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

Background

1. The background which I set out below is taken from the plaintiff's closing submissions ("PCS"), and with which Mr Donaldson took no issue.
2. 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.
3. SkyMesh entered into a series of funding agreements in relation to funding for the ABGP, which ended on 30 June 2011.
4. In a schedule to each of the funding agreements, there was a standard form service agreement that SkyMesh was required to enter into with each of its customers. Those standard form agreements included warranties that SkyMesh was required to provide to its customers.
5. SkyMesh and Ipstar entered into the following service provider agreements and variations: 1. An agreement dated 27 September 2007 "the Bandwidth Agreement" Exhibit D1/652-694; 2. An addendum dated 1 August 2008 "the First Addendum" Exhibit D2/922-923; and 3. An addendum dated 27 April 2011 "the Second Addendum" Exhibit D4/2669-2680.
6. The express warranties contained in agreements between Ipstar and its purchasers were initially limited to a period of 12 months only. Ipstar eventually accepted that it was bound to honour the manufacturer's warranties set out in the TPA and ACL. From about February 2011 Ipstar began to provide a three year warranty for defects in manufacturing and workmanship of the Ipstar products imported.
7. The Ipstar satellite and broadband equipment provides broadband internet services via two Earth Stations (in large satellite dishes) located in Kalgoorlie, Western Australia and Broken Hill, New South Wales. These dishes send signals to Thaicom's satellite Ipstar-1 in geostationary orbit above the earth, which relays signals to and from smaller Ipstar satellite dishes located at the premises of ISPs customers.
8. At its peak Ipstar had 80,000 user terminals in operation in about 2010-2011. The number has diminished as a result of the introduction of the NBN and the penetration of the Telstra 3G network into rural Australia.
9. SkyMesh and APN have been the two largest Ipstar ISPs. APN is the largest. As at 2011 when the new bandwidth pricing terms were being imposed on SkyMesh, SkyMesh had 28,302 customers with active terminals and APN had 30,216 customers representing 38% and 41% respectively of the total Ipstar terminals. The total fleet was 74,009 in 2011 and had declined to 27,290 in 2014. In 2014 SkyMesh had 36% of that fleet and APN 47%: Exhibit D6/4060A. The significant decline in users is, at least in part, a result of the introduction of NBN network.
10. The Ipstar broadband service is a proprietary service and all users must have a proprietary User Terminal ('UT') supplied by Ipstar. Terminals supplied by any other service are not capable of accessing the Ipstar broadband service. The UT supplied by Ipstar does not function with any other satellite service.
11. The Ipstar UT consists of an Outdoor Unit ('ODU') interconnected to an Indoor Unit ('IDU') by two coaxial cables. The ODU contains a: 1. Satellite dish antenna and mounting frame of 84 cm diameter; and 2. Satellite RF (Radio Frequency) transceiver assembly consisting of: 1. an antenna feed horn which collects RF signals received by, and radiates transmitter RF power to, the satellite dish antenna; 2. a Low Noise Block ('LNB') down converter which amplifies the received RF signal in a Low Noise Amplifier ('LNA') then converts it to a lower frequency suitable for processing by the IDU; 3. a Block Up Converter ('BUC') with an output power of either 1 or 2 watts which converts the transmit signal generated by the IDU to a higher frequency and power level suitable for transmission to the satellite; and 4. an OrthoMode Transducer ('OMT') and Transmit Reject Filter ('TRF') which connects the LNB and BUC to the feed horn enabling both to share the same satellite dish antenna without interfering with each other. Although the ODU includes the satellite dish it is the Satellite RF transceiver assembly which is the subject of the defective goods claim in this case and I shall use ODU to mean that assembly, a photograph of which can be found at Exhibit D/1036.
12. The IDU is essentially a modem which links to the customer's computer.
13. A high level block diagram of an Ipstar broadband UT is shown in Figure 2 on page 11 of Peter Burns' report dated 8 November 2012 Exhibit D6/3504.
14. The Ipstar satellite system known as the "VSAT system" operates in the Ku and Ka-Band segments of the RF spectrum. These spectrum bands are part of the broader microwave frequency spectrum used by radio communications links operating between two terrestrial locations separated by a clear line of sight path as well as between a satellite and an earth station.
15. The ODUs are designed to receive and send signals to utilise the particular spectrums available and are quite sophisticated pieces of equipment.
16. In or about 2008 Ipstar commenced supplying internet bandwidth to SkyMesh (as a wholesale supplier of internet bandwidth) in accordance with the Bandwidth Agreement and began supplying SkyMesh with the products necessary (the UTs) for SkyMesh customers to connect with the Ipstar satellite. Within a few months Ipstar ceased to supply these products directly to SkyMesh and referred SkyMesh to one of its three distributors, SkyBridge, through which to purchase and install its products. SkyMesh has not sought to make out a case based on the direct sale to it by Ipstar in the first four months.
17. SkyBridge was not only a distributor for Ipstar but authorised by Ipstar to install and service Ipstar products. In formal contractual terms Ipstar supplied UTs to SkyBridge which in turn supplied them to SkyMesh. SkyMesh then supplied them to its customers. SkyBridge installed the Ipstar UTs on SkyMesh's behalf for SkyMesh's customers and SkyMesh provided bandwidth to those customers via the Ipstar satellite. SkyBridge provided service calls when requested by SkyMesh to respond to customer problems with their internet satellite service, including problems with Ipstar's equipment.
18. SkyMesh entered into the following agreements with SkyBridge: 1. an agreement dated 16 January 2008 for the calendar year 2008; 2. an agreement dated 17 March 2009. No further written agreements were entered into and the agreement dated 17 March 2009 continued to govern the relationship between SkyMesh and SkyBridge.
19. Until March 2011, the provision of bandwidth to SkyMesh by Ipstar was governed by the Bandwidth Agreement and the First Addendum. In March 2011 the Second Addendum took effect and it is the Second Addendum which is the subject of the unconscionable conduct claim.
20. There is no dispute that Ipstar, SkyBridge and SkyMesh had, by 2010, come to realise that there were two significant problems in connection with the Ipstar equipment. The first was that an extensive number of ODUs had a water ingress problem. Water ingress problems were first noted in July 2007: see Exhibit D3/1569. The ODUs are located on the satellite dish outdoors and were frequently not adequately sealed against the rain.
21. The second major problem which revealed itself in the period 2008 to 2010 and beyond related to the modem supplied by Ipstar as part of its kit. Many of the modems suffered what Ipstar described as a "drop out," "freezing" or "hang" issue. There is agreement between the parties that the drop out issue was a result of firmware issues. Firmware is software embedded in a product such as a modem which enables the product to function and communicate with for example, a network or other devices. If a modem 'hangs' or 'freezes' or drops out, it prevents the consumer from using the product as it was intended to be used since access cannot be gained to the network. This problem was identified by Ipstar and it is described as a known issue in a document created by Ipstar in April 2010 Exhibit D3/1635: "One of the known root causes that IPSTAR is currently targeting to address with the upgrade of the UT [ User Terminal] firmware is the UT software hanging problem. In theory, UTs will not transmit on the same time slots when they are in TDMA [Time Division Multiplexity Algorithm]. However, they demonstrate this behaviour when they hang or fail to response to the Gateway for a certain period. Under this circumstance, UTs will continue their transmission on the old time slots if their data buffer is not empty. These data packets then collide with others (good) Uts data in the same time slots and result in high CRC errors. Eventually, the connection of GW [Gateway] and the good UT is reset causing drop out experience."
22. There is no dispute that if either the ODU or modem were not functioning properly the customer could not access the Ipstar satellite system. The kit was installed by SkyBridge and not by the customer: T207.21. The ODU and modem were not permitted by Ipstar to be opened by the customer or the service technician from SkyBridge.
23. SkyMesh's case is not limited to water ingress problems and modem dropouts but its ability to rely on other equipment defects in the ODUs and IDUs is contested by Ipstar for reasons I shall later explain. Much of the focus of the case has been on the water ingress problem and the modem drop out problem, and I shall expand on these topics below.
24. There is extensive evidence concerning the help desk arrangements that SkyMesh, SkyBridge and Ipstar had in place. There is no dispute that customers of SkyMesh who had service difficulties first contacted the SkyMesh help desk, and if SkyMesh personnel could not solve the customer's problem the customer was put through to the SkyBridge helpdesk. If the SkyBridge personnel could not solve the problem (even with the assistance of Ipstar personnel if that was thought appropriate: see T499-500) SkyBridge arranged to send out a technician to the premises of the customers.
25. The SkyBridge technicians would attend at the customer's premises with such replacement equipment as they had been instructed by their base to take with them. They would follow a testing protocol designed to eliminate simple faults such as incorrect cabling or power faults outside of the Ipstar equipment. If the SkyBridge technician, often in consultation with a more senior person at SkyBridge's base, determined that an item of Ipstar equipment should be replaced he or she would do so. SkyBridge would invoice SkyMesh for the service call and the cost of replacement equipment.
26. There was evidence from one of the SkyBridge technicians, a Mr Anthony Wonish (Mr Wonish's affidavit 2 July 2016) as to procedures adopted and he was not challenged on that evidence. Documentation was created by SkyBridge in relation to the service calls in respect of the 4000 claims which are the subject of these proceedings. The experts retained by SkyMesh and Ipstar agreed that there was no flaw in the help desk process Exhibit D7/ 4464-4465 and there was no suggestion that SkyBridge did not proceed in accordance with the guide issued by Ipstar called the "Ipstar Level 1 Troubleshooting for Service Providers" (Exhibit D13/1332). The technicians' notes which are part of Exhibit O1-O3 have not been shown to be, or suggested to be, inconsistent with Mr Wonish's evidence.
27. Indeed more generally there were very few contested facts and there were no submissions made that I should not accept the evidence of any of the witnesses called.

The Defective Goods Claim

1. 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.
2. 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.
3. 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).
4. 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.

Ipstar's Threshold Arguments

1. 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.
2. 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.
3. 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."
4. 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.
5. 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.

The Defective Goods Claim: Beyond the Threshold

1. 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'.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.

The Prone to Failure Case

1. The "prone to failure case" is based on the ODU water ingress problem and the modem drop out problem.
2. 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.
3. 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.
4. Mr Donaldson disputes that Medtel has any relevance to the present case.
5. 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.

Ipstar Kit Not Functioning

1. 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.
2. 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.
3. 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.
4. 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.

The Pleading Issue

1. 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.
2. Mr Williams contended that SkyMesh's pleadings should not be read as so confined.
3. 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.
4. 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.

The Sleeping Cat Issue

1. 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.
2. 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."
3. 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

1. 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

1. 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.
2. 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

1. 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.
2. 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.
3. 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.
4. 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.

Item 1

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.
2. 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

1. 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

1. 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

1. 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

1. 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

1. 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

1. 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.
2. 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.
3. 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

1. 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.
2. Mr Williams proffered no reply to these points and I accept them.
3. SkyMesh has failed to make out its claim for helpdesk wages.

The Unconscionable Conduct Claim

1. 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.
2. 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.
3. 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.

Conclusion

1. 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.
2. 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