Federal Court of Australia|1994-05-13|Before: Re J, O'Loughlin J

The Applicant's claims: Kodak's Defence and cross-claim

56. Last efforts to resolve the disputes between the parties were made in the latter part of March and early April 1992 but they were unsuccessful and Mr Knox instituted proceedings in the name of Canvas Graphics on 9 April 1992; it has sought damages under three heads. First, it has alleged that Kodak was under a duty of care to Canvas Graphics and that it breached that duty of care. Secondly, it has alleged breaches of s52 of the TPA, s56 of the Fair Trading Act, 1987 (SA) and s7 of the Misrepresentation Act, 1971 (SA) in that the representations pleaded in the statement of claim "were false, misleading, deceptive and untrue", and, to the extent to which any of them related to the future, there were no reasonable grounds for believing that they were true. Finally, it was pleaded that Kodak breached an implied term of the rental agreement in that -

57. In par35 of its statement of claim, Canvas Graphics listed nineteen complaints. They were either alleged faults in the equipment that was the subject of the rental agreement or claims relating to the conduct of Kodak. The nineteen issues were, in turn, advanced as the particulars of negligence, the particulars of the breaches of statutory duties and the particulars of the breaches of the implied term.

58. In its defence, Kodak has advanced four main propositions. First, it has denied each of the allegations that have been made against it, being those that are particularised in par35 of the statement of claim. Then it has pleaded an accord and satisfaction, claiming that on 10 April 1992 (the day after the institution of the proceedings in this litigation) Dr Switkowski (who was then the Deputy Managing Director of Kodak) and Mr Knox verbally agreed to settle the outstanding differences between the parties upon the terms recited in par37 of the defence. Next, Kodak raised a defence under the title of "Causation". It pleaded, in effect, that any failure on the part of Kodak to perform its contractual, statutory and other obligations and duties was caused by a combination of Canvas Graphics failing to make its operators available to Kodak for training on the equipment, by it failing to afford to Kodak personnel reasonable and exclusive access to the equipment so that it might be tested and serviced and by Mr Knox "consistently and persistently" subjecting Kodak staff to abuse. It also pleaded under the heading of "Causation" that the causal effect of any breach on its part was limited by reason of the expectation of the parties that the Prophecy system would be superseded by new technology within the period of the rental agreement. That particular argument can be dismissed summarily because it was contradicted factually by Mr Orth at pp3284-5 in a passage of his evidence which is quoted later in these reasons. Finally, Kodak alleged that Canvas Graphics had failed to mitigate its losses in that it repudiated the settlement that had been agreed between Dr Switkowski and Mr Knox. On the subject of mitigation, Kodak also claimed that Canvas Graphics could have and should have obtained other equipment if (which was denied) the Kodak Prophecy equipment was inadequate for its purposes.

59. Kodak has filed a cross-claim against Canvas Graphics. Upon the premise that the court finds that there was an accord and satisfaction as pleaded in the defence, Kodak seeks by way of damages, $14,298 being the equivalent of two months' rent for the equipment plus $11,915.29 which is alleged by Kodak to be a compromised amount that is owing by Canvas Graphics for the supply of consumables. But, in the event of the court not finding in its favour on the issue of accord and satisfaction, Kodak claimed, in the alternative, $100,086 being rent and damages equivalent to rent for a period of fourteen months from October 1991 to the return of the equipment in December 1992 together with the sum of $22,915.29 being monies due and unpaid for consumables. Kodak claimed interest and costs under its alternate heads of claim.

60. Upon his return from overseas in late March 1992, Dr Switkowski read a facsimile transmission from Mr Knox dated 25 March (Doc 138) in which he said that he had instructed his solicitors "to prepare for litigation on behalf of the company". The letter suggested that a settlement might still be achieved because the last sentence read:

"If you wish to act to save the situation including the

reputation of all, please do so promptly as this is the last

chance."

Dr Switkowski responded by speaking first with Miss Johnson and then with Mr Knox by telephone. He described his approach in these terms:

"Well, upon my return it seemed reasonably clear that the

company was in considerable difficulty and yet it was an

organisation that we at Kodak felt we could succeed with

into the future. It was a business that was an attractive

business to us and so we had some equity in the success of

Core Text and so looking at alternatives that might provide

them with some sort of bridging finance seemed to me to be a

reasonable thing to explore." (p3037)

61. Subsequent to those discussions, Dr Switkowski instructed Mr Orth and Mr Hook to discuss with Mr Knox the terms under which a settlement might be achieved. This led to an exchange of correspondence commencing with an offer from Mr Hook dated 3 April (Doc 143), Mr Knox's counter offer dated 5 April (Doc 144) and Mr Hook's reply to that counter offer (Doc 145) dated 6 April 1992. At this stage the parties had moved quite some way towards an agreement but there were still several very contentious areas that had not been resolved. But Mr Knox's reply to Mr Hook of the same date (Doc 146) seemed to close the door on further negotiations. He expressed his disappointment, saying that he had "no choice but to close Core Text as a direct result of Kodak's actions" and that Kodak would be "hearing very shortly" from the solicitors for Canvas Graphics.

62. It is agreed that Dr Switkowski and Mr Knox had further settlement discussions by telephone throughout Friday 10 April 1992. Dr Switkowski said in evidence that he traversed each issue that remained outstanding and that, together, he and Mr Knox reached agreement - either one side or the other conceded a point and, in some cases, an appropriate half-way mark was reached.

63. In his statement (Ex RS19) Dr Switkowski had claimed that, at the end of the last telephone conversation, Mr Knox had said words to the effect "All right, its a deal". He was questioned further by his counsel on that subject during his evidence-in-chief:

"By the end of your discussions with Mr Knox on Friday, the

10th, were there any issues that you perceived were

outstanding between you and Mr Knox with respect to the

reaching of an agreement?... In my opinion there were none."

(p3043)

64. According to Dr Switkowski, he concluded the last of his telephone discussions with Mr Knox by telling him that he would send Mr Knox "a written confirmation on Monday together with the draft Release Statement" (Ex RS19, p13). In par37 of its defence Kodak pleaded that the "covenants and arrangements" that the parties had agreed upon were as follows:

"37.1 the parties would enter a new agreement in lieu of the

Rental Agreement for the lease to Canvas Graphics of

the same equipment as covered by Appendix A of the

Rental Agreement save and except to the extent that

the equipment had been varied by consent to the 10

April 1992."

(The variation was, of course the replacement of the Linotronic 530 for the Scantext).

"37.2 the first payment by Canvas Graphics pursuant to the

new agreement would occur on 1 November 1992."

(Thus, upon the assumption that there was an accord and satisfaction, there were rental instalments for November and December due as at the date on which the equipment was returned).

"37.3 Kodak would provide to Canvas Graphics an interest

free loan in the sum of $100,000 for 5 years."

(Depending on prevailing interest rates and the fixing of an appropriate discount rate this could have had a present value of about $80,000).

"37.4 Canvas Graphics undertook to use only Kodak

consumables during the period of the new agreement,

37.5 Kodak would forgive Canvas Graphics the sum of $11,000

in respect of the current account of Canvas Graphics

with Kodak for consumables."

(This was said to include an amount to cover Mr Knox's costs of visiting Boston).

37.6 Canvas Graphics would give to Kodak a full release and

discharge in respect of any and all claims that Canvas

Graphics might then have against Kodak,

37.7 the terms of the agreement were to be confidential,

37.8 save as varied the terms of the Rental Agreement would

apply to the new agreement."

65. Mr Knox's version of the phone conversations on 10 April is not materially different save for the manner in which they were concluded. On Dr Switkowski's version of the events, agreement had been reached by each side making executory promises. But according to Mr Knox the matter concluded with his saying:

"I will agree to that, subject to finalization of the total

package and to Prophecy being made to work immediately."

66. Both men agreed that there was then a reference by Dr Switkowski to referring the matter to Kodak's legal department. He said that he had told Mr Knox that the legal department would be sending a draft of the settlement agreement on Monday. He added:

"I urged him to read it carefully. We had - I was sensitive

to the fact that the words that were to be used to release

Kodak from any claims that Core Text may have had were yet

to be drafted by the legal department, and I wanted Mr Knox -

given what I felt to be a fairly kind of brittle approach

to some of the stuff - to read the words carefully to

understand that they were necessarily going to be of a legal

nature and that he should feel comfortable that the intent

of our agreement would be captured in that statement, and

that we should be able to complete the agreement formally

the following day." (p3044)

On the other hand, Mr Knox said in his statement (Ex AS1 p158) that Dr Switkowski had said:

"I will agree to your propositions this afternoon and I want

to get you money quickly but I don't want you to finally

agree to anything until you have received the document our

legal department is preparing. You will receive that by

3.30 pm on Monday."

67. A draft of a document entitled "Deed of Settlement and Release" was forwarded by Kodak's legal department under cover of a letter dated 13 April 1992. It was forwarded to the solicitors for Canvas Graphics because Kodak's legal department had been served with a copy of the application and statement of claim that had been issued out of this court on 9 April 1992. I accept Dr Switkowski's evidence that he did not know about, and that Mr Knox did not tell him of, the existence of these proceedings during the course of their settlement discussions throughout 10 April.

68. In one respect, at least, the Deed contained a significant omission. In his counter-offer to Mr Hook (Doc 144 dated 5 April 1992) Mr Knox had written:

"Subject to satisfactory agreement including the successful

supply and installation of the HPG 64mb Accelerator Board

and accurate and proper calibration of the Screen without

further delay, we agree to release Kodak from any Claims."

Kodak accepted this particular provision but no part of it was contained in the draft deed. Independently of this point, Mr Knox said, but Dr Switkowski disputed, that other important matters had been omitted from the draft deed. Mention of one, as an example, will suffice. Mr Knox had sought, as a term of settlement, that Kodak would give Canvas Graphics "access to all technical literature, product information and support from KEPS Billerica MA." Mr Knox said that this remained a condition of the agreement; Dr Switkowski said that he had refused to agree to it and that Mr Knox had not pressed the point (p3041). I prefer the evidence of Dr Switkowski to that of Mr Knox on this issue. I found him a very careful and concerned witness. As appears later in these reasons, he was at pains to allow for Mr Knox's views and was prepared, where appropriate, to make concessions. He was as calm as Mr Knox was angry and ruffled. Subject to a most important matter which I will address in due course, where the evidence of Dr Switkowski conflicts with the evidence of Mr Knox, I accept the evidence of Dr Switkowski. In particular, I accept that Dr Switkowski genuinely believed that he had successfully negotiated a settlement with Mr Knox. He did not have his legal department send the draft deed as a working paper for further discussions; he had it prepared because of his belief that the matter was concluded.

69. Kodak's view that the matter had been settled is also evidenced by the language of their letter to Messrs White Berman dated 13 April 1992 (Doc 152).

"The matter was finally settled between Andrew Knox and Dr

Switkowski directly on the basis that a Deed of Settlement

and Release would be forwarded to your clients today.

Under the circumstances it seems best to forward that

document to you.

You will accordingly find enclosed the proposed Deed of

Settlement and Release for your comments."

70. Canvas Graphics did not reply until 24 April (Doc R51) when Messrs White Berman wrote:

"Indeed our client is of the view that he could not possibly

enter into any agreement whilst the equipment still does not

perform to specification."

Mr Knox maintained this attitude under cross-examination. At p1392 he said:

"I had been waiting for then seven months for them to do it.

I was not prepared to enter into agreement and I made that

clear, unless there was a clear undertaking it would work

and work immediately."

71. The concept of "Accord and Satisfaction" has been explained by Scrutton LJ in British Russian Gazette and Trade Outlook Ltd v Associated Newspapers Ltd (1933) 2 KB 616 at 643-4 in these terms:

"Some difficulty in the authorities results from the fact

that the early view of the law was that consideration for an

accord must be executed, but at a later period the Courts

took the view that it was sufficient if the consideration

was executory. The matter is fully discussed in Professor

Holdsworth's work, and the work of the late Sir John Salmond

and Professor Winfield, which, in my opinion, accurately

states the position. Accord and satisfaction is the

purchase of a release from an obligation whether arising

under contract or tort by means of any valuable

consideration, not being the actual performance of the

obligation itself. The accord is the agreement by which the

obligation is discharged. The satisfaction is the

consideration which makes the agreement operative. Formerly

it was necessary that the consideration should be executed:

'I release you from your obligation in consideration of 50 pounds

now paid by you to me.' Later it was conceded that the

consideration might be executory: 'I release you from your

obligation in consideration of your promise to pay me 50 pounds

and give me a letter of withdrawal.' The consideration on

each side might be an executory promise, the two mutual

promises making an agreement enforceable in law, a contract."

72. Murphy J quoted sections of the above passage and relied upon them in Fraser v Elgen Tavern Pty Ltd [1982] VicRp 38; (1982) VR 398 at 400-401 and I respectfully adopt it as a correct statement of the law.

73. The classical exposition of the law dealing with the transposition of negotiations to concluded agreement is that contained in the joint judgment of Dixon CJ and McTiernan and Kitto JJ in Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353 at 360:

"Where parties who have been in negotiation reach agreement

upon terms of a contractual nature and also agree that the

matter of their negotiation shall be dealt with by a formal

contract, the case may belong to any of three classes. It

may be one in which the parties have reached finality in

arranging all the terms of their bargain and intend to be

immediately bound to the performance of those terms, but at

the same time propose to have the terms restated in a form

which will be fuller or more precise but not different in

effect. Or, secondly, it may be a case in which the parties

have completely agreed upon all the terms of their bargain

and intend no departure from or addition to that which their

agreed terms express or imply, but nevertheless have made

performance of one or more of the terms conditional upon the

execution of a formal document. Or, thirdly, the case may

be one in which the intention of the parties is not to make

a concluded bargain at all, unless and until they execute a

formal contract."

74. Mr Wells QC, counsel for Kodak, argued that the events of 10 April 1992 constituted an agreement between the parties that fell within the first category. Should that be correct, then it would mean that an accord and satisfaction had been reached on Friday 10 April 1992. If, as it was submitted on behalf of Canvas Graphics, the draft deed contained material omissions, that fact would not disturb the existence of the concluded agreement unless, of course, it could be argued that the material omissions were not accidental omissions but a deliberate repudiation of the oral agreement. In the alternative, Mr Wells submitted that a concluded agreement, falling within the second category had been reached. He likened Dr Switkowski's concern that Mr Knox check the draft deed to an agreement that was "subject to solicitor's approval" - as to which see the remarks of Richardson J in Provost Developments Ltd v Collingwood Towers Ltd (1980) 2 NZLR 205 at 213-214:

"They had not left it to their solicitors to decide whether

or not there would be a contract."

See also Associated Grocers Co-operative Limited v Hubbard Properties Pty Ltd (1986) 42 SASR 321 at 337 per Zelling J.

75. It seems to me, however, that the proposition that a final agreement was reached between the parties on 10 April 1992 must fall at the first hurdle. I have come to that conclusion for two reasons: my assessment of Mr Knox's character and a concession most generously offered by Dr Switkowski. As to Mr Knox's character, it must be remembered that he had had a long and distressing episode with Seligson and Clare. Irrespective of who was at fault, the fact remained that he had not been able to make a success of his bureau business with the Agfa equipment. He had turned to Kodak and its Prophecy system as his saviour. But after six months (from October 1991 to April 1992 and, again, without, at this stage, attributing blame) he found himself still having trouble with his replacement equipment. In those circumstances, it is more likely than not that a person such as Mr Knox would not be prepared to accept promises. He would demand action: he would want, as a precondition of settlement, a fully operational Prophecy system. In cross-examination Dr Switkowski was asked whether Mr Knox had said, during the course of negotiations on the Friday, that "The Prophecy system must be working"? Dr Switkowski was prepared to concede that Mr Knox "may well have done that" (p3070). I have therefore come to the conclusion that it was a material term of the concluded negotiations that Kodak had to get the Prophecy system operational immediately. Until that condition was fulfilled, the parties were not bound to the agreement. As Kodak did not get the Prophecy system operational, I find that the defence of accord and satisfaction is not open to it.

76. Canvas Graphics pleaded that Kodak breached an implied term of the rental agreement in that the equipment was not of merchantable quality and was not suitable for Canvas Graphic's purposes. Those purposes were identified in the pleadings by the applicant, first, as "an alternative colour production system": that is, a system that could do the work that the Agfa Colour-Scape system was unable to do; and, secondly, as a system that could output, at least, newspaper broadsheet size. Clause 3 of the printed conditions of the rental agreement refers to the separate issues of merchantability and purpose. It provides:

"The customer shall carefully examine and check the

equipment and any installation work by Kodak at the date of

delivery/installation and shall forthwith notify Kodak and

specify relevant particulars if in the opinion of the

customer the same does not accord with the description

thereof is not of merchantable quality or is unsuitable for

the customer's purposes." (Doc 19)

77. Kodak accepted that, at common law, an owner of goods impliedly contracts with the hirer of those goods that they will be reasonably fit for a specified purpose or for the ordinary purpose that is indicated by their nature. But despite the contents of clause 3, Kodak would not concede that there could exist, at common law, an implied condition in contracts of hire that the goods hired will be of merchantable quality. As to clause 3, it was submitted that it did not import an implied term of merchantability into the agreement: rather, so it was claimed, the clause was designed to exclude such a question arising during the currency of the lease. In rejecting this argument, I do not consider that it is necessary to go beyond the particular facts of this case. I believe that it is sufficient to find, as I do, that in this case, Mr Knox clearly made known to Mr White that he was having difficulties outputting colour on the Agfa Colour-Scape system. It was in that context that Mr White thereafter raised with Mr Knox the existence and utilization of the Prophecy system. Subsequent discussions with Mr Brodie at the demonstrations then extended beyond the system to the peripheral equipment. As to the respondent's argument that clause 3 exists to prevent a customer complaining about lack of merchantability after installation, that argument, if correct, would suggest that he could complain at the time of, or before, installation. If that is correct then the respondent's argument that there can not be such an implied term in a contract of hire is contradicted.

78. The process by which terms will be implied into a contract so that they may provide "business efficacy" is that contained in the advice of the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings [1977] HCA 40; (1977) 16 ALR 363 at 376:

"Their Lordships do not think it necessary to review

exhaustively the authorities on the implication of a term in

a contract which the parties have not thought fit to

express. In their view, for a term to be implied, the

following conditions (which may overlap) must be satisfied:

(1) it must be reasonable and equitable; (2) it must be

necessary to give business efficacy to the contract, so that

no term will be implied if the contract is effective without

it; (3) it must be so obvious that 'it goes without saying';

(4) it must be capable of clear expression; (5) it must not

contradict any express terms of the contract."

Reference to this authority and to the subsequent decisions of the High Court in which that statement has been accepted and approved are to be found in the judgment of Gummow J in Service Station Association Ltd v Berg Bennett and Associates Pty Ltd [1993] FCA 445; (1993) 117 ALR 393 at 399.

79. Having regard to the findings that I have made with respect to the information that Mr Knox gave to Mr White commencing in May 1991, I am satisfied that the rental agreement contained implied conditions of merchantability and suitability. The issue of suitability may be expanded in these terms: Kodak held out that the Prophecy desk top publishing system would be a suitable system for Canvas Graphics to use for the purposes of PostScript colour output. As for merchantability, there was an implied term that the system would be operational and capable of fulfilling its promised functions. I am also satisfied, independently, on the twin subjects of merchantability and suitability that Kodak impliedly recommended to Canvas Graphics that a Scantext imagesetter would be an appropriate imagesetter to interface with the Prophecy system. I am fortified in coming to both those conclusions by having regard to the evidence of Mr Hook and a letter of 30 August 1991 (Doc 17) ostensibly written by Mr David White to Mr Knox. In fact it was Mr Hook's evidence that the letter was composed by Mr Scroop for signature by Mr White. Both men were senior executives of Kodak. Mr Scroop was the Regional Sales Manager responsible for South Australia and Mr Hook was the National Sales Manager (Printing and Publishing Imaging Group).

80. In the letter of 30 August 1991 to Mr Knox, Kodak had said:

"Kodak has purposely delayed the release of the Prophecy

system until such time that it was perfected, extensively

tested for reliability, meeting market expectations and our

technicians, demonstrations, customer support people and

sales representatives were fully trained." (Doc 17)

That statement must be read in the knowledge that it did not just refer to the independent working of the Prophecy system; it also referred, of necessity, to the ability of the Prophecy system to interface with appropriate scanners at the front end and appropriate imagesetters at the output end.

81. In cross-examination Mr Hook was asked whether he held the view that was expressed in Doc 17 as at 30 August 1991. His reply was circuitous but I take it that he adhered to that view. He said:

"The equipment had been thoroughly tested in our modern

studio. Our service people had been trained. Our

demonstrators - in as much as David Brodie - had been sent

to the US and trained and as of that date we had put a

select group from the sales team through a two week training

program." (p3100)

82. The respondent raised an alternative plea in par32 of its defence and it is that to which I now turn. It claimed that if the equipment failed to perform, the cause of the failure was the conduct of Canvas Graphics (and especially Mr Knox) as particularised in par39 of the defence. Broadly the conduct of which Kodak complained may be summarised as the failure of Canvas Graphics to present its operators for training, the failure of Canvas Graphics to allow proper access to Kodak personnel to test and investigate the equipment, the attempts by Canvas Graphics operators to operate the equipment without adequate training (including inappropriate attempts to enhance or alter its operation) and finally the conduct of Mr Knox in "consistently and persistently" abusing Kodak staff.

83. As Mr Knox's conduct is central to all these issues, it is appropriate, first, to assess the competing submissions on this subject. Kodak argued that his conduct was so extreme that, if it be found that Kodak has any liability in tort or for breach of statutory duties, Mr Knox's conduct would constitute contributory negligence. And if it be found that Kodak was in breach of its contractual obligations, then an assessment of consequential losses could not be undertaken without having particular regard to the conduct of Mr Knox. On an issue of causation, Kodak has mounted a case based on Mr Knox's conduct, claiming that his, and therefore Canvas Graphics' conduct had a direct causal effect on the losses that Canvas Graphics has suffered.

84. To understand the competing arguments that have been advanced on this topic, it needs to be emphasised that a deep and bitter enmity developed between Mr Knox on the one hand and certain members of Kodak's staff on the other. This has resulted in both sides going to extremes to advance their respective causes. I reject Mr Knox's protestations that, although angry and frustrated at times, he was never abusive, but I also note that, on some occasions, some of the Kodak witnesses (and Mr Brodie in particular) allowed their personal feelings of dislike for Mr Knox to colour their evidence. For example, it was specifically pleaded in par39.4.1 of the defence that:

"Knox caused service staff from Intergraphica Ltd (sic) in

attendance to service the Scantext 2051PD Imagesetter to

leave the premises without completing their work by reason

of constant threats and abuse."

85. Although Kodak had the obligation (as between it and Canvas Graphics) to install the imagesetter along with the Prophecy system in Canvas Graphic's premises, it had arranged with Intergraphica that Intergraphica would supply the personnel for that installation. Those persons were Mr Osborne and Miss Garris.

86. Mr Osborne was called as a witness by Canvas Graphics; neither party called Miss Garris. In evidence-in-chief (p1980) Mr Osborne said that during the time, in October 1991, when he was at the premises of Canvas Graphics installing the Scantext imagesetter, Mr Knox neither swore at him nor did he use offensive language. He added, however, that Mr Knox did speak to Miss Garris "in a rather harsh manner" adding that he (Mr Osborne) "got fairly upset" as a result. Asked whether Mr Knox had used offensive language towards Miss Garris, Mr Osborne replied "he was sort of yelling at her in a raised voice. As far as using language, offensive language, I don't think so, no." Under cross-examination Mr Osborne acknowledged that by the second day "the atmosphere became a bit strained" and by the third day "the atmosphere was quite strained" (p1983). Mr Osborne recalled that Mr Brodie had been present during the attempted installation of the Scantext imagesetter and it was put to Mr Osborne in cross-examination (pp1983-4);

"Well, let me see if I can refresh your memory. Do you

recall saying to Mr Brodie words to this effect: 'I will

cock that guy', or, 'I'll cock him out' - or words to that

effect?... I can tell you exactly when that happened now

you've asked the question. It was the day that I spoke of

with Miss Garris. I said to David, 'If this guy keeps this

up I'll drop him'. David said to me, 'Don't do that its not

worth it'."

Nevertheless, despite repeated attempts by the cross-examiner, Mr Osborne would not concede that Mr Knox's conduct had amounted to abuse - either of him or of Miss Garris. In particular Mr Osborne negated the suggestion that he or Miss Garris left the premises of Canvas Graphics as a result of Mr Knox's conduct. He made it quite clear that they left the premises because, to his frustration, he could not get the Scantext imagesetter operational, an event that he described as "very unexpected". He offered as an explanation the proposition that certain software was needed from Germany and would not be available for "at least 6 months" (p1981).

87. Even though counsel for Kodak announced, during the course of his opening, that his client no longer pursued the allegation in par39.4.1, the contents of that paragraph were still the subject of cross-examination of Mr Brodie. The following extract from his cross-examination during which he was given the opportunity of reading par39.4.1 establishes, in my opinion, that Mr Brodie had jumped to a conclusion as a result of Mr Osborne leaving the premises of Canvas Graphics a day earlier than expected:-

"Have you ever been of the opinion that Knox caused the

service staff from Intergraphica to leave the premises as is

alleged without completing their work by reason of constant

threats or abuse - sorry, threats and abuse? Just take your

time to absorb it?... Yes, yes. I was of the opinion - I'm

trying to be fair here. I was of the opinion that by the

end of the Thursday of that week that the Scantext

imagesetter was not going to work, that the people in

Germany had indicated there was a problem. I knew that Mr

Osborne left on the Wednesday and that Adrienne Garris left

on the Thursday. I freely admit that by the Thursday there

was nothing more that they could do but that on the

Wednesday I was of the opinion that Mr Osborne left a day

early because of but not the sole reason, but part of the

reason was the atmosphere in the place. That is about the

most honest answer I can give you there. That's the way I

recall it.

Would you agree with me now that the service staff from

Intergraphica in attendance at Knox's premises to service

the Scantext imagesetter did not leave the premises without

completing their work by reason of constant threats and

abuse?... There were a lot of threats and there was a lot of

abuse but I tend to have some difficulty with that

paragraph.

Would you agree with me it is wrong, Mr Brodie?... Well,

what I'm trying to say is that Mr Osborne left a day

earlier. Part of the reason for his departure was his

feelings about Mr Knox, especially the way he was treating

Adrienne Garris, but that's as far as I could take that."

(p2645)

88. On the following page it was put to Mr Brodie that the allegation in par39.4.1 was "wrong" and he replied "It is not totally correct".

89. Mr Brodie is a quiet, sincere man; he is very mild mannered and, I would think, he might be overly sensitive. He certainly could not cope with Mr Knox and his outbursts. When he said, speaking of his later visit to Canvas Graphics in December 1991, that he would never return - even if it cost him his job (p2543) - he spoke with intensity and total conviction. I believed that statement without reservation. Whatever it was that Mr Knox said to him, it was more than Mr Brodie could stand. I am satisfied however that Mr Knox would have had an entirely different perception. His manner in the witness box readily identified him as a person who is arrogant and self-assured by nature. He has total confidence in his own ability. He is quick to temper and thinks nothing of swearing at and about people and generally heaping abuse on them. That is his character; such a person, thoughtless of the feelings of others, would consider his conduct wholly justified when others would describe it as abusive.

90. Mr Knox's acerbic personality, more than anything else, was responsible for this litigation. It was his outright rudeness that alienated various members of the Kodak staff. In turn they, not unnaturally, turned against Mr Knox and, as a result, in some cases, they have exaggerated his conduct.

91. In my opinion it is not necessary to descend into detail, that is, it is not necessary to determine the exact words that Mr Knox might have said to a particular person on a given occasion. It is sufficient to note that Mr White gave evidence that during the period of installation commencing 21 October 1991 Mr Knox became increasingly angry and that he, Mr White, felt "very embarrassed and uncomfortable". Mr Scroop gave the same sort of evidence. He volunteered that he had said to Mr Knox that he (i.e. Mr Knox) was the one who had chosen the Scantext and wanted it included in his package and it was he (Mr Knox) who had negotiated the price directly with Intergraphica. I am of the opinion that Kodak, by using the Scantext at the demonstration, had impliedly recommended it and Mr Knox was justified in having the same view. Mr Scroop's attitude of disassociating responsibility would, therefore, have justifiably made Mr Knox angry. I do not, however, consider that it justified language such as:-

"That its, take your fucking equipment and get out of here.

You people don't know what your doing."

Even if those were not the exact words that were used by Mr Knox on that occasion, they are indicative of the manner in which he insulted people.

92. This attitude of personal abuse was the subject of evidence by other witnesses. For example, Mr O'Sullivan, in a discussion with Mr Knox on 9 January 1992, suggested that a particular expert visit Mr Knox's premises. Mr O'Sullivan went on in his statement to say:-

"Knox then became instantly abusive and started using f -

words and saying that I was as useless as Brodie..."

Mr Hagan, a technician employed by Kodak claimed that Mr Knox said to him:-

"Why are you taking so long? You fucking people are

hopeless. You don't know what your doing."

Mr Gardiner was, at the time of giving his evidence, a senior sales executive, electronic products, at Kodak, a position which he had held for eighteen months. He referred to an incident that occurred on Sunday 29 March 1992 at Canvas Graphics' premises. In paragraph 18 of his statement RS22 he said that Mr Knox became angry:-

"Whereupon Knox's face went a deeper shade of red, he became

extremely agitated and aggressive and stood up and kicked

his chair away from the table and shouted:

'Kodak are the most ignorant pack of c....s I have

worked with and White is one of the worst'."

Asked in cross-examination how he felt at the time of this incident, Mr Gardiner replied:-

"I personally felt like getting on the next plane to Sydney

and leaving it at that. I could see we were in conflict."

(p3178)

93. It is of some significance to mention that no Kodak people called on Mr Knox after that episode.

94. The evidence of Mr Orth, who, of the Kodak witnesses, was next in seniority to Dr Switkowski was quite damning of Mr Knox. He was asked in cross-examination to explain Kodak's business practices regarding offers to customers of upgrades of hardware and software. He explained:

"In the normal course of business any upgrade would be

offered on the basis of an adjustment to the monthly rental

payments in terms of whether we would waive that or not -

where we would waive the payment, the charge - it would be

conditional on several factors, one of which obviously is

the level of business that we are doing - consumable

business. Another is the payment history of the customer

and one extremely one is the relationship we have with that

particular customer. I guess on all of those three counts

in the case of Andrew Knox he really strikes out on each one

of those, particularly the way that he treated my people in

the attempt that we were trying to establish the system for

him. I had people I was very concerned about that were

physically ill at the treatment they were getting so on that

account alone I was particularly concerned about the

business relationship or the lack of a business relationship

with this particular customer. On those conditions it would

not only be probably not offered but certainly would not

consider waiving any costs." (pp3284-5)

95. Bearing in mind that most of the extracts of evidence to which I have just referred have come from written witness proofs that were exchanged before the commencement of trial, it was put to Mr Knox in cross-examination (p1331):-

"Well, you are aware of the nature of the abuse that is

alleged against you by ...? ... Yes, and it did not occur."

I reject Mr Knox's answer; I am overwhelmed by the consistency of the complaints that were made against him. I repeat that there were degrees of exaggeration brought about by the enmity which had developed and I have allowed for that in coming to my conclusion. But it seems clear to me, and I hold, that Mr Knox is a person who is, by nature, quick to abuse and quick to pepper his abuse with the most vulgar and (to some) the most offensive of the traditional Anglo-Saxon expletives. It is quite incredible that such an intelligent man should behave in such a manner. One need not be a student of human nature to observe that conduct of that nature will inevitably cause an adverse reaction from most people.

96. I have not overlooked Mr Morecombe's detailed and painstaking referrals and cross-references to the oral evidence and written statements. He has amply established areas of inconsistency and exaggeration. It is for that reason that I have expressly declined to make findings as to the exact words that may have been used by Mr Knox on a particular occasion.

97. In his final submissions, Mr Morecombe submitted that I should ignore the evidence of Mr Brodie; it was argued that Kodak's own witnesses had proved him incompetent. I am not prepared to make that finding; it is too harsh. I must however find, as I do, that the difficulties that Mr Knox experienced in his attempts to operate the Prophecy system were beyond Mr Brodie's capabilities. That conclusion is, in my opinion, inevitable. Why otherwise would Mr O'Sullivan and Dr Switkowski in January 1992 (see Docs 68 and 81) be contemplating bringing someone from the USA. I find that in January 1992, three months after installation, and notwithstanding attendances by Kodak technicians in October and December, the Prophecy system was not operating properly. Whilst that finding goes some way to explaining Mr Knox's conduct I do not, however, shy away from making the finding that I have made and I make a further finding that, in general terms, the conduct of Mr Knox was the dominant cause in the exacerbation of the strained relationship between him and various officers of Kodak.

98. I turn next to the question of training by Kodak of Canvas Graphics operators.

99. Document 31, a publication entitled "Prophecy News", published in November 1991 says:

"The ease of use with Prophecy also means a quick start-up.

With traditional CEPS systems and high-end scanners, the

start-up time can be as long as three to six months. With

Prophecy the start-up time will be as quick as a few weeks."

100. Mr Swartz was more cautious; he was of the opinion that, depending upon one's background, an operator could become productive within two to three months (p3710).

101. Although the subject was not referred to in the rental agreement, training was specifically mentioned in the letter dated 30 August 1991 (Doc 17) from Mr White to Mr Knox. The letter was written by Mr White in the expectation that Canvas Graphics was then about to enter into an agreement with Kodak either to purchase or to lease the Prophecy desk top publishing system. In his opening sentence, Mr White said:

"... we would like to formalise our proposal and summarise

the services and benefits which are being offered to you."

At a later stage in the letter there appears the following passage:

"As the training costs are an upfront expense to Kodak, we

would need to invoice you for this amount at the date of

installation. The cost of one week's training (Monday to

Friday) for two operators is $3,500."

Although, as I have said, there was no reference to training in the rental agreement, both sides have presented their cases upon the premise that it was an essential term of the bargain that the parties had made. Whether it is a term to be implied in the rental agreement or whether it is to be regarded as a collateral agreement was not addressed by counsel and, for my part, I see no need to categorise it one way or the other. Canvas Graphics has claimed that Kodak breached its contractual obligation to train its operators. Kodak seeks to answer this claim by saying that if there was inadequate training it was as a result of Mr Knox's conduct.

102. In my opinion there is a short answer to this particular issue. I am of the opinion that Kodak is bound by the evidence of Mr Gardiner who, in March 1992, was of the opinion that Mr Knox and his staff had been sufficiently trained. The suggestion of inadequate training because of Mr Knox's abusive conduct was raised, for the first time in the pleadings, by way of an amendment in April 1993 to Kodak's original defence; that defence had been filed eleven months earlier on 29 May 1992. It had complained about the failure to submit to training; it had also alleged a failure to follow instructions and an unlawful access to and wrongful interference with the Prophecy system. It had even alleged that Mr Brodie "was ejected from the premises". But nowhere did it refer to Mr Knox's abuse or conduct as a reason or a cause for an inability to perform a duty or to carry out an obligation. That is not to say that Mr Knox did not behave in the way now complained of - I have held, in the broad, that this has been made out - but it means that, at the time, that is in the period of October 1991 to April 1992, Kodak did not identify his conduct as having a material connection with or a causative effect upon its common law and statutory duties and its contractual obligations. Mr Knox's conduct and any effect that it might have had on Kodak's training obligations must, in my opinion, be put aside as an exercise in ex post facto rationalization.

103. That leaves unanswered the situation as it existed between installation in October 1991 and April 1992, and it is to that subject that I now turn.

104. Mr Hook and Mr Knox exchanged correspondence on 14 February 1992 on a variety of subjects dealing with perceived inadequacies in the equipment (Docs 110 and 111 respectively). Mr Hook raised the question of the inadequacy of operator training, alleging at one stage that offers of assistance from Kodak "have been consistently rejected". In reply Mr Knox said (inter alia):-

"I note that as yet our training is incomplete and there is

nobody in Adelaide who can completely carry out that task."

"Files were saved correctly and I find the answer that

advice was offered when first issued a most extraordinary

statement under the circumstances and does Kodak no credit

in its responsibility to adequately commission and train a

client if your assertion that operator error is the only

problem."

105. At the time when this correspondence was exchanged, there had been two periods of training - or attempted training. The first occurred in the week 21 October 1991 when installation of the Prophecy system commenced and Mr Brodie attended for the purpose of training. The second occasion was in the period of 11-13 December 1991 when Mr Brodie attended for the purpose of calibrating the Linotronic 530.

106. As to the October period, Mr Knox claimed that the absence of an operational imagesetter made it an exercise in futility to commence training on the Prophecy system. Mr Brodie disagreed and I side with Mr Brodie. As between the two men, Mr Brodie was the teacher and Mr Knox the student. It did not become Mr Knox to tell Mr Brodie that training on Prophecy without an operational imagesetter would not be of value. The further training in December was, in all probability, inadequate because of Mr Knox's demands that commercial activities be given priority to training. In this, Mr Knox was in error. There is nothing in the evidence to support his proposition that training should have taken place outside normal business hours. However, there was some training during both of Mr Brodie's visits; there was further training in March concluding with Mr Gardiner's visit. Mr Gardiner's assessment that training was completed must stand as Kodak's case and must compel a conclusion that inadequacies in the Prophecy equipment subsequent to March were not as the result of operator error. On the other hand, lack of operator training until March contributed to Mr Knox's difficulties and for this he was responsible. His degree of responsibility is a matter to be taken into account in any assessment of damages.

107. Mr Simon Hackett is the technical director of a company which specialises in the sales, support and installation of networking and communications software for a variety of computer systems. He has had over 12 years experience in the computer communications field and regularly demonstrates new working technologies at trade shows in the USA and Australia. He gave evidence that Mr Knox had approached him and discussed with him the possibility of installing additional software into the Prophecy system. Mr Hackett examined the system on two occasions. On his first visit, Mr White was present; on the second occasion Mr Hagan was present. But on neither occasion did Mr Hackett interfere in any technical or other sense in the operation of the Kodak Prophecy system. In his witness proof (Ex AS4) he said, and I accept:

"Hence, I left the system as it was, unmodified, and

operating in just the same manner as it had been operating

before I arrived." (p3)

108. I accept that Mr White observed an aberration in the system which was described in evidence by the use of the word "back slash" but the evidence is insufficient for me to make a finding with respect to the origin or the cause of the "back slash". I am satisfied however that it was not Mr Hackett's responsibility.

109. Mr Knox at p1252 claimed that a magenta caste first occurred in output on 10 January 1992. He said that the existence of this caste meant that his company's Prophecy equipment was incapable of producing commercial quality colour. (p1247)

110. Mr O'Sullivan's notes of 17, 22 and 30 January 1992, being Docs 69,74 and 87, each contain a reference to Mr Knox's complaint about the existence of the caste. Document 85, Mr Knox's letter to Dr Switkowski dated 28 January 1992, complains of the existence of a caste. On 31 January 1992 Mr O'Sullivan wrote to Mr Knox (Doc 88) saying that he believed that the magenta caste was due to:

"The precision ICC software being inactive or a need to

recalibrate the scanner."

The proposal that calibration might be the cause of the caste was also suggested by Mr Hook in his letter of 14 February 1992 to Mr Knox (Doc 110) when he said under the heading of "Colour Caste":

"Prophecy contains calibration tools which are specifically

designed to eliminate caste, if used correctly."

The issue of the magenta caste is raised in par27 of the statement of claim:

"27. Between December 1991 and February 1992 the equipment

was not functioning properly and had not been

commissioned and during that period Knox undertook

extensive work to commission the Prophecy system

without the assistance of Kodak. During this period

Knox made numerous requests of Kodak for information

and assistance. Knox's complaints specifically

included:-

(a) A magenta colour caste appearing in the proofs;

(b) ..."

111. Kodak did not plead to that allegation, claiming that it was a matter of evidence. Kodak thereby left unstated in the pleadings its attitude to the magenta caste.

112. The magenta caste was raised again in par32B of the statement of claim when it was pleaded that on 23 March "Knox complained to White by telephone that a magenta caste was present in the output from the Prophecy system." Again Kodak declined to plead, claiming that the issue was a matter of evidence.

113. Counsel for Kodak, in opening his case for the defence, addressed the question of the magenta caste (p2227) with the observation that the system had been commissioned; it was operative and such obligations, if any, as thereafter arose as a result of deficiencies in the quality of output, were merely matters of servicing and maintenance.

114. In his witness proof (Ex RS29) Mr Swartz advanced as one of several explanations for the existence of a caste in the output "error in proofing contact, exposure or processing" which in amplification in his evidence he described as "operator error".

115. At p3609, during the course of his evidence-in-chief, Mr Swartz was asked questions by his counsel about the quality of certain proofs that had been tendered as exhibits during the course of the trial. They were proofs which had been prepared at some stage by Mr Knox or members of his staff. Mr Swartz expressed the opinion that the proofs "indeed show over-exposure. In one case I thought I saw some under-exposure". As I have earlier said, I accept Mr Swartz as an expert witness and my acceptance of his opinion leads to the conclusion that the subject of exposure indicates that there might have been some degree of operator error in the proofing system. Counsel for Canvas Graphics had objected to the receipt of this evidence claiming that incorrect proofing was a subject that had not been addressed in Mr Swartz' witness proof. This complaint was not accurate and, in any event, it misconceived the importance of Mr Swartz' evidence with respect to the subject of operator training. If it was apparent to Mr Swartz that the operators employed by Canvas Graphics were deficient in their proofing abilities then it should have been likewise apparent to the Kodak personnel, such as Mr Brodie and Mr White and any others who, from time to time, attended at Canvas Graphics' premises and had the opportunity to evaluate the work of the operators. The failure by these employees of Kodak to raise that issue (even though the proofing system was not a Kodak product) seriously questions the adequacy of the Kodak personnel and their ability to give the correct training.

116. At p3812 ff I ruled on the admission of this evidence saying:-

"It was proposed that Mr Swartz would express the opinion

that exhibit A3, a 3M proofing strip, which was produced at

1400 hours on 17 December 1992 by Mr Knox, showed that the

proof had been over-exposed. Such evidence, if admitted,

might lead to an inference that the existence on occasions

of a caste was caused because of inadequate proofing perhaps

through the fault of the proofing machine, perhaps through

the fault of the proofing operator, but not through the

fault of the Prophecy system."

117. I permitted the evidence to be led with some reservation as to relevance. After all, a test in December 1992 was far removed from the events of (say) the preceding March. But it has since occurred to me that if Mr Swartz has correctly noted that Mr Knox was not competent to proof material in December, it is more than likely that we was not competent earlier in the year. That being the case, Kodak must take a measure of the blame for failing to meet its contractual obligation on the subject of training. On the other hand, it is appropriate to mention at this stage that I do not agree with Mr Gardiner's conclusion. For reasons stated elsewhere in these reasons I am satisfied that Kodak did not meet its contractual obligations with respect to operator training.

118. Mr Alvin Clausen attended the demonstration at Canvas Graphics on 18 June 1992 at the invitation of Kodak. He was called, however, as a witness for Canvas Graphics. Mr Clausen gave his occupation as a colour grader, explaining that the work of a colour grader requires an ability for precise colour correction. He further explained his work at p2105 as follows:

"When a commercial is shot or filmed, or a documentary, it

is obviously done over a period of days, different lighting,

all sorts of different circumstances, different exposures.

When this film is made into a commercial each scene has to

be looked at individually and the corrections for contrast,

brightness, colour, colour retrieve, is done and this done

on a scene by scene basis and it is what we call graded,

graded to an even consistency..."

119. Mr Clausen was satisfied that at the end of the demonstration the proof contained a magenta caste. I find that the reason for his attendance at the demonstration was to make an assessment of the colour output resulting from the use of Prophecy system. As to this he said:

"... we basically at the end of the day ended up with a

print which was not the same as it should have been.

When you say it was not the same as it should have been, can

you explain that further?... Well, the proof that was

produced was quite magenta, and the original was not.

When you say the original, do you mean the slide?... The

slide." (p2106)

120. Mr Clausen acknowledged that he saw a demonstration (presumably on the same Prophecy system) by Mr Brodie at a later date in the presence of Mrs Morgenthaler and he acknowledged that the final proof was a perfect match to the monitor - there was no caste. He confirmed the evidence of other witnesses that monitors must be calibrated on a regular basis and that any movement in a monitor may cause a loss of calibration. He also emphasised that operator skill is a matter of paramount importance.

121. Mr Clausen's evidence establishes that in June 1992 Canvas Graphics' Prophecy system was outputting with a magenta caste. His evidence suggests that this may have been caused as a result of a deficiency in the equipment; and perhaps that deficiency arose because of a need to recalibrate; that, in turn, may indicate operator error.

122. He did however lean towards a deficiency in the equipment, for he said in his report of 17 October 1992 to Mr Knox (Doc 178):

"You have requested my assessment of the difficulties in

obtaining correctly colour balanced reproductions when using

the Kodak Prophecy system.

My assessment is that the difference observed in colour

temperature between the optical viewing source and the

grading monitor would make fine and precise colour

correction difficult if not impossible."

123. Although his evidence does not establish, on the balance of probabilities, whether it was the one or the other, his evidence does establish that Mr Knox either did not know how to recalibrate the Prophecy system or did not know how to operate it correctly. This finding of inadequacy is, in turn, traceable back to an insufficiency in Mr Knox's training.

124. During November 1991, Mr Knox and his staff attempted to test the Prophecy system. As the Scantext imagesetter was inoperable, they connected Prophecy to the Agfa SelectSet 5000. As a result of their tests, it was found that only the black plate imaged on occasions and that when all plates were obtained, the screen angle of all four was 45 degrees. When Mr Brodie attended at Canvas Graphics on 11 December to calibrate the Linotronic 530 imagesetter into the Prophecy system, he supplied a software file that rectified the 45 degrees angle problem but the "black plate only" problem was not solved until 9 January. Mr Knox was critical of the delays by Kodak in attending to these faults. The remedy for the 45 degrees problem had been advised as early as the August edition of "Hot Off the Prepress", a KEPS publication intended for the use of Kodak Prophecy customers. A solution to the black plate problem was discovered in December 1991 but Mr Knox was not advised until much later.

125. Under the terms of the rental agreement, Kodak was to provide a Prophecy 500 Mb disk drive and it did so. But the KEPS people in America told Mr Knox during his visit in March 1992 that he needed a 1 Gb system drive to achieve the image area that he needed and that he had expected. The larger Gb drive was, in fact, installed by Kodak on 19 March shortly after Mr Knox's return from the United States. This overcame a major problem that had confronted Canvas Graphics in the operation of the Prophecy system: it could not consistently obtain output without locking up the RIP. In his witness proof Mr Knox said that, as a result of this intermittent weakness, he felt unable to accept jobs for fear that he would not be able to meet deadlines. He instanced his inability to output a book for the design graduates of the University of South Australia.

126. On the same occasion at Bellerica, the KEPS personnel recommended the installation of a High Performance Group Card (an "HPG card") to speed up the time of output. Mr O'Sullivan acknowledged that he had a note from that meeting that "the HPG board was a must to make it practical for productivity" (p3021), a factor that was confirmed by Mr Hook (p3133). The installation of an HPG board was discussed by Mr Hook with Mr Knox at a meeting at Canvas Graphics' premises on 19 March 1991 and, as a result, Kodak ordered one for urgent delivery. It arrived in early April and its proposed installation featured significantly in the settlement negotiations. However, when they collapsed Kodak did nothing further about its installation. Although there was no contractual obligation on the part of Kodak to supply an HPG card, its willingness to do so was indicative of its recognition that the Prophecy system was inadequate for the purposes of Canvas Graphics.

127. I consider that it is now appropriate to summarise the findings that have been made to date and to add to them certain other findings which, in my opinion, were not the subject of serious debate.

128. I am satisfied that there were deficiencies in the Prophecy system that had been installed by Kodak in the premises of Canvas Graphics in October 1991. I am also satisfied that Kodak was aware of the existence of deficiencies in the system and that it accepted that it had a responsibility for the correction of those deficiencies. Speaking generally, this is evident from the extent of the correspondence and the number of personal and telephone contacts between the parties. Specific recognition by Kodak of its responsibility may, however, be found in the evidence of Mr O'Sullivan and in his file notes. Mr O'Sullivan arrived in Boston and visited the KEPS premises at Billerica on 14 February 1992. He spoke with Mr Abbey and Mr Pelletier about Mr Knox's forthcoming visit. He made notes of those conversations (Doc 113), saying:

"Met with Steve Abbey. He is interested in doing what it

takes to look after our customer. He will get involved with

visit on March 2."

Later, in the same set of notes, Mr O'Sullivan wrote:

"Also met with Greg Pelletier. He will be taking care of

Andrew's visit since Paul will be away on March 2. We had a

good lunchtime meeting on Andrew Knox visit and what we

should be doing."

129. These notes do not reveal any suggestion that Mr Knox was a "nuisance" or that his complaints were unreasonable or unjustified. If Mr O'Sullivan had held any of these views, he would have forewarned his American associates and one would expect to see a memo to that effect in his detailed notes. This conclusion is reinforced by the contents of Mr O'Sullivan's facsimile message to Mr David Liebermann of KEPS on 19 February 1992 (Doc 115):

"David, Please let me know if there is any problems with

this revised programme.

I think customers discussion points are fairly straight

forward - he will not be sending disk/tape of his job. He

is already into his trip.

We expect that visit should be positive. Customer has

indicated (A) He does not want to see Prophecy come out of

his business (B) He does not want to proceed down the path

of legal action - two positive signs. We still expect he

will push us for some type of compensation for all his

'Grief'.

I understand that Greg Pelletier will look after us on this

visit since you will be away on March 2. If Steve Abbey can

drop in and welcome Andrew Knox I think it will be a big

'Plus'.

I think our customer is looking for constructive help on

Postscript and the 'Tricks and Traps' on getting reliable

output.

We need to be careful not to directly criticise his network

(He is sensitive - Thinks he is a World Leader)."

130. In his witness proof (Ex AS1 at p134) Mr Knox gave his version of his concluding remarks at the last visit to Billerica:

"I said, 'Are we all now agreed it is not my network or my

operators that is the problem, as that is all we have heard

now for four months and quite frankly that attitude has been

totally counter productive and delayed us getting on with

the job.' Pelletier said, 'No, as far as we are concerned it

is neither your Operators nor your network.' Cardoza and

Lieberman both chorused, 'I agree.' French and O'Sullivan

said nothing and showed no acknowledgment. I looked at

O'Sullivan and said, 'You have not said anything. You still

think it is our network and our operators. I was on the

telephone last night to Australia and David Brodie and David

White are still carrying on, upsetting my staff and once

again blaming them, despite the fact that we are here trying

to solve the problem, and quite frankly I have had enough of

that attitude. If anyone thinks that it is my staff or my

network say so now.' No-one spoke up. I then said, 'That

being the case Ken, it is time you nailed your colours to

the mast, is it us or is it Prophecy?.' Ken did not reply."

131. Both Mr O'Sullivan (p3023) and Mr French (p3382) agreed that Mr Knox had made statements to that effect. I do not, however, thereby assume that Kodak has accepted that there is no operator error involved. In the resolution of this litigation I find that the silence of Mr O'Sullivan and Mr French is equally consistent with their efforts to ensure that discord was reduced as much as possible: see for example, Mr O'Sullivan's warning to Mr Lieberman in Doc 115, to which I have just referred.

132. The following passage from the cross-examination of Mr O'Sullivan is an example of his concern and frustration. Mr Knox was oblivious to all this: he could only see fault in Kodak; Mr Knox wrote to Dr Switkowski on 17 March 1992 (Doc 134):

"... but the result has been the infliction of considerable

damage to Core Text financially and extraordinary rudeness

to its Management and Staff which will not be easily

forgotten or repaired."

But Mr O'Sullivan said with respect to a telephone conversation that he had with Mr Knox on 9 January 1992:

"He got angry when I once again brought up the subject of

bringing Mr Lawrence over to Adelaide to take a look at his

network. In fact he used foul language on the phone, got

abusive and finally told me he was angry and was going to

hang up in my ear which he proceeded to do so. At the end

of that conversation I sat down and thought: I don't know

why I'm doing this. I'm trying to help. I felt very

frustrated. My objective was from the time I got involved,

I wasn't involved day to day technically in the nitty gritty

because I didn't have those skills but my objective was to

try and resolve problems and I was quite happy when I rang

up because what we were trying to do was work through this

list of problems that Mr Knox had and I'd finally found the

information, and I'm a little bit hazy from exactly where it

come from, that there was a work-around for this black

plate. I rang up to tell him those kind of things and still

suggesting Mr Lawrence and that's when he became most

abusive." (pp2971-2972)

133. I am prepared to accept that Mr Knox had a genuine subjective belief that Kodak was at fault. Mr Knox is a person who has such confidence in his own ability that he can not readily bring himself to accept that he may be at fault. But from my assessment of him and his personality and fitting that assessment into the totality of the evidence, I find that the passage from Mr O'Sullivan's evidence, rather than the passage from Mr Knox's letter, more accurately reflects the realities of the situation. With those findings in mind, I turn to a consideration of Kodak's deficiencies.

134. As at early April 1992, when Dr Switkowski was negotiating with Mr Knox to end their disputes, there were, as I find, certain identifiable factors pointing to an acknowledgement of fault on the part of Kodak. I list them hereunder:

1. Kodak had not invoiced Canvas Graphics for any monthly rental

instalments of $7,149. The first of these was due to be invoiced

on the date of installation (21 October 1991) and thereafter

monthly in advance. At that point seven instalments totalling

almost $50,000 remained uninvoiced. Why? Kodak knew that they

had a dissatisfied client but it has consistently maintained

throughout the trial that his complaints were not justified or

were his own fault. If Kodak had held that opinion in late 1991

and early 1992, it would have rendered monthly invoices to Canvas

Graphics; it did not render them because it knew that the

equipment that it had installed was not operating correctly.

2. Training costs were to have been paid at the date of

installation.

They amounted to $3,500. No invoice had been sent for them. The

same question and observation can be made.

3. Kodak, notwithstanding that Mr Knox may have chosen the Scantext

imagesetter as the imagesetter of his choice, chose to include it

as part of the rental package. It is common ground that the

Scantext imagesetter was inoperable and had to be replaced with

the Linotronic 530.

4. Mr Brodie in his report, following upon his three day visit to

Canvas Graphics on 11-13 December 1991, summarised the problems

and complaints as he saw them and concluded with a recommendation

that Kodak either "Remove Prophecy and state that we feel it would

be difficult to continue" or "Get a network and PostScript expert

over from Boston and cater to his whims". The use of the

expression "cater to his whims" shows that Mr Brodie probably

considered that Mr Knox was being difficult but he must have had

some concern to recommend the costly exercise of bringing out an

expert from America.

5. Mr O'Sullivan was of the opinion that it might be beyond the

capabilities of anyone in Australia, including Mr Brodie who had

responsibility for training, to attend to Mr Knox's problems. In

an internal memorandum directed to Dr Switkowski dated 24 January

1992 (Doc 81) he wrote:

"I don't think the technical problems are very

great - I am sure an experienced person could

overcome them quickly. Ziggy I think we need to

put(?) on your offer - either we fix it quickly

or we bring someone from the USA to do whatever

it takes to resolve the matter."

6. The willingness of Mr O'Sullivan, with the knowledge of Dr

Switkowski, to make appointments for Mr Knox to visit Kodak in the

USA to discuss his problems supports a finding that Kodak

Australia were not able to rectify the problems at Canvas Graphics

(as does the reference to "an experienced person" in Doc 81

above).

7. The willingness of Kodak to negotiate the proposed settlement in

April 1992 also supports that finding. There were, of course,

commercial advantages to Kodak in maintaining a business

relationship with Canvas Graphics and these cannot be ignored.

However, in the absence of fault on the part of Kodak, the terms

of the compromise that had been offered were very generous:- a 12

month rent holiday worth over $85,000 and a 5 year interest free

loan of $100,000 having a present value of almost the same amount.

(These figures differ from those of Kodak's expert accounting

witness, Mr Baker. In his report (Ex R86 dated 11 March 1994) Mr

Baker purported to value Kodak's offer of settlement based on the

terms of settlement as he understood them. Those terms do not

coincide with the provisions set out in Kodak's defence. For

example, Mr Baker proceeded upon the premise that the interest

free loan was repayable by monthly instalments of $1,667 per

calendar month over a period of five years commencing in April

1992. He also assumed that the monthly rental payments were

originally due to commence in April 1992 so that his value was

based on a six month rent holiday - not twelve months. There were

also other differences between his instructions and the terms as

pleaded in the defence so that he arrived at the sum of $56,508 as

the value of Kodak's offer to Canvas Graphics in April 1992).

8. Mr Clausen's evidence was that in June 1992 there was a strong

and unacceptable magenta caste in the proof that was produced at

the demonstration; that caste had appeared, intermittently, since

the previous January.

9. The black plate problem, the 45 degrees problem, the rotation

problem, the 500 Mb disk drive, the failure to supply additional

cassettes were all small problems; most of them were ultimately

solved; but they all added up to a scenario for concern and they

had a material effect upon the ability of Canvas Graphics to

establish its business as a colour output bureau.

135. These factors, in their totality, satisfy me that Canvas Graphics has made out a justifiable cause of complaint against Kodak.

136. I am satisfied, as a result of my review of the evidence and my assessment of the witnesses, that certain statements were made to Mr Knox, both by Mr White and by Mr Brodie, with respect to the Prophecy system which were inaccurate. The extent of the inaccuracies was such as to make those statements misrepresentations amounting to misleading and deceptive conduct. In particular I have come to the conclusion that Mr White represented to Mr Knox that the Prophecy system was "ideal" for Canvas Graphics and was capable of resolving its colour output problems. I am also satisfied that, during the demonstration on 8 August 1991 Mr Brodie discussed the question of the speed of output with Mr Knox and offered an estimate of 25 minutes. In coming to those conclusions, I have been materially influenced by my assessment of Mr Knox's character and his antecedents. It was apparent that he is a very intelligent man and that he is in the habit of enquiring into every aspect of a subject before making a decision. I find it consistent with his character that he would only have evinced interest in the Kodak Prophecy system as a result of obtaining answers, satisfactory to him, with respect to the stated abilities of the system. Thus he would wish to know that the system had the capabilities to perform that which the Agfa Colour-Scape system was unable to do. The time of output would obviously be a critical issue because it was one of the most important - if not the most important - feature governing productivity and hence, profitability. In coming to this conclusion I have not overlooked Kodak's trenchant criticism about Mr Knox's delay in voicing this complaint.

137. I am also satisfied and find that the Prophecy system was not fit for the purpose for which it was acquired (which purpose was made known by Mr Knox to Kodak through his discussions with Mr White and with Mr Brodie). It was not fit because of the following deficiencies:

1. It had an inadequate 500 Mb system drive.

2. The monitor did not have closed loop calibration.

3. It could not consistently produce colour images because of the

black plate problem until that problem was rectified on 9 January

4. The 45 degrees angle problem, which was not corrected until 11

December 1991, should never have occurred.

5. Output time (which would have been materially reduced by the use

of an HPG accelerator board) was too long for commercial

productivity.

6. It would not interface with the Scantext imagesetter.

138. These issues are six only of the nineteen complaints that were particularised in par35 of the statement of claim. Some of the remaining thirteen matters were repetition; others such as the delay in the supply of extra cassettes and the delay in the delivery of the scanners are more properly to be regarded as irritants than breaches of contract. Finally, some of the complaints were not made out. I instance, as an example of the latter, an allegation that Kodak incorrectly advised Canvas Graphics that a Linotronic 630 imagesetter "would not be available in Australia for use with or as part of the Prophecy System". In my opinion, Kodak was quite justified in making that statement.

139. I also find that the equipment that was the subject of the rental agreement was not of merchantable quality. I refer to the magenta caste, to the black plate, to the 45 degrees problem, and to the Scantext imagesetter. However, the occurrence of these events and the failure of Kodak to make the system operational after it had been installed for over six months was sufficient cause, in my opinion, for Canvas Graphics to rescind its contract for the hire of the equipment.

140. While not abandoning its claims in tort and for breach of statutory duties, Canvas Graphics concentrated upon its claims for damages in contract. Relying upon the evidence of Mr Martin, a chartered accountant who was presented to the court as an independent expert, Canvas Graphics compiled a claim for damages which included actual losses plus loss of profits. The loss of profits was limited to 1995 for the same reasons as those that were applied in the Agfa proceedings:- that is, it was assumed that new technology would be on the market by then, thereby rendering the Prophecy system obsolete. Having regard to the findings that I have made, it seems appropriate to address the issue of damages in contract only as they would subsume any that would otherwise be available to Canvas Graphics under any other cause of action.

141. Mr Martin, in his calculations of losses and likely profits, was conscious of the need to draw a dividing line between the Agfa and the Kodak claims. Thus, he recognised, quite correctly, that the starting point in his calculation of the damages that are said to be attributable to Kodak, was October 1991. But even then, some subsequent outgoings, of which interest on borrowed moneys and bank charges in relation to earlier accommodation are examples, could not be charged against Kodak. Operating upon a premise that questions of causation of losses were limited to choosing between Agfa and Kodak, Mr Martin's first exercise was to claim that the losses of Canvas Graphics for the period 31 October 1991 to 30 June 1993, which he said "related" to Kodak, were $461,576: (See the report of Mr Martin Ex AS7 pp4 and 26).

142. Mr Martin next made a series of calculations with respect to "forecast profits". These calculations were, first, for the period 1 November 1991 to 30 June 1992, secondly for each of the next three financial years and finally for the four month period 1 July to 31 October 1995. For that four month period, Mr Martin assessed that Canvas Graphics would then make a net profit of $527,691 which would equate to an annual net profit of $1,583,073.

143. In the judgment in the Agfa proceedings, I recounted the poor profit history of the Knox group of companies and observed that such profits as had been earned had been earned from disciplines in which Mr Knox had acknowledged expertise. With respect to the Agfa proceedings, I had assessed that he would have had little exposure to the bureau market; with respect to the Kodak proceedings, it should be acknowledged that, by October 1991, Mr Knox would have acquired some limited practical experience as a result of his disastrous attempt to enter the bureau market. But nothing in the evidence points to Mr Knox having acquired the skills and experience that would be required to operate a successful bureau business.

144. In my judgment in the Agfa proceedings, I set out the reasons why I ruled that the "survey evidence", which Canvas Graphics had sought to adduce through Mr Martin, was inadmissible. I also set out my reasons for ruling why Mr Ferguson's evidence on the subject described as "discretionary expenses" was inadmissible.

145. In the Kodak proceedings, counsel for Canvas Graphics sought to adduce the same "survey evidence" and the same evidence with respect to "discretionary expenses". As a time saving device, and with the co-operation of counsel for Kodak, it was agreed that the applications by Canvas Graphics to lead that evidence would be based on the same arguments that had been advanced in the Agfa proceedings, that Kodak would object to such evidence being admitted and that I would, without further argument, rule against the admission of the evidence on both topics for the reasons given by me in the judgment in the Agfa proceedings.

146. For the purposes of assessing its damages, I am prepared to proceed upon the assumption that Canvas Graphics entered into the rental agreement with Kodak with the expectation that it would thereby have a profitable business. But counsel for Kodak submitted that Canvas Graphics should not get an award for damages for loss of profits for the reason that it had not proved that the rental agreement would have generated a profitable business; he relied upon the evidence of Mr Baker who identified five conditions precedent to the exercise of projecting profits (pp3431-3433). They were expected turnover, capacity to meet demand, capabilities of personnel and equipment, sufficient working capital and finally, as Mr Baker said:

"Standing back and saying: is what you've produced

realistic... does it make commercial sense." (p3433)

147. In my opinion, and contrary to the submissions of counsel, there is evidence that would justify a finding that Canvas Graphics was able to meet these benchmarks save only for the question as to the sufficiency of its working capital. But on that subject it would seem that in October 1991 (even though the situation had materially deteriorated by March 1992) Mr Knox's bank was standing behind him and his group. Nevertheless, I feel that there is much force in Mr Baker's observation at p3433:

"Because if a company at the commencement or the

establishment of a business is derived of working capital,

has effectively used up all of its bank borrowings, and

there is a learning curve and re-establishment phase

required, then there is clearly a risk of it incurring

losses in its early stages of operation, which it may not be

able to fund."

148. It is not possible to assess Canvas Graphics' losses upon the premise that all establishment costs and all operating costs as from October 1991 are Kodak's responsibility. With effect as from early December 1991, Kodak possessed a fully operational Linotronic 530 imagesetter as well as scanners and the Macintosh and IBM workstations. In other words, even though the Prophecy system may have been inoperable, Canvas Graphics still had some capacity for colour output as from then. In this regard it is necessary to make an observation which is similar to an observation that I made in the judgment in the Agfa proceedings: Canvas Graphics had acquired equipment - not a business - as a result of its contract with Kodak. In other words, this litigation is concerned with the losses that are attributable to faulty equipment or lack of operator training; it is not to be assumed that such losses equate with all losses that were incurred in the operation of the business in the same period.

149. Mr Faucett of Lithoplatemakers suggested that the colour market in Adelaide might be worth $15M. It is not feasible to make any use of that figure as is apparent from the circumstances of his cross-examination:

"Yes. Do you know what the colour market is worth in

Adelaide?... Off the top of my head, no. Have you got any

proportion (sic)? I mean is it worth $1 million or is it

more than that? I would suggest that the Adelaide market is

possibly worth 15 million." (pp3332-3333)

150. It is apparent that Mr Faucett had been asked to express an opinion without prior notice and that he did not have any data upon which to base his estimate. He was also asked what proportion of the colour market had been taken over by bureau services: his answer of "less than 10%" must, like his figure of $15M, be treated as no more than a reasonable guess from a man who is knowledgeable in the trade. In particular, even though Mr Faucett's estimates may have some value as broad indicators, I stress that they could not be used, as Mr Morecombe wished to use them, as any basis for a calculation of damages.

151. Mr Keith Phegan, who with Mr Lewis (a witness in the Agfa proceedings) established the Adelaide Apple Bureau as a desk top publishing bureau in the mid 1980's, gave evidence on behalf of the respondent. He said in his witness proof (Ex RS14) that at the time of its inception, the Adelaide Apple Bureau was the first desk top publishing bureau in South Australia and that in 1992, at the time of the making of his statement, his bureau was using five imagesetters and five scanners.

152. Mr Phegan said that his bureau introduced colour work in May 1991 and that they spent approximately four months commissioning the colour separation system before they commenced promotion of the new service. He also said that his business had two colour imagesetters working approximately 16 hours per day per machine. He considered that two machines were necessary to meet deadlines and to provide a safeguard in case of break downs. It was Mr Phegan's belief that his bureau was now second only to the "WYSIWYG Bureau" of Sydney as the largest bureau in Australia.

153. In assessing Mr Knox's knowledge and forecasts of the desk top publishing bureau market and, in particular, the use of colour reproduction work in that market and, comparing his knowledge and forecasts with those of Mr Phegan, I prefer those of Mr Phegan. I have come to that conclusion because Mr Phegan has the experience that Mr Knox has never been able to gain.

154. In his witness proof, Mr Phegan set out details of his business' financial position as at 30 June 1992 and his estimate of its likely turnover in the 1993 financial year. When however, in February 1994, counsel sought to question him about the actual figures for the preceding 1993 financial year, Mr Phegan first objected to disclosing confidential information and then counsel for Kodak objected on the grounds of relevance. I had ruled against the admission of like evidence through Mr Lewis in the Agfa proceedings but, as it seemed to me, the proceedings in the Kodak trial had proceeded in a different manner. First, Mr Phegan had given evidence for the defence in the form of financial information about his business without objection - Mr Lewis had not; secondly, Kodak had made it known that it would be calling Mr Baker, a chartered accountant and a partner in the firm of Price Waterhouse, as an expert witness to challenge the opinions of Mr Martin. Mr Baker's evidence and opinions were, in turn, based in part upon information about the bureau market that he had obtained from Mr Phegan. In those circumstances I ruled that it was permissible for counsel for Canvas Graphics to cross-examine Mr Phegan about the finances of his business. However, in deference to Mr Phegan's wishes I ruled that such evidence would be taken in confidence. As events have transpired, I have not found it necessary to refer in detail to any of that evidence. It is sufficient to make the following observations:

1. Although Mr Martin claimed some knowledge of the digital pre-press

industry, he acknowledged that he has had no previous contact with

the bureau market.

2. Such information as Mr Martin obtained with respect to the bureau

market came as a result of his discussions with Mr Knox and Misses

Slattery and Johnson (see his evidence at p1888).

3. Neither Mr Knox, Miss Slattery nor Miss Johnson had, in any

meaningful way, practical "hands on" experience in running a

PostScript colour bureau.

4. Mr Phegan, by the time he gave his evidence, had worked in the

desk top publishing business and in the operation of a bureau

since the mid 1980's. He had practical experience in the

PostScript environment and he had worked in colour since late

5. Mr Knox, without prior practical experience (other than the Agfa

episode) and with one imagesetter, two scanners and the Prophecy

system was intending to enter the PostScript colour bureau market

in Adelaide and set up in opposition with a bureau which had an

established clientele, used five scanners and five imagesetters

and, unknown to Mr Knox, was also about to enter the same colour

market a few months later in late 1991.

155. In that context, I have Mr Phegan's evidence about his business' actual turnover in the 1993 financial year (p2446) for its bureau work and I have Mr Martin's estimate of what Canvas Graphics' projected gross sales for that same financial year would have been if the Prophecy system had been of merchantable quality and fit for the purpose for which it was acquired. Without setting out the exact figures, it is sufficient to say that Mr Martin's estimate for Canvas Graphics was 76% of the actual turnover of the Adelaide Apple Bureau for that financial year. In my opinion, it is fanciful to suggest that an inexperienced newcomer with minimal equipment could achieve such a result so quickly. The whole case for the applicant has suffered from Mr Knox's supreme self-confidence and Mr Martin's calculations are an infectious manifestation of that self-confidence. Mr Knox's beliefs in his own abilities were even transmogrified into the written submissions of counsel:

"It is the evidence of Bounsall and Phegan that the

traditional trade houses eventually took on postscript.

Canvas Graphics with Prophecy would have in effect pre-empted

that move giving it a substantial share of the bureau

market and of the emerging postscript colour market which

rapidly increased to include the entirety of the $15 million

colour separation market for South Australia... Canvas

Graphics' philosophy, equipment and Kodak Prophecy, had it

worked, would have positioned it as a major player in the

bureau market and in the $15 million local colour separation

market." (pp100-101)

156. In the harsh light of reality, there was no justification for such an inspiring proposition. That is not to say that Canvas Graphics does not have a case for damages: it does. But the quantification of those damages is far removed from the figures that are contained in Mr Martin's report. As with the Agfa proceedings, it will be necessary to make a juryman's assessment of those damages. There is no empirical data upon which one could safely rely. The assessment is one that must be made of a company that was intending to embark on a new business venture in October 1991. At that stage its employees had minimal exposure to the new venture which, according to Mr Phegan, took a considerable period of time to settle down. As at October 1991, because of its disastrous experience with the Agfa Colour-Scape equipment, the company was in overdraft and, according to Mr Martin's investigations, it had accumulated losses of $450,000 (Ex AS7 Par3.8). Kodak was not to blame for any of these losses.

157. I can place no reliance on Mr Martin's projections; in brief, neither he nor Mr Knox had sufficient knowledge of the bureau market. Furthermore, Mr Phegan's evidence of actual results and the extent of his business' equipment contradicted their assessments. I can, however, allow for the fact that with fully operational equipment, and notwithstanding the recissionary financial climate, Mr Knox had a base, in the form of his advertising clients plus his and Miss Slattery's creative talents, from which he could have launched into the PostScript colour bureau market. It is, however, very difficult to gauge what would have been the likely measure of his success.

158. There are, at least, three reasons why Mr Knox and Canvas Graphics would have faced severe difficulties in making a successful entry into the PostScript colour bureau market. First, he was starting a new business of which he had little experience, in recessionary times. Secondly, he was starting from a very poor financial base with a prospect that there would be a delay in cash flow until the system had been made operational and the operators had become proficient in the use of the equipment. Thirdly, he had a very strong market competitor in Adelaide Apple Bureau and, in addition, the traditional colour houses have since became a new force and new competitors in the PostScript colour market.

159. In his final submissions, Mr Morecombe QC, counsel for Canvas Graphics, was critical of Mr Baker's reliance on information that he had obtained from Mr Phegan. Mr Morecombe complained that Mr Baker had relied on Mr Phegan for all his information in relation to the market and the potential for growth within the market of PostScript colour bureau. He likewise complained that Mr Baker had relied exclusively on Mr Phegan for information relating to the likely operational expenses of such bureaux. That information, so claimed Mr Morecombe, had been provided by Mr Phegan to Mr Baker by way of interview only and without documentation to support the information so provided.

160. It is not appropriate that Canvas Graphics should make such complaints. It was the applicant that carried the onus of establishing that there was a relevant market and the parameters and the likely growth of that market. But it did none of those things. Mr Knox stated his personal views but he had no direct knowledge of the bureau market and no independent evidence was forthcoming as part of the applicant's case on any of these subjects. At least it can be said of Mr Phegan that he has had many years' experience as one of the proprietors of the Adelaide Apple Bureau in the operation of a bureau business. If Mr Phegan and Mr Knox are placed side by side, the opinions of Mr Phegan, a man with years of experience in the market, are to be preferred to those of Mr Knox, a man with no personal experience save for his disastrous attempt to enter the bureau business with the Agfa Colour-Scape equipment a few months earlier.

161. There are too many factors that compete for attention: they make it impossible to assess, in an arithmetical sense, the financial future that would have awaited Canvas Graphics if the Kodak Prophecy system had performed in accordance with the representations upon which Mr Knox relied and in accordance with the implied terms with respect to merchantability and suitability. I have referred, in the Agfa proceedings, to the authorities that deal with the difficulties that can arise in a quantification of damages and I will not repeat them.

162. The calculations, totalling in excess of $3M, that have been advanced by Canvas Graphics are dominated by two simplistic propositions, both of which must be rejected. The first is that all losses incurred by Canvas Graphics (other than interest and charges based on borrowings as at October 1991) are the responsibility of Kodak. That must be rejected as it ignores such matters as operator inadequacies, insufficiency of working capital, the strength of the opposition in the bureau market, the lack of knowledge at the managerial and executive level of the same market and the time that it would have taken in any event to have appropriately qualified staff fully operational within the system (this was Mr Phegan's learning curve of some four months). Even if Prophecy was fully operational as from its installation, who could say whether Mr Knox and his staff would have surmounted those difficulties? And if he had surmounted those difficulties, what would have been the measure of his success? He and Mr Martin presume to answer that question by postulating the number of customers, the number of jobs and the category of jobs that Canvas Graphics would have obtained in the four years to October 1995. Their postulations could have been doubled or halved and there would have been no way of testing them. These are the imponderables that make it impossible to accept Mr Martin's calculations.

163. Mr Morecombe, relying upon a passage from the judgment of Brennan J in The Commonwealth of Australia v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64 at 105, sought to shift the onus on to Kodak so that it had a responsibility of establishing either that there were no losses or the lesser size of these losses. His Honour had said:

"However, when a contract is rescinded for breach and that

breach, by preventing the performance of the contract, has

made it impossible for the plaintiff to prove that the net

value of his contractual benefits ($B - $y) exceeds the

wasted expenditure incurred in reliance on the defendent's

promise prior to rescission ($x), it is just to shift to the

defendant the ultimate onus of proving that, had the

contract been performed, the net value of the plaintiff's

benefits would not have covered the expenditure he had

incurred before rescission."

164. But that passage is limited to the question of wasted expenditure and is of no assistance when calculating losses of future profits.

165. I reject the arguments that were advanced on behalf of Kodak that the rental agreement would not have lasted the intended five year period because of the insolvency of Canvas Graphics and because of ongoing technological changes. So long as Canvas Graphics was carrying on business and buying and paying for its consumables, Kodak would have continued dealing with Mr Knox even though his company might have been insolvent and his personality acerbic. As to changes in technology, an otherwise financially sound business relationship would have overcome that problem.

166. I fix upon the sum of $185,000 in damages and there will be judgment in favour of Canvas Graphics accordingly.

167. That figure takes into account Mr Baker's calculation of $42,079 as his estimate of past losses to June 1992; it also takes into account loss of profits to October 1995 and interest to date. I have not allowed anything for interest in respect of profits that might have been derived after the date of judgment. In fixing upon such a global award, I have been conscious of the award that was made in the Agfa proceedings. I have also been conscious of the fact that some of Canvas Graphics' losses after October 1991 are nevertheless traceable back to the Agfa claim.

168. I have come to the conclusion that Kodak's cross-claim must be dismissed. Its breach of the implied terms of the rental agreement entitled Canvas Graphics to rescind the rental agreement.

169. I will hear the parties on the question of costs.

Canvas Graphics Pty Ltd v Kodak (Australasia) Pty Ltd [1994] FCA 1085; (1994) Atpr 41-326 (13 May 1994)

R v Watson; Ex parte Armstrong [1976] HCA 39; (1976) 136 CLR 248

Livesey v NSW Bar Association [1983] HCA 17; (1983) 151 CLR 288

Canvas Graphics Pty Ltd v Kodak

At a glance

Court

Decision date

Before

Source

Judgment (198 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (24)

Canvas Graphics Pty Ltd v Kodak (Australasia) Pty Ltd [1994] FCA 1085; (1994) Atpr 41-326 (13 May 1994)