CANON AUSTRALIA PTY LTD v PATTON

JUDGMENT OF: Basten JA at 1; Campbell JA at 9; Harrison J at 70

(1) Appeal allowed. (2) Set aside the orders made in the court below. DECISION: (3) In lieu thereof, order that judgment be entered for the Appellant against the First and Second Respondents in the sum of $175,869.48. (4) Order that interest be paid on that amount at the rate prescribed from time to time by Schedule 5 Uniform Civil Procedure Rules 2005 from 8 December 2006. (5) First and Second Respondents to pay the costs of the appeal. (6) First and Second Respondents to pay the costs of the Appellant of the trial.

CATCHWORDS: TRADE PRACTICES - unconscionable conduct of creditor towards guarantor - failure to supply goods to trading company when debts outstanding - whether guarantor suffered

Australian Securities and Investments Commission Act 2001 (Cth), s 12CC Contracts Review Act 1980 (NSW), s 9 LEGISLATION CITED: Credit Act 1984 (NSW), s 147 Trade Practices Act 1974 (Cth), ss 6, 51AA, 51AB, 51AC Uniform Civil Procedure Rules 2005, Schedule 5

Attorney General (NSW) v World Best Holdings Ltd (2005) 63 NSWLR 557 Australia & New Zealand Banking Group v Karam (2005) 64 NSWLR 149 Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 Australian Securities and Investments Commission v National Exchange Pty Ltd (2005) 148 FCR 132; [2005] FCAFC 226; (2005) 56 ACSR 131 Begley v Attorney General (NSW) (1910) 11 CLR 432 Ben Shipping Co v An Bord Bainne [1986] 2 All ER 177, 187 Bruns v Colocotronis ("The Vasso") [1979] 2 Lloyds Rep 412 Compania Sudamericana De Fletes SA v African Continental Bank Ltd ("The Rosarino") [1973] 1 Lloyds Rep 2 CASES CITED: Equiticorp Finance Ltd (In liq) v Bank of New Zealand (1993) 32 NSWLR 50 Gracechurch Holdings Pty Ltd v Breeze & Anor (1992) 7 WAR 518, 524 Hurley v McDonald's Australia Ltd (2000) ATPR 41-741 Interchase Corp Ltd (in liq) v FAI General Insurance Co Ltd [2000] 2 Qd 301 Pettman v Keble (1850) 137 ER 1067 Re Kitchin; Ex parte Young (1881) 17 Ch D 668 Sabemo Pty Ltd v de Groot (1991) 8 BCL 132 State Bank of NSW v Stenhouse (1997) Aust Torts Rep 81-423

Spencer Bower, Turner and Handley, The Doctrine of Res Judicata, (3rd ed by Handley, 1996) at [224]

Canon Australia Pty Limited - Appellant PARTIES: Roger James Patton - First Respondent Glynda Colleen Patton - Second Respondent

COUNSEL: S. Bell - Appellant Dr S. Churches - Respondents

SOLICITORS: Simon Ravdens, Lawyers - Appellant Self-Represented - Respondents

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40858/06 DC 4147/05

BASTEN JA CAMPBELL JA HARRISON J

14 September 2007 CANON AUSTRALIA PTY LIMITED v ROGER JAMES PATTON & ANOR Judgment 1 BASTEN JA: I agree with the orders proposed by Campbell JA and subject to one matter, with his Honour's reasons. My concern relates to the epithet identified as "such a high level of moral impropriety", in describing unconscionability for the purposes of s 51AC of the Trade Practices Act 1974 (Cth). In addition, there is a legal obstacle, possibly a form of estoppel, which demonstrates that the judgment below in favour of the Respondent cannot stand. 2 The term "unconscionable" appears in ss 51AA, 51AB and 51AC. Of present relevance is the inter-relationship between ss 51AA(1) and 51AC(1). Section 51AA is concerned with conduct which is unconscionable within the meaning of the general law; s 51AC does not refer to the general law, but includes a list of factors to which the Court may have regard, similar to those found in earlier legislation in this State in the Contracts Review Act 1980 (NSW), s 9 and the Credit Act 1984 (NSW), s 147. Section 51AC identifies areas of trade and commerce to which it applies, namely the supply of goods and services for the purposes of trade or commerce: sub-ss (1), (2) and (7). (Section 51AB is the comparable section in relation to the supply of goods or services for personal, domestic or household use: s 51AB(5).) By contrast, s 51AA(1) applies to the conduct of corporations generally in trade or commerce (but see also s 6(3)). Section 51AA plays a secondary role: it does not apply to conduct prohibited by ss 51AB or 51AC: see s 51AA(2). Accordingly, it is not necessary to assume that the term "unconscionable" in s 51AC has some different or broader meaning than in s 51AA. That is not to say that s 51AC may not operate in circumstances in which general law unconscionability would not, but merely that there is no need to seek out a more expansive operation. Further, the exercise of taking into account listed factors, as contained in the Contracts Review Act and the Credit Act, was not carried out with respect to the question of unconscionable conduct but rather to the question whether a particular contract was "unjust" in the circumstances. Whilst adopting a similar list of factors, the Trade Practices Act has adopted the criterion to be applied as that of "unconscionable" conduct. 3 In Australia & New Zealand Banking Group v Karam (2005) 64 NSWLR 149 this Court considered how the concept of economic duress could be accommodated within established equitable principles, holding that the preferable approach was restricted to threatened or actual unlawful conduct. After referring to the judgment of Kirby P in Equiticorp Finance Ltd (In liq) v Bank of New Zealand (1993) 32 NSWLR 50, the Court stated at [57]: "For reasons noted below, his Honour's view that a principled approach should, in effect, abandon the term 'economic duress' and, presumably, questions of 'illegitimate pressure'[,] should be accepted." (Although the absence of the suggested additional comma may have caused apparent ambiguity, it is clear from the further discussion at [62]-[66] that both phrases were thought to involve vague or question-begging language.) 4 The Court accepted that "where the power to grant relief is engaged because of a contravention of a statutory provision such as s 51AA, s 51AB or s 51AC of the Trade Practices Act (Cth), the Court may be entitled to take into account a broader range of circumstances than those considered relevant under the general law": at [66]. (The reference to s 51AA was inappropriate, given its different language.) Whether reference to the range of factors will give rise to some different concept of unconscionability from that established under the general law will then be a matter of statutory construction. However, to treat the word "unconscionable" as having some larger meaning, derived from ordinary language, and then to seek to confine it by such concepts as high moral obloquy is to risk substituting for the statutory term language of no greater precision in an attempt to impose limits without which the Court may wander from well-trodden paths without clear criteria or guidance. That approach should not be adopted unless the statute clearly so requires. It is not necessary to pursue the matter further in the present case. 5 There is an additional obstacle in the course the Respondents sought to pursue below. When Ms Patton appeared at trial, she was given leave to appear for her husband, but not for the company, James Aston Pty Ltd. That may have been because she had no authority from the company to act for it. In any event, the result was a judgment against the company which is not challenged. Yet the conduct relied on by the Respondents to establish unconscionability was conduct between the company and its supplier. No doubt guarantors can rely on such conduct to avoid liability under a guarantee, but when there is a judgment in favour of the supplier which is inconsistent with a finding of unconscionable conduct which would relieve the principal debtor of its obligations, and no separate conduct is relied on as between the supplier and the guarantors, a judgment in their favour would be inconsistent with the judgment as between the supplier and the company. 6 The actual finding made by the trial judge, was that "as a result of" the unconscionable conduct of Canon in failing to supply the company with certain parts, "Mr and Mrs Patton suffered damage equivalent to the sum of moneys recoverable by Canon Australia from James Aston": at [43]. The logic of this conclusion is unclear, but the unspoken premise appears to be that the Respondents have suffered damage, namely that they are legally liable to pay the amount of the judgment debt incurred by James Aston. This presumably reflects the fact that they had no defence to the claim against them under the deed of guarantee and indemnity. The factual basis upon which the cross-claim was upheld was thus directly inconsistent with the factual basis upon which judgment was given, in the same proceedings, against the company and, by implication, the finding of liability against the guarantors. 7 No explanation was provided as to how the Respondents could, by a claim for damages in the amount of the judgment debt, effectively mount a collateral challenge to the judgment against the company. 8 Inconsistent judgments may result if separate proceedings were brought against the principal debtor and the guarantors. However, where the guarantors controlled the principal debtor company or where they had notice of the demand against the principal debtor, they may yet be estopped from denying the liability of the principal debtor, established by judgment in other proceedings: see Spencer Bower, Turner and Handley, The Doctrine of Res Judicata, (3rd ed by Handley, 1996) at [224] and see Pettman v Keble (1850) 137 ER 1067; Ben Shipping Co v An Bord Bainne [1986] 2 All ER 177, 187 (Bingham J); Gracechurch Holdings Pty Ltd v Breeze & Anor (1992) 7 WAR 518, 524 (Ipp J); State Bank of NSW v Stenhouse (1997) Aust Torts Rep ¶81-423 (Giles CJ, Com Div) and Interchase Corp Ltd (in liq) v FAI General Insurance Co Ltd [2000] 2 Qd 301 (Davies, McPherson JJA and Byrne J). 9 CAMPBELL JA: In the court below, the primary judge held that two guarantors were not required to pay a debt because of unconscionable conduct on the part of the creditor. 10 The creditor in question is the Appellant, Canon Australia Pty Ltd ("Canon Australia"). The guarantors in question are the Respondents, Mr Roger Patton and Mrs Glynda Patton. The Appellant challenges both the finding that it has engaged in unconscionable conduct, and the finding that the conduct alleged to be unconscionable caused the Respondents to suffer damage equal in amount to the guaranteed debt. The Trading Relationship 11 In 1997 Mr and Mrs Patton incorporated James Aston Pty Ltd ("James Aston") as a vehicle for their business of selling parts for Canon and Hewlett-Packard printers. The business grew, and made sales not only in Australia, but also in other countries. 12 Parts for both Canon and Hewlett-Packard printers are manufactured by Canon Inc in Japan. James Aston did not acquire such parts by purchasing them directly from Canon Inc. Rather, it acquired them by purchasing them from Canon Australia. 13 There was, it seems, no long-term supply contract between Canon Australia and James Aston. All invoices that Canon Australia sent to James Aston had, on the reverse, terms and conditions of sale that included the following provisions: "4.01 The Customer shall make payment in full without any deduction or withholding whatsoever on any account within that period shown on the face of this invoice or at some later date following invoicing which must be clearly evidenced in writing as having been agreed between Canon and the Customer. … 4.04 Canon reserves the right to defer without penalty delivery of any Equipment which has been ordered by the Customer so long as any amount remains overdue for payment or any credit limit is exceeded. … 8 NO WAIVER A failure to exercise or enforce, a delay in exercising or enforcing, or conduct which is inconsistent with the exercising or enforcing, any right or remedy held by Canon in relation to these Conditions will not in any way preclude or operate as a waiver of the exercise or enforcement of that right or remedy." 14 The standard form of invoice that Canon Australia sent to James Aston contained on its face a remittance slip that the customer was requested to return with its remittance. The information contained on the remittance slip included a statement of the date by which payment was due, which was invariably the end of the month following the month in which the goods were invoiced. A statement of that date when payment was due also appeared in the body of the invoice itself. 15 Mr and Mrs Patton each executed a deed of personal guarantee and indemnity on 15 March 2001 in favour of Canon Australia, guaranteeing payment on demand of the unpaid invoice price of goods supplied by Canon Australia to James Aston. Each deed contained the following provision: "The Guarantor agrees that this Guarantee shall be a continuing guarantee and shall be irrevocable and remain in full force and effect (notwithstanding that Canon may at any time and without giving notice to the Guarantor, refuse to further supply goods, services and/or financial accommodation to the Dealer) until a written notice discharging the Guarantor from his obligations is given to the Guarantor by Canon." Events in the Court Below 16 There was no dispute in the court below that Canon Australia had supplied goods to James Aston in the period January 2005 to July 2005, and that those goods had not been paid for. Nor was there any dispute that the standard credit terms that Canon Australia allowed to James Aston were that payment for any delivery of goods was due at the end of the month following the month in which the goods were invoiced. There was no dispute that James Aston had failed to pay the cost of the goods, namely $175,869.48. 17 At the trial, James Aston was not represented, in consequence of which judgment was entered against it in the sum of $175,869.48. Liberty to apply in relation to interest on that sum was reserved. 18 Mrs Patton appeared at the trial to represent herself and (by leave of the primary judge) to represent Mr Patton. James Aston and Mr and Mrs Patton had filed a defence to the action at a time when they had solicitors acting for them. They had also filed a cross-claim. The defence and cross-claim each raised numerous grounds of defence and cross-claim. At the trial, Mrs Patton did not deal specifically with those individual grounds of defence and grounds of cross-claim. Indeed, she made no final submissions at all. That happened because at the conclusion of evidence, and after counsel for Canon Australia had made submissions, Mrs Patton sought some time to obtain a transcript before making submissions. The primary judge fixed a time within which she had leave to make written submissions. No submissions were filed within that time. In consequence, the primary judge delivered judgment, saying that he did so addressing "only such arguments as may reasonably have been anticipated by the plaintiff on the basis of the pleading and the evidence". 19 The primary judge delivered judgment on 8 December 2006. He identified the basis upon which Mr and Mrs Patton resisted the claim of Canon Australia as being that, "Canon Australia, in breach of s 51AC of the Trade Practices Act 1974 (Cth) , engaged in conduct which rendered James Aston unable to pay the debt, which conduct was, in all the circumstances unconscionable, and that in consequence, if they are liable as guarantors of James Aston then, pursuant to s 82 of the Trade Practices Act , they are entitled to damages equivalent to the claim on the guarantee." 20 The primary judge upheld that contention. On the hearing of the appeal, counsel for Mr and Mrs Patton did not seek to support the decision in the court below on any different basis. The Earlier Supply Interruption 21 By 1999 James Aston had developed a business of supplying 110 volt parts suitable for use in Canon printers to the United States market. In 1999 James Aston's supply of those parts suddenly ceased. Mrs Patton enquired of the manager of the parts department at Canon Australia why that was so. She was told: "… that they had been notified by Canon Tokyo that they were not to supply me with any more 110 volt parts. I objected to that and said, 'Why not?' and they said, 'Because your market in America is too much', and they stopped immediately, cancelled all of the orders and my turnover dropped by 700,000 the next month because I had signed orders for those and then they wouldn't supply them." 22 After some eight months, Canon Australia resumed supply of the 110 volt parts to James Aston. The 2005 Supply Interruption 23 In the period leading up to December 2004, James Aston accumulated a considerable stock of individual parts suitable only for Hewlett-Packard machines ("HP-only parts"). As Mrs Patton explained it: "… when you are a distributor, you tend to hold things which people ring and ask you to sell them so you must have stock on hand, particularly when the supply is erratic." 24 Between November 2004 and April 2005, Mrs Patton, on behalf of James Aston, placed various orders for parts with Canon Australia. While some of those orders have been supplied, others have not. Those orders that have not been supplied are for parts that are suitable for Hewlett-Packard printers. 25 The first communication of a reason for this failure to supply came in an email dated 21 April 2005 from Canon Australia to Mrs Patton. It attached a complete list of outstanding orders that Canon Australia held from James Aston, with the parts that had been ordered identified individually by part numbers. The email said: "As you know we have gone to lengths to continue the supply of HP parts, but unfortunately due to contractual agreements with HP, C'Inc will no long be supplying these parts to C'Australia, see attached list of HP only parts."

The attached list stated, alongside various part numbers, "C'Inc will not supply" . Clearly, in this email "HP" means "Hewlett Packard" , "C'Inc" means Canon Inc, and "C'Australia" means Canon Australia. 26 Mrs Patton replied on 22 April 2005, incredulous that Canon Inc would refuse to supply parts. 27 On 26 April 2005 an officer of Canon Inc emailed Mrs Patton, saying: "I currently don't have an ETA for the being [sic] supplied, except RG9-1494-040, which can be supplied if you still want them. RG5-6517-230 no eta RG9-1494-040 can be supplied, if you like RG5-7061-140 no eta, no b/o in C'Inc I'll also send a copy of this email to Brett, as leverage with C'Inc to continue supply, but currently Canon Inc will not supply any of the listed HP parts." 28 In reading this email, I take it that "eta" means "estimated time of arrival", and "b/o" means "back order" or "bulk order". Part number RG9-1494-040 had appeared on the parts list that Canon Australia had sent to Mrs Patton on 21 April 2005, without a "C'Inc will not supply" notation alongside it. Thus, the email of 26 April 2005 did not represent any change of mind from that which had been communicated by Canon Australia on 21 April 2005. 29 On 30 May 2005 an officer of Canon Australia emailed Mrs Patton saying: "Good news, after much negotiation, Canon Inc have agreed to supply a final order of HP unique parts. Could you please check your requirement and let me know by 9am tomorrow (31/5/05). Please note: C.Inc have informed it could take more than 3 months to completely supply your order. Let me know if you have any questions." 30 On 30 May 2005 Mrs Patton sent an order for various parts of total cost $296,360.50. That order included, but was not limited to, parts that had been listed as "C'Inc will not supply" in the email of 21 April 2005. 31 By 22 June 2005 that order had not been supplied. Mrs Patton emailed Canon Australia, saying: "A short note to ask you if you could co-operate with me to allow me to get the "HP only" bulk order that we placed recently. We, unfortunately are experiencing cash flow problems - we are NOT going broke, we just have a lot of debtors that are also having the same problem. If you could let me know when the bulk orders are coming, or have arrived in Australia, my customers have said that they are more than happy to pre-pay me. This then will give me the cash flow to pay for my shipments from you before you ship. This will make the Canon Credit Dept. very happy." Failure to Pay for the Goods Supplied 32 Meanwhile in 2005, Canon Australia had supplied James Aston with the various goods for the price of which Canon Australia sued in the court below. There was no evidence that those goods were supplied on anything other than the standard credit terms. Thus, they were supplied on the basis that payment for any delivery of goods was due at the end of the month following the month in which the goods were delivered. The price of those goods became overdue as follows: Following end of Total amount overdue February 2005 $31,851.21 March 2005 $95,895.97 April 2005 $138,418.75 May 2005 $172,374.12

33 James Aston paid $20,000 to Canon Australia on 15 June 2005, but some other goods were supplied by Canon Australia after the end of April 2005. 34 Canon Australia continued to supply the parts for the price of which it sued in the court below until 19 July 2005. James Aston had, by the time of the trial on 25 October 2006, sold all of those goods, and used the sale proceeds to pay debts other than the debts due to Canon Australia. Final Breakdown of the Commercial Relationship 35 On 27 July 2005 Mrs Patton wrote to Canon Australia, saying: "I am very anxious to re-establish the parts turnover in James Aston Pty Ltd. Due to non-supply of parts by Canon this company's turnover is rapidly becoming non-existent. With that aim in mind I would like to put the following proposal to you. As previously discussed with you: In late May, early June, 2005 I placed an order with the Canon Parts Dept. for $296,360, being for printer parts which Canon had recently designated as "HP only". This order was to replace multiple orders originally placed on Canon in the period December, 2004 - April, 2005 for parts which were listed as available on Canon's pricelists, but not supplied. The parts on the order placed on Canon were for orders placed by customers on James Aston P/L ie pre-sold. My customers agreed that they would pay for the parts as the parts arrived in Australia. I have recently had an email from Jason Brock, from the Canon Parts dept, telling me that some of the parts, totalling A$61,639 have arrived in Australia and are available for despatch. I can now ask my customers to pay for these goods. Which payment I could immediately remit to you, in total. Approximately A$71,000. The balance of the payments from my customers for the backorder, referred to above, of some $270,000, will be transferred to James Aston P/L in line with Canon's delivery schedule. As these funds become available to me they will be forwarded to Canon immediately. This will have the effect of paying for the parts being supplied and reducing the existing balance. We are currently embarking on an aggressive campaign to move existing stock from our shelves. This, combined with the recognition by my customers of our ability to again access and supply Canon parts, will result in a large boost in turnover, thus allowing our indebtedness to Canon to be eliminated in a matter of a short period of months." 36 On 29 July 2005 Canon Australia served letters of demand on James Aston, and on each of Mr and Mrs Patton, relating to the total of the amount of invoices that had been sent up to the end of May 2005 and that were unpaid. No issue was raised concerning the adequacy of these demands. Unconscionable Conduct - The Principles 37 Section 51AC Trade Practices Act 1974 (Cth) provides, so far as relevant: "(1) A corporation must not, in trade or commerce, in connection with: (a) the supply or possible supply of goods or services … to a person … engage in conduct that is, in all the circumstances, unconscionable. … (3) Without in any way limiting the matters to which the Court may have regard for the purpose of determining whether a corporation or a person (the supplier ) has contravened subsection (1) or (2) in connection with the supply or possible supply of goods or services to a person or a corporation (the business consumer ), the Court may have regard to: (a) the relative strengths of the bargaining positions of the supplier and the business consumer; and (b) whether, as a result of conduct engaged in by the supplier, the business consumer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; and (c) whether the business consumer was able to understand any documents relating to the supply or possible supply of the goods or services; and (d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the business consumer or a person acting on behalf of the business consumer by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the goods or services; and (e) the amount for which, and the circumstances under which, the business consumer could have acquired identical or equivalent goods or services from a person other than the supplier; and (f) the extent to which the supplier's conduct towards the business consumer was consistent with the supplier's conduct in similar transactions between the supplier and other like business consumers; and (g) the requirements of any applicable industry code; and (h) the requirements of any other industry code, if the business consumer acted on the reasonable belief that the supplier would comply with that code; and (i) the extent to which the supplier unreasonably failed to disclose to the business consumer: (i) any intended conduct of the supplier that might affect the interests of the business consumer; and (ii) any risks to the business consumer arising from the supplier's intended conduct (being risks that the supplier should have foreseen would not be apparent to the business consumer); and (j) the extent to which the supplier was willing to negotiate the terms and conditions of any contract for supply of the goods or services with the business consumer; and (k) the extent to which the supplier and the business consumer acted in good faith." 38 Section 51AA Trade Practices Act provides:

"(1) A corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories. (2) This section does not apply to conduct that is prohibited by section 51AB or 51AC." 39 When section 51AA was first enacted, it did not contain subsection (2) in its present form. Section 51AC was added to the Trade Practices Act after section 51AA, and by the same legislation as amended section 51AA(2) to its present form. As section 51AC was evidently intended to have practical effect, it must follow that relief will potentially be available under section 51AC in circumstances that do not involve unconscionability within the meaning of the unwritten law of the States and Territories. 40 In Hurley v McDonald's Australia Ltd (2000) ATPR ¶41-741 the Full Federal Court (Heerey, Drummond and Emmett JJ) considered whether a statement of claim should be permitted to be amended to include an allegation of unconscionable conduct under section 51AB Trade Practices Act. Because the question of construction of section 51AC arose in that context it was not necessary for their Honours to express a final view about any precise meaning that "unconscionable conduct" had in section 51AC. They said (at [21]-[22]): "… Nevertheless, it must be possible for the Applicant to demonstrate that the particular conduct alleged in the proposed new causes of action is capable of constituting unconscionable conduct, at least on some arguable construction of that expression.

For conduct to be regarded as unconscionable, serious misconduct or something clearly unfair or unreasonable , must be demonstrated - Cameron v Qantas Airways Ltd (1994) 55 FCR 147 at 179. Whatever "unconscionable" means in s51AB and s51AC, the term carries the meaning given by the Shorter Oxford English Dictionary, namely, actions showing no regard for conscience , or that are irreconcilable with what is right or reasonable - Qantas Airways Ltd v Cameron (1996) 66 FCR 246 at 262. The various synonyms used in relation to the term "unconscionable" import a pejorative moral judgment - Qantas Airways Ltd v Cameron (1996) 66 FCR 246 at 283-284 and 298." 41 In Attorney General (NSW) v World Best Holdings Ltd (2005) 63 NSWLR 557, Spigelman CJ (at [119], 583) said, concerning a different statutory provision, "Over recent decades legislatures have authorised courts to rearrange the legal rights of persons on the basis of vague general standards which are clearly capable of misuse unless their application is carefully confined. Unconscionability is such a standard." 42 He continued (at [121], 583): "Unconscionability is a concept which requires a high level of moral obloquy. If it were to be applied as if it were equivalent to what is "fair" or "just" , it could transform commercial relationships …" 43 Those remarks can equally, in my view, be applied to the notion of "unconscionable conduct" in section 51AC. 44 In Australian Securities and Investments Commission v National Exchange Pty Ltd (2005) 148 FCR 132; [2005] FCAFC 226; (2005) 56 ACSR 131 the Full Federal Court (Tamberlin, Finn and Conti JJ) construed section 12CC of the Australian Securities and Investments Commission Act 2001 (Cth). That section prohibits unconscionable conduct in trade or commerce in connection with the supply of financial services. The prohibition is in terms not materially different to section 51AC Trade Practices Act. Their Honours said (at 140; [30]) that section 12CC "was intended to operate as a 'mirror' provision to s 51AC of the Trade Practices Act …". Their Honours continued: "30 … Authority on s 51AC supports the proposition that the prohibition in s 12CC is not to be read down by limiting its operation only to circumstances where the common law would grant relief in respect of unconscionable conduct: Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (No 2) (2000) 96 FCR 491 at 502 per French J; Australian Competition and Consumer Commission v Keshow [2005] ATPR (Digest) 46-265 at [97] per Mansfield J and the cases and authorities there cited. It is equally clear both from the actual language of s 51AC and of s 12CC and from the extrinsic materials relating to s 51AC that these provisions were intended to build on and not to be constrained by common law case law: see Australian Competition and Consumer Commission v Radio Rentals Ltd [2005] FCA 1133 at [24]; and Debates . The language must be given its ordinary meaning and must not qualified by pre-existing constraints on liability: see Australian Competition and Consumer Commission v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253 at [30]-[37]; Pearson G, "The ambit of unconscionable conduct in relation to financial services" (2005) 23 (2) C&SLJ 105 at 123; Bigwood R, "Curbing Unconscionability: Berbatis in the High Court of Australia" (2004) 28(1) MULR 203." 45 Their Honours also said (at 142; [40]), concerning the list of factors the court was empowered to have regard to in deciding whether a contravention of section 12CC had occurred. "… These factors should be considered and weighed as a whole. Some may weigh in favour of a characterisation of the conduct as unconscionable and others may not. It is not appropriate to approach this list as exhaustive. This list is indicative of some of "the relevant circumstances"." 46 Consistently with Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 (at 492) the principles of construction propounded in the Full Federal Court in Hurley and National Exchange should also be applied in this court. Unconscionable Conduct - Application to the Facts 47 The learned primary judge relied upon several different elements in reaching the conclusion that the Appellant had engaged in unconscionable conduct. I will examine these in turn. Failure to Supply HP Parts 48 An important part of the allegation of unconscionability that Mr and Mrs Patton make is that the failure to supply the Hewlett-Packard parts that were ordered has seriously affected the cash flow, and hence the viability, of James Aston, and has rendered at least a significant part of its existing stock in trade, for all practical purposes, unsaleable. 49 The primary judge regarded the relevant failure to supply HP-only parts as being the failure that occurred after 30 May 2005. He said: "32. The inability or refusal of Canon Australia to supply "HP only parts" to James Aston in December 2004 may have been beyond the control of Canon Australia if Canon Australia did not have the parts because Canon Inc had not supplied them. The only evidence to that effect appears as assertions in correspondence tendered by Mrs Patton. 33. The refusal after 30 May 2005 is however to be seen in a different light. By then Canon Australia was able to supply the parts if it so wished." 50 There was some evidence from Mrs Patton that in the December 2004-January 2005 period Canon Australia replaced its computer system, "which took a long time to implement and did not work properly for quite a while. No orders were processed by Canon in December 2004 or in January 2005 presumably because of the new computers." In my view, both because the possibility of the new computer system interfering with regularity of supply had not been negatived, and because there was a possibility left open, even on Mrs Patton's own evidence, of Canon Australia not having the parts to supply, the primary judge was right in not drawing any conclusion that Canon Australia had engaged in unconscionable conduct up to 30 May 2005 by failing to supply. It must be borne in mind that a person who alleges that a transaction is unconscionable has the onus of proving that it is more likely than not that it is unconscionable. If the facts are such that there is a realistic possibility that a state of affairs exists in accordance with which the action of a defendant would not be unconscionable, the discharging of that onus may involve negativing the likelihood of that state of affairs existing. 51 In my view, however, the only change that arose on 30 May 2005 is that Canon Australia became able to supply a single order of HP-only parts, on the basis that it could take more than three months to supply the order. By 30 May, James Aston had a significant overdue debt to Canon Australia, that had accrued over the months January to April 2005. The existence of that debt was not due to any unconscionable behaviour on the part of Canon Australia. Canon Australia, by the terms of supply, reserved the right not to supply goods while amounts were overdue. The terms of the personal guarantees that Mr and Mrs Patton had executed acknowledged that their liability under the guarantee would continue even if Canon Australia refused to supply further goods to James Aston. In my view, the situation concerning failure to supply after 30 May was correctly summarised by Mrs Patton in cross-examination: "Q. So by July they'd agreed to provide the parts which made your old stocks saleable? A. That's correct. But they did it because of the lack of - because we owed them money." Failure to Supply for Cash In Advance 52 The learned primary judge was of the view that Mrs Patton's offers of 22 June 2005 and 27 July 2005 were in substance the same, and were an offer to remit the full price of each order, plus James Aston's margin, prior to delivery. The primary judge evidently regarded Canon Australia's refusal to supply the parts on those terms as one of the elements of unconscionable conduct. 53 In my view, the offer contained in the email of 22 June 2005 was not a simple offer to pay the full price of each order plus margin prior to delivery. It made it clear that the ability of James Aston to remit payment in advance of delivery was dependent upon James Aston's customers prepaying it. When James Aston was, according to the same email, experiencing cash flow problems, Canon Australia would be entitled to wonder whether Mrs Patton's assurance that her (unidentified) customers are "more than happy to pre-pay me" was a sufficient basis upon which to act. It would also be entitled to wonder to what extent there was overlap between the customers said to be more than happy to prepay, and the debtors who were experiencing cash flow problems. 54 Further, by the time of the letter of 27 July 2005, an imprecision had crept into Mrs Patton's proposal. Instead of offering to pay "before you ship", she offered to pass on the payments she received from customers "in line with Canon's delivery schedule" (whatever that may mean). 55 As well, the proposal that Mrs Patton was putting forward in both June and July 2005 was one that had as an essential element of it that James Aston would have the money pass through it, on the way from the customer to Canon Australia. If James Aston was experiencing cash flow problems, Canon Australia would be entitled to not feel total confidence about whether money paid by a customer to James Aston, would emerge from James Aston. I say that attributing no dishonesty whatsoever to Mr and Mrs Patton - it is a common event in Australian commercial life for a Pty Ltd company to give a charge over all its assets to a bank or other financier, and receivership or liquidation can be instigated by the bank or financier in a way and at a time not dependent upon any deliberate decision of the directors. There is no evidence about whether James Aston had given any such charge, but the fact that it was a possibility that had not been negatived is something that should be taken into account in deciding whether Canon Australia's failure to supply on the terms suggested by Mrs Patton had such a high level of moral impropriety that it could properly be described as "unconscionable". 56 In my view, Canon Australia could reasonably have expected to have been provided with more information than was contained in Mrs Patton's email of 22 June 2005 and her letter of 27 July 2005 before it felt confident that it would receive payment in advance for any "HP only" goods that it supplied. 57 As well, there is a distinct flavour in the evidence that Canon Australia was dependent upon being supplied by Canon Inc to be able to meet any orders placed on Canon Australia by James Aston. The evidence does not elucidate the extent to which Canon Australia had stock on hand from which to meet the order placed on 30 May 2005 or needed itself to order stock specifically to meet that order. Beyond the reference in the email of 30 May 2005 to the possibility that it would take three months to supply the order for HP-only parts in full, the evidence does not elucidate the extent to which time would elapse between James Aston placing an order on Canon Australia, Canon Australia placing an order on Canon Inc, Canon Inc supplying the parts to Canon Australia, and Canon Australia in turn supplying the parts to James Aston. There is a finding that "Canon Australia usually delivered orders within days of receipt of the order", but during the period January to July 2005 that situation did not apply in relation to HP-only parts. The reason why that is so appears, from the evidence, to be that Canon Inc would not supply those HP-only parts to Canon Australia. (There might be cases in which the Australian subsidiary of an overseas corporation has unconscionable conduct on the part of its parent attributed to it, but in the present case no allegation was made of unconscionability on the part of Canon Inc.) The proposal that Mrs Patton put on 22 June 2005 involved her paying Canon Australia once Canon Australia had stock on hand. It involved Canon Australia bearing the risk of ordering parts from Canon Inc, and finding, once the order arrived in Australia, that James Aston was not in a position to pay for it. I am prepared to assume that that type of risk is the type of risk that a supplier will often undertake for a regular customer who is creditworthy. Taking such a risk for a customer that was, by its own admission, experiencing cash flow problems may be a different proposition altogether. 58 As well, and particularly importantly, Mrs Patton's proposals in June and July made only a very limited offer to deal with the arrears of debt which, by then, were substantial. The offer to pay Canon Australia the cost plus margin, in relation to the shipment of parts that had arrived in Australia by 27 July, would have resulted in the arrears of debt being reduced only by an amount in the order of $10,000. That would still leave long-standing arrears of more than $160,000. Refusal to Accept Return of Stock 59 The primary judge also relied, as an element of unconscionability, upon Canon Australia having refused to accept return of James Aston's stock on hand in satisfaction of the debt or any part of it. There was no evidence concerning the age or condition of that stock. Mrs Patton put on no affidavit evidence to establish a value. In the course of being cross-examined, she referred to "the $190,000 worth of stock that we had". That value of $190,000 was evidently accepted by the primary judge. Even so, when it was not part of the terms of trade that Canon Australia would take back unsaleable stock, and when there was no evidence of the age or condition of the stock on hand, I am not persuaded that the failure to take it back was unconscionable. The Primary Judge's Conclusions 60 The fundamental finding of his Honour was as follows: "36. There may be circumstances in which refusal to treat on the terms offered by James Aston may be reasonable, although such circumstances do not readily come to mind. However, the distress of James Aston was brought about by actions beyond its control, and the accommodation sought from its trading partner, Canon Australia, involved no commercial risk to Canon Australia. 37. The refusal to supply the parts on the terms offered by James Aston was not reasonably necessary for the protection of the legitimate interests of Canon Australia. To the contrary, that refusal operated to the detriment of the legitimate interest of Canon Australia in recovering the debt owed in respect of earlier sales." 61 In my view, that passage contains error. For the reasons I have earlier given, Canon Australia would be entitled to take the view that the payment proposal put forward by Mrs Patton involved commercial risk to Canon Australia, and did not deal adequately with the long-standing debt. 62 There is some imprecision in the finding that "the distress of James Aston was brought about by actions beyond its control". It is not clear what distress, at what time, was being talked about. It is not readily apparent how any failure by Canon Australia to supply HP-only parts produced the effect that the goods that were supplied during January to April 2005 inclusive were not paid for in accordance with the credit terms at the end of February to May 2005 inclusive. There was no attempt to demonstrate by evidence that it was the unavailability of HP-only parts that caused the cash flow of James Aston to be reduced to such an extent that it could not pay for the Canon parts that were being supplied to it during January to April 2005 inclusive. Further, even if it were correct that the distress of James Aston was brought about by actions beyond its control, what really matters for present purposes, is whether the failure of James Aston to pay for the Canon goods that were supplied to it, was caused by unconscionable conduct on the part of Canon Australia. In my view, this has not been shown. As well, it seems that at least part of the reason for the financial distress of James Aston was that its own debtors were experiencing cash flow difficulties. 63 The primary judge inferred (at [40]) that "the refusal of Canon Australia to supply 'HP only parts' to James Aston after 30 May 2005 was not generated by genuine financial concerns." 64 The evidence does not establish any "refusal" to supply the parts after 30 May 2005 - rather, it establishes a failure to supply the parts at that time. 65 The primary judge recognised that this finding was an inference. He stated its basis as being (at [41]): "… the trading history between Canon Australia and James Aston which include interruptions to supply for suspect motives, the fact that Canon Australia refused to supply the parts on terms that it be paid in advance, and the fact that Canon Australia would not countenance the mitigation of its loss in any measure, by accepting return of stock to the value of approximately $190,000." 66 The first matter relied on by the primary judge relates to the 1999 interruption to supply. That interruption did not relate to HP-only parts. No ground of appeal relates to the judge's decision to admit evidence of the earlier interruption to supply. Even so, it provides, in my view, the flimsiest basis for any inference concerning the motivation of Canon Australia in ceasing to supply James Aston in 2005. I have earlier explained how the apparent unwillingness of Canon Australia to agree to the payment terms that Mrs Patton proposed in June and July 2005 was more complex than a simple refusal to agree to supply on payment in advance. I would decline to draw the inference that the primary judge drew. 67 In my view, it has not been shown that the conduct of Canon Australia, in failing to supply HP-only parts, was unconscionable. Nor has it been shown that the failure of Canon Australia to supply HP-only parts has caused damage to Mr and Mrs Patton equal in amount to the cost price of the parts for which James Aston has not paid. 68 Since writing the above, I have had the opportunity to read the draft judgment of Basten JA. I would prefer not to make a decision about the correctness of the alternative ground upon which his Honour favours upholding the appeal. It is not a ground that arose in the course of argument of the case. As well, there is a line of authority that has held that, at least sometimes, a guarantor who has guaranteed the payment of what is actually owing by the principal will not be bound by a judgment or arbitration award obtained by the creditor against the principal: Re Kitchin; ex parte Young (1881) 17 Ch D 668; Begley v Attorney-General (NSW) (1910) 11 CLR 432; Bruns v Colocotronis ("The Vasso") [1979] 2 Lloyds Rep 412. (It may be otherwise if the guarantee is of the amount of any judgment or award against the principal (Compania Sudamericana De Fletes SA v African Continental Bank Ltd ("The Rosarino") [1973] 1 Lloyds Rep 21; Sabemo Pty Ltd v de Groot (1991) 8 BCL 132 at 145 ff).) Further, consideration would need to be given to the significance, for the type of estoppel being invoked here, of the fact that the judgment in question against the company was in effect a default judgment. I would prefer not to embark upon these questions when another path to decide the case is open. Orders 69 I propose the following orders:

(3) In lieu thereof, order that judgment be entered for the Appellant against the First and Second Respondents in the sum of $175,869.48.

(4) Order that interest be paid on that amount at the rate prescribed from time to time by Schedule 5 Uniform Civil Procedure Rules 2005 from 8 December 2006.

(5) First and Second Respondents to pay the costs of the appeal.

(6) First and Second Respondents to pay the costs of the Appellant of the trial. 70 HARRISON J: I agree with Campbell JA. **********

19/09/2007 - Correcting typographical error - Paragraph(s) 3

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