Castel Electronics Pty Ltd v Toshiba Singapore Pte Ltd - [2011] FCAFC 55 - FCAFC 2011 case summary — Zoe

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Castel Electronics Pty Ltd v Toshiba Singapore Pte Ltd

[2011] FCAFC 55

Federal Court of Australia (Full Court)|2011-04-20|Before: Keane CJ, Besanko JJ

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Source facts

Court

Federal Court of Australia (Full Court)

Decision date

2011-04-20

Before

Keane CJ, Besanko JJ

Source

Original judgment source is linked above.

Judgment (26 paragraphs)

[1]

Introduction 1 This is an appeal and cross appeal from orders of a judge of this Court made on 28 September 2010 that there be judgment for the appellant in the sum of $2,613,127 and that the respondent's cross claim be dismissed. On 9 December 2010 the primary judge ordered the respondent pay interest in the sum of $2,047,356.51. He also made orders as to costs. The respondent was ordered to pay the appellant's costs on a party and party basis until 29 April 2009. He ordered the appellant pay the respondent's costs incurred after that date on an indemnity basis. 2 There are no grounds of appeal directed to the costs orders which were made by consent but the appellant does seek orders on appeal that the respondent pay the costs of the appeal "and of the proceeding below insofar as the same have not been disposed of by final order".

[2]

History 3 The appellant, Castel Electronics Pty Ltd ("Castel") which is incorporated in Australia, carries on business as a wholesaler and distributor of electrical and electronic products, including television receivers (set top boxes, digital recording devices), audio products, white goods including air conditioners and associated goods. 4 The respondent, Toshiba Singapore Pte Ltd ("TSP") which is incorporated in Singapore, is a wholly-owned subsidiary of Toshiba Corporation ("Toshiba") and Toshiba Home Appliance Corporation ("THAC") both of which are incorporated in Japan. Toshiba is a large-scale manufacturer of electrical and electronic equipment. 5 On 8 August 1996 Castel entered into a non-exclusive distributorship agreement with Toshiba under which Castel became the Australian distributor of Toshiba products ("Distribution Agreement"). The Distribution Agreement was renewed annually until 1 April 2007. 6 From October 1997 TSP became the supplier of Toshiba branded television products to Castel. The majority of these products were manufactured by TSP or by companies with which TSP had contracted their manufacture. 7 Set top boxes are designed to allow analogue television receivers to receive digital television broadcasts. TSP's first set top box was an S23 which was followed by an S25. Those set top boxes were not materially different to their competitors' set top boxes. 8 Mr So was employed by TSP. In September 2003 he advised Mr Kwong, the Managing Director of Castel, that TSP intended to market an improved version of the S25 with high definition capacity. Mr Kwong was invited to indicate the best price at which TSP could sell the improved unit. He advised the unit could sell for $999 "on introduction in August 2004". TSP had subcontracted the manufacture of the J35 set top box to Zinwell Corporation ("Zinwell"). 9 In 2004 TSP informed Castel of a new range of products it was developing including the J35 set-top box and the DLP rear projection television receiver. In the Toshiba manuals and by Mr So of TSP it was represented that the J35 was capable of receiving high definition television digital signals in all Australian display formats and was capable of recording and replaying high definition television broadcasts. TSP represented that DLP receivers incorporated digital light processing technology; included a long life "Phoenix" lamp; and offered large screen sizes (up to 72 inches). 10 In December 2004 TSP provided Castel with a sample J35 set-top box. Castel placed its first commercial order for 2,380 J35 units for delivery in January 2005. There were delays in supply of the J35 boxes to Australia because of manufacturing complications encountered by Zinwell. Units had to be returned so that faulty software could be replaced. The J35 product was finally launched in Australia in April 2005. 11 After the release for sale of the J35 units in Australia, Castel received numerous complaints about their performance and functionality. The reported faults in the J35s were "generic" in the sense that they were common to a batch of J35s imported to Australia rather than being a "one-off" or isolated occurrence. In the two years following the launch of the J35 set top box, the volume of generic faults or defects were so great as to have been "of an epidemic nature" to Castel. 12 After the faulty J35s had been reworked by Zinwell, TSP indicated by email on three separate occasions to Castel that the defects had been remedied. Despite those reassurances, Castel continued to encounter serious problems with the J35 units even after they had been reworked and Castel was forced to recall the units. 13 Mr Kwong said that "at least 54 generic faults of an epidemic nature" were encountered in the two years following the April 2005 launch. 14 On 20 May 2005 Mr Kwong wrote to Ms Violet Oh of TSP: HDD-J35 Re your email for the above we would not be able to take any more units for May because we have now stopped sales of the unit, as there are huge numbers of complaints from both retailers and consumers on the product. Please refer to you (sic) QC [Quality Control] division as Victor has been in contact with them over the past weeks. As to when we can resume delivery will depend on when we can rectify the problems and how we address the units (approx 2,000 units) already in the market. 15 On 7 June 2005 Mr Sato of TSP emailed Mr Kwong on the first of the occasions in [12] saying that he believed that the major software problems with the set top boxes had been solved. 16 However, Castel continued to encounter problems with the J35s even after the defects were said to have been remedied. On 5 July 2005 Mr Kwong wrote to Mr Sato detailing the significant problems Castel were having with the units. 17 Ms Oh responded but on 8 July 2005, in response to the volume of complaints and consumer concern, Castel informed TSP that it had temporarily stopped selling the J35 units in Australia and would not accept further stock. Castel emailed: If we cannot resolve the retailers/consumers concern we not only cannot sell them the J35 (sic) but also any other products. 18 On 12 July 2005 a meeting took place in Melbourne between River Chiang of Zinwell, Mr Chey of TSP and representatives of Castel to discuss the J35 problems and to allow Mr Kwong to make a decision by 14 July 2005 "as to the on-going sales activities of the J35". 19 In the meantime, on 13 July 2005 Mr Kwong wrote to Mr Sato requesting "to hold any more shipment of J35 to us - whether we paid for or opened [letter of credit] for. If there is to be any reworked such should not be done here but at Zinwell". 20 On 4 August 2005 Mr Sato sent the second email to Mr Kwong advising the faults in the J35 had been rectified. On 8 November 2005 Mr Sato sent the third email to Mr Kwong and for the third time told Mr Kwong that the faults in the J35 had been rectified. 21 However, faults in the J35s continued to emerge. Castel estimated that each unit which it sold had to be re-worked or returned for rectification on average 2.6 times after the first sale. By mid-2006, Castel had considered that the ongoing deficiencies of the J35 were so profound that the model would never be merchantable in Australia. 22 There were also recurrent complaints to Castel about faulty lamps in the DLP television receivers. 23 In October 2005 TSP informed Castel about a new product, the C-26 set-top box, which was designed to have similar features to the J35 but without the latter's hard disk recording function. Castel placed orders with TSP for delivery of C26 units between September 2005 and August 2006. The first delivery of 1,000 units was made in October 2005. However, similar defects to those encountered with the J35 were apparent in the C26 set top box. 24 On 5 April 2007 representatives of Castel, TSP and Toshiba agreed to terminate Castel's distributorship of Toshiba products. Castel, TSP and Toshiba entered into a termination agreement ("Termination Agreement") in order to resolve "a number of issues outstanding between them relating to the cessation of the Distribution Agreement". The Termination Agreement provided that, for the purposes of that agreement, Toshiba and TSP were to be "jointly or severally called Toshiba". 25 The Termination Agreement did not cover certain "Unresolved Disputes" including those pertaining to "claims for warranty, quality and consumer issues … for … Toshiba brand television receivers and set top boxes including … J35, STB, DLP and C26 purchased by Castel from Toshiba". 26 Castel entered into a further agreement with TSP and Toshiba relating to those disputes which had not been resolved by the Termination Agreement ("Unsolved Disputes Agreement"). The Unsolved Disputes Agreement provided, inter alia, that TSP was to make an interim payment of $2 million to Castel. While the Unsolved Disputes Agreement asserted that the parties were to negotiate in good faith in order to resolve unsolved disputes as expeditiously as possible, it also preserved the right of either party to take such further action as "may be available to them".

[3]

Castel's claims at trial 27 In Castel's Amended Statement of Claim, Castel sought relief for loss and damages on two grounds. Castel asserted that TSP had engaged in misleading and deceptive conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth) ("TP Act"). Castel alleged that TSP was further or alternatively liable for breach of the sales contracts which existed between TSP and Castel for the supply of Toshiba products. 28 Castel asserted that a contract for the sale of goods came into existence between Castel and TSP upon receipt by Castel of each pro forma invoice from TSP. 29 Castel said that by supplying the defective J35 products, the DLP products and the C-26 products, TSP breached the terms of the sales contract relating to the particular goods. 30 Castel pleaded that by supplying the defective J35 products, the DLP products and the C-26 products, TSP breached several terms implied into the sales contracts by virtue of the United Nations Convention on Contracts for the International Sale of Goods done at Vienna on 10 April 1980 ("CISG"). Castel asserted that CISG applied to the sales contracts because Castel and TSP had their respective place of business in Australia and Singapore, both of which are "Contracting Parties" under CISG. 31 Castel claimed that by operation of Article 35 of CISG the following terms were implied into each sales contract: (a) that the Respondent as seller was obliged to deliver goods of the quantity, quality and description required by the sales contract (Article 35(1)); (b) that the goods had to be fit for the purposes for which goods of the same description would ordinarily be used (Article 35(2)(a)); and, (c) that the goods would have and retain for a reasonable period of normal use by consumers their specified qualities and characteristics. 32 Castel asserted that the supply of defective or faulty products by TSP breached each of those implied terms. 33 In the alternative, Castel invoked the warranties for fitness for purpose and merchantable quality implied by s 19(a) and (b) of the Goods Act 1958 (Vic) ("Goods Act"). 34 Castel asserted that TSP made certain representations relating to the functionality, quality and capability of the J35 and C-26 set top boxes and the DLP receivers. It claimed that it had relied on these representations in placing orders for each of these products. Further, Castel argued that these representations constituted misleading and deceptive conduct because the representations were either false or TSP had no reasonable basis for making them. 35 Castel alleged that TSP represented that the J35: (a) was being developed and would be released in July 2004; (b) would be capable of receiving high definition television digital broadcast signals in all relevant Australian display formats; (c) would be capable of recording and replaying high definition television broadcasts; (d) would be more powerful than the existing S25 set-top box; (e) would most likely be the "most wanted set-top box in the market"; (f) would be available by the launch date set by TSP or such later date as would allow Castel sufficient time to exploit the innovative character of the J35 before competitors could introduce competing products into the market. 36 Castel alleged that in reliance upon those representations, it purchased 4,640 J35s from TSP. 37 Castel complained of the further representations by TSP that the problems earlier discovered in the J35 had been substantially resolved and it remained superior to competitors' actual and proposed products ("further representations"). Castel alleged that in reliance on the representations and further representations it purchased a further 4,040 J35s from TSP. 38 Castel alleged that both the representations and the further representations amounted to misleading and deceptive conduct and that TSP had no adequate basis for making them. 39 In relation to the DLP product, Castel alleged that TSP made representations that: (a) they would be large rear projection television receivers utilizing DLP technology developed by Texas Instruments of United States of America and licensed to Toshiba for the manufacture of DLP television sets; (b) they would have a long lamp life; and (c) they would be superior prestigious products. 40 Castel asserted that in reliance on the DLP representations, Castel placed orders for, and TSP supplied, 2,250 units between December 2004 and October 2006. 41 Castel alleged that from January 2005 serious defects in the DLP receivers became apparent. 42 Castel claimed the DLP representations were misleading and deceptive conduct in that they were false and that TSP lacked any adequate basis for making them. 43 Castel alleged that TSP represented that the C-26 would have the following characteristics: (a) it would be a state of the art set top box with features long awaited by consumers; (b) it would have substantially the same capacities as the J35 was meant to have save for a recording function; (c) it would be free of defects; and (d) it would be superior to a competitive set top box product marketed by Sony with a Broadcom IC chip incorporated into a set top box. 44 Castel asserted that in reliance on the C-26 representations, Castel entered into sales contracts with TSP for the purchase of 12,000 C-26s. It was then alleged that, after delivery, serious defects appeared in the C-26s. Castel also alleged that the C-26 representations amounted to misleading and deceptive conduct and that TSP lacked any adequate basis for making them. 45 Castel sought relief under two principal heads of damage. 46 First, Castel claimed for the costs it incurred in dealing with the faulty products supplied by TSP under the sales contracts and the breach by TSP of those contracts ("the expectation claim"). Under the expectation claim, Castel sought $23,634,533 in damages ("the expectation damages"). 47 Secondly, Castel claimed that it had lost an opportunity by not becoming a distributor of Harman International Industries Inc ("Harman"), an electronics manufacturer. Castel pleaded that it had not taken up the opportunity to become Harman's distributor in reliance on the representations made by TSP in relation to the J35, DLP and C-26 products ("the reliance claim"). Castel quantified the lost opportunity on its reliance claim at $33,657,361 ("the reliance damages"). 48 In its amended statement of claim Castel pleaded the expectation claim at $15,585,442. It pleaded in respect of the reliance claim: 74. The Applicant lost the opportunity to acquire and profit from the Australian Harman International distributorship and any other supplementary business by reason of relying upon the said misleading and deceptive conduct constituted by the J 35 representations and DLP representations and the consequences thereof, and thereby suffered further loss and damage. Particulars The Applicant's loss when account is taken of its lost opportunity to pursue alternative business prospects is $34,338,579 (which includes the costs of $15,585,442 of dealing with the faulty products referred to above). The calculation is summarised in the Particulars of Loss delivered separately. Further loss and damage is being incurred and the Applicant reserves the right to serve amended particulars before trial. 49 In a document entitled Amended Particulars of Loss and Damage, Castel identified its losses in the dollar figures mentioned in [46] and [47] and as separate entitlements. 50 Although it does not appear to have been argued before the primary judge and was not argued on appeal, it is difficult to think that Castel could be entitled to damages under both claims. 51 Baron Parke stated the general rule as to the measure of damages in Robinson v Harman (1848) 154 ER 363 at 365 "… where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed". That principle has been applied in Australia: Wenham v Ella (1972) 127 CLR 454 at 471; Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 80. 52 If the Court assesses Castel's expectation damages with that principle in mind, Castel could not thereafter be entitled to reliance damages. 53 The expectation claim only arises because of TSP's failure to provide Castel with goods of the quality and description represented which were fit for the purpose for which goods of the same description would ordinarily be used and goods of merchantable quality. 54 Castel only claims to have suffered damages based on its reliance claim because it lost an opportunity which on its case it would not have exercised if TSP had performed its obligations under the contract. 55 If Castel is compensated for its expectation claim, and therefore compensated for TSP's breach, it is difficult to see how Castel could then be entitled to damages on its reliance claim. In this case Castel's damages for its expectation claim all fall within the first limb of Hadley v Baxendale (1854) 9 Exch 341 and accordingly Castel will, if compensated, receive all losses that arise directly from the breach. In those circumstances it will have been treated as if TSP had performed its side of the bargain and the question of Castel's reliance claim would not arise. 56 Castel's case was that it would have pursued the opportunity if it had not been misled. If it is compensated for the breach it would follow it would not have pursued the opportunity. At trial Castel apparently put its two claims as alternatives. The primary judge said at [162] that Castel "indicated in written submissions that its claim for loss and damage was put on two alternative bases". 57 On appeal the case was not put that way and Castel sought its reliance damages in addition to the expectation damages. However, we do not need to reach a conclusion on that matter because we agree with the primary judge that the reliance claim was not made out as a matter of fact. 58 In its Amended Particulars of Loss and Damage, Castel recognised allowances which had been made by TSP: 9. The Applicant gives credit for the following payments received from the Respondent by way of partial compensation for its losses: Amounts and Dates USD AUD (Equivalent of AUD) 18/02/2005 USD 63,731,80 AUD 84,976 8/11/2005 AUD 195,272 5/05/2006 USD 50,000 AUD 69,000 11/04/2007 USD 78,409 AUD 104,545 11/04/2007 AUD 363,946 11/04/2007 USD 2,000,000 AUD 2,666,667

[6]

The evidence 69 Castel relied on the evidence of an independent expert Mr Peter Acton, a financial and management consultant, to prove the quantum of damages it sought under both the expectation claim and the reliance claim. Mr Acton has a Masters of Business Administration from the Stanford Graduate School of Business; is a Fellow of the Institute of Company Directors; and a Fellow of the Australian Institute of Management. He has served as a company director in Australia and has held corresponding positions on other boards and advisory panels and committees. 70 The expectation claim had three separate bases: (a) a claim for the cost and expenses of attempting to remedy the faults in the defective products and the further expense of Castel dealing with its retailers (the first aspect); and (b) the loss of profit suffered by Castel in wholesaling other Toshiba products apart from the defective products over the period (the second aspect); and (c) the loss of profit on the defective products (the third aspect). 71 The first aspect of the expectation claim related to the increased costs incurred by Castel in dealing with the defective Toshiba products. The evidence of Mr Acton was that the supply of the relevant defective products by TSP to Castel resulted in increased costs for Castel of $7,431,843 over the three year period from 2004/2005 to 2006/2007. 72 The increased costs, Mr Acton said, consisted of: (a) time spent by Castel's sales staff visiting customers and retailers to rectify problems with the products supplied by TSP; (b) non-salary costs such as motor vehicle expenses referable to Castel's sales staff visiting customers and retailers; (c) time spent by Castel's internal service staff in rectifying units, returning them to Zinwell as required and returning the reworked products to consumers; (d) engaging external service contractors and purchasing spare parts to rectify the defective products; (e) additional freight costs; (f) employing additional staff to deal with customer complaints; and (g) "fixed costs" such as office space and depreciation. 73 For the second aspect of the expectation claim, Castel asserted that TSP's supply of defective products reduced the gross profit margin of other electronic products sold by Castel. Mr Acton's evidence was that, prior to the manifestation of problems with the J35, C26 and DLP products, the gross margins which Castel had maintained in respect of other electronic products exceeded 25%. After the defects became apparent in the marketplace, Castel's gross margin on sales of other electronic products or brown goods (as they are called), declined from 24.9% in 2003/2004, to 20.5% in 2004/2005 and 16.4% in 2005/2006 before rising in 2006/2007 to 19.4%. 74 Mr Acton was of the opinion that the diminution in gross margin was attributable to the problems experienced by customers with the defective products, not because of a contraction of, or increased competition in, the market for electronic goods. He said in his written report: Prior to the product problems in 2003/04, margins averaged a little over 25%. I understand this is higher than typical in visual products and resulted from Castel's strategy of limited distribution and premium positioning based on perception of quality. After the problems were known in the market place, the margin was significantly lower (16-25%, average 20.3%). The vast majority of these sales during this period was of Toshiba brand product. In 2004/05 another brand, Orion, accounted for around one-third of this category, and the following year one sixth before ceasing altogether. Castel carried some high-end Macintosh product as well but this accounted for less than 1% of the sales analysed above, and the remainder carried the Toshiba brand. As Orion products were generally lower margin than Toshiba their withdrawal should have tended to increase average margins over this period. In the absence of any evidence of a market-wide decline in margins for these products at their normal price points, it is reasonable to infer that this decline in margin was caused by an unsuccessful product offering and the need to win back Toshiba business that was deterred by the problems experienced with product performance. This would have taken the form of extra discounts, free product, cash incentives and additional display materials, all of which costs would have been reflected in a reduction in Gross Margin. It is important to emphasise that this cost is not an opportunity cost. The sales in question actually took place but it seems they only did so at the additional cost of abnormal discounts. Gross Margin lost comes directly off profits, since the costs of generating the revenue are unchanged by the discount on them. Had Castel's margin on Toshiba products remained at 25%, profits would have been significantly higher, giving rise to additional cumulative lost profit to Castel of $8,404,217. 75 Mr Acton in the three financial years ending 2005, 2006 and 2007 quantified the loss sustained by Castel in respect of reduced gross margins on those other goods at $8,404,217. He calculated the sales of goods apart from the defective goods in each of the three years from which he deducted the cost of sales. He thereby identified the actual gross margin and the percentage gross margin. 76 Because he assumed that the cost of sales was a constant, he then calculated the implied sales. That is, he increased the actual gross margin in each year to 25% and thereby calculated what the sales would have been if the 25% margin had been maintained. He then calculated, as Castel's loss, the difference between the actual gross margin in dollar terms that was obtained in each year and the gross margin in dollar terms which would have been obtained if the 25% gross margin had been maintained. 77 In the third aspect of its expectation claim Castel sought to recover the losses it sustained by reason of the significant diminution in gross profit margins in respect of the defective products supplied by TSP. 78 According to Mr Acton, Castel would have expected the J35, DLP and C-26 products to have sold at a significantly higher margins compared to other Toshiba products because they were novel and without direct competition in the market. 79 Mr Acton said that there was a rapid decline in the profit margin for the J35, DLP and C-26 products as soon as defects became known. For example, Mr Acton's evidence was that the gross profit margin for the J35 was 34.9% during the first three months of sales but, after seven months, the gross profit margin had dropped to 6.8%. 80 Mr Acton said based on other Toshiba products the drop in gross profit margin should not have exceeded 1% after the first three months of sales. Mr Acton calculated the total gross profit margin loss for each of the defective products. The margin loss for each of the defective products was calculated by deducting the actual gross margin received from the sales of products ("actual gross margin") from the gross margins expected to have been achieved if the products had not been defective ("expected gross margin"). The evidence which was accepted by the primary judge was that the total profit margin loss on the defective products sustained by Castel amounted to $2,176,591 after some arithmetical adjustments which are not relevant for this appeal. 81 Castel's reliance claim was based on the loss of opportunity to take up the Harman distributorship. In September 2003 Castel approached Harman International to indicate its interest in becoming a distributor of Harman products in Australia. At that time, Convoy International ("Convoy") was a distributor of Harman products in Australia which were marketed under brand names, Harman Kardon and JBL, being Harman's range of professional speaker products. 82 In April 2004 Harman offered to appoint Castel as distributor of its Infinity brand speakers and car audio products. Castel rejected Harman's offer because it was interested in carrying the complete Harman range. Mr Kwong gave evidence that if Castel was limited to distributing only some of Harman's products there would be insufficient income to justify the distributorship. 83 Harman was not prepared to displace Convoy as the distributor of other Harman products but insisted that it would only appoint Castel as a distributor of the Harman Kardon and JBL products if a satisfactory agreement could be reached between Castel and Convoy for the displacement of Convoy. 84 Castel therefore entered into negotiations with Convoy to secure the Convoy distributorship of the Harman products. Convoy insisted that the goodwill attaching to the Australian distributorship of the Harman Kardon and JBL products was valued at $6 million. Castel did not accept that figure to be the true value of Convoy's distributorship and suggested an independent valuation by KPMG. The valuation was not pursued because Convoy indicated that KPMG's valuation would not affect the price which it was seeking. 85 Castel was unable to agree on terms with Convoy for the takeover of its Harman distributorship. In May 2004 Castel advised Harman that it would not be pursuing its negotiations with Convoy in relation to the Harman distributorship. 86 Mr Kwong said in evidence that Castel did not pursue the Harman distributorship "because of the assurances of TSP regarding the imminent launch of its new J35 and DLP products". Mr Kwong said that but for TSP's representations in relation to its new products, Castel "would have pursued and concluded a Harman distributorship or other distributorships". 87 Mr Kwong's evidence was that at June 2004 the option to distribute Infinity branded Harman products remained available to Castel but Castel was not prepared to take up Harman's renewed offer of a limited distributorship.

[8]

Findings of the primary judge 92 The primary judge accepted that upon the issue of an invoice as a notification of acceptance of an order from Castel for Toshiba products, a contract came into existence between TSP and Castel. 93 His Honour found that, because Australia and Singapore "have, at all material times, been "Contracting States" within the meaning of the CISG" the CISG governed the rights and liabilities of Castel and TSP under each sales contract. In particular, His Honour found that Article 35 of the CISG operated to imply into each sales contract warranties of merchantable quality and fitness for purpose. 94 His Honour found there had been "clear, persistent and recurrent breaches by TSP of the implied warranties imported into each sales contract". His Honour said: The totality of the relevant evidence establishes to a very high degree of satisfaction that the J35 was never developed to a point where it was reasonably fit to be offered for sale to Australian retailers or in the Australian retail market for set-top boxes. Although less comprehensive, the evidence also establishes to a considerable degree of probability that there were similar breaches of the implied warranties in respect of both the DLP television receivers and the C26 set-top boxes. 95 The primary judge made no findings in relation to Castel's claim that TSP had engaged in misleading and deceptive conduct contrary to s 52 of the TP Act although he said that many of the representations relied upon were coextensive with the implied warranties of fitness for purpose or merchantable quality arising under the CISG. 96 However, his Honour considered it unnecessary to address Castel's s 52 claim because it was "relied on only in support of the alternative reliance claim". Because his Honour found that the reliance claim had not been made out, it followed that Castel's reliance on s 52 of the TP Act did not require consideration. 97 The primary judge held that Castel's claim for damages was confined to its expectation claim in respect of the alleged breaches of the sales contracts. 98 As to the first aspect of Castel's expectation claim, the primary judge reminded himself of the general principle that "costs are only recoverable if they would not have been incurred but for the breach." His Honour said that "[c]osts which would have been incurred in any event as a necessary incident of the purchaser's business cannot be claimed to reduce the profit which would have been derived had the goods conformed with the contract." 99 His Honour did not accept that Castel could recover the costs associated with its permanent sales staff visiting customers and retailers in response to complaints about defective goods. His Honour reasoned that such costs would only be recoverable where there was evidence that the attendances with its customer in relation to the defective goods meant that the sales staff had foregone the opportunity to pursue other profit making activities. 100 The primary judge found that Castel was entitled to the costs it incurred in hiring additional service staff to deal with customer complaints. However, for reasons that are not clear, the primary judge awarded only 80% of the figure calculated by Mr Acton. His Honour found at [189] of his reasons: Were it not for the evidence of Mr Hew, noted at [42] above, that Castel had to take on 35 additional service staff to deal with customer complaints about the J35 and other "epidemic" products, I would have been disposed to take an approach to the claimed expenses of the service department like that noted above in respect of "Field staff". However, in the light of Mr Hew's evidence, I have treated as an allowable expense 80% of the figure calculated by Mr Acton for internal service staff. 101 His Honour must be understood to mean that he accepted Mr Hew's evidence and thereby made the allowance claimed. His Honour does not disclose why however he allowed only 80% of the claim. 102 Mr Acton calculated the total costs of the service department over the 2004/2005, 2005/2006, 2006/2007 financial years at $1,092,158. His Honour reduced that amount by 20% thereby awarding Castel $873,726. He said at [192]: In the result, I have assessed Castel's damages under this part of its expectation claim as follows: Castel Service 2004/05 113,789 2005/06 349,383 2006/07 628,986 1,092,158 less 20% 218,432 873,726

[14]

107 As to the second aspect of Castel's expectation claim, the primary judge did not accept Mr Acton's evidence that the significant decline in gross margin in relation to other Toshiba products was caused wholly by Castel selling the defective products supplied by TSP. His Honour found that the decline was partly attributable to the contraction of the Australian brown goods market and increased competition in the market between wholesalers from 2003. 108 The primary judge found that but for the breaches of contract by TSP, the gross margin which Castel would have derived on its sales of non-epidemic Toshiba goods for the 2005/2006 and 2006/2007 financial years would have been 20%. His Honour arrived at this figure after finding that Castel's average gross margin on sales of other Toshiba goods had contracted from 24.9% in 2003/2004 to 20.5% in 2004/2005. The reduction in average gross margin in this period was, the primary judge said, due to a contraction in the brown goods market from 2003 and increased competition between participants in that market, resulting in greater discounts by wholesalers. 109 His Honour said at [198]: It is notable that there was a decline in gross margins on non-epidemic "Toshiba" products which occurred in 2004-2005 before the epidemic products could have had a significant impact and when, as Mr Acton noted in the passage quoted at [193] above, the lower margin "Orion" products accounted for one-third of Castel's relevant sales. I therefore prefer the inference that the decline was attributable rather to the contraction of the Australian brown goods market from 2003 and increased competition between participants in that market resulting in substantially greater discount (sic) by wholesalers. 110 The primary judge rejected Mr Acton's estimate of the repercussive effect of the defective products as being "unduly high". His Honour found that but for the defective products, Castel's margins on its other electronic products would have averaged 20% (as opposed to 25% as suggested by Mr Acton) in each of the 2004/2005, 2005/2006 and 2006/2007 financial years. 111 His Honour therefore rejected Castel's submission that the 4.4% reduction in gross profit margin between 2003/2004 and 2004/2005 was due to "the repercussive effect of the "epidemic" Toshiba products". His Honour said at [199]: Evaluating the evidence to which I have just referred in conjunction with Mr Acton's concession under cross-examination that he had no particular knowledge of, and had carried out no investigation into, the electronic brown goods market in Australia, I find that his estimate of the repercussive effect of the "epidemic" Toshiba products is unduly high. In my view, a more realistic estimate is that, but for the presence of the "epidemic" products, Castel's margins on its other Toshiba products would have averaged 20% in each of the years 2004-2005, 2005-2006 and 2006-2007 instead of the 25% "hypothetical gross margin" imputed by Mr Acton. 112 Accordingly, his Honour found that the damages recoverable by Castel under this head were confined to the 2005/2006 financial year in which Castel's actual gross margin was 3.6% below the 20% average gross margin (actual gross margin for the 2005/2006 financial year was 16.4%). In the 2004/2005 financial year there was no loss of margin as the actual gross margin was 20.5%. There was only a small loss of margin in the 2006/2007 financial as the actual gross margin was 19.4%. The primary judge ignored both of those years. 113 The primary judge calculated that the loss sustained by Castel as a result of reduced margin in respect of the other electronic products was $2,195,720. His Honour does not say how he arrived at that figure in respect of the reduction of 3.6% in the gross margin from 20% in the financial year 2005/2006. 114 As to the third aspect of Castel's expectation claim, the primary judge accepted Mr Acton's evidence that the J35, DLP and C-26 devices were innovative products and should have attracted significantly higher margins than other products when they were introduced into the Australian market. His Honour rejected the evidence of Mr Jeffrey Hall, an expert called by TSP who holds postgraduate qualifications in finance, that the J35, C26 and DLP were not innovative products. 115 The primary judge also rejected Mr Hall's evidence that the approach adopted by Mr Acton was unreliable because it depended on a "simple average" decline in margins. His Honour concluded that Mr Acton's approach was consistent with the global approach His Honour adopted to the assessment of damages. 116 The primary judge ultimately upheld Mr Acton's quantification of this aspect of Castel's expectation claim at $2,176,591. 117 The primary judge concluded that the total sum to which Castel was entitled under the three aspects of its expectation claim consisted of: (i) Cost of dealing with defective products $1,725,232 (ii) Impact of defective products on Castel's sales of other products $2,195.720 (iii) Loss of margin of profit on defective products $2,176,591 $6,097,543

[15]

118 His Honour assessed the loss and damage sustained by Castel as a result of TSP's breaches of the sales contracts as $6,097,543. From this sum, His Honour deducted the amount of $3,484,406 which TSP had already paid to Castel in part compensation. 119 The primary judge entered judgment for Castel in the sum of $2,613,137 for Castel's expectation claim. We have already referred to the subsequent order for pre-judgment interest in the sum of $2,047,356.51. 120 The primary judge dismissed Castel's reliance claim. He found that Castel did not pursue the Harman distributorship because it was not prepared to pay the amount sought by Convoy and Harman was not prepared to terminate or transfer its distributorship agreement with Convoy. In doing so, His Honour rejected Castel's submission that it had not pursued the Harman distributorship in reliance on the representations made by TSP in relation to the defective products. 121 The primary judge found that the negotiations between Castel, Convoy and Harman in relation to Castel's acquisition of a Harman distributorship ceased in early June 2004. His Honour was not satisfied that after 4 June 2004, Castel, Convoy or Harman contemplated the revival of an acquisition or transfer of Convoy's Harman distributorship by Castel. 122 His Honour regarded as significant the fact that Castel did not call Mr Clarke, who had been specifically recruited to manage Castel's proposed new audio division and had conducted all negotiations with Convoy and Harman. His Honour observed that Mr Clarke was no longer employed by Castel but there was no evidence that he had been deployed to assist in some other facet of Castel's business after the Harman negotiations ceased which his Honour would have expected if Castel had forgone the Harman opportunity. 123 His Honour said after referring to Mr Clarke's absence: Nor was any evidence adduced from any representative of Harman or Convoy that the Harman option could readily have been revived after June 2004 had Castel thought fit. In any event, neither Mr Kwong nor anybody else on behalf of Castel gave evidence to suggest that, at any time after June 2004, it gave any thought to reviving the Harman option. 124 The primary judge concluded that the reliance claim could not be made out because: … the Harman Option ceased to be available to Castel on 4 June 2004 before the making of almost all of the alleged J35 representations, the further J35 representations, the DLP representations and the C26 representations and independently of any act or forbearance by Castel in reliance on any of those representations. 125 The reliance claim therefore failed for two reasons: first, the representations had not been made before negotiations with Harman ceased; and secondly, negotiations ceased for reasons apart from Castel's association with TSP. 126 The primary judge dismissed TSP's cross claim. 127 His Honour found that the evidence did not support TSP's contention that the payment of $616,673 to Castel for the stock it took over from Castel pursuant to the Termination Agreement was an overpayment. Indeed, a reconciliation tendered in evidence on behalf of Castel suggests that it was underpaid by $75,973 on that account. 128 In respect to TSP's second claim for the sum of $2,666,667 paid by TSP pursuant to the Termination Agreement, His Honour observed this payment was allowed by Castel and was therefore to be set off against the damages recoverable by Castel. His Honour did so in calculating the judgment sum of $2,613,137. 129 TSP's third claim to be indemnified for taking over Castel's five year warranty obligations was abandoned by Senior Counsel for TSP in the course of his opening address.

[16]

The Notice of Appeal, the Notice of Contention and the Cross Appeal 130 Castel's Notice of Appeal complains of his Honour's rejection of Castel's reliance claim for damages and the first and second aspects of Castel's expectation claim which had not been accepted in full by the primary judge. 131 TSP filed a Notice of Contention in which it contended that the primary judge's finding that TSP was not liable to Castel under s 52 of the TP Act should be affirmed for two reasons apart from those relied upon by the primary judge. 132 TSP also filed a Notice of Cross Appeal in which it appealed against the primary judge's orders that there be judgment for the appellant in the sum of $2,613,127 plus interest and that the respondent's cross claim be dismissed. 133 Castel's Notice of Appeal contains 18 grounds of appeal which can be summarised in relation to the two different claims. 134 The grounds of appeal in relation to Castel's reliance claim are that the primary judge erred by: (a) finding that after June 2004, none of Castel, Convoy or Harman contemplated the revival of the Harman Option; (b) failing to find that as at June 2004 Harman was willing for Castel to take on the wholesale Australia-wide distribution of Harman's Infinity, Becker and JBL professional speaker ranges; (c) failing to consider: (i) the course which Castel would have taken if TSP had not made the J35 and DLP representations; (ii) the opportunity which was lost to Castel in not taking up the Harman Option in reliance on those representations; (d) failing to find that the J35 representations and the DLP representations were misleading and deceptive, and that Castel relied on the J35 representations and on the DLP representations, and not quantifying the loss sustained by Castel relying on the J35 and on the DLP representations, and in not pursuing a distributorship for audio consumer goods after June 2004. 135 Castel's Notice of Appeal challenges the findings made by the primary judge in relation to the costs of dealing with the defective products (which was the first aspect of Castel's expectation claim) and the impact of the defective products on the gross sales of other electronic products sold by Castel (which was the second aspect of Castel's expectation claim). 136 The grounds of appeal in relation to the first aspect of Castel's expectation claim are that the primary judge erred in: (a) not awarding Castel the costs attributable to sales staff (also called field staff, but excluding those sales staff who were re-assigned to the service department) whose re-assigned duties entailed dealing with consumers and visiting retailers to receive complaints, provide explanations and deal with the epidemically faulty goods; (b) not awarding Castel increased administrative staff costs attributable to dealing with the epidemically faulty goods; (c) reducing Castel's claim for the costs of service personnel attributable to rectifying the epidemically faulty goods by 20%. 137 The grounds of appeal in relation to the second aspect Castel's expectation claim are that the primary judge erred in: (a) finding that there was no significant impact on Castel's gross margin in the 2004/2005 financial year; (b) finding that there had been a contraction of the Australian brown goods market from 2003; (c) finding that increased price competition in relation to sales of audiovisual consumer goods in the 2002/2003 financial year or subsequently, particularly in relation to plasma television receivers, led to a reduction in Castel's gross margin in the 2004/2005 financial year; (d) finding that Castel's margin on its other Toshiba products would have been 20% in the 2005/2006 and 2006/2007 financial years but for the presence of the defective products; (e) not applying a gross margin of 25% in calculating the profit lost to Castel on its sales of other Toshiba goods between the 2004/2005 and 2006/2007 financial years. 138 The Notice of Contention only addresses Castel's reliance claim. It raises two points. The thrust of the first point is that if the primary judge had considered the s 52 claim, which he did not because he was of the opinion that Castel had not proved a loss of opportunity, the primary judge would have been bound to find that there had been no contravention of s 52 in any event. The primary judge would also have concluded that Castel had not proved that it had relied on any of the J35 or DLP representations and Castel's reliance claim would have been dismissed in any event. Because for reasons that follow we agree that his Honour was right to dismiss Castel's reliance claim for the reasons he did, we do not need to consider the first point raised in the Notice of Contention. 139 TSP also contended in its Notice of Contention that Castel failed to prove that it suffered loss for which TSP was liable. We will briefly address that contention but again, because we agree with the primary judge's reasons for dismissing Castel's reliance claim, we do not need to resolve that issue. 140 TSP's Notice of Cross Appeal contains 29 separate grounds of appeal. The grounds may be summarised within six broad grounds: (a) the primary judge failed to apply Article 35(3) of CISG; (b) the primary judge failed to apply Article 74 of CISG; (c) the primary judge should have ruled that Mr Peter Acton's evidence was inadmissible; (d) the primary judge should not have found that there was only a single cause of action but should have found that there were a number of contracts where Castel submitted each order for the various TSP goods; (e) the primary judge erred in not considering each separate contract and considering the damage suffered by Castel in respect of each separate contract; (f) the primary judge failed to apply Article 77 of CISG.

[17]

The submissions on appeal on the reliance claim 141 Castel submitted that the primary judge should have found that a distribution agreement between Castel and Harman remained available to Castel as at June 2004 and thereafter. 142 It submitted Castel was already negotiating with Harman in relation to a distributorship when the representations were made by TSP and Harman had already offered Castel the distribution of some of its goods in Australia. In April 2004 and again in June 2004 Harman offered to appoint Castel to be the Australian distributor of its Infinity branded speakers. Castel submitted that as at June 2004 Harman was also willing for Castel to distribute certain other of its professional speaker ranges, including Becker and JBL. Harman was willing for Castel to acquire Convoy's distribution of Harman goods in Australia, provided that satisfactory terms of agreement could be reached. Castel contended Convoy had indicated that it was willing to cede its Harman distribution for the right price. There was no written or long term distribution agreement between Harman and Convoy. 143 Castel argued that the primary judge erred by failing to consider the course which Castel would have taken if TSP had not made the J35 and DLP representations and the opportunity which was lost to Castel in not taking the course in reliance on those representations. 144 Castel submitted that the approach to be adopted in determining its reliance claim was that the Court should have first considered the course Castel would have taken if TSP had not made the representations about its J35 and DLP products; and secondly determined the opportunity which was lost to Castel in reliance on those representations. Castel submitted that approach was consistent with the decisions in Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 and Commonwealth v Amann Aviation Pty Ltd 174 CLR 64. 145 Castel submitted that notwithstanding that it pursued an agreement with TSP in preference to a distribution agreement with Harman, the opportunity to enter into a distributorship agreement with Harman nevertheless remained available to it after June 2004. Castel submitted that the primary judge erred in finding that after June 2004, none of Castel, Convoy or Harman contemplated the revival of the Harman distributorship negotiations. 146 TSP asserted that the primary judge's finding that the Harman distributorship was no longer available to Castel was open to His Honour and supported by the evidence. The correspondence between Harman and Castel in June 2004 demonstrated that Harman had decided it did not want to appoint Castel as its distributor. Further, Castel had been unable to reach any agreement with Convoy to acquire its distribution of Harman products. 147 TSP contended that Castel's appeal against a failure by the primary judge to find a loss of opportunity to acquire distribution rights in respect of Harman products after June 2004 was not pleaded by Castel in its Amended Statement of Claim. 148 Further, TSP submitted that there was no evidence to support Castel's assertion that any opportunity existed for Castel to pursue a distribution agreement with Harman after June 2004. TSP submitted that there was no evidence as to whether Harman products were distributed in Australia after June 2004, or as to any commercial distribution agreements in existence between Harman and third parties. Moreover, there was no evidence that Convoy remained Harman's distributor after June 2004 or whether Harman's position that it would not replace Convoy as its distributor had changed. Further, there was no evidence as to whether Convoy would have sold their rights to Castel after June 2004. 149 TSP submitted that Castel's claim that it would have pursued the Harman distributorship was inconsistent with its reason for rejecting Harman's initial offer to distribute its Infinity branded products. Castel rejected the initial offer because it was seeking "a wider range of products that would justify the necessary investment in infrastructure required to represent Harman products in Australia". 150 In the alternative, TSP submitted that even if the opportunity existed, there was no evidence as to the value of any post June 2004 commercial distribution agreement with Harman. TSP submitted that Castel had not proved the value of the foregone Harman opportunity. Castel's claim for loss of profits was based on the difference between a projected or hypothetical profit calculated by Mr Acton and Castel's actual profit for the years in question. TSP asserted that Mr Acton's hypothetical profit was based on two assumptions, neither of which had been proved. 151 The first assumption related to the gross sales of Harman products. As part of his calculation, Mr Acton assumed that Castel would have to pay for the costs of acquiring Convoy's distribution rights. TSP submitted that the figure used by Mr Acton is making this allowance was based solely on Mr Kwong's evidence about the price he expected Castel to pay Convoy. However, no evidence was given about what price, if any, Convoy would have accepted. 152 The second assumption upon which Mr Acton's loss of profits calculation was based was that Castel would have available to it a larger range of Harman products than that available to Convoy at June 2004. Mr Acton assumed that Castel would sell a range of Harman products including Infinity Home, Infinity Car, Becker and JBL. The products distributed by Convoy at June 2004 included the Infinity, Becker and JBL brands. TSP submitted that there was no evidence that Harman would have made its range of JBL and Becker products available to Castel. 153 TSP contended that the loss of opportunity foregone had no value because if the opportunity had come into fruition it would not have resulted in any profit to Castel.

[18]

The reliance claim considered 154 Castel's ambition to extend its business to the distribution of audio products via the Harman Option was conceived by Mr Kwong in 2003. Castel met with Harman and expressed an interest in distributing Harman products. Meetings between the two companies took place between 2003 and 2004. After various negotiations, Harman offered to appoint Castel to be its Australian distributor of "Infinity" brand speakers and car audio products and indicated its willingness to extend the distributorship to further brands after Castel had demonstrated a period of successful trading in the "Infinity" products. Harman was not prepared however to displace Convoy as the distributor of Harman's brands in Australia. 155 The primary judge considered Castel's decision not to pursue the Harman Option by reference to the evidence of Mr Kwong. His Honour said at [83]: In his witness statement, Mr Kwong explained as follows the thought processes which led him, between May and June 2004, not to proceed with the Harman Option; 162. The position reached between Castel and Convoy at the end of April 2004 was that Convoy was willing to withdraw from selling Harman goods for an appropriate price. I was prepared for Castel to pay a figure of the order arrived at by a major accounting firm plus a sensible amount of premium, if necessary. There was more work to be done to reach agreement as matters stood at the end of May 2004. 163. Because of the assurances of TSP regarding the imminent launch of its new J-35 and DLP products I took the view that Castel should pursue that relationship rather than continue to negotiate with Convoy. If I had known in the second half of 2004 or early 2005 that Toshiba or TSP did not have a reliable product of the represented capacity of the J-35, Castel would have concluded a deal with Convoy and Harman to take over the distribution of Harman products in Australia. I know of no reason why such negotiations would not have been successful at that time. 164. Castel withdrew from the negotiations with Convoy in June 2004 and committed itself to taking advantage of the J-35 and DLPs. I was mindful of Castel's long relationship with TSP and the standing of Toshiba branded products to that point and of the considerable promise of its proposed products. If I had known that TSP was not in a position to supply essentially fault free J-35 and DLP products Castel would have pursued and concluded a Harman distributorship or other distributorships. There was no point in Castel taking on Toshiba TV products which had not been sufficiently developed or tested to meet the digital broadcasting needs of consumers in the Australian market. 165. Castel's relations with Harman remained on a friendly basis after May 2004 and in June 2004 Mr Rinckenberger wrote to me confirming that the Infinity brand was still available for Castel to distribute in Australia. 156 The primary judge referred to Mr Kwong's evidence in cross-examination at [93]: When cross-examined about that end to the discussions between Castel and Harman, Mr Kwong indicated that it would be far too expensive for Castel to pay between $2 million and $3 million dollars to acquire Convoy's business on top of the $5.7 million which he had allowed for spending to establish the new business and introduce the resources necessary to sell and service the Harman products throughout Australia. 157 The primary judge found that the Harman Option was foregone by 4 June 2004, that is to say before any of the allegedly significant misrepresentation occurred. His Honour did not accept that Castel's decision to forego the Harman Option was materially affected by TSP's alleged misrepresentations. TSP's decision to pass on the Harman Option reflected its own unwillingness to pay $6 million to buy out Convoy and Harman's refusal to drop Convoy in favour of Castel. His Honour said at [94]: In the light of the whole of the evidence about the Harman Option, I am satisfied that it was foreclosed to Castel by early June 2004 because Castel was not prepared to pay anything, or anything like the amount which Convoy was asking, for the goodwill attaching to its Harman distributorship and Harman was not prepared to terminate that distributorship or transfer it to Castel without a payment of compensation acceptable to Convoy. I am not persuaded that any of Castel, Convoy or Harman contemplated, after 4 June 2004, the revival of the Harman Option upon payment to Convoy by Castel of $6 million or any other amount. 158 It should be noted here that the primary judge also examined in close detail the correspondence between the parties to the negotiations in relation to the Harman Option. In none of this correspondence was there any suggestion that the proposed acquisition of the J35s by Castel from TSP had any bearing on Castel's attitude to the negotiations with Harman and Convoy on the negotiations. There was also no evidence of any internal contemporaneous Castel document which contained such a reference. 159 The primary judge concluded (at [165]): In my view, it is unnecessary to resolve any of the controversies which have been raised about the application of the Trade Practices Act to the facts of the present case. That is because the representations in question, many of which are co-extensive with the implied warranties of fitness for purpose or merchantable quality arising under the CISG, are relied on only in support of the alternative reliance claim. … [T]he alternative reliance claim cannot be made out because the Harman Option ceased to be available to Castel on 4 June 2004 before the making of almost all of the alleged J35 representations, the further J35 representations, the DLP representations and the C26 representations and independently of any act or forbearance by Castel in reliance on any of those representations. It follows that an assessment of Castel's claim for damages must be confined to its primary expectation claim in respect of the alleged breaches of the sales contracts. 160 Castel's attack on the primary judge's rejection of its claim in respect of the Harman Option fails to recognise that this claim failed, not because his Honour did not properly consider the claim, but because his Honour did not accept Mr Kwong's evidence that he chose not to pursue the Harman Option because of the promised availability of high quality J35 units and would have been able to secure the Harman distributorship had he not been distracted by TSP's misleading assurances. 161 It was open to his Honour to reject Mr Kwong's evidence in the light of Mr Kwong's answers in cross-examination. His Honour referred to these answers. It may also be said that the absence of any contemporaneous document suggesting a link between the negotiations for the Harman Option, the availability of the J35 units from TSP, the clear evidence that Harman was not disposed to abandon Convoy (its current distributor) in favour of Castel and that there was no prospect that Castel would agree to pay Convoy's asking price for the transfer of the distributorship. Additionally, all tend to support the conclusion that the suggestion that Castel might have secured the Harman distributorship was wishful thinking on Mr Kwong's part. 162 The primary judge did not expressly state that he found Mr Kwong's evidence in-chief on this point unreliable, but that is not to the point. The findings which his Honour made are consistent only with that conclusion. In Abalos v Australian Postal Commission (1990) 171 CLR 167 at 178 - 179, McHugh J, with whom Mason CJ, Deane, Dawson and Gaudron JJ agreed, said: In S.S. Hontestroom v. S.S. Sagaporack [[1927] AC 37 at 47], Lord Sumner pointed out that: not to have seen the witnesses puts appellate judges in a permanent position of disadvantage as against the trial judge, and, unless it can be shown that he has failed to use or has palpably misused his advantage, the higher Court ought not to take the responsibility of reversing conclusions so arrived at, merely on the result of their own comparisons and criticisms of the witnesses and of their own view of the probabilities of the case. The course of the trial and the whole substance of the judgment must be looked at, and the matter does not depend on the question whether a witness has been cross-examined to credit or has been pronounced by the judge in terms to be unworthy of it. If his estimate of the man forms any substantial part of his reasons for his judgment the trial judge's conclusions of fact should, as I understand the decisions, be let alone. Consequently, where a trial judge has made a finding of fact contrary to the evidence of a witness but has made no reference to that evidence, an appellate court cannot act on that evidence to reverse the finding unless it is satisfied "that any advantage enjoyed by the trial judge by reason of having seen and heard the witnesses, could not be sufficient to explain or justify the trial judge's conclusion": Watt or Thomas v. Thomas [[1947] A.C. 484 at 488]. … As I pointed out in Jones v. Hyde [(1989) 63 ALJR 349 at 351; 85 ALR 23 at 27], when a trial judge resolves a conflict of evidence between witnesses, the subtle influence of demeanour on his or her determination cannot be overlooked. It does not follow that, because her Honour made no express reference to the demeanour or credibility of either [a witness's], demeanour or credibility played no part in her findings on the supervision issue. … [Footnotes omitted]. 163 To the extent that the primary judge's findings of fact on this issue were contrary to Mr Kwong's evidence, this Court cannot act on that evidence to reverse the findings unless it is satisfied that the advantages enjoyed by the primary judge in seeing and hearing the witnesses "could not be sufficient to explain or justify the trial judge's conclusion". 164 The advantage which the primary judge enjoyed in seeing and hearing Mr Kwong give evidence is therefore important. But even if that advantage is left out of account, it is difficult to accept that his Honour could reasonably have been so impressed by Mr Kwong that he could have been led to overlook the glaring absence of any contemporaneous documentary support for the thesis on which Castel's reliance claim depends. It is simply not possible to say that his Honour erred in not allowing his credulity to be stretched so far as to accept Mr Kwong's evidence on this point. 165 Accordingly, there is no substance in Castel's insistence that Castel was persuaded by TSP to forego a commercial opportunity which the Court must value taking into account the degree of probabilities or possibilities. 166 It was incumbent on Castel to establish on the balance of probabilities that it had lost a valuable opportunity. If Castel satisfied the burden of proof it bore on this issue, the Court could proceed to value that opportunity in accordance with the degree of likelihood that the opportunity would have ensued to Castel's pecuniary gain. In Sellars v Adelaide Petroleum NL 179 CLR 332 at 346-353, Mason CJ, Dawson, Toohey and Gaudron JJ analysed the authorities at length, emphasising the distinction between causation of loss (which must be determined in accordance with the general civil standard of proof) and the assessment of the plaintiff's loss "taking into account any reductions arising from the uncertainty of future events". Their Honours concluded their discussion with the observation: "When the issue of causation turns on what the plaintiff would have done, there is no particular reason for departing from proof on the balance of probabilities notwithstanding that the question is hypothetical". That authoritative statement applies with no less force where the issue is not only what the plaintiff would have done, but also involves questions as to what others would have been disposed to do in relation to reaching an agreement with the plaintiff. 167 The primary judge was simply not satisfied that Castel would or could have concluded an agreement with Harman or Convoy, nor that the misconduct alleged by Castel against TSP had any bearing on that state of affairs. Even if Mr Kwong genuinely believed that he would be able to conclude an agreement with Harman or Convoy, the primary judge was entitled to regard that belief as no more than wishful thinking after the event. Damages are not awarded for wishful thinking. 168 On appeal Castel also complained that the primary judge had failed to address Castel's loss of opportunity after 4 June 2004. 169 Castel did not plead that the opportunity to take up the Harman distributorship was available to it after 4 June 2004. Castel pleaded in paragraph 69 of its Amended Statement of Claim that it lost the opportunity of pursuing alternative business prospects "which the Applicant would have pursued in consequence of the Respondent's inability to supply products necessary to the profitability of its business". 170 In paragraph 70 it alleges in October 2003 it began discussions with Harman. In paragraphs 71 and 72 it detailed the discussions. It pleaded in paragraphs 73 to 74: 73. In or about June 2004 the Applicant determined not to take up its opportunity to acquire the Harman International distributorship for Australia by reason that the Applicant was satisfied in consequence of the J35 representations and DLP representations as to its ability to achieve its profit projections for the 2005 financial year and subsequently. 74. The Applicant lost the opportunity to acquire and profit from the Australian Harman International distributorship and any other supplementary business by reason of relying upon the said misleading and deceptive conduct constituted by the J35 representations and DLP representations and the consequences thereof, and thereby suffered further loss and damage. Particulars The Applicant's loss when account is taken of its lost opportunity to pursue alternative business prospects is $34,338,579 (which includes the costs of $15,585,442 of dealing with the faulty products referred to above). The calculation is summarised in the Particulars of Loss delivered separately. Further loss and damage is being incurred and the Applicant reserves the right to serve amended particulars before trial. 171 TSP sought further particulars of Castel's pleas. Initially they were refused but in due course better particulars were given of paragraphs 71 to 72 which identified the communications between Castel, Convoy and Harman. No particulars are given of any communications after 4 June 2004. Castel refused to give particulars of paragraph 73. In response to paragraph 74 it gave the following particulars: 44. Under paragraph 74 (request 101) The J35 and DLP representations induced the Applicant to believe that it would have a range of leading Toshiba branded electronic products available for sale in the Australian market that would be sufficient to meet competition from competitive products and give the Applicant a relative advantage. For this reason the Applicant did not pursue the Harman product distributorship further at the time, and later the Applicant was not in a position to do so given the nature and extent of the product failures the subject of this proceeding. 45. Under paragraph 74 (request 102) The Applicant regularly considered other opportunities to expand or develop its business. In the period 2003 to 2004 the Applicant had the opportunity to consider the following audio opportunities, McIntosh car audio, Denon, Onkyo, Marantz, Koi and Kenwood. 46. Under paragraph 74 (request 103) The Applicant will provide its evidence of loss and damage including the financial information and calculations supporting its claim in the form of a witness statement in lieu of further particulars. 172 Castel's pleaded claim was one for damages which crystallised on 4 June 2004 when Castel determined not to proceed with the Harman option. 173 Moreover, it did not run a case at trial that it lost an opportunity after 4 June 2004. The only evidence that could be said to be relevant to such a claim was that of Mr Kwong who said that Castel would have pursued and concluded a Harman distributorship. The evidence which was led supported his Honour's finding that negotiations between Castel and Harman ceased on 4 June 2004 before the representations were made and for reasons apart from the representations. 174 Castel rejected Harman's offer to distribute its Infinity branded products in an email dated 28 May 2004. Castel also said that it had ceased negotiations to acquire Convoy's distribution of selected Harman products because Convoy's asking price was too high. It is apparent from email correspondence between Mr Clarke of Castel and Mr Rinckenberger of Harman on 28 May 2004 that Convoy would only sell its distributorship of Harman products to Castel for $6 million. In the same email, Mr Clarke said that Castel was not prepared to pay $6 million for Convoy's distributorship rights. In cross examination Mr Kwong indicated that Castel would not even pay $2 or $3 million for Convoy's Harman distributorship. There was no evidence that Convoy would have sold the distributorship for a lower price than the asking price. There was no evidence that Castel would have paid $6 million. In an email dated 4 June 2004 Mr Rinckenberger said that Harman was not prepared to displace Convoy as its wholesale distributor in Australia. There was no evidence that Harman ever changed its position in that regard. 175 There was no evidence of any correspondence or any form of communication between between Harman, Convoy and Castel after June 2004. There was no evidence to support any finding that Castel intended to renew its negotiations with Harman or Convoy or that it refrained from doing so because of the impugned representations. There was no evidence that Harman continued to distribute its goods after June 2004. Nor was there any evidence of its relationship with Convoy after that time. There was not a scintilla of evidence that either of Harman or Convoy would have entered into negotiation with Castel after June 2004. There is no evidence of what Convoy would have wanted to sell or assign the distributorship and whether Castel would pay that amount. 176 The reason of course that there is no evidence is because no one ever contemplated after 4 June 2004 that Castel would want to become Harman's distributor in Australia. 177 The primary judge did not address any reliance claim after 4 June 2004 because there was no plea raising such an issue and no evidence to support such a claim. We reject the submission advanced on the appeal that the primary judge should have considered the reliance claim after 4 June 2004. There was in fact no such claim. 178 The primary judge was right to dismiss Castel's reliance claim for the reasons he gave. Once he had dismissed the reliance claim for the reasons he did, he did not need to consider whether Castel had proved a contravention of s 52 of the TP Act. For those reasons, the first point in the respondent's Notice of Contention does not need to be addressed. 179 We shall briefly address TSP's second point in its Notice of Contention. At the hearing of this appeal, counsel for TSP handed up a document entitled "Short Note of the Respondent's Submissions in respect of the Appellant's 'Reliance' Claim". In this document, TSP sought to demonstrate that, upon a proper understanding of the evidence and contrary to Mr Acton's evidence, the opportunity had no value. 180 Castel relied on the evidence of Mr Acton for its reliance damages. He valued the Australian home audio market at $800 million and the car audio market at $500 million. No evidence was led to support Mr Acton's assessment of the markets. In Mr Kwong's supplementary affidavit, Mr Kwong said he supplied the information to Mr Acton upon which Mr Acton valued the markets. However, he does not say what information he supplied or how he valued, if that is what he did, those markets. There was in those circumstances no evidence adduced to support Mr Acton's assessment of the markets. TSP submitted that Mr Acton's figures bore no relationship to the estimates given by Harman of those markets. Harman, it was submitted, would know the size of the markets being manufacturers and suppliers into those markets. The correspondence between Harman representatives and Castel showed that Harman valued the home audio market at $64.2 million and the car audio market at $107.2 million. Mr Kwong was examined on Harman's estimates and he agreed those to be Harman's calculations. 181 TSP argued that Mr Acton's unsupported estimate of the markets was in the case of the audio market 12 times larger than Harman's estimate; and in the case of the car audio market in the order of 5 times larger than Harman's estimate. 182 Mr Vincienne, a Harman employee, wrote in an email on 23 October 2003 in respect of the home audio market that Harman hoped to attain 1% market share for its Infinity products after one year and 3% after three years. In the same email he indicated that in respect of the car audio market Harman hoped to attain 2% of the market after one year for its Infinity products and 6% after three years. 183 TSP calculated, using Harman's assessment of the size of the markets, that sales of Harman's Infinity products would gross $2.74 million in the first year and $8.22 million in the third year. 184 TSP also addressed Convoy's distributorship of Harman products. 185 Mr Kwong estimated in an email to Harman dated 10 May 2004 that Convoy's turnover of Harman products at 10 May 2004 was $6 million per annum. Mr Kwong agreed that Castel could not make a profit on a $6 million turnover per annum. He said in an email to Harman dated 23 April 2004 that Castel would try to grow that part of the business by 50% in three years to reach an annual turnover of $9 million. 186 TSP produced a table which summarised the evidence: Business Turnover, end of year 1 Turnover, end of year 3 'Infinity' Home Audio $0.64 million $1.92 million 'Infinity' Car Audio $2.1 million $6.3 million Convoy distributorship $6 million $9 million Total $8.74 million $17.22 million

[19]

187 In cross examination, Mr Kwong said that in order to make a profit distributing Harman products, Castel would need to achieve a turnover of at least $20 million per annum. TSP submitted by reference to the evidence and the table that even if Castel had obtained the Harman distributorship, it could not have realised a profit within three years because the projected turnover on Harman's own estimate was $17.22 million. TSP further contended that if Castel had had to pay $6 million to Convoy for the distributorship the profitability of the distributorship would have been even more problematic. 188 At the hearing Castel answered TSP's analysis in two different ways. First, it said Mr Acton's estimate of the home audio market and the car audio market was based on what he had been told by Mr Kwong. 189 Secondly, Castel argued that TSP's analysis failed to take into account the wide range of products Castel would have distributed if it had acquired Convoy's distribution of Harman products. Castel said TSP was wrong to limit its analysis to one brand, Infinity, where the evidence established that Castel intended to acquire a wider range of car audio and home audio products from Convoy including Becker and JBL branded professional speakers. Castel asserted that TSP's Note failed to draw together all of the components that would have made up the gross sales of projections across professional speakers, home speakers and car speakers. For those reasons, Castel submitted that TSP's attack on Mr Acton's estimates as to the value of the Harman opportunity should fail. 190 Castel's arguments do not answer TSP's analysis. Whilst Mr Kwong might have given the estimates of the markets to Mr Acton, and we have already referred to Mr Kwong's supplementary affidavit in that regard, that does not prove that the markets were of the size estimated by Mr Kwong or assumed by Mr Acton. Mr Acton relied on the size of the markets to assess Castel's reliance damages where there was no evidence to support that assumption. 191 The second submission made by Castel is simply wrong. TSP's analysis is not confined to the Infinity brand. The analysis assumes that Castel will obtain the Convoy distributorship. 192 For those reasons there appears to be some force in TSP's argument but it is unnecessary to express a concluded view because, for the reasons earlier given, we are satisfied that no relevant opportunity existed at any time.

[20]

The admissibility of Mr Acton's evidence 193 Before addressing the appeal and cross appeal in relation to Castel's expectation claim, it is necessary to address the submission put by TSP that the whole of Mr Acton's evidence was inadmissible. A similar objection was taken by TSP at trial but his Honour received Mr Acton's report and Mr Acton's oral evidence. 194 The respondent contended that Mr Acton had no special training, experience or qualifications that would allow him to express an expert opinion on any aspect of the brown goods industry or market in Australia: Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705 at [85]. 195 TSP also argued that Mr Acton's retainer was oral as no written direction was given to him as to how he was to undertake his task. He was not informed of the legal principles upon which he had to rely for the purpose of determining the loss under the CISG or the Goods Act or otherwise. It was also contended that Mr Acton also accepted, without qualification, the instructions given him by Mr Kwong and other members of Castel's staff for the purpose of formulating his opinion. 196 Thirdly, it was asserted that Mr Acton made a large number of assumptions which were not reasonable or proper assumptions because they had no factual underpinning. 197 In summary, TSP contended that Mr Acton's evidence should not have been admitted because: (a) Mr Acton conceded that he did not have any relevant specialised knowledge of the Australian brown goods market; (b) Mr Acton's opinions were based on assumptions the foundations for which were not proved; and (c) Mr Acton's opinions were not probative in the sense that they did not answer any relevant question raised by Castel's claims for breach of contract (pursuant to the CISG) or pursuant to the TPA. 198 Therefore TSP argued Mr Acton's evidence did not come within the exception in s 79(1) to the opinion rule in s 76 of the Evidence Act 1995 (Cth) ("Evidence Act"). Section 79(1) provides: (1) If a person has specialised knowledge based on the person's training, study or experience, the opinion rule does not apply to evidence of an opinion of that person that is wholly or substantially based on that knowledge. 199 Before addressing the objections it is necessary to understand the exercise which Mr Acton carried out. 200 Mr Acton presented a written report in the form of a witness statement which was verified by affidavit. Contrary to TSP's submissions Mr Acton identified the matters to which he had regard in writing his report in Annexure 2. 201 First, he had regard to the Guidelines for Expert Witnesses in proceedings in the Federal Court. He had regard to the Statement of Claim, a Schedule of Faults, the Particulars of Loss and Damage and the Schedule of Other Epidemic Products. He had regard to Castel's audited accounts, profit and loss statements, expense analyses, balance sheets and cash flow statements. He also had regard to Castel's management's accounts. He went behind the audited accounts and management accounts and had regard to the source documents which underly those accounts. He had regard to Castel's sales and service records, HR records, supplier invoices, bank statements and time sheets. He had regard to a number of documents which evidenced the dispute between Castel and TSP, including correspondence between the parties, notes of meetings and correspondence from retailers evidencing complaints. He also had regard to the correspondence between Castel and Harman, a presentation made by Castel to Harman and correspondence between Castel and Convoy. His report was largely based on the financial statements of Castel which he used in particular in relation to the expectation claim to calculate the losses relating to the three aspects of that claim. 202 Forensic accountants and persons who have qualifications in business administration and the like practise in a well-recognised field of expertise. In their practice those experts have regard to financial statements and records for the purpose of expressing accounting and audit opinions often in regard to claims against accountants. They also have regard to those records to identify losses which are said to have been suffered by a business as a result of some actionable wrong. In that regard the experts must have regard to the changes in the financial condition of the business from time to time. 203 The exercise carried out by Mr Acton is often carried out by expert forensic accountants who identify the financial documents which are relevant to the inquiry. To the extent necessary, the documents are explained including their contents in order that the Court can understand the company's business. They are often explained to establish some trend in the company's business activities both before and after the cause of action arose. The Court could carry out the inquiry for itself. It could have regard to the underlying source documents and construct for itself the trends upon which reliance is put. However, the practice is to have forensic experts carry out the exercise in advance of the hearing in order to save the Court the time and trouble of the exercise. It is an appropriate way of presenting evidence relating to the financial affairs of a company which claims to have suffered a loss. Their evidence assists a Court in understanding transactions which involve complex accounting treatments. The evidence is a summary of the financial records of the company and admissible: Potts v Miller (1940) 64 CLR 282 per Dixon J at 302-303. It is not opinion evidence at all. It is a summary of the company's financial records. 204 In Australian Securities and Investments Commission v Rich (2005) 53 ACSR 110, Austin J when speaking of forensic accountants said at [272]: It seems to me that some of the work of a forensic accountant is to be treated as admissible in the same fashion as scientific facts. Suppose the report of a forensic accountant contains a complex financial calculation. The result of the calculation is not an opinion because, if the calculation is done correctly and the financial records from which it has been derived are proven, it is true as an analytic mathematical proposition without reliance on any inferences or questions of judgment. The expert's work is mathematical and analytical rather than based on scientific observation, but in both cases there is a factual conclusion, admissible as evidence of fact, derived from the application of specialised knowledge. 205 Mr Acton's evidence was almost entirely factual and consisted no more than identifying the appropriate costs and margins relating to both the defective and non-defective goods. The evidence was not of the kind that Austin J rejected in Dean-Willcocks v Commonwealth Bank of Australia (2003) 45 ACSR 564 which consisted of conclusions which were not for an expert but for the Court to reach. 206 In respect of the first aspect of the expectation claim, Mr Acton took into account the financial records of Castel to determine as accurately as he could the costs occasioned to Castel to remedy the defective products. In that exercise he did no more than explain the calculation of the costs associated with remedying and dealing with the defective products. His evidence in this regard was simply informative and not an opinion. 207 In respect of the second aspect of the expectation claim, he had regard to the margins on non-defective goods which Castel was achieving prior to it marketing the defective products and identified the gross profit margin. He noted the substantial decline in that gross profit margin over a period of time and inferred because there was nothing else he could find relevant, that the decline in gross profit margin was due to Castel's marketing of the defective products. 208 The inference that Mr Acton drew was an inference that was equally available to the primary judge. Indeed, in respect of the second aspect of the expectation claim, the primary judge did not accept the inference Mr Acton raised but drew an inference for himself that the decline in the gross profit margin of other goods due to Castel's involvement with the defective products was 3.6% in one year only. His Honour reached that conclusion on an examination of the surrounding objective facts. 209 In relation to the third aspect of the expectation claim, Mr Acton again had regard to Castel's financial statements from which he was able to establish that the gross profit margin in relation to the defective goods was substantially less than that which would have been expected for goods which were not defective. 210 Again, Mr Acton drew an inference from the information available to him, which he explained was drawn because of the absence of any other reasons in those financial records for the decline. In this respect, the primary judge accepted the inference which he had drawn but, of course, the primary judge could have drawn the same inference for himself. Indeed by accepting Mr Acton's evidence, he was effectively drawing that inference himself from the financial statements. 211 The first ground of objection was that Mr Acton did not possess "specialised knowledge" which would allow him to express an opinion. If the evidence which is sought to be adduced is an opinion, s 79 requires the person offering the opinion to have specialised knowledge "based on the person's training, study or experience". Moreover, to qualify for admissibility the opinion must be "wholly or substantially based on that knowledge". 212 The opinion rule is defined in the Dictionary by reference to s 76 of the Evidence Act but "opinion" is not defined. An opinion is an inference drawn from observed facts: Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (No 5) (1996) 64 FCR 73 at 75; Quick v Stoland Pty Ltd (1998) 87 FCR 371 at 373. 213 We think much of Mr Acton's evidence was not opinion evidence at all and therefore does not need to come within s 79 to be admissible. It is only that evidence where Mr Acton sought to draw inferences from the facts contained in Castel's financial statements and records that TSP could object. 214 Mr Acton had sufficient knowledge based on his study or experience to give an opinion on the trends that could be observed in Castel's financial statements. He was undoubtedly qualified by training and experience to identify Castel's relevant financial statements and underlying records to show the Court the cost to which Castel had been put in remedying and dealing with the objective products; the loss of gross margins on non-defective goods following upon the marketing of the defective products; and the loss of margin on the defective goods themselves. 215 TSP could have shown in cross examination that Mr Acton lacked the education or experience for the task which he performed in explaining Castel's financial statements or for the drawing any of the inferences. However, TSP did not attempt to do so. We reject TSP's contention that Mr Acton was disqualified from giving opinion evidence because he lacked the appropriate expertise. He had specialised knowledge in the financial statements of corporations and he was thereby entitled to give evidence of Castel's financial affairs. 216 We also do not accept that Mr Acton's opinions were based on assumptions, the foundations for which were not proved. Mr Acton has identified the assumptions upon which his report is based both in Annexure 2 and also from time to time during the report. A reading of his report shows that he heavily relied upon Castel's audited financial statements and management accounts and the underlying financial records. Some times those assumptions are supplemented by what he was told by Castel's witnesses. In due course, Mr Simon Shan gave evidence identifying the sources of information and the processes whereby financial information was supplied to Mr Acton, and no objection was taken to that evidence. We think that Mr Acton was entitled to give his evidence in the form that he did. 217 We do not need to address the question whether the basis rule applies to the report or evidence of an expert so that the report must identify the assumptions upon which the opinion is based. The conflicting opinions on this issue have been articulated in many decisions in different jurisdictions and are referred to in Australian Securities and Investments Commission v Rich 53 ACSR 110 at [320]-[324] First, because contrary to TSP's contentions we think the assumptions Mr Acton has made are made apparent in his report. He has identified the sources of his information and his report in his working papers identifies how those sources have translated into assumptions. Secondly, because neither party asked us to reconsider this Court's decision in Quick v Stoland Pty Ltd 87 FCR 371 in the light of Heydon JA's decision in Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705. The question simply does not arise. 218 TSP also argued that Mr Acton's evidence should not be received because not all of the underlying evidence to which he referred was proved. We have already mentioned Mr Shan's evidence. We think this submission should be rejected for the reasons given by Gibbs J in Re Montecatini's Patent (1973) 47 ALJR 161. In that case, Gibbs J considered a patentee's loss where the opponent argued that the patentee had relied upon a forensic expert accountant but not tendered the basic financial information relied upon. He said at 169: The manner in which the result of the financial operations of a company may be proved was discussed in Potts v. Miller (1940), 64 C.L.R. 282, at pp. 292, 301-305. Two rules seem to be established, first, that books of account kept according to an established system in organized business are receivable in evidence as proof of the financial progress or of the result of business operations conducted on a large scale, and secondly, that when the books are produced, or their production is not insisted on, an accountant who has examined them may state their general effect. To produce all the records examined by Mr. Gidley-Kitchin and his staff might well have caused enormous expense and inconvenience. It was very proper that the opponents should not have insisted upon their production. Having failed to insist upon it, however, they cannot now assert that the evidence is inadmissible because of the absence of the records or because of the failure strictly to verify them. Of course it is still open to the opponents to submit that the evidence, although admissible, does not suffice to establish the petitioners' case. 219 TSP did not call for the underlying financial records upon which Mr Acton relied but rather sat back and claimed, in the end result, the assumptions had not been proved. That is not permissible for the reasons given by Gibbs J in Re Montecatini's Patent 47 ALJR 161. 220 No real complaint was made that Mr Acton's reasoning processes were not exposed in his report or his evidence. We have assumed that an expert must expose any reasoning process in the expert's report and any subsequent evidence. We think no complaint could have been made of Mr Acton's report because Mr Acton's report and working papers adequately disclose his reasoning process. 221 The third objection that Mr Acton's opinions were not probative of any relevant question raised by Castel's claim for breach of contract must be rejected. TSP relied upon the general discretion to exclude evidence under s 135 of the Evidence Act arguing that the probative value of Mr Acton's evidence was substantially outweighed by the danger that the evidence might be unfairly prejudicial to a party or be misleading or confusing. 222 It was put that his evidence was not probative in the sense that his evidence did not address any relevant issue on the expectation claim. We think this submission relies upon an anterior submission that his Honour was wrong to treat the claim as one breach of contract and should have examined each sales contract separately. The argument was that Mr Acton's evidence for his expectation damages assumed one breach and therefore was not probative of the claim for damages based on breach of contract. For reasons which we will come to, we reject that argument. It therefore follows we reject the objection to Mr Acton's evidence. 223 For those reasons, we think the primary judge was right to admit Mr Acton's evidence. The weight which was to be put upon that evidence was for the primary judge. It is clear from his Honour's reasons that his Honour gave varying weight to the different opinions expressed by Mr Acton. Some he accepted entirely; some he accepted in part; and some he rejected. 224 In carrying out that exercise, his Honour carefully analysed all aspects of Mr Acton's evidence particularly the inferences drawn by Mr Acton for the purpose of determining whether the inferences were properly drawn. 225 We reject TSP's contention that the primary judge was wrong to receive Mr Acton's evidence.

[21]

The expectation claim considered 226 The primary judge awarded damages for costs incurred through its service department in dealing with the defective products for the 2004/2005, 2005/2006 and 2006/2007 financial years. This included the costs of employing additional staff in the service department: see [175] of his Honour's reasons. However, the primary judge did not allow the whole of Castel's claim in this regard. 227 Castel submitted that the primary judge erred in not awarding Castel the costs attributable to the additional sales staff it employed in anticipation of increased sales activity from 2005 to 2007. In particular, Castel submitted that the primary judge erred in finding that Castel would not have reduced its sales force even if there was no need to retain that staff to deal with the faulty goods. 228 Castel submitted that Castel's expenses increased considerably in 2002/2003 in anticipation of increases sales activity from TSP's supposedly innovative products. Further, during the years from 2004/2005 to 2006/2007 Castel engaged additional sales staff to increase its sales capacity to allow for an Australia-wide distribution. Castel submitted that although the additional staff it employed between 2004/2005 to 2006/2007 were classified as sales staff, the bulk of their duties included visiting and pacifying retailers, listening to complaints, providing explanations and collecting defective goods. Mr Acton's evidence was that sales staff spent 39% of their time on activities other than sales. 229 Although there was no direct evidence from Castel that the additional sales staff were surplus to Castel's sales needs, Castel contended that the primary judge should have inferred that Castel would not have continued to employ its sales staff unnecessarily. Castel submitted that the primary judge should have found that those staff would not have been employed and retained but for the need to carry out the additional work caused by the defective products. Castel submitted such an irresistible inference arose because Castel carries on an ordinary commercial business which would not continue to employ surplus staff unnecessarily. 230 Castel submitted that His Honour ought to have quantified and awarded Castel the costs of that sale staff in an amount of $1,899,731 (plus interest) for the 2004/2005, 2005/2006 and 2006/2007 financial years. 231 Castel further submitted that the primary judge erred in not awarding Castel increased administrative staff costs attributable to its dealing with the epidemically faulty goods. Castel submitted that the primary judge ought to have quantified and awarded Castel $1,353,642 on account of such increased administration costs over the 2005, 2006 and 2007 financial years. 232 Further, Castel alleged that the primary judge erred especially when he gave no reason in reducing Castel's claim for the costs of service staff attributable to rectifying the epidemically fault goods by 20%. 233 His Honour correctly identified the principle upon which this first aspect of the expectation claim fell to be assessed. The extra costs incurred with rectifying defective products are either a cost as a result of the breach which operate to reduce profits. 234 However, he found that those costs which he refused to award were not recoverable because the costs would have been incurred in any event. There is no doubt that if these costs would have been incurred in any event then the costs cannot found a claim for damages. 235 His Honour accepted Mr Hew's evidence that the increase in the service staff from 7 to 35 was due to a need to rectify the defective goods. However, he was not prepared to find that the need for extra staff or extra administration costs had been made out on the evidence. 236 Whilst Mr Acton was able to quantify what he said was the labour and administrative costs associated with the defective products, Castel did not lead any evidence as to what it would have done in regard to its staff if it had not needed to attend to the defective products. Castel left it to the primary judge to draw an inference that if it had not needed to provide staff to attend to the defective goods Castel would have reduced their sales staff in each of the years 2004/2005, 2005/2006 and 2006/2007 in accordance with Mr Acton's assessment of the sales staff which had been employed in dealing with the defective products. Alternatively, Castel left it to the judge to infer that a business would not continue to employ people who were otherwise not productive. 237 Castel could have led direct evidence from Mr Kwong that he would not have carried the staff that he did over the period of time except for the problems associated with the defective products but that is not necessarily fatal to Castel's claim. Whilst we think Mr Kwong should have been asked what policy he would have adopted with respect to surplus staff if the goods had not been defective, the evidence would not have been by itself sufficient to prove the damage. Not a great deal of weight would have been ascribed to evidence of a kind which TSP would have described as self-serving. The primary judge needed to consider on the objective facts what policy Castel would have been likely to adopt if the products had not been defective. 238 In the year 2004/2005 the average number of sales staff employed was 14.31; in the year 2005/2006 16.05; and in 2006/2007 14.15. 239 Mr Acton calculated that the number of staff who were employed in attending to defective products was 2.91 in 2004/2005; 8.64 in 2005/2006; and 6.17 in 2006/2007. 240 We think with respect that the primary judge was wrong not to draw the inference sought by Castel. If Mr Acton's evidence is to be accepted, and it was not suggested it was unreliable in this regard, nearly 50% of the sales staff was employed in remedying defective products in 2005/2006 and almost 50% in 2006/2007. It is hard to think that if the products had not been defective that Castel would have continued to employ those people when no other work was apparently available to them. 241 It would have been better if Castel had proved by direct evidence that which we are prepared to infer but we think that his Honour should have allowed the amount claimed in respect of the sales staff over the period of three years which was in the sum of $1,899,731. 242 Castel's claim in relation to administrative staff also rests upon the Court drawing an inference that Castel would not have employed administrative staff in the period between the financial years ending in 2005 and 2007 of the numbers that were employed, except for the need to address the defective products. 243 In the financial year ended 2005 the average administrative staff for that year was 13.01; in the financial year ended 2006 the average administrative staff was 15.1; and in the financial year ended 2007 the average administrative staff was 12.41. 244 Mr Acton calculated that in respect of those three years 3.70, 9.88 and 7.82 staff were devoted to dealing with the defective products in one way or another. 245 Like Castel's claim in relation to the sales staff, Castel said that the primary judge should have drawn the inference that Castel would not have employed the numbers it did but for the need to attend to dealing with complaints and rectifying the defective products. 246 Castel was a tightly run business. Mr Kwong's dealings with Convoy suggest Mr Kwong was an astute, shrewd and energetic businessman. This can be seen by his attempts to obtain the Harman distributorship. However, he was also a practical businessman. He was not prepared to take on part of the Harman range because it would not be profitable. Mr Kwong dealt with the difficulties caused by the defective products resolutely. For all of those reasons, it is difficult to think that Castel would have kept on the staff over the period of time if there had been no work for them to perform. 247 We think the primary judge was wrong not to have drawn the inference which Castel sought and should have allowed the administrative staff which Mr Acton said was employed in relation to the defective products. 248 Mr Acton quantified this part of the first aspect of Castel's claim at $1,353,642. 249 The third matter for consideration on the first aspect of Castel's claim is the reduction that the primary judge made in relation to the costs of Castel's service department. The primary judge accepted Mr Hew's evidence that Castel's service department had to be increased from 7 to 35 to handle complaints and allowed for that loss. However, he reduced the amount claimed by Castel by 20% for reasons which he left unexpressed. 250 Mr Acton's assessment of this part of the first aspect of Castel's expectation claim was based upon the assumption that Mr Hew's evidence was accepted. The primary judge accepted Mr Hew's evidence. In our opinion, having accepted Mr Hew's evidence, there was no reason to reduce this part of the first aspect of Castel's expectation claim by 20%. We agree with Castel's contentions that that part of their claim should be increased by 20%, an increase of $218,432. 251 We would therefore increase the award in favour of Castel on the first aspect of its claim by:

Sales Staff $1,899,731
Administrative Staff $1,353,642
Service Department $218,432

$3,471,805

252 We turn to the second aspect of Castel's claim. At trial, Castel had argued that the loss of profit margin on other Toshiba products ought to be determined by reference to the average profit margin of 25.18% in the four financial years from 1999/2000 to 2003/2004 financial year, being the period prior to the introduction of the defective products in April 2005. 253 Castel submitted that the primary judge erred in determining that the reduction in average gross margin was due to a contraction in the brown goods market and increased competition amongst retailers. It also took issue with his Honour's finding that the introduction of the defective products had not had a significant impact on Castel's gross margin in the 2004/2005 financial year. 254 Castel submitted that the introduction of the J35 product in April 2005 had a significant impact on its total gross margin for other products in the 2004/2005 financial year. Castel asserted that the decline of average gross margin on the other products from 24.9% in 2003/2004 to 20.5% in 2004/2005 was solely caused by the introduction of the J35 product. 255 Castel claimed that in 2004/2005, 11 per cent of the total annual service department activity was devoted to dealing with J35 related problems. Castel led evidence of the complaints made by retailers and consumers about the poor performance of the J 35 product. Because Toshiba goods were marketed as innovative technology, Castel submitted that the defects in the defective products were so widespread that they were likely to have an immediate and significant impact on gross profit margin. For those reasons, Castel argued that the "only inference fairly open was that the epidemically faulty products had a substantial adverse impact…on the gross margin reducing it from…25.18% for the 4 years prior to 2003/2004 to 20.5% in the 2004/2005 year". 256 Castel submitted that the impact of the J35 on the gross margin of other Toshiba products in the 2004/2005 financial year should not be measured solely from the date the product was available for sale (i.e. April 2005). Castel asserted that the delayed release of the J35 affected the sales of other products such as analogue televisions with which it was to have been sold as a package. 257 Castel contended that the primary judge's finding that the reduction in profit margin was due to a contraction in the brown goods market in 2003 was contrary to the evidence. Castel referred to its evidence of increased gross margin for the 2002/2003 financial year (27.7%) and the evidence that it had maintained its gross profit margin notwithstanding retail price competition. Castel asserted that the fact there was evidence of falling retail prices did not translate directly to falling wholesale profit margin. The finding Castel argued was not supported in the evidence and was contrary to unchallenged evidence of Mr Acton that the economy and retail sales were very strong at the relevant time. In cross examination, Mr Acton said: But you didn't do an analysis of the market to see whether the market had declined overall? ---No, I didn't. I think an overall decline in the market, in margins in a marketplace, at a time when, in fact, consumer sentiment and activity was very strong would be extremely unusual, so I did no more than ask Castel if there was any evidence. 258 TSP did not deny that the introduction of the J35 had a significant impact on the average gross margin of Castel. TSP submitted that Mr Acton's evidence should be given very little weight as there was no evidence to support his assumption that there had been no market wide decline in margins for brown good products during the relevant period. Mr Acton admitted under cross examination that he had not conducted any analysis of the market to determine the strength of the market at the relevant time. 259 TSP further submitted that his Honour's finding that there had been a contraction of the brown goods market in 2003 was open on the evidence. The monthly Product Sales Inventory Reports ("PSI reports") sent by Mr Kwong to Mr Sato demonstrated, in TSP's submission, a market wide decline in margins for brown goods during 2003 and 2004. 260 The primary judge relied on the evidence of Castel's Manager of Sales and Marketing, Mr Michael Hall for his finding of increased competition in the brown goods market which his Honour set out at [198]: 11. In the 2002-2003 year Castel had to meet increasing competition in the digital field especially in relation to plasma screen television receivers, such as Fujitsu, Panasonic, Pioneer, NEC, LG, Samsung. 12. The plasma television receivers supplied by the Respondent suffered a cost disadvantage in the Australian market as compared to competitive products supplied by Samsung, Panasonic and Sony. The price differential was in some lines more than a thousand dollars. As a result it was difficult for Castel to sell the Toshiba branded sets against competing brands. … 18. By June 2005 the problems with the J-35 were adversely affecting Castel's sales of other Toshiba products, such as LCD Televisions (Emphasis in original.) 261 There was no evidence that the list prices of non-epidemic Toshiba products had been discounted or reduced in response to complaints about the defective products. Further, there was no evidence adduced as to the landed cost of Toshiba goods other than the J35, C26 and DLP products and whether these costs had varied after the introduction of the faulty products. 262 However, Castel asserted that the primary cause of the reduction in gross profit margins of other Toshiba products was an increase in costs incurred as a result of having to deal with the defective products. In particular, Castel referred to the costs it incurred in giving sweeteners and discounts designed to quell retailer dissatisfaction with Toshiba products. 263 Mr Acton gave evidence that in his opinion some of the erosion of the profit margin on the non-epidemic "Toshiba" products was attributable to "extra discounts, free product, cash incentives and additional display materials". This opinion was based on advice he received from Mr Hall. In his witness statement, Mr Hall said that: 50. In order to maintain some goodwill with its retailers Castel had to provide various incentives and "sweeteners", such as exchanging other products and providing bonuses (free or discounted price products), to retailers to maintain their support. 264 However, Castel admitted there was no evidence as to the quantum of such sweeteners or discounts. Indeed, the primary judge noted the absence of quantitative evidence of the effect on the gross margins on non-epidemic products: [197]. The only evidence was that sweeteners or discounts were given by Castel to its retail customers in an attempt to persuade them to continue purchasing Toshiba products. 265 In our opinion, there was evidence to support the primary judge's finding that the decline in sales was partly attributable to the contraction of the Australian brown goods market from 2003 and increased competition between participants in that market, all of which attributed to greater discount by wholesalers. The primary judge was entitled to rely upon the evidence of Mr Hall and the evidence contained in the PSI reports from 2003 onwards from Mr Kwong. Those reports provided telling evidence of the state of the market during that period independent of Castel's problem with the defective products. 266 We reject Castel's contention that the PSI reports ought to be understood as Mr Kwong's statements only in respect of general brown goods rather than high technology brown goods in which Castel conducted its business. There would be no point in Mr Kwong advising TSP or Toshiba of the state of a market in which neither participated. The PSI reports are a damning indictment of the state of the market over the relevant time and contain Mr Kwong's contemporaneous opinion of the market. 267 His Honour was right in our opinion to conclude as an estimate that Castel's margins on its other Toshiba products would have averaged 20% in each of the financial years ended 2005, 2006 and 2007 instead of the 25% "hypothetical gross margin" of which Mr Acton gave evidence. 268 His Honour's finding meant that there were only two years of the three years under consideration in which the gross margin fell below 20%; in 2005/2006 to 16.4% and in 2006/2007 to 19.4%. 269 His Honour limited his assessment of the damage to 2005/2006 we think because his Honour thought that a reduction of 0.6% in 2006/2007 was de minimis. 270 Sales in the relevant year 2005/2006 were $36,909,591. His Honour calculated the 3.6% reduction in gross margin to be $2,195,720: [199]. TSP claimed the arithmetical calculation engaged in by the primary judge was wrong. It claimed the proper calculation for the 2005/2006 year would lead to a figure of $1,344,944. 271 Castel accepted that the arithmetical calculation was wrong but submitted that the correct calculation would lead to a figure of $1,681,180.25 for the 2005/2006 year. Castel also in addressing this arithmetical error again sought damages for the reduction in the gross margin below 20% for the 2006/2007 year. 272 It is not possible to understand how his Honour reached the figure that he did for the reasons he gave. We accept, as the parties did, his Honour's calculation involves an undisclosed error. Castel urged the Court when correcting this error to also award damages for the diminution of 0.6% in gross margin for the year 2006/2007. 273 For the reasons we have given, we agree with his Honour's reasons. We do not think when addressing an arithmetical error we should ignore the primary judge's reasons and award damages for the 2006/2007 year. His Honour clearly thought the loss was de minimis. We do not think in an exercise of this kind that a Court can be so precise as to determine whether a difference in gross margin of 0.6% in 20% or 25% in the non-defective products was due to the particular events of which complaint was made. It is not possible to be that precise. We therefore, like the primary judge, shall confine ourselves to the 2005/2006 year. 274 We must now address why it is that the two parties contend for a different result which, of course, must be because the parties are working on different premises. 275 Mr Acton dealt with this aspect of Castel's claim in Attachment 25 of his report. We have already identified the method by which his calculation was carried out: [207]. His calculations in Attachment 25 must be treated with caution for two reasons. First, the gross margin average that the primary judge found was 20% not 25% and the 2006/2007 year should be ignored. 276 The starting point for both parties' calculation is the net sales of non-defective products in 2005/2006. Mr Acton found that figure to be $36,909,591. The cost of those goods was $30,872,617. The margin expressed as a percentage is 16.4%. 277 TSP argued that Castel would be compensated for its loss by awarding Castel 3.6% on the sales figure of $36,909,591, viz $1,344,944. 278 As we have already explained, that was not the exercise carried out by Mr Acton who determined the implied sales by reference to 25% of the cost of sales. He then calculated the gross margin in dollar terms and calculated Castel's loss by deducting from that figure the gross margin actually made in dollar terms. 279 On appeal Castel submitted that was the correct approach and carried out that exercise. Using a 20% margin, the implied sales figure is $38,590,771.25. The implied margin in dollar terms is $7,718,154.25. The actual gross margin in dollar terms was $6,036,974. Deducting that figure from the implied gross margin a loss of $1,681,180.25 is arrived at. 280 The correct approach is that contended for by Castel. If an assumption is made that the cost of sales is constant, then the figure that must change to affect the gross margin is the sales. No one suggested that assumption to be wrong. The cost of sales was what the manufacturer charged the wholesaler because sales have reduced, the gross margin reduces. The sales reduce because the prices for which the goods are sold reduce, not because there are any less sales. It follows, as Castel and Mr Acton say, that the exercise must be approached by determining what the sales would have been if the actual margin was as his Honour found it should have been, 20%. 281 We reject TSP's calculation which would lead to a significant under compensation for the 2005/2006 year loss. 282 His Honour allowed $2,195,720 on this head. The correct figure on his reasons is $1,681,180. The judgment will have to be reduced by $514,540. 283 In the end result therefore, on the appeal, Castel has succeeded on the first aspect of its expectation claim and the damages awarded to it should be increased by $3,471,805 284 It has failed in relation to its appeal against his Honour's findings on the second aspect of its expectation claim and that part of his Honour's assessment should be reduced by $514,540 to reflect the arithmetical error to which we have referred. 285 That leaves a net gain for the appellant Castel on the appeal of $2,957,265.

[22]

The cross appeal 286 TSP filed a cross appeal in which it argues that: 1. The primary judge erred in failing to address TSP's submission that, by reason of art 35(3) of the CISG, TSP was not liable to Castel for any lack of conformity of the set-top boxes because at the time of the conclusion of each relevant contract, Castel knew, or could not have been unaware, of a lack of conformity in each and every relevant set-top box within the meaning of art 35(3) of the CISG. 2. The primary judge erred in failing to hold that Castel failed to prove, as required by art 74 of the CISG, that at the time of the conclusion of each relevant contract TSP foresaw, or ought to have foreseen, the losses that Castel claims to have suffered. 3. The primary judge failed to address TSP's submission that Castel had failed to discharge its duty, created by art 77 of the CISG, to take reasonable steps to mitigate any loss caused by a breach by TSP of any contract to supply the set-top boxes and DLPs to Castel. 4. The primary judge erred in failing to hold that Castel did not prove that it had suffered any loss for which TSP is liable. In particular, the evidence of Mr Acton was inadmissible and should have been excluded or disregarded. Mr Acton's evidence of Castel's hypothetical profit based on the consummation of the Harman Option was premised on two assumptions (gross sales and a "range of products") and that no evidence was called to prove either of these assumptions. TSP also contends that Mr Acton was not qualified and was unfamiliar with quantifying losses under contracts for the sale of goods and that his evidence did not therefore satisfy the requirements of ss 79(1) of the Evidence Act. 5. The primary judge erred in holding that "there was, relevantly, a single cause of action in breach of contract" and by failing to apply a proper approach to the assessment of loss and damage. 287 TSP seeks to have the orders below set aside and that there be judgment for TSP in the amount of $US2,000,000 paid over to Castel by way of security for payment of such sum as Castel is entitled to recover from TSP. 288 In response to TSP's cross appeal, Castel argues that: 1. When each contract was entered into for the purchase of the J35s, the C26s or the DLPs, Castel did not know, and could not have been aware, of a lack of conformity in each and every set-top box within the meaning of art 35(3) of the CISG. Castel submits that the trial judge found Mr Hew to be a "careful and impressive witness" whose evidence established that Castel did no more in regards to the testing than merely facilitate the work of TSP and its contractor, Zinwell. Once Castel became aware of the defects, it halted supply until it was informed by TSP that the defects had been rectified. 2. Castel's loss was foreseeable and foreseen at the date of each contract. TSP knew that the goods which it delivered were not ready for mass production and sale. 3. TSP failed to raise any issue at trial as to a failure on Castel's part to mitigate its loss. 4. TSP did not seek at trial to have Mr Acton's evidence excluded as inadmissible. 5. The primary judge was correct in holding that it was permissible to group claims in respect of a number of different sales contracts because the damage allegedly caused by each breach was substantially the same and the grouping did not obscure issues of causation and quantum of damages in relation to each breach. 289 Before dealing with the particular Articles of the CISG relied upon on the appeal we should briefly deal with an anterior point which was relied upon by TSP. It claimed that the primary judge erred in treating the claim as a single breach of contract and that the primary judge should have dealt with each contract separately and assessed damages in respect to each separate contract. 290 The circumstances of this case allowed the primary judge to treat TSP's conduct as a single breach of contract even though the defective products were supplied pursuant to a number of different orders. It was not necessary to address each sales contract and determine which of the products supplied pursuant to that sales contract suffered from what defect and the particular damage suffered as a consequence. There were three types of defective products, the J35, DLP and C26. They were supplied over a relatively short time and within each of the separate products they had the same endemic types of faults. 291 The breach was substantially the same in respect of each of the defective products and occurred over a short time therefore grouping the individual breaches did not obscure questions of causation and damge. In Cassis v Kalfus [2001] NSWCA 460 Hodgson JA with hom Powell and Heydon JJA agreed, said: A large factor in causing the trial to miscarry has been the lack of precision in the appellants' pleading. It is not acceptable to plead a series of breaches occurring over many years, and then to make a global pleading of damage caused by all the breaches. While it may be appropriate to bring a claim arising out of an ongoing relationship, involving a number of breaches occurring over many years, and while it could be productive of complexity and repetition to require each individual breach to be explicitly linked to allegations of damage caused by that breach, a pleading should enable definition, in a way fair to both parties, of issues concerning breach, causation and quantum of damage in relation to each cause of action relied on. It may be possible to group causes of action where the damage involved in each of them are substantially the same, so long as this can be done without obscuring issues of causation and quantum of damages arising in relation to each of them. 292 This was the type of case to which his Honour was referring in the last sentence of the passage set out above. It was not necessary in the circumstances to consider each product, each breach and any damage caused by each breach. 293 After the hearing TSP provided the Court with a document entitled "Respondent's Note on Authorities Concerning the Measure of Damages". The argument contained in that document relied upon a finding that each sales contract had to be considered individually, a premise which we have rejected. Notwithstanding that we have rejected the premise, we shall mention the argument because we would have rejected the argument even if we had accepted the premise. 294 As we understand the argument, TSP claims that Castel had to prove on the balance of probabilities that its expectation of a certain outcome, as a result of a performance based relevant contract, had a likelihood of attainment rather than being a mere expectation. It claimed that the appellant's expectation of higher gross margins must be "objectively made out": Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 85. 295 The argument went that to calculate the gross margin which was lost, in the case of resale of goods, there must be evidence of the cost of the goods and of the cost of sales. Price obtained on the resale must be adduced in evidence in order to determine the hypothetical and actual gross margins. 296 It may be in a given case that a party who claims expectation damages must establish objectively that the expectation would have been realised. If a person bought an item for $80 and says that he or she was not able to sell that item for the expected profit of $20, that person may have to establish that the item had a value in the market of in the order of $100. 297 But in a case such as this where the mark-up on goods which will determine the gross margin is not an issue in the case, the party who has suffered the loss does not have to establish that there was a market of the kind which the parties accepted commercially existed. TSP knew the price which Castel would sell the various products supplied by TSP. It knew what the prices were in the market. 298 There was no obligation on Castel in this case to prove that each of the defective products which were sold to it would fetch a particular price in the market where the parties understood the value of those products not defective in the market. 299 For those reasons, even if we had accepted the premise we would have rejected the argument. 300 We propose to deal in turn with TSP's contentions based on articles of the CISG.

[23]

Article 35(3) of the CISG 301 Article 35 of the CISG provides: (1) The seller must deliver goods which are of the quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract. (2) Except where the parties have agreed otherwise, the goods do not conform with the contract unless they - (a) are fit for the purposes for which goods of the same description would ordinarily be used; (b) are fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract, except where the circumstances show that the buyer did not rely, or that it was unreasonable for him to rely, on the seller's skill and judgement; (c) possess the qualities of goods which the seller has held out to the buyer as a sample or model; (d) are contained or packaged in the manner usual for such goods or, where there is no such manner, in a manner adequate to preserve and protect the goods. (3) The seller is not liable under sub-paragraphs (a) to (d) of the preceding paragraph for any lack of conformity of the goods if at the time of the conclusion of the contract the buyer knew or could not have been unaware of such lack of conformity. 302 TSP did not plead its reliance on Article 35(3) as a defence to Castel's claim. Article 35(3) and its relevance to the case was mentioned only in the following lines in TSP's final written submissions to the trial judge: … upon the admissions made by Mr Hew in cross-examination, TSP contends that at the time at which each relevant contract was entered into between Castel and TSP for the supply of … J35 and/or … C26 set top boxes by TSP to Castel, Castel knew, or could not have been unaware, of a lack of conformity in each and every set top box within the meaning of Article 35(3) of the CISG. Accordingly, by reason of Article 35(3) of the CISG, TSP is not liable under Article 35(2) for any such lack of conformity. 303 The Court was told by counsel for Castel that this submission was overlooked by them at trial. For that reason alone no complaint was made about it. It is not difficult to accept that Castel's counsel overlooked TSP's submission given the manner in which it was presented. 304 This Court has recently reiterated that "[m]aterial facts must be pleaded with the degree of specificity necessary to define the issues and inform the parties in advance of the case they have to meet": Kernel Holdings Pty Ltd v Rothmans of Pall Mall (Australia) Pty Ltd (1991) 217 ALR 171 at 173; Betfair Pty Ltd v Racing New South Wales (2010) 189 FCR 356 at [49]. 305 In Banque Commerciale SA en Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279 at 296-297, the High Court confirmed that a party is entitled, at trial, to have the opposing party confined to its pleading because the first party is entitled to come to trial to meet only the issues raised on the pleadings. If, however, the first party allows the other party to raise other material facts and issues for the determination of the court, then the court may proceed to determine the proceeding on those further material facts and issues. See also Gould & Ors v Mount Oxide Mines Ltd (in liq) (1916) 22 CLR 490 at 517. 306 The admissions by Mr Hew on which TSP relies were elicited in cross-examination which was, at that time, ostensibly relevant to Mr Hew's credibility. At no stage did TSP seek to amend its pleading to set up its reliance on Article 35(3) of the CISG. There was no indication by Castel at trial that Castel was content to depart from the pleadings and to deal with Mr Hew's admissions as a defence to Castel's claim. 307 If an application had been made at trial by TSP to amend its pleadings to raise this issue, no doubt Castel would have resisted the application on the ground that it was made late and that a delay in the completion of the trial would have been necessitated by the need to take instructions and possibly to plead a waiver by TSP of Article 35(3). In this latter regard, a case of waiver might have been raised by reference to the payments which TSP made to Castel in respect of the defects and the ongoing efforts which TSP made to repair its defective products. 308 For these reasons, TSP should not now be allowed to raise this argument. In any event, it is far from clear that there is merit in TSP's argument. 309 Article 35(3) of the CISG, properly construed, excludes liability only where the circumstances which give rise to the liability for lack of conformity alleged by the buyer are known to the buyer. It is only if the buyer knew of the "lack of conformity" which gives rise to the liability that Article 35(3) operates to render that liability unenforceable. Article 35(3) does not operate to deem the goods in question to be in conformity with the contract; rather, it proceeds on the assumption that the goods do not conform with the contract in a way which would give rise to a liability in the seller for loss were it not for Article 35(3). Article 35(3) operates to relieve the seller from the liability which would otherwise arise from that "lack of conformity". The seller is relieved from that liability only where the "lack of conformity" which gives rise to the liability sought to be enforced by the buyer was known to the buyer at the time the contract was made. 310 To put it another way, if the factual circumstances giving rise to the lack of conformity which is alleged by the buyer to give rise to the liability which it asserts against the seller were not known to the buyer at the time the contract was made, Article 35(3) of the CISG does not defeat the buyer's claim merely because different factual circumstances giving rise to a different lack of conformity were known to the buyer. The focus of Article 35(3) is upon the "liability" in respect of which the buyer seeks to recover its loss. It is only if the facts which give rise to that liability are known to the buyer at the time of making the contract that Article 35(3) affords the seller a defence against the buyer's attempt to enforce its claim. 311 This construction of Article 35(3) reflects the natural and ordinary meaning of the text. It would also be quite uncommercial to read Article 35(3) as excluding liability for loss suffered by reason of a lack of conformity where the buyer knew of, and was content to accept, a particular defect (such as an absence of software which the buyer intended to obtain and install itself) but did not know of a different defect (such as faulty wiring) which was also present when the contract was made. Knowledge of the first defect would not relieve the seller from liability for loss resulting from the second. 312 Accordingly, Article 35(3) would operate to relieve TSP from liability for loss suffered by Castel by reason of defects in non-conforming goods supplied by TSP only if, at the time of making each contract for the supply of those goods, Castel knew of the particular defects which gave rise to that liability. The cross-examination of Mr Hew did not establish his knowledge of the existence of the particular defects which gave rise to the liability which Castel seeks to enforce and which ultimately became manifest in the particular goods in each batch at the time the order for that batch was made. 313 The cross-examination of Mr Hew elicited admissions by Mr Hew that after J35 units were received by Castel from TSP, Castel on-sold some of them, even though they were affected by defects. Mr Hew did not admit that there were serious defects in all such units; and the questions were focussed upon his knowledge of defects after receipt, and before on-sale, not upon the material time, which was when Castel and TSP contracted for the supply of any particular batch. It did not seek to elicit admissions that Mr Hew knew, or must have been aware of, defects in all the J35 units, the subject of each order, at the time the orders were placed by Castel. The cross-examination was not targeted with sufficient precision to engage the operation of Article 35(3). TSP failed to establish that the particular defects which gave rise to the lack of conformity in respect of which Castel sued TSP were known to Castel at the time each batch of goods was ordered by it. 314 For these reasons this aspect of TSP's cross appeal should be rejected.

[24]

Article 74 of the CISG 315 Article 74 of the CISG provides: Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract. 316 At trial, TSP submitted that: … no evidence was given, or addressed in the cross-examination of any TSP witness, of what TSP did foresee, or ought to have foreseen, as loss likely to be suffered by Castel as a result of any breach by TSP of any contract. Accordingly, there is no evidence on which the Court may conclude, as required by CISG Article 74, that TSP did foresee, or ought to have foreseen, any of the alleged losses which Castel has claimed to have suffered. 317 In this Court, TSP argues that the primary judge erred in failing to accept this submission and to give an adequate explanation of the reasons why he did not accept it. 318 TSP's argument is misconceived insofar as it proceeds on the assumption that what "ought to have been foreseen by" TSP could only be proved by evidence from TSP's employees. When Article 74 speaks of consequences which "ought to have been foreseen" it is speaking of consequences which were, objectively speaking, foreseeable by the breaching party. The primary judge found that this test was satisfied. His Honour said at [194]: I accept that it was foreseeable at the time of the formation of each of the relevant sales contracts that recurrent failures, recalls and delays in supplying replacements of the "epidemic" products would have had a repercussive effect in reducing Castel's margins of profit on other "Toshiba" products. Mr Acton's inference that some of the erosion of the profit margin on the non-epidemic "Toshiba" products was attributable to extra discounts, free product, cash incentives and additional display materials is borne out by the evidence of Mr Michael Hall. 319 It is evident, in our respectful opinion, that his Honour used the word "foreseeable" to refer to what "ought to be foreseen". There was no error on his Honour's part in treating what was "foreseeable" as the same as "ought to have been foreseen". 320 This aspect of TSP's appeal should be rejected.

[25]

Article 77 of the CISG 321 Article 77 of the CISG provides: A party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach. If he fails to take such measures, the party in breach may claim a reduction in the damages in the amount by which the loss should have been mitigated. 322 TSP's argument under this heading involves two steps: first, that Article 77 conditions the right of recovery of damages by a buyer upon compliance with the obligation in the first sentence of Article 77; and secondly, that it is incumbent on the buyer to plead and prove its compliance with that obligation. In our opinion, neither step is correct. 323 While the first sentence of Article 77 imposes an obligation to mitigate, the second sentence prescribes the manner in which that obligation is given effect. It operates by affording the party in breach "a claim" for a reduction in the damages which will otherwise be payable by that party. Article 77 contemplates that, absent a successful claim by the party in breach for a reduction in "the damages" otherwise payable, the other party will be entitled to recover "the damages". 324 Article 77 thus creates an obligation in one party to mitigate loss and confers a correlative right upon the party in breach to enforce that obligation. The natural and ordinary reading of Article 77 structured as it is, is that the right of enforcement conferred by the second sentence of the Article is an exhaustive statement of the rights of the party in breach. That right is "a new right … created with an inseparable new remedy": Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 456; Josephson v Walker (1914) 18 CLR 691 at 697, 701-702. 325 That view accords with commercial commonsense. It would be distinctly surprising if the onus of proof cast upon the party in breach by the second sentence of Article 77 could be cast off by that party simply asserting non-compliance by the innocent party with the obligation created by the first sentence of the Article. 326 Insofar as the second sentence of Article 77 is concerned, it is for the party in breach to make good its claim for a reduction in damages. In Joseph Constantine Steamship Line Ltd v Imperial Smelting Corporation Ltd [1942] AC 154 at 174, Viscount Maugham said: … [t]he burden of proof in any particular case depends on the circumstances under which the claim arises. In general the rule which applies is "Ei qui affirmat non ei qui negat incumbit probatio." [It falls to him who asserts, not to him who denies, to prove.] It is an ancient rule founded on considerations of good sense and should not be departed from without strong reasons. 327 Neither the text nor the context of Article 77 of the CISG reveals any good reason to depart from this rule. TSP did not plead or seek to prove its claim for a reduction in the damages payable by it. 328 Accordingly, we conclude that TSP was obliged to plead and prove its claim for a reduction under Article 77. It failed to do so. 329 In any event, the primary judge's findings were inconsistent with a failure on the part of Castel to mitigate its loss. His Honour said at [161]: There were tentative suggestions by some of the witnesses called on behalf of TSP that Castel had contributed to the breaches to which I have just referred by inadequate efforts itself to rectify the "epidemic" products, particularly the J35, or, by insufficient monitoring of the attempts by TSP and Zinwell engineers to correct the defects. However, I am satisfied by the evidence of Mr Hew, who was a careful and impressive witness, that Castel personnel did no more than facilitate the work of the visitors from TSP and its contractor, Zinwell. Similarly, I do not regard decisions by Castel to launch the "epidemic" products, especially the J35, on the Australian wholesale market as prompted by anything other than a desire to keep faith with its retailers and protect the reputation of the "Toshiba" brand. Castel's endeavours in this respect, although largely unsuccessful, were reasonably seen as likely to mitigate the damage flowing from the breaches which I have found TSP to have committed of the successive sales contracts. In my view, the deficiencies in the J35 and the other "epidemic" products were essentially attributable to a desire by TSP, understandably encouraged by Castel, to be among the first in the Australian market with an advanced set-top box having a capacity to record and play back the television programs which it converted from digital format. However, that desire on the part of TSP was not tempered, as it should have been, by a proper appreciation of the need to develop, before mass production, a prototype demonstrated by exhaustive testing to be completely effective in Australian conditions. The absence of an appreciation of that kind was, I consider, the main factor contributing to the breaches of the sales contracts which I have found. 330 Accordingly, this aspect of TSP's cross appeal must be rejected. 331 We have already dealt with the admissibility of Mr Acton's evidence which assumes the fourth ground of appeal: [192]-[225]. TSP did not separately address his Honour's award in regard to the second and third aspects of Castel's expectation claim, although during the appeal raised the arithmetical error in respect to the second aspect with which we have dealt. 332 In regard to the third aspect, TSP contended that Mr Acton wrongly assumed margin movements but as part of its overall contention that Mr Acton's evidence was not admissible. No more needs to be said about that.

[26]

Conclusion 333 For the reasons we have given, we think the judgment will need to reflect an additional loss suffered by Castel in the order of $2,957,265. 334 However, we cannot simply make an order that the judgment be increased by that amount because that would be to under-compensate Castel. The judgment sum contains within it a significant sum for interest. If Castel's damages are to be increased by the amount to which we have referred, no doubt that would have an effect on the interest to which Castel is entitled. The parties should be entitled to be heard in relation to that. 335 We would expect that Castel would be entitled to the costs of the appeal and of the cross appeal, but we will hear the parties in relation to the order for costs. 336 We also noted at the outset of these reasons the order for costs made by his Honour on 9 December 2010. We do not know why the parties consented to the orders in their terms but we suspect that an offer was made by TSP which was more favourable than the judgment entered by the primary judge. We do not know whether the increase in the award, together with any interest upon that increase, would have an effect upon those orders. The parties ought to be heard in relation to that matter. We think that the parties should provide us, as they did the primary judge, with the calculation of the interest which would be payable on the award and any submissions they would wish to make in relation to the question of the costs of the trial. Of course if these matters can be agreed by the parties we would invite the parties to bring in short minutes to reflect the agreement. 337 For those reasons, we make the following directions: 1. Castel provide its written submissions within 7 days in relation to: (a) the interest payable on the increased award; (b) the judgment sum to be entered by this Court; (c) the order for the costs of the trial; (d) the costs of the appeal and cross appeal. 2. TSP to file its written submissions in reply within 10 days. I certify that the preceding three hundred and thirty-seven (337) numbered paragraphs are a true copy of the Reasons for Judgment herein of this Honourable Court.

Parties

Applicant/Plaintiff:

Castel Electronics Pty Ltd

Respondent/Defendant:

Toshiba Singapore Pte Ltd

Legislation Cited (4)

Trade Practices Act 1975(Cth)s 52

Trade Practices Act 1974(Cth)

Evidence Act 1995(Cth)ss 76, 79, 135

Goods Act 1958(Vic)s 19

Cases Cited (21)

Cases cited: Abalos v Australian Postal Commission (1990) 171 CLR 167 referred to Allstate Lift Insurance Co v Australia and New Zealand Banking Group Ltd (No 5) (1996) 64 FCR 73 cited Australian Securities and Investments Commission v Rich (2005) 53 ACSR 110 discussed Banque Commerciale en Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279 cited Betfair Pty Ltd v Racing New South Wales (2010) 189 FCR 356 cited Byrne v Australian Airlines Ltd (1995) 185 CLR 410 cited Cassis v Kalfus [2001] NSWCA 460 cited Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 cited Dean-Willcocks v Commonwealth Bank of Australia (2003) 45 ACSR 564 cited Ginza Pte Ltd v Vista Corporation Pty Ltd [2003] WASC 11 cited Gould & Ors v Mount Oxide Mines Ltd (In liq) (1916) 22 CLR 490 cited Josephson v Walker (1914) 18 CLR 691 cited Kernel Holdings Pty Ltd v Rothmans of Pall Mall (Australia) Pty Ltd (1991) 217 ALR 171 referred to Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705 followed Playcorp Pty Ltd v Taiyo Kogyo Ltd [2003] VSC 108 cited Potts v Miller (1940) 64 CLR 282 followed Quick v Stoland Pty Ltd (1998) 87 FCR 371 cited Re Montecatini's Patent (1973) 47 ALJR 161 followed Robinson v Harman (1848) 154 ER 363 cited Roder Zelt-Und Hallenkonstruktionen GMBH v Rosedown Park Pty Ltd (1995) 57 FCR 216 cited Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 cited Wenham v Ella (1972) 127 CLR 454 cited

[2010] FCA 1028

[2003] WASC 11

[2003] VSC 108

(1990) 171 CLR 167

(1996) 64 FCR 73

(1990) 169 CLR 279

(2010) 189 FCR 356

(1995) 185 CLR 410

(1991) 174 CLR 64

(1916) 22 CLR 490

(1914) 18 CLR 691

(1991) 217 ALR 171