Repudiation of the bailment
60 The trial judge found that ACS Hire's conduct in handing over the Reglon scaffolding to Action was inconsistent with the possession it was given under the hire agreement and thus gave to Reglon the immediate right to possession. Accordingly, Reglon had standing to sue in conversion. The trial judge considered that cls 2.3 and 5 of the hire agreement were relevant in reaching that conclusion. It will be recalled that under cl 2.3, Reglon acknowledged that the Reglon scaffolding had been hired to ACS Hire "for the purposes of on-hire to scaffold users in the building and construction industry". Clause 5 then specified that ACS Hire's rights in the scaffolding were as a mere bailee, with a right "only to use [the Reglon scaffolding] in accordance with and under [the hire agreement]".
61 The appellants challenge this finding. Before dealing with the bases of this challenge, it is convenient to deal with another aspect of the appellants' appeal, namely, their contention that ACS Hire did not hand over the Reglon scaffolding to Action. The appellants argue that it was ACS Hire that took possession of the Reglon scaffolding from sites in Preston and Brooklyn and had it delivered to Wetherill Park; ACS Hire had a lease over part of the Wetherill Park site and when Reglon scaffolding was transferred to construction sites, it did not thereby pass into Action's actual possession. The appellants also rely upon the fact that ACS Hire and Action were both under the control of Brian Baker.
62 In my opinion, the appellants' submissions misunderstand the trial judge's finding on this question. At [33], his Honour stated that "[t]here was no right to hand the scaffolding over to Action for hire". The import of the appellants' submissions seems to suggest that there had to be some physical handing over of the equipment. Whilst I consider that the evidence was sufficient to establish that there was a physical handing over, the essential finding made by his Honour was that ACS Hire allowed Action to hire the equipment to scaffolding users. It was in this sense that his Honour found that ACS Hire handed over the Reglon scaffolding to Action for hire.
63 The evidence on that point was all one way. Brian Baker gave evidence that Action contracted with various builders to supply scaffolding and secured and administered those contracts. He also gave evidence that Action paid ACS Hire's bills. Greg Baker also gave evidence that the Reglon scaffolding was used to fulfil Action's hire contracts and if the Reglon scaffolding was insufficient, the Action scaffolding was also used. Donald Campbell, the internal accountant for Action, gave evidence that even after the hire agreement was entered into, ACS Hire did not carry on the business of hiring scaffolding equipment. Rather, Action used whatever scaffolding it received from Reglon to integrate it with its own scaffolding for the purpose of its business.
64 The appellants contended that that there was no difference in substance in handing the scaffolding to Action, because the intent of the hire agreement was that the scaffolding would not remain in ACS Hire's possession. Rather, the possession of the scaffolding was intended, by the terms of the hire agreement, to be given to third parties and there was no difference in substance in the scaffolding being given to Action for the purpose of on-hiring from ACS Hire, or ACS Hire doing the on-hiring itself. It was submitted that, in fact, the handing over of the Reglon scaffolding to Action was done in furtherance of the purpose in cl 2.3. The appellants also contended that there was nothing in the hire agreement to prevent ACS Hire using other entities as the hiring company, especially those controlled by Brian Baker.
65 It was also submitted that the effect of Reglon's contention would be to impose an arbitrary limit on the way in which ACS Hire could conduct its business and was inconsistent with the context in which the hire agreement was made. In this regard, the appellants contended that the context in which the hire agreement had been entered into included; John Smit's knowledge as to Brian Baker's businesses, John Smit's confidence in Brian Baker's expertise in operating scaffolding business and his acknowledgment that he had no desire to interfere with how Brian Baker ran his business.
66 The appellants further contended that the conduct of John Smit on behalf of Reglon, as revealed by his own evidence, was consistent with the appellants' interpretation of the hire agreement. They relied upon the fact that John Smit had fortnightly meetings with Brian Baker to see how the overall position was in respect of hiring out the scaffolding; that he gave evidence that he was "simply content that rent be paid"; and that Reglon, through John Smit, took no steps to ensure that ACS Hire was complying with the terms of the hire agreement. In addition, the appellants rely upon John Smit's evidence that he said he would not have given instructions to separate the scaffolding.
67 I do not accept that this is a fair statement of John Smit's evidence. Indeed, his evidence was somewhat equivocal. It was apparent that Reglon did not know at least until early 2006 that the Reglon and Action scaffolding had been mixed. However, John Smit said in his affidavit sworn 13 June 2006, that "[a]ccordingly, and in any event" (emphasis added), he would not have given instructions to separate the scaffolding. The appellants rely upon the phrase "and in any event" as demonstrating that Reglon did not consider that the fact that Action had possession of the scaffolding and had mixed it with its own, was inconsistent with the terms of the hire agreement.
68 However, that evidence has to be viewed in conjunction with John Smit's cross-examination. When asked whether he had taken any steps to ensure that ACS Hire was complying with its responsibilities under the hire agreement to keep records of the comings and goings of the scaffolding, he explained that although he did not himself take any steps to ensure the records were kept, he was given assurances on many occasions by Greg Baker, Brian Baker and other senior persons that stock control records were being kept and stock movements were being recorded. John Smit also said that he was content to leave it to Brian Baker to maintain such adequate records as he might choose to keep. In any event, he understood that because of the fact the stock was painted red and to some extent, the fact some scaffolding was micro-dotted, the Reglon scaffolding remained readily identifiable.
69 The effect of the appellants' argument is that no distinction was to be drawn between ACS Hire and Action and no significance should be attached to ACS Hire's obligations under the hire agreement because Brian Baker was, in effect, both ACS Hire and Action. Whilst that might be an agreeable enough proposition in a non-legal context, it has no relevance to legal obligations created under a contract. Its irrelevance is underscored by the fact that, being separate legal entities, either ACS Hire or Action, or both, could have come under completely separate ownership at any time during the course of the ten year period of the hire agreement. Accordingly, any 'comfort' that might have arisen from Brian Baker's background control of each company was not to the point.
70 The very purpose of the detailed provisions of the hire agreement was to enable Reglon to be assured of a number of matters, including the financial viability of ACS Hire and its ultimate control over the scaffolding. As I explain below, the handing over of the Reglon scaffolding to Action undermined, or at least had the potential to undermine, each and every obligation that ACS Hire had under the hire agreement and had the potential to render the representations made under the hire agreement worthless.
71 It was submitted, alternatively, that Action itself was a scaffold user, within the meaning of cl 2.3 of the hire agreement so that there had been an on-hire of the scaffolding by ACS Hire to it. There was no evidence to support this contention.
72 The appellants further contended that his Honour's reliance on cl 5 was misguided. They argued that that clause did not have the effect of reserving the right to immediate possession to Reglon. Rather, it was concerned with ownership, not the right of possession. It followed on this argument that his Honour erroneously construed cl 5 when, at [33], he stated that the handing over of the Reglon scaffolding to Action for hire was an action "outside the terms of possession acquired by the contract". The appellants also submitted that this construction of cl 5 gave cl 15.2 no work to do and in particular, overlooked the operation of cl 15.2.2, which made provision for the termination of ACS Hire's right to possession in the case of an event of default.
73 There are a number of underlying difficulties with this submission. First, it fails to recognise the principles to which I have already referred, namely, that a bailment may be terminated by a repugnant act notwithstanding that the contract underlying the bailment may not be terminated, unless some requirement of the underlying contract, such as the giving of notice, has been complied with. Further, his Honour did not, as I understand his reasoning at [33], construe cl 5 as having the effect of "reserving the right to immediate possession to Reglon" as contended by the appellants. Rather, his Honour considered that his conclusion that ACS Hire's actions in handing over possession of the Reglon scaffolding to Action had the effect that the right to immediate possession reverting to Reglon, was supported by the provisions of cls 2.3 and 5. That is quite a different proposition from saying that his Honour construed cl 5 as having that effect.
74 In my opinion, his Honour's conclusion is correct and was supported by cls 2.3 and 5. Clause 2.3 required that the scaffolding be used for the purposes of on-hire to scaffold users. Under cl 5, ACS Hire had a right to use the scaffolding only "in accordance with, and under, this Agreement". As I explain below, giving Action possession of the Reglon scaffolding did not amount to compliance with cl 2.3. A failure to perform any of the covenants or provisions of the hire agreement was an event of default: cl 15.1, giving Reglon the right to specifically enforce performance, or terminate the hire agreement, or to take possession of the scaffolding: cls 15.2.1, 15.2.2 and 15.2.3.
75 Under cl 15.2.3, if Reglon chose to retake possession of the scaffolding, ACS Hire was required to do all things necessary to give Reglon the benefit of any contracts or arrangements entered into by ACS Hire relating to the scaffolding. ACS Hire may have been able to comply with this clause to the extent that any Reglon scaffolding was in the actual possession of Action. However, ACS Hire would have had no legal right to pass on to Reglon the benefit of contracts of hire entered into by Action with scaffold users, unless Action cooperated with ACS Hire. There was no legal obligation on Action to do so and if Action was in receivership or liquidation, it would have no actual ability to do so.
76 In any event, the handing over of the entire quantity of the Reglon scaffolding to Action was a distinctly different commercial operation with different contractual and financial implications from ACS Hire on-hiring the scaffolding to scaffold users from time to time in accordance with the terms of the hire agreement. There are a number of reasons why this is so. First, there was no express contractual control relating to the use of the scaffolding in Action's hands. This is of particular importance, because under the terms of the hire agreement, ACS Hire had specific obligations in relation to the scaffolding. These obligations included where the scaffolding was to be stored: cl 4.1. It was required to pay various costs relating to the scaffolding, including all repair and operating expenses: cl 6.2.4. It was required, at its own cost, to keep and maintain the scaffolding in a properly serviced and working order, and in good and substantial repair: cl 9.1.1.
77 In addition, ACS Hire made certain representations and warranties under the hire agreement, including a representation that it was not in default or difficulty under any deed or the like by which it was bound or in respect of any financial commitment or obligation that it had: cl 7.1.1. It also had an obligation to comply with all applicable laws relating to the safe and lawful operation of the scaffolding: cl 9.2.1. Action had none of these obligations, nor did it make any representations to Reglon.
78 Further, it is apparent that the fees to be derived from the on-hire of the scaffolding were to be a source of the hire fees payable to Reglon under the hire agreement. By handing over the scaffolding to Action, ACS Hire deprived itself of that source of income and potentially of its ability to pay the hiring fees under the hire agreement. Although Action paid ACS Hire the amount of the hiring fees payable to Reglon, this arrangement was only as viable as Action's own financial position, a matter in respect of which Reglon had no knowledge and no control.
79 This is to be contrasted with the position as between Reglon and ACS Hire. ACS Hire was required to submit to Reglon a proposed annual program and budget: cl 11. Quarterly statements were required to provide true and accurate records and accounts of its performance of its duties under the hire agreement: cl 12. It was required to maintain proper systems of internal control to enable its assets to be adequately controlled and accounted for and to provide reasonable control of transactions: cl 13.1.2. Those records were to be available for inspection by Reglon on 30 days notice: cl 13.2, and ACS Hire was to provide a statement of account reflecting those matters at the end of each financial year: cl 13.3.
80 There were other provisions of the hire agreement that demonstrate the fundamental difference in the 'control' Reglon had under the hire agreement and the potentiality for the loss of 'control' by the handing over of the scaffolding. Thus, pursuant to cl 6.2.4, not only was ACS Hire responsible for the payment of all repairs and operating expenses relating to the scaffolding, it did not have authority to create any lien or charge upon the scaffolding and was required to give any workman notice of that prohibition before such workman undertook any work upon the scaffolding. There was no such prohibition or obligation on Action.
81 Under cl 7.1.1, ACS Hire warranted that it was not subject to any financial obligation that was reasonably likely to adversely affect its ability to comply with its obligations, including the payment of hiring fees, under the hire agreement. Action gave no such warranty. This could have significant practical effects. For example, if a receiver or liquidator was appointed to Action, the receiver or liquidator would be entitled to receive the fees for the on-hire of the scaffolding by Action for the payment of Action's creditors. Reglon, of course, was not a creditor of Action and thus would not have any entitlement to claim any hire fees owing by ACS Hire under the hire agreement either from the receiver or liquidator.
82 The loss of control by ACS Hire over the scaffolding by giving possession to Action underscores the fundamental difference in that arrangement to what was specified in the hire agreement and demonstrates that the arrangement with Action was repugnant to the express provisions of the hire agreement. Accordingly, there is no error in the trial judge's conclusion at [33] that handing the scaffolding over to Action for Action to on-hire was outside the terms of the hire agreement and was so inconsistent with the terms of the contract as to constitute a repudiation. As there was a repudiation, then, on the principles that I have already discussed, the right to immediate possession in the Reglon scaffolding reverted to Reglon.
83 The appellants further contend that even if Reglon had an immediate right to possession in respect of the Reglon scaffolding, that did not extend to the scaffolding on sites, because the contracts for hire of scaffolding to builders vested the right of possession in the hirers. The appellants accepted that the hirers on site were sub-bailees and as such owed duties to Reglon as the owner, those duties being subject to the contracts of sub-bailment. Reglon's answer to this is simple: the sub-bailments themselves were acts which were inconsistent with the terms of the bailment because the contracts of hire were between Action and the relevant building companies. Reglon's agreement was for the on-hire by ACS Hire. It was submitted that any sub-bailment agreement by Action was contrary to the provisions of cl 9.3 and in particular, cl 9.3(f), which provided:
"[ACS Hire] acknowledges Reglon's right, and will use its best endeavours to ensure that others acknowledge Reglon's right at all reasonable times to: