties, unconscionable conduct: see ACCC v Simply No Kneed [44] - [47]. 2. The Court must "assess and characterize the conduct of the impugned party in trade or commerce against the standard of business conscience, reflecting the values and norms recognised by parliament" to which his Honour referred. 3. Inequality in bargaining position alone is insufficient and Keane J remarked in Paciocco at [293]: "the existence of a disparity in power which is an all pervading feature of a capitalist economy does not establish that the party which enjoys the superior power acts unconscionably by exercising it."
In relation to 127(10) I should interpolate that whilst absence of good faith is a matter to which regard can be had by reason of s.22(l) failure to act in good faith, without more, does not amount to unconscionable conduct within the meaning of s.22 of the ACL.
Mr Williams identified as relevant to SkyMesh's claim the following subsections of s.22: (a)(b)(d) (but limited to pressure), (e) (f) (j) and (l).
The Bandwidth Agreement was due for renegotiation in March 2011. On 4 February 2011 Mr Cross of Ipstar wrote to Mr Rees at SkyMesh attaching an addendum to the contract part dated 7 February 2011 with a new bandwidth price of $3,060 per Mbps per month plus GST. The draft Addendum also included warranty terms and reference to an 'RMA' process (Return Merchandise Authorisation). The covering email stated: "We trust you understand that the new pricing is [a] a reflection of the substantial increase in cost of doing business with SkyMesh" (Exhibit D4/2143)
There followed correspondence whereby Mr Rees sought clarification if what was meant by the words 'increase in cost of doing business with SkyMesh'.
Eventually Ipstar advised that its final offer for bandwidth was $2,933/Mbps per month. Although Ipstar did not advise SkyMesh of this at the time or indeed at any time prior to commencement of these proceedings, the figure of $2,933 was calculated by Mr Cross and was arrived at by determining what would be, based on a broad brush approach, the anticipated cost to Ipstar of meeting its statutory warranties for equipment purchased by SkyMesh from SkyBridge: see Exhibit D4/2627-2628 and paragraphs 65 and 66 of Mr Cross's affidavit of 4 April 2014. That figure was assessed at $1,005,840 and Mr Cross then calculated how that amount could be recovered through an increase of bandwidth charges- i.e. an additional $433 per Mbps per month. Mr Cross accepted in cross-examination that he was calculating the cost of warranty claims in respect of equipment already received by SkyMesh customers: T552.20-42.
At the time of receipt of Ipstar's final offer Mr Rees indicated that he objected to the increase and that as SkyMesh had no choice he would be signing an addendum 'under protest:' Mr Rees had become aware that no other ISP (large or small) was the subject of a price increase, and he did not regard the declining number of users as relevant since the downturn applied to all ISPs.
Proceedings were commenced by SkyMesh in 2011 in relation to the unconscionability claim and the defective goods claim.
I summarise the factual matters upon which SkyMesh relies to assert that Ipstar acted unconscionably: 1. Ipstar sought to impose, as a price increase, an amount that it calculated would be the likely cost to it of meeting the statutory warranty claims of SkyMesh. That was not designed to protect a legitimate interest of Ipstar. 2. It did not disclose to SkyMesh the true basis of the price increase calculation but asserted that the price increase was as a result of a higher cost of doing business with SkyMesh based not only on SkyMesh exercising its statutory warranty rights but also on its failure to comply with Ipstar's RMA policy and a high number of service calls from SkyMesh since 2010. 3. It continued to provide untruthful answers to questions posed by SkyMesh concerning the price increase. I set out a portion of the cross-examination of Mr Cross relied on, at T563.1-T564.9: Q. You say, "We have already seen a huge increase in the number of service calls from SkyMesh since December which is disproportionate to other providers, then you say (and I do not mean your statutory warrant retro claims." A. Yes. Q. You were intending to suggest, weren't you, that the reason for the price increase was not to do with the statutory warranty claims? A. No, I'm just saying there's a huge increase in the number of service calls since December. Q. Come on, Mr Cross, have a look at this. "We've seen a huge increase in the number of service calls from SkyMesh since December which is disproportionate to other providers" and then you specifically state, "And I do not mean your statutory warranty retro claims", don't you? A. Yes. Q. In other words you're talking about issues other than the statutory warranty claims? A. Yes. Q. You're seeking to justify the price increase on the basis of matters other than the statutory warranty claims; aren't you? A. Yes. Q. That's not a true reflection of the reasons for your price increase; was it? A. No. Q. You accept, don't you, that this third time that you've dealt with this concept didn't involve a frank and honest response from you? You accept that; don't you? A. Partially, yes. Q. Insofar as you were purporting to give an explanation for the increased cost of doing business it was a false explanation; wasn't it? A. Yes. Q. The reason you gave a false explanation is because you did not want to reveal the true reason for the price increase, that's right; isn't it? A. Yes. Q. Can we go then to the first time you deal with this issue, it's at 2386. You don't in that email reveal the true reason for the price increase; do you? A. No. Q. You tried to keep secret from SkyMesh the true reason for the price increase; didn't you? A. No. Q. Really? Is that really your evidence? A. We didn't reveal the reason for the price increase. Q. We know that, you tried to keep it secret; didn't you? A. Not intentionally. Q. Mr Cross, you intentionally kept secret from SkyMesh, from the time that you were asked questions about it, what the real reason was for the price increase; didn't you? A. Yes. and see T552.15-50, T553.42-47, T558.37-39, T560.41-47, T560.31-T561.26 and T573.9 1. It imposed a price increase on SkyMesh and on no other internet service provider and SkyMesh had a similar number of customers using Ipstar as APN whose bandwidth price was lower than that of SkyMesh even without the price increase. 2. It was aware that SkyMesh could not move its customers away from Ipstar because: 1. SkyMesh would have had to purchase approximately $60 million worth of new hardware since none of the Ipstar hardware would work with other systems: see T567.35-568.9,T570.39-46, 2. no other provider was available for the amount of bandwidth SkyMesh required: see T570.40-T571.40, 1. Ipstar had not paid any of the claims for statutory warranty as at the date of the price increase notwithstanding that it had been determined by Mr Leeflang that some of the claims were valid. 2. It introduced as part of the addendum an RMA policy even though SkyMesh was not purchasing equipment from Ipstar. 3. It introduced as part of the Second Addendum warranty terms. 4. Ipstar asserted that the cost of doing business with SkyMesh was higher than other providers but no review was ever undertaken by Ipstar in support of that contention see: T561.2-40.
Mr Donaldson made the following points: 1. Much of SkyMesh's 'unconscionability' case was not pleaded. 2. Since SkyMesh's case is that it had no choice but to accept the price increase required by Ipstar there is an illogicality to SkyMesh's case on a number of points. SkyMesh was not tricked or misled into signing the addendum or because Ipstar applied any pressure. 3. Ipstar does not accept that it was dishonest in its dealing with SkyMesh but even if it was that dishonesty does not go anywhere. Had Ipstar said: "We have calculated the average rate of claims on defective products to be $x million per year and that requires us to increase the bandwidth price to $y extra per million Mbps per month, the situation would have been no different. 4. Mr Donaldson accepted that there was little prospect of bandwidth being obtained from any other supplier and that the cost of equipment for an alternative network even if available, was prohibitive, but contended that if SkyMesh found itself in a weak bargaining position as at January 2011 because it had 35,000 customers who had purchased Ipstar equipment and could not transfer to another network that arose because it had not arranged for a fixed price for all of the period that it was contractually bound to its customers. It had created its own vulnerability. It was in no different position to a café owner who had established the café in rented premises, and had to renegotiate a new rental at the end of the lease period or a commodity trader who had bought up a substantial quantity of a product the demand for which has suddenly increased dramatically. If commodities or services have become rare there is nothing unfair or unjust, let alone unconscionable, in one party seeking to obtain a higher price than the other party had previously paid. This is supported by Keane J's observation in Paciocco which I have set out at [127] (12) above. 5. The increase was effectively a 15% increase and not unduly harsh and relevantly the price of $2999 per Mbps was actually less than the price that SkyMesh had paid for an earlier period. 6. With all the talk of SkyMesh's predicament when it agreed (albeit under protest) to a 15% price increase it sold its business a few months ago for $8.6 Million dollars (T669). 7. The Court is not a price regulatory authority: see [347] of Paciocco.
The recoupment of statutory warranties was a matter specifically raised in opening by Mr Williams at T27.14-T28.35. I shall refer to this as "the back door recovery point." When Mr Donaldson responded on this topic by way of opening see T272-T274.44 he put forward various arguments which are picked up in the DCS but he did not at that point allege that the back door recovery point was not open on the pleadings. That contention is mentioned at DCS 64 and became amplified in the final oral submissions: T748.19-749.4. Mr Donaldson claimed that it was a matter on which Ipstar could have addressed evidence. Mr Williams responded to these pleading points: T784-787. In my view it is open to SkyMesh to advance the back door recovery point for a number of reasons: 1. SkyMesh pleaded at para 14 of the Commercial List Statement (Exhibit D1/45) that the price increase was not reasonably necessary for the protection of the legitimate interests of Ipstar, 2. s.22 requires consideration of all circumstances ("a wide ranging enquiry" per North J in Advanced Medical) and that is a relevant circumstance- indeed this links to the third point, 3. Ipstar sought to justify the price increase in its evidence- and relied on various matters which SkyMesh challenged- "the substantial increase in the cost of doing business" was clearly put as an important circumstance by Ipstar. 4. Mr Donaldson's failure to protest against the back door recovery point after Mr Williams had opened, whilst not decisive, is relevant.
Whilst on the subject of pleading points in relation to unconscionability Mr Donaldson also claimed that SkyMesh had never articulated a claim: 1. that Ipstar had acted unconscionably because it was refusing to pay the warranty claims. 2. Ipstar was not paying warranty claims for the purpose of applying commercial pressure, 3. Ipstar's introduction of the RMA terms and the terms of future warranties was together with the price increase part of a "three pronged approach".
In relation to the matters in [138] (a)-(c) even if they could be relied on they do not really advance SkyMesh's unconscionability claim because its case is that it had to agree to the price increase because without such agreement it could not provide the service to its customers for which they had contracted not because Ipstar had not paid the warranty claims or required compliance with the RMA. I do not base my decision on any of these matters.
Given that SkyMesh received $8.6 million for the totality of its business it is not possible to assess what it received for the satellite component. It does not in any event appear to me to have any relevance to the unconscionability claim. Nor for that matter is it relevant that APN had negotiated terms that, if they had been offered to SkyMesh, would have reduced the amount payable by SkyMesh by $8.4 million rather than the $3.4 million claimed, or the fact that SkyMesh had for one earlier period been paying more than $2,933 per Mbps per month.
So far as a lack of honest dealing on the part of Mr Cross in responses to SkyMesh is concerned even though such conduct is the type of conduct within the purview of the ACL there is no evidence from Mr Rees that he was misled or did anything (or did not do something) because of what Mr Cross or anyone else from Ipstar told him. Mr Cross's admission that he gave a false explanation to Mr Rees for the price increases and intentionally held back the true reason is however indicative of a recognition that recovery of the statutory warranty for past sales would not be an appropriate or permissible course of action.
Had Ipstar simply wished to increase the price for bandwidth by 15% because it was in its commercial interest to do so to maintain its profit margin notwithstanding the burden of meeting warranty claims or potential product failure in the future and because it believed that SkyMesh would be willing to pay that increased price and because not to do so would have been commercially unwise on the part of SkyMesh I very much doubt that its conduct could be characterised as unconscionable, and I say that even recognising that SkyMesh was in a predicament because it had purchased Ipstar equipment and agreed to abide by the ABGP terms and conditions, and Ipstar well knew that. I also am inclined to think that a seller who chooses to seek a higher amount from one purchaser as compared to another, or indeed all others, is free to do so. There can be no expectation by a purchaser that the price that he or she is paying is equal to the price that any other customer is paying (absent any express representation to that effect).
However, I regard of paramount importance the fact that what Ipstar decided to do, through Mr Chinveeraphan and Mr Cross, was to calculate in a broad fashion what the statutory warranty would be likely to cost Ipstar for UTs supplied to consumers by SkyMesh and to impose that cost on SkyMesh. S.74K of the TPA renders any term of a contract (even if incorporated into another term) which purports to exclude, restrict or modify or has the effect of excluding, restricting, or modifying any liability of a person to compensate or indemnify another person, void. I think the legislature was thereby making clear that a person such as a seller or importer who is required to meet a liability for defective goods imported into Australia and sold by it, must carry the burden of indemnifying the consumer, or an intermediate seller who has compensated the consumer.
I am of the view that it must be inferred that the legislature did not regard it as in the legitimate interests of Ipstar to require SkyMesh to pay to it an amount calculated as the cost to Ipstar of meeting its statutory warranties.
What Ipstar has done, in effect, is to require SkyMesh to indemnify it for the statutory liability Ipstar had to SkyMesh, which was not in protection of its legitimate interests. In imposing that requirement Ipstar did do so in an environment where SkyMesh had no real practical alternative but to accept the price increase because the requisite bandwidth was only available from Ipstar and the cost of new equipment required if SkyMesh changed service provider was prohibitive. Mr Cross accepted in cross examination that Ipstar "held all the cards" see T571.38. I therefore find that Ipstar has engaged in conduct that is in all the circumstances unconscionable.
In addition, Ipstar did not seek to recover the cost of statutory warranties from other service providers, did not advise SkyMesh that the true basis of the calculated increase was solely Ipstar's assessment of what it would have to pay for statutory warranties for claims already made and gave what Mr Cross admitted were not frank and honest answers to the questions asked by Mr Rees: matters falling within s.22 (a)(b)(e)(f) and (i). These matters of themselves would not be sufficient but when added to the matters referred to in [134]-[135] they reinforce the unconscionability of Ipstar's conduct.
I therefore conclude that Ipstar acted unconscionably in requiring SkyMesh to meet an obligation that Ipstar was required by statute to meet itself. It should be required to refund to SkyMesh the amount so extracted being an amount of $3.4 million.

Conclusion

It follows that SkyMesh is entitled to judgment on its claim for indemnity in respect of the defective goods claim (excluding the wages claim) and on its unconscionability claim of $3,482,367 million. In relation to the precise amount for which judgment on the defective goods claim should be entered I have referred to the amount as $1,837,792 but this should be calculated by the parties to ensure that the correct figure is ascertained. It was agreed by Counsel that the question of interest should be deferred.
I will hear the parties on the precise form of orders and the issue of interest and costs. 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 December 2016

Australian Competition and Consumer Act 2010(Cth)

Australian Securities and Investment Commission Act 2001(Cth)

Trade Practices Act 1974(Cth)

Emery v Johns Period Furniture [1989] SASC 1624 Fubilan Catering Services Ltd v Compass Group (Australia) Pty Ltd [2007] FCA 1205 Grant v Australian Knitting Mills (1935) 54 CLR 49; [1936] AC 85 Hampton Court Ltd v Crooks (1957) 97 CLR 367 Henville v Walker (2001) 206 CLR 459; [2001] HCA 52 Lithgow City Council v Jackson (2011) 244 CLR 352 Medtel Pty Ltd v Courtney (2003) 130 FCR 182 Merck Sharp & Dohme (Australia) Pty Ltd v Peterson (2011) 196 FCR 145; [2011] FCAFC 128 Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199; [2015] FCAFC 50 Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28, (2016) 333 ALR 569 Peterson v Merck Sharpe & Dohme (Australia) Pty Ltd (2010) 184 FCR 1; [2010] FCA 180 Protec Pacific Pty Ltd v Steuler Services GmbH & Co KG [2014] VSCA 338 PT Ltd v Spuds Surf Chatswood Pty Ltd [2013] NSWCA 446 Purkess v Crittenden (1965) 114 CLR 164 Rogers v Parish (Scarborough) Ltd [1987] QB 933 Thomas v Foreshore Marine Exhaust Systems Pty Ltd [2005] NSWCA 451 Tonto Home Loans Australia Pty Ltd v Tavares; FirstMac Ltd v Di Benedetto; FirstMac Ltd v O'Donnell [2011] NSWCA 389 Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; [1988] HCA 7 Watts v Rake (1960) 108 CLR 158 Texts Cited: Benjamin's Sale of Goods (9th edition 2014 Sweet and Maxwell) Suttons' Sales and Consumer Law, (4th ed 1995, LBC Information Services) Category: Principal judgment Parties: APS Satellite Pty Ltd (formerly known as "SkyMesh Pty Ltd") (Plaintiff) IPSTAR AUSTRALIA PTY LTD (Defendant) Representation: Counsel: D.L Williams SC, R.D Glover (Plaintiff) S.R Donaldson SC, M. Sealey (Defendant) Solicitors: Thomson Geer (Plaintiff) Norton Rose Fulbright (Defendant) File Number(s): 2011/380786 Publication restriction: Nil

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