Marvoe Management Pty Ltd t/as The Sweet Life v Plantation Management Services

Supreme Court of NSW|2016-09-20|Before: Campbell J

ara 10 Pty Ltd [2007] NSWSC 1528 PST Energy 7 Shipping LLC v OW Bunker Malta Ltd (The Res Cogitans) [2016] AC 1034; [2016] UK SC 23 Ramsay v Watson (1961) 108 CLR 642 Shepherd v R (1990) 170 CLR 573 Stoneleigh Finance Limited v Phillips [1965] 2 QB 537 The Queen v Hillier (2007) 228 CLR 614 Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165; [2004] HCA 52 United States Shipping Board v The Ship St. Albans [1931] AC 632 Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603 Warren v Gittoes [2009] NSWCA 24 Texts Cited: Adams, Macqueen and Atiyah, Atiyah's Sale of Goods (Pearson Education, 12th ed, 2010) KCT Sutton, Sales and Consumer Law (Thomson Reuters, 4th ed, 1995) Category: Principal judgment Parties: Marvoe Management Pty Ltd t/as The Sweet Life (Plaintiff) Plantation Management Services (WA) Pty Ltd (First Defendant) and Bobadah Pty Ltd t/as Territory Tree Nursery (Second Defendant) Representation: Counsel: Mr G P McNally SC with Mr A J Barnett (Plaintiff) Mr R Cavanagh SC with Mr S Walsh (First and Second Defendants)

Solicitors: Rural Law with Peter Long (Plaintiff) Gilchrist Connell (First and Second Defendants) File Number(s): 2011/377173 Publication restriction: Nil

Introduction

1 Marvoe Management Pty Ltd, trading as The Sweet Life, is suing Plantation Management Services (WA) Pty Ltd and Bobadah Pty Ltd, trading as Territory Tree Nursery, for damages for breach of contract. I will refer to the plaintiff as The Sweet Life and the defendants together as Territory Tree Nursery.
The Sweet Life is a primary producer farming cucurbits including watermelons, rockmelons, honeydew melons and pumpkins on land it owns at Lambells Lagoon in the Northern Territory. Territory Tree Nursery is in the business (in part) of germinating seeds to seedlings for planting. Its contract with The Sweet Life, like that with other customers, required the customer to supply the seeds for germination.
The Sweet Life's cause of action is based on an alleged breach of the contract for the 2011 growing season, which in the Northern Territory around Humpty Doo commences in the dry season in about April or early May. The Sweet Life's case is that the seedlings supplied by Territory Tree Nursery from seeds supplied by the former were affected by a disease known as Fusarium wilt, having the scientific name Fusarium oxysporum f. sp. niveum ("FON"). FON is a soil-borne fungal disease affecting the vascular system of the watermelon plant. It does not affect the other cucurbits grown by The Sweet Life. The disease constricts water uptake and flow, causing wilting which may result in the death of the plant. Infection occurs when microspores germinate and penetrate the root. The disease is not necessarily fatal to individual plants, but it reduces fruit number, size and quality, decreasing the marketable yield. FON was not known in the Northern Territory prior to the 2011 growing season.
It is convenient to record here that The Sweet Life's 2012 watermelon crop, which was not germinated by Territory Tree Nursery, was also affected by FON. A claim against the third defendant and the related cross-claims were settled prior to the commencement of the hearing. The terms of that settlement were recorded in a deed inter partes.

Legal basis of the claim and issues

The Sweet Life claims that its contract with Territory Tree Nursery was a contract for the sale of goods and that the supply of the diseased seedlings constituted a breach of the conditions of fitness for purpose and merchantable quality implied by the Sale of Goods Act 1972 (NT) which The Sweet Life contends form part of the contract.
Territory Tree Nursery does not dispute that some of the seedlings it supplied were affected by FON. It says, however, that the likely source of the disease was the seeds supplied by The Sweet Life, rather than the soil, punnets or processes it supplied or undertook. It denies the contract is one for the sale of goods importing the statutory warranties. It asserts that property in the seeds supplied by The Sweet Life did not pass to it; rather the contract was for germination of seedlings from seeds supplied by the customer. Territory Tree Nursery says the correct legal category of the contract is bailment for reward locatio operis faciendi as discussed by Brereton J in Pangallo Estate Pty Ltd & ors v Killara 10 Pty Ltd [2007] NSWSC 1528. Territory Tree Nursery strenuously disputes The Sweet Life's computation of the damages claimed, arguing that they are excessive and cannot be substantiated by the evidence.
A number of issues fell away during the hearing. The Sweet Life initially contended that the law of New South Wales governed the contract but has now accepted that the contract is governed by the law of the Northern Territory. It also abandoned certain categories of loss: the claim for losses contingent on the recrudescence of FON in the affected fields; and losses said to flow from the diverter of resources from the 2011 rockmelon crop to deal with what it regarded as the crisis affecting the watermelon crop.
Territory Tree Nursery abandoned its defence premised on the incorporation in the contract of written terms of trade including clauses excluding the statutory warranties and stipulating for other limitations. It accepts that the evidence does not demonstrate that those terms were incorporated.
There are then essentially three issues for determination: first, the legal characterisation of the contract and identification of its terms; secondly, the identification of the probable source of the FON in either of the seeds or the process of germination; and thirdly, the quantification of The Sweet Life's loss of profit from its 2011 watermelon crop.

The first issue - the contract

As I explain below when dealing with quantum at [104]- [105], The Sweet Life is a joint venture between experienced cucurbit horticulturists from the Riverina region of NSW and established Sydney produce merchants. The venture is managed from the produce merchant's offices at the Flemington Markets in Sydney. The produce merchants were well established in business, as were the growers, and had on-going arrangements regularly renewed for the supply of produce including watermelons to a large supermarket chain.
The venture acquired a banana farm at Lambells Lagoon near Humpty Doo in the Northern Territory. The vendor had grown some watermelons on the farm before its sale. He had been "using Territory Tree Nursery … to germinate the seeds and deliver seedlings" (affidavit of Joseph Logozzo 16 October 2014 [33]). After they acquired the farm, Joseph Logozzo, from the produce merchants, and Duane Amaro, from the horticulturists, attended the Territory Tree Nursery site for discussions and an inspection of its facility before placing the first order for watermelon seedlings in the venture's first year of business, 2008. Mr Logozzo said, "I don't recall that there were any great discussions insofar as promises or representations being made" by Territory Tree Nursery (affidavit 16 October 2014 [37]).
The venture contracted with Territory Tree Nursery to supply seedlings germinated from seeds supplied from the venture's usual seed merchants in each of 2008, 2009, 2010 and 2011. "All of the dealings" between The Sweet Life and Territory Tree Nursery were through the produce merchant's office at the Flemington Markets (affidavit 16 October 2014 [41]).
Mr Logozzo said that the other cucurbits "were planted using direct drilled seed" (affidavit 16 October 2014 [48]). He explained (at [49]): "Watermelons were planted using seedlings because the watermelon is the seedless variety with the seeds being very expensive at around 40 cents a seed and, because they need a constant temperature to germinate, it was better for us to contract a nursery to germinate the seed, rather than for us to direct seed into the ground."
The Sweet Life decided to plant 206.9 acres of seedless watermelon in the 2011 season (Ex D). Two types of seed were to be germinated: "Nightshade" and "Blooming Brilliant". It was decided to continue to use Territory Tree Nursery for germination (affidavit 16 October 2014 [71]).
The contract between The Sweet Life and Territory Tree Nursery for the 2011 season was formed by the following steps which I have taken from the affidavits of Mr Logozzo of 16 October 2014 and 15 August 2016. I accept this evidence. The relevant paragraphs from the first affidavit are [71]-[74] and from the second affidavit are [1]-[5]. Mr Logozzo telephoned Territory Tree Nursery from his Sydney office and spoke with the then manager, Melissa Debarros, who did not give evidence at the hearing. I infer he outlined The Sweet Life's requirements in terms of numbers overall, and batch numbers for the delivery schedule proposed on behalf of The Sweet Life. The evidence shows that planting was proposed to be staggered from late April to early July 2011. The precise details were confirmed in an order numbered 81 ('Order No. 81') dated 4 April 2011. Order No. 81 forms part of Exhibit N. It is in the form of a schedule setting out the number and type of seedlings to be supplied on a given date and the price of each delivery. Territory Tree Nursery charged at the rate of either 7 cents or 11 cents per seedling, depending on the type.
Ms Debarros spoke to Mr Logozzo on 11 April 2011 and informed him "that as seed was not received until Fri 8/4/11, we are today seeding the delivery for 28/04/11 which we hope to bring forward to del. date 2/5/11" (affidavit 16 October 2014, tab 2, Ex JJL-1). She requested that Mr Logozzo check the order number, sign in confirmation (which he did) and "return signed copy via fax". This too was done.
I find that the submission of order No. 81 was in the nature of an invitation to treat. Ms Debarros's hand written endorsements on the order form re-faxed to The Sweet Life on 11 April 2011 constituted Territory Tree Nursery's offer, changing the delivery date for the first batch. The offer was accepted by Mr Logozzo signing the "confirmation of order" and returning it to Ms Debarros by fax.
The Territory Tree Nursery seemed to submit that the contract was a unilateral one which "was not complete until [Territory Tree Nursery] had performed that which it was required to perform" (closing outline of submissions [6]). I am not satisfied that this is so. Looking at the matter from a commercial point of view, it is unrealistic to treat order No. 81 as some kind of standing offer only to be accepted if and when Territory Tree Nursery delivered seedlings in accordance with the order. That sort of approach would leave the customer in a completely invidious position not knowing whether the seedlings ordered would be supplied until they were in fact delivered. The contract was made on 11 April 2011 by Mr Logozzo re-faxing Order No. 81, having signed the confirmation of order.
I am satisfied that the parties were correct to agree that the contract was governed by Northern Territory law. The contract was formed upon receipt in the Northern Territory of Mr Logozzo's faxed confirmation of order: Entores Limited v Miles Far East Corporation [1955] 2 QB 327. It was to be performed wholly within the Northern Territory. The seeds were to be delivered by arrangements made by The Sweet Life's seed merchant to Territory Tree Nursery's facility at Palmerston in the Northern Territory. The germination of the seeds was to occur solely at that facility and the batches were to be delivered in accordance with the contract to The Sweet Life's farm at Humpty Doo in the Northern Territory.
Order No. 81 describes the "variety" ordered in these terms: "Night Shade seed supplied … Blooming Brilliant - Seed Supp. …" Given the circumstances known to each party from past dealings, if for no other reason, the words "seed supplied" or "Seed Supp." record, perhaps in shorthand, the parties' agreement that the customer, The Sweet Life, was obliged to provide the seed to be germinated. The Territory Tree Nursery's obligation was to supply the quantity of seedlings required on the nominated delivery date. The first nominated date of 28 April 2011 was pushed back to 1 May 2011 during the telephone discussion between Ms Debaross and Mr Logozzo on 11 April 2011 before the contract was formed.
The first entry on Order No 81 is in the following terms: Quantity Variety Delivery Unit price Amount GST amount Total 27,900 Night Shade seed supplied 28/04/2011 110.0000 3069.00 306.90 3375.90

The quantity of 27,900 is obviously a reference to the number of seedlings to be supplied, not the seeds supplied by the customer. This follows when one considers the prices to be charged by reference to the four columns to the right of the order. The expression "seed supplied" indicates that "seed" is used as a collective noun.

Other documents (Exhibit E.42-64) demonstrate that the seed supplier, Yenda Producers Co-operative Society Limited, arranged for Jarit Vegetable Seeds to "ship" the seeds to Territory Tree Nursery. Exhibit E.59 is an internal document of Territory Tree Nursery which summarises its program for performance of the contract. Amongst other things it demonstrates that in its production Territory Tree Nursery, no doubt sensibly, over-seeded to account for possible wastage in the germination process. For instance, the first batch of Nightshade ordered as 27,900 seedlings resulted in a delivery on 4 May 2011 (two days late) of 28,250 seedlings.
The total number of seedlings of both types ordered was 483,600. The total number of seeds delivered by Jarit to the Territory Tree Nursery during the first week of April 2011 was 333,333. A further 200,000 seeds were despatched by Jarit and delivered to Territory Tree Nursery on 15 April 2011. Clearly the parties to the contract did not contemplate a precise correlation between seeds supplied and seedlings delivered.
Mr Logozzo was cross-examined about his expectations in relation to what the Territory Tree Nursery would do with the seeds supplied and what he understood their role was in the performance of the contract (131.40-134.5 T). However I will, in accordance with The Sweet Life's submissions, disregard this evidence for the purpose of interpreting the contract: Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165; [2004] HCA 52 at 177[35]-178[36], and 179[40].

The arguments of the parties

It is perhaps convenient to commence with the arguments of Territory Tree Nursery to better identify the issue. Territory Tree Nursery says that the contract could not be a contract for the sale of goods because The Sweet Life provided the seeds, the property in which never passed to Territory Tree Nursery. It followed from this, so the argument ran, Territory Tree Nursery had no property in the seedlings which it germinated. For this reason the contract was not one for the sale of goods. Section 6(1) of the Sale of Goods Act 1972 (NT) is in the following terms: A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration called the price. The argument is that the subject matter of the contract determined by reference to Order No 81 is that Territory Tree Nursery agreed to return the seeds supplied by The Sweet Life grown-out as seedlings for planting. Although it charged a fixed amount for each seedling supplied, as it never had property in the seeds, it never had property in the seedlings and the contract should be characterised as one for the application of labour and skill to The Sweet Life's property and not for the sale of goods. Effectively the contract was for the provision of services necessary to germinate the seeds and grow them to a size where they could be planted in The Sweet Life's horticultural enterprise.
Territory Tree Nursery argued, that this is not a case in which heterogeneous goods are mixed in the manufacturing process such that the original goods lose their character and what emerges is a wholly new product: Associated Alloys Pty Ltd v Metropolitan Engineering and Fabrications Pty Ltd & anor (1996) 20 ACSR 205 (at 209).
Territory Tree Nursery relied heavily upon the judgment of Brereton J in Pangallo Estate, arguing that the contract was like the contract between the grower and the winemaker there for the grower's grapes to be crushed and otherwise processed into wine. As I have said, it was argued that the supply of seed by The Sweet Life for germination by Territory Tree Nursery was consistent with a bailment, if that is what the parties intended: Caltex Oil (Australia) Pty Ltd v The Dredge "Willemstad" (1976) 136 CLR 529 (at 561) per Stephen J.
Territory Tree Nursery also argued that as the source of the FON may have been defective seed supplied by The Sweet Life, it would be bizarre if the delivery of FON-affected seedlings could be treated as the breach of an implied warranty by the Territory Tree Nursery.
The Sweet Life argued that the question of whether the nature of the contract is one for the sale of goods depends upon the application of "the substance of the transaction" or "essential character of the agreement" test propounded by the learned text writers: Adams, Macqueen and Atiyah, Atiyah's Sale of Goods (Pearson Education, 12th ed, 2010) at p 26; KCT Sutton, Sales and Consumer Law (Thomson Reuters, 4th ed, 1995) at [2.39]. It is submitted that this approach has been applied (albeit with some reservation) by the High Court (the plaintiff's closing submissions [25]): Pacific Film Laboratories Pty Ltd v Federal Commissioner of Taxation (Cth) (1970) 121 CLR 154 (at 160 and 172-174).
The Sweet Life argued that property in the seeds had vested in Territory Tree Nursery by reference to the general principle referred to by Robert Goff LJ in Clough Mill Ltd v Martin [1985] 1 WLR 111 (at 119): "… where A's material is lawfully used by B. to create new goods, whether or not B. incorporates other material of his own, the property in the new goods will generally vest in B, at least where the goods are not reducible to the original materials". On this approach the new goods were the seedlings which were clearly not reducible to the original seeds. It did not matter whether Territory Tree Nursery utilised material of its own, but in fact it did; seedlings were returned for planting in the media added by Territory Tree Nursery to grow the seedlings. That Territory Tree Nursery charged per seedling rather than any service fee was a strong indicator that the contract was one for the sale of goods.

Decision about the nature of the contract

In Stoneleigh Finance Limited v Phillips [1965] 2 QB 537 at 569, Davies LJ stated: "No authority is needed for the proposition that it is the duty of the court in any given case to look behind the form of any transaction such as that at present under consideration and to ascertain its real substance." Sellers LJ described it as "the duty of the court to discover the true nature of the transaction" (at 560). The question there was whether what purported to be a contract for the hire purchase of certain trucks was in truth an unregistered bill of sale over the trucks thereby disentitling the finance company from taking possession of the vehicles upon the hirer going into liquidation.
In truth, however, a "substance of the transaction" approach is not of great assistance except to the extent it confirms that the court is not bound by the form of the transaction adopted by the parties. Given the rudimentary nature of the documentation in the present case, such an approach does not assist the task of characterising the contract in a practical way. Rather, as the authorities acknowledge, it states the object of the task. In Pacific Film Laboratories the question was whether the supply by a photographic studio of prints and duplicates of colour transparencies manufactured by it was the sale of goods within the meaning of the Sales Tax Assessment Act (No 1) 1930 (Cth) (see 172 by Walsh J). Walsh J pointed out (at 173) that: "…[t]he need to determine the substance or nature of the contract … are statements of the question which has to be decided rather than statements of a test by means of which it may be decided".
Walsh J was of the view that the arrangement was a contract for the sale of goods. His Honour stated (at 174): "The customers of the appellant wish to obtain prints and duplicates which were not yet in existence at the time when the orders were given. When they had been produced by the appellant the prints and duplicates were to be handed over to the customers and were to belong to the customers. In the circumstances of this case there is no reason to take the view that the obtaining by a customer of property in a new chattel, in exchange for a sum of money to be paid to its manufacturer, was only ancillary to a contract the substance of which was that skill and labour should be exercised. The case concerns the commercial production of large numbers of prints and duplicates. Although the customer had to supply film or a negative or a colour transparency in order that the prints and duplicate might be made by the appellant, those prints and duplicates were new articles which contained no material supplied by the customer. I am of the opinion that the substance of the agreement between the customer and the appellant was that it was an agreement for the manufacture by the appellant of goods and for the delivery of them to the customer, to whom the property in them would pass at or before the time of delivery and who would pay to the appellant a price for the goods. It was therefore an agreement for the sale of goods." His Honour pointed out in that case that the film, negatives or colour transparencies provided by the customer were returned to the customer at the end of the process. That the property in the image depicted in the prints or duplicates never passed to the photographic studio made no difference.
Barwick CJ, after commenting that it was not possible to derive uniformity of application of principle from the English authorities said (at 160-161): "… I think one can derive from them the principle that the question whether or not an agreement is an agreement merely to provide services or an agreement for the sale of goods depends upon the substance of the arrangements between the parties and is not to be resolved by any single criterion. However, in this connexion the circumstance that the services are to produce a chattel in which, but for the agreement, and what is done under it, the person to whom it is to be delivered would have had no property is a most potent circumstance." His Honour considered that "once the contract is executed by the production and delivery of the goods" (at 161), there is generally no need to categorise the antecedent arrangement.
However, it may be important to have regard to the following statement of Windeyer J (at 165): "Of course a man cannot buy something that is already his. And the Sale of Goods Acts in force in Australia, all copied from the Sales of Goods Act 1893 of the United Kingdom, it being itself a codification of the common law, treat a sale as a transaction effecting a transfer of "the general property in the goods"." This dictum captures the nub of the issue for determination in this case and explains why The Sweet Life emphasised the words of Goff LJ (as his Lordship then was) quoted at [30] above.
It is perhaps appropriate to commence with the passage from Bryson J's (as his Honour then was) judgment in Associated Alloys at 209 which both parties cited. His Honour said: "The question whether goods which have been used in some manufacturing process still exist in the goods produced by that process, or have gone out of existence on being incorporated in the derived product is, in my opinion, a question of fact and degree not susceptible of much exposition. When wheat is ground into flour it is reasonably open to debate whether the wheat continues to exist; when flour is baked into bread there could be little doubt that the flour does not. Many examples might be encountered or imagined, and each must be addressed separately. Where goods of a homogeneous character are mixed co-ownership might be a correct conclusion; but that is a problem of a different kind. There is some discussion in the judgment of Bridge LJ in Borden (UK) Limited v Scottish Timber Products Limited [1981] 1 Ch 25 at 41; [1979] 3 All ER 961, addressing "a mixture of heterogeneous goods in a manufacturing process wherein the original goods lose their character and what emerges is a wholly new product …"". Bryson J went on to quote Goff LJ's dictum set out above at [30]. With characteristic penetrating insight his Honour observed (at 209): "Blackstone's question whether goods are reducible to the original materials is not simply a matter of physics. Other perspectives have to be considered, including the economic perspective. The scraps of leather produced by cutting up a manufactured shoe could not in reality be regarded as the original leather from which the shoe was manufactured…" Bryson J's analysis of this question was approved by the Court of Appeal: (1998) 16 ACLC 1633 at 1639. The decision was affirmed on other grounds in the High Court of Australia: (2000) 202 CLR 588; [2000] HCA 25. This aspect of his Honour's reasoning was not called into question in the High Court.
Associated Alloys, in common with Clough Mill and Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd (1976) 1 WLR 676; [1976] 2 All ER 552, concerned so-called retention of title or Romalpa clauses. The more recent case of PST Energy 7 Shipping LLC v OW Bunker Malta Ltd (The Res Cogitans) [2016] AC 1034; [2016] UK SC 23 falls into a similar category. The context is generally an attempt by the "seller" to claw back the goods or protect its entitlement to the price in the event of the insolvency of the "buyer", obtaining a preference over unsecured creditors contrary to statutory priorities.
PST Energy 7 concerned an attempt by the buyer of goods to resist a liquidator's action for the price under s 49 Sale of Goods Act 1979 (UK), the equivalent of s 51 in the Northern Territory Act. The retention, or reservation of title, clause in the contract operated to withhold transfer of title until payment. The arrangements in that case were held not to be a contract for the sale of goods but a contract sui generis having broadly similar incidents. The seller's liquidator was held to be entitled to recover the price from the buyer.
In Associated Alloys the contract subject to the reservation of title clause was for the supply of steel plate worked, together with other components, into cylindrical pressure vessels. Bryson J held that the steel plate no longer existed and that the seller had no property in the pressure vessels which were the derived property, notwithstanding the reservation of title clause.
In Clough Mill it was held that the seller of yarn under a contract containing a retention of title clause retained legal title to unused yarn pending either payment or resale. In the circumstances the seller was entitled to recover the unused yarn on the buyer's insolvency.
In Scottish Timber Products the title to resin supplied under a contract containing a retention of title clause passed to the purchaser when it was used in the manufacture of chip board. Bridge LJ said (at 43): "The resin became an inseparable component, or ingredient, of the chip board. The property in the chip board vested in the defendants. There was nothing in any contract which precluded the defendants from selling that chip board, receiving the purchase price and employing the proceeds of sale in their business."
The Sweet Life relies upon this line of cases, even though its contract contains no retention of title clause, to argue that upon germination of the seeds grown to seedlings, the seeds it supplied were no more than an ingredient in the seedling the property in which vested in the Territory Tree Nursery.
The question about whether title had passed to the winemaker from the growers was critical in Pangallo Estate. If title had passed to the winemaker, it arguably passed to the landlord for forfeiture of the winemaker's interest for default under the lease. Brereton J determined that the question of transfer of title depended upon the characterisation of the contract between the growers and the winemaker. If the contract was one of bailment for labour and works, the growers would retain title. If a contract of sale of the grapes for resale once the wine was made, title would pass to the winemaker and the property in the wine may have been amenable to the claims of the landlord.
Brereton J commenced his analysis (at [11]) by acceptance of "the proposition that when the goods owned by A are changed by B's manufacturing process into an entirely different object, so that the original goods can no longer be identified (for example, as wheat is converted into bread), the new object is owned by B". After a review of the authorities including Associated Alloys, Chapman Bros v Verco Bros & Co Ltd (1933) 49 CLR 306 and Caltex Oil, his Honour pointed out, by reference to these authorities, that bailment may involve either "the redelivery of a specific thing in its original, or some altered, form to the bailor": Chapman Bros per Rich J at 314. His Honour concluded (at [20]): "[The authorities make] clear that in the case of fungible goods, their comingling, or their manufacture into other products to be returned to the original owner, does not result in property passing from the original owner, if the parties' intent is consistent with a bailment. Accordingly, the intent of the parties is ultimately determinative." (My emphasis.)
It should be noted that Associated Alloys and Scottish Timber Products were cases where there had been an agreement to sell goods (albeit with a retention of title clause) and delivery to the buyer. In Pangallo Estate the growers paid the wine maker a fee per tonne for making the grapes into wine. Even so, in Associated Alloys and Scottish Timber Products the process of manufacture, notwithstanding the retention of title, had the effect that the "derived goods" were the property of the manufacturer.
The factors which led Brereton J to conclude that the relationship between the growers and the winemaker was one of bailment locatio operis faciendi were expressed at follows (at [22]): "In my view, it is quite clear that the parties never entertained any intention that the growers sell their grapes to [the wine maker] and then repurchase them. One of the most telling factors in that regard is that there was no suggestion that [the winemaker] would pay for the grapes upon receipt, or at any other time: she was simply paid a fee per tonne for contract winemaking services. Similarly, the circumstance that the wines, once made, were sold under the name and label of the growers is telling."
In Toll v Alphapharm (at 179 [40]) a unanimous High Court explained that the rights and liabilities of the parties to the contract are to be determined by application of the principle of objectivity. Their Honours continued: "It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction."
It is clear that there was no sale of the seed supplied by The Sweet Life to Territory Tree Nursery. Indeed, when the contact was terminated the balance of seed on hand was returned to The Sweet Life by Territory Tree Nursery on 28 June 2011 (see Exhibit E.59). Bearing in mind the passage from Toll v Alphapharm I have just set out and the need to determine common intention objectively, it is not irrelevant to consider that because seedless watermelon seeds were expensive and germination required a controlled temperature, it was better for germination to be done professionally than for The Sweet Life "to direct seed into the ground" (affidavit of 16 October 2014 [49]). Equally, however, what was provided for by the contract was a large quantity of watermelon seedlings for planting out in The Sweet Life's horticultural enterprise from seed supplied by The Sweet Life.
There was no necessary correlation between each seed and each seedling supplied. It is clear that the contract focussed on the supply of seedlings in batches at specified intervals in accordance with The Sweet Life's planting program. The subject matter of the contract is clearly the provision of watermelon seedlings from watermelon seed supplied by the buyer. The parties contemplated that there would be a degree of wastage. This is shown by the delivery of seeds in bulk and Territory Tree Nursery oversowing each batch beyond the quantity specified in Order No. 81. I repeat, this allowed for natural wastage in the process.
Unlike the grower's grapes in Pangallo Estate, where the winemaker was paid a fee per tonne of grapes for her contract wine making services, here Territory Tree Nursery was to be paid per seedling, not per seed. This is significant because a reasonable person would understand that the parties intended that the risk of wastage in germinating the seedlings required to be delivered in performance of the contract would be borne equally by the parties. The Sweet Life would bear the cost of any wasted seeds, and Territory Tree Nursery the opportunity cost of seeds planted and processed which either failed to germinate or failed to thrive. Significantly, in Pangallo Estate the fee per tonne was payable on the grapes supplied. In this case, the price (referred to as a "unit price") was payable upon seedlings delivered without reference to seeds supplied.
This is a case, to adapt the language of Bryson J in Associated Alloys (at 209), where the seeds supplied have been used "in some manufacturing process" and, in my judgement, "have gone out of existence on being incorporated in the derived product". This engages with the principle referred to by Goff LJ in Clough Mill. The Sweet Life's seed was lawfully used by Territory Tree Nursery to create new goods, namely the seedlings, and the latter has incorporated, to some degree, other material of its own such as the potting media. The seedlings produced after germination and a degree of cultivation are, of course, not reducible to the original seeds. In application of the general rule the property in the seedlings vested in Territory Tree Nursery. In my judgement this occurred after germination when an identifiable seedling had begun to thrive.
I am satisfied that the contract for the supply of seedless watermelon seedlings was a contract of sale of goods whereby Territory Tree Nursery agreed to transfer the property in the seedlings to The Sweet Life for a money consideration called the unit price within the meaning of s 6 Sale of Goods Act 1972 (NT). It may also be said that the seedlings at the time the contract was made were "future goods" within the meaning of s 10 of that legislation. The contract in that regard was not unilateral, as Territory Tree Nursery submitted, but wholly executory, in as much as the consideration provided by each party was a promise to perform on (or within a reasonable time of) the specified dates for delivery: s 15 Sale of Goods Act 1972 (NT). The contract was one for sale of "unascertained or future goods by description". Rule 5, provided by s 23, applied to the passing of property in the seedlings to The Sweet Life, although nothing turns on this for present purposes.

Implied terms

The Sweet Life contends that the circumstances established by the evidence demonstrate that the conditions of fitness for purpose and merchantable quality are implied in the contract by force of s 19(a) of the Northern Territory legislation. Section 19 is essentially in the common form familiar from the local derivatives of the parent United Kingdom legislation. It may be said that in practical terms in the case at hand there is unlikely to be much difference between the fitness for purpose and merchantability conditions. Clearly, watermelon seedlings purchased in great bulk are likely to be required for only one purpose, that is, the cultivation and harvesting of seedless watermelons in a large scale commercial horticultural enterprise. It is well established that goods "only meant for one particular use in ordinary course" must be fit for that use if they are to be merchantable: Grant v Australian Knitting Mills Limited [1936] AC 85 at 99-100 by Lord Wright. His Lordship pointed out that in such cases the "exceptions" in (a) and (b) of s 19 "in truth overlap". Accordingly, it may be unnecessary to address the matters separately, at least at length.
It is not seriously argued that watermelon seedlings supplied for planting and cultivation in the Sweet Life's commercial enterprise were either "fit for purpose" or "merchantable" if affected by FON. The real issue that was contested was that if the contract was a contract for sale, then as The Sweet Life supplied the seed, and the goods sold were the seedlings, Territory Tree Nursery made no warranty of fitness or merchantability in respect of the seeds. This submission at a factual level is obviously bound up with the second major issue I have identified concerned with the source of the FON. But I am of the view, as a matter of substantive law, and of interpretation of the contract, that Territory Tree Nursery's argument must be correct. If the Sweet Life supplied seeds already infected with FON, then the supply under the contract of sale of FON-affected seedlings did not constitute a breach of either warranty implied by law.
I will not set out s 19 in full. It follows the familiar form derived from s 14 of the 1893 Act. I should record that there is no express agreement and nothing arising out of the course of dealing between the parties which negatives or varies any liability which would otherwise arise under the contract: s 57 of the Act.
Professor Sutton has summarised the circumstances necessary to be established by the evidence to engage the fitness for purpose condition in KCT Sutton, Sales and Consumer Law (LBC Information Services 4th ed, 1995) at 240 [9.3]. The first requirement is: "A buyer must make known, not necessarily expressly to the seller, at or before the time when the contract is made, the particular purpose for which he or she wants the goods." There is no difficulty with this particular matter. As I have said the goods may be used for only for one purpose, and must be fit for that purpose. But, in any event, due to past dealings from 2008 Territory Tree Nursery knew the particular purpose for which the Sweet Life required the goods.
The second requirement is: "The particular purpose must be disclosed in such a way that it is clear that the buyer is relying on the seller's skill or judgement, and that he or she does in fact rely on it."
It is important to point out that for this requirement partial reliance will be sufficient. This is important because Territory Tree Nursery will only be responsible for the condition of the seedlings, not the seeds supplied by The Sweet Life through its usual seed merchant. In Cammell Laird & Co Ltd v the Manganese Bronze and Brass Co Ltd [1934] AC 402 at 428, after reviewing relevant authorities Lord Wright concluded: , "… reliance need not be "exclusive," though it must be substantial and effective, it follows, I think, that a reliance partial but substantial and effective, will bring the implied condition into play: it would then be a matter for construction of the particular contract whether the condition that "the goods shall be reasonably fit for such purpose" is to be read without qualification or whether it is to be limited to the matters within the particular province entirely left to the seller's skill and judgement. There are no doubt in fact many such cases of limited reliance. (My emphasis) At 429 his Lordship continued: "I regard [the precedents reviewed] as authorities for the proposition that the condition of fitness may in proper cases be implied where it was only in some respects that the buyer relied on the seller's skill and judgement".
This principle is regarded as "settled, well before the Cammell Laird case" by Lord Wilberforce in Christopher Hill Ltd v Ashington Piggeries Ltd [1972] AC 441 at 490. Lord Diplock (at 508) was of the same view. His Lordship said of partial reliance: "In large part this decision was made by your Lordships' House in 1934 in the Cammell Laird case (citation omitted). It was there laid down that if the defect in the goods which rendered them unfit for their purpose was due to a characteristic which it lay within the sphere of expertise of the seller to detect and avoid, the responsibility for their unfitness lay with the seller. The ratio decidendi leads ineluctably to the corollary that if the defect was due to a characteristic which it lay within the sphere of expertise of the buyer to detect and avoid, the seller was not contractually responsible for it. It did not attract the implied condition under [section 19(a)]. The field of the seller's undertakings as to the fitness of the goods for the purpose corresponded with the field of the buyer's reliance upon the skill and judgement of the seller." This dictum is apposite to the case at hand: if the FON was due to the seed, Territory Tree Nursery is "not contractually responsible for it"; if the FON is not in the seed but in the seedling it "was due to a characteristic which it lay within the sphere of expertise of the seller" to detect and avoid and "the responsibility for their unfitness lay with the seller".
I am satisfied from Mr Logozzo's evidence (affidavit 16 October 2014 [49], CB 2.537) that The Sweet Life did in fact rely upon the skill or judgement of Territory Tree Nursery in germinating and cultivating the seeds to supply bulk seedlings fit for planting out. I am also satisfied that a reasonable person in the position of Territory Tree Nursery would have realised that. This would arise from the previous course of dealing and from the number of seedlings ordered to be delivered in instalments consistent with the planting program. That Territory Tree Nursery fully appreciated the delivery dates were a planting program is made clear from the correspondence about the seed delivery being late and the inability to comply with the first date nominated in Order No. 81. I think this also follows from the consideration that a part of Territory Tree Nursery's business was to provide seedlings to a number of Northern Territory growers from seeds supplied by those growers. Being in the business, a reasonable person in the position of Territory Tree Nursery would appreciate the factors which were relevant to the growers: the relative expense of seedless watermelon seed and the need to germinate the seeds and grow the seedlings in a controlled environment.
Professor's Sutton's third requirement is that "the goods must be of the description which is in the course of the seller's business to supply". There is no question that this element was satisfied.
The fourth requirement is that "the specific goods must not be bought under their patent or other trade name". This question does not arise in the circumstances of this case.
I am satisfied that the agreement to sell the seedless watermelon seedlings contained the statutory condition as to fitness for purpose.
It follows from the findings that I have made that the merchantability condition is also implied by law in the contract. The seedless watermelon seedlings were goods bought by description from Territory Tree Nursery, a seller which deals in goods of that description. There was no opportunity on the part of The Sweet Life to examine the seedlings before the contract was made. It took some time after the instalments commenced to be delivered before the signs of FON were manifest and identified. Drawing the distinction between the seeds and the seedlings, the condition does not extend to cover any defect resulting from the condition of the seeds.

Alternative case

Territory Tree Nursery argued that had I not been satisfied that the contract was an agreement for the sale of goods, The Sweet Life's claim should be dismissed. I raised this matter with Senior Counsel for Territory Tree Nursery during closing submissions and raised it again by email to Senior Counsel for both parties dated 4 August 2017. I drew their attention to PST Energy 7, in particular [31] and [34], which suggests that warranties as to fitness for purpose and merchantability may be implied in fact in contracts that are not contracts for the sale of goods properly so called. I am grateful to Counsel for the submissions that they have provided on the question of whether a contract of the type discussed in Pangallo Estate may not contain implied terms like those implied by law under sale of goods legislation.
Mr Cavanagh SC and Mr Walsh essentially argued that as such an argument had never been raised by the plaintiff including in pleadings, the case had not been run on the basis that such terms were to be implied at common law. It was submitted that Territory Tree Nursery may have wished to adduce further evidence addressing the issues identified in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 and Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 346. It is difficult to deduce what admissable evidence that might have been.
Mr McNally SC pointed to paragraph 4 of his reply (see CB Vol 1 p 29) which pleaded an implied term in the alternative, if the contract was found to be for the provision of services rather than sale, that the seedlings supplied be free of disease. He also argued that in substance this was not materially different from the statutory warranties and that similar warranties had been implied in contracts like those the subject of Pangallo Estate: GK Serigraphics v Dispro Limited (Unreported, EWCA Civ, Cumming-Bruce LJ, 15 December 1980, pp 12-13).
As the matter is raised on the pleadings there can be no objection to The Sweet Life relying on it. As the nature of the contract and its terms involves questions of law it does not seem to me that its resolution depends upon the making of any additional findings of primary fact or the adducing of further evidence.
Given the decision I have made about the nature of the contract, it is unnecessary to decide this issue and I will say nothing further about it.

The second issue - the source of Fusarium wilt

The resolution of the issue concerning the source of FON in The Sweet Life's batches of seedlings germinated by Territory Tree Nursery in 2011 depends mainly upon expert opinion. I was assisted in this regard by the evidence of two eminent plant pathologists from the United States of America: Dr Kathryne Everts, a professor at the University of Maryland, and Dr Ray D Martyn Jr, currently Professor Emeritus, Purdue University.
The reports of Dr Everts of 30 September 2014, 16 February 2015 and 14 August 2016 were admitted as Exhibits H, J and K respectively. The reports of Dr Martyn of 3 May 2016 and 15 August 2016 were admitted as Exhibits 2 and 3. Dr Everts and Dr Martyn conferred on 25 August 2016 and prepared a joint report dated 30 August 2016 which was admitted as Exhibit 5. They gave concurrent evidence on 19 and 20 September 2016.
As mostly occurs with the modern procedures for eliciting expert evidence concurrently, there were many areas of agreement between Dr Everts and Dr Martyn. This agreement related to the possible sources of the infection and the extent of it in the seedlings produced by Territory Tree Nursery for The Sweet Life.
Perhaps surprisingly, the experts agreed that on the material available to them there were only two possible sources of the infection: either the seeds supplied by The Sweet Life were already infected when purchased, or Territory Tree Nursery's equipment and materials used in the germination of the seeds had become contaminated. Dr Everts preferred the latter and Dr Martyn the former.
It is also apparent to me that as highly qualified and as eminent in their field as the experts undoubtedly were, the issue was not susceptible of resolution on purely scientific bases. The science undoubtedly informed the approach each of them took, but in the end the process each of them engaged in was essentially one of logical deduction, albeit informed by their, as I have said, undoubted expertise.
The case therefore falls into that category discussed in Ramsay v Watson (1961) 108 CLR 642 at 645. There the issue was whether a worker's medical condition was due to lead intoxication at work rather than the autogenous disease of essential hypertension unconnected with the absorption of lead. The unanimous Court said of the evidence on this point of "an experienced physician skilled in the relevant branch of medicine who had examined the patient": "He gave his opinion as his inference of probability rather than as a logically established certainty. But to argue in the circumstances that it offended against the rules of logic is to mistake the nature of rational inference and of intellectual persuasion as to probability in the attribution of events to causes. That some medical witness should go into the box and say only that in his opinion something is more probable than not does not conclude the case. A qualified medical practitioner may, as an expert, express his opinion as to the nature and cause, or probable cause, of an ailment. But it is for the jury to weigh and determine the probabilities. In doing so they may be assisted by the medical evidence. But they are not simply to transfer their task to the witnesses. They must ask themselves "Are we on the whole of the evidence satisfied on the balance of probabilities of the fact?" In deciding the question then I must be guided by the whole of the relevant evidence, not just the opinions of the eminent plant pathologists.
The experts provided a definition of Fusarium wilt (459.42-46.18 T) which I have drawn on in my general introductory comments. I will repeat that Fusarium wilt or FON, as I have been calling it, is a vascular wilt disease which is soil borne. Dr Everts, with Dr Martyn's agreement, explained that soil borne means a pathogen is harboured in the soil and invades the root system of the plant. Dr Martyn added that the pathogen remains in the soil for virtually its entire life. The pathogen invades xylem tissue in the vascular system of the plant. The xylem is the vessel which conducts water to the plant to provide nutrition. Once the pathogen becomes established in the xylem it restricts the ability of the plant to take up nutrition to the upper portions of the plant which then wilts. The plant need not die but its productivity may be greatly reduced.
Both scientists agreed that FON may not have been present in the Northern Territory before 2011. Dr Martyn said that FON was first described in the literature in 1864 (512.26 T). He also said "Fusarium wilt does show up in watermelon fields eventually almost always" (461.35 T).
As I have said, both agreed that it is impossible to categorically say how The Sweet Life's seedlings became infected or what was the source of the infection. Both experts agreed that a conclusion on the probabilities depended upon a logical analysis of "other available evidence".
Dr Everts' opinion is summarised in Exhibit 5, Question 5 (p 3) in the following terms: "I believe that the Nightshade seedless watermelon seedlings were infected with FON, due to the presence of FON in the nursery and poor sanitation practices at the nursery. I base my opinion on several pieces of evidence presented to me that indicate the problem was widespread in the nursery and occurred over several months. This evidence includes that FON was confirmed on seedlings from trays from the plaintiff that had not been planted to the field; that FON was confirmed from soil on the floor of the nursery; that four customers of the nursery … in addition to the plaintiff, had plants tested and confirmed for the presence of FON; that Mr Barbagallo, who worked at the nursery, stated that when they began to steam the soil in trays prior to planting in late May, the problems abated; and that the fifth seedling batch delivered to the plaintiff had less than 50% of the seeds that were planted …"
Dr Everts amplified this summary in evidence (462.32-465.16 T). She added to the information relayed above that at the very start of the season, in February, seed from a batch grown for another customer, Bernie Prior, later tested positive for FON. From this Dr Everts said, "so we know that [FON] was in the nursery as early as February of 2011". She explained that she understood that the steaming room was not operating around that time and regarded this as a "serious phytosanitary problem". Bleaching of the germination trays had been used in place of steaming which Dr Everts regarded as "a good method to reduce the contamination in the tray". She made the point that the "soil" cannot be bleached. She also referred to the consideration that the seed supplied by The Sweet Life, including the batch used for the germination which took place, had been tested later and produced a negative result. She also regarded the photographs she had seen of seedlings delivered to The Sweet Life as not consistent with what she would expect from seed infection; in that case she would have expected isolated seedlings within a tray at a very low percentage. The fact that the photographs showed "many plants", and affected plants clumped together, was not typical of seed infestation. The clumping of affected seedlings can occur within a nursery tray since the seedlings are in close proximity in the media: "they are packed together within the nursery house" (465.15 T).
I think it can be said that after careful cross-examination (467.49-489.21 T) Dr Everts' opinion was unchanged and essentially unshaken. She agreed that the potting media which tested positive for FON came from the Territory Tree Nursery's quarantine room which may have hosted contaminated seedlings. She said it was likely that FON was in the potting media, having been introduced by a seedling known to be infected, and if FON was in the potting media it could spread from that source (474.40 T). She rejected the suggestion that there was no way of saying whether the other affected growers' problem was due to them providing infected seed, Territory Tree Nursery's potting media being infected, or a latent infection on the grower's own land. She said "there is no way to be 100% certain" (480.30 T) but she made it clear that she was relying upon a body of "circumstantial pieces of evidence".
It was pointed out to Dr Everts that the evidence showed that Bernie Prior's seeds, which tested positive for FON in 2011, were supplied by Jarit, as were The Sweet Life's. It was then put to Dr Everts that that was "perhaps the most important factor to which you can have regard in determining" the source of the FON (484.50 T). Dr Everts disagreed. She accepted that Bernie Prior's seed was contaminated but she pointed out that none of the other 2011 seed tested proved positive. She said: "It doesn't indicate anything to me about the source - seed being a source of FON for the other growers." (485.15 T) Dr Evert was challenged about the significance of that evidence. It was put that because the samples tested were necessarily small compared to the 480,000 odd seeds that The Sweet Life supplied to the Territory Tree Nursery, negative test results "[don't] really say very much … about what may have been happening to the other seeds". She said she would defer to the experts in the testing laboratories. She was prepared to assume "they probably appropriately tested the seed" (485.45 T).
Dr Martyn's opinion was summarised in Exhibit 5 (Question 5, p 3) in the following terms: "The likely source of the infection was the Nightshade seeds supplied to TTN by the plaintiff. It is unlikely that FON originated within the TTN operation as, three different samples of potting media and irrigation were tested for FON and all were negative. The only positive test was from soil underneath the bench in the quarantine greenhouse. This could be expected since trays with symptomatic seedlings were removed from the main greenhouse and placed on a bench in the quarantine house. Additionally, TTN has been supplying watermelon seedlings for a number of years and never had a problem [with FON]."
Dr Martyn said that the pathogen lives in agricultural field soil (470.5 T). The potting medium or mixture used at the Territory Tree Nursery was "a mixture of things like peat moss and pine bark and things that make a nice organic medium" (469.48 T). He thought that "on the balance of probabilities" the combination "does not contain FON" (470.5 T). He considered there was no reason for FON to be present in that combination. In his view the purpose of steaming as part of good greenhouse practice "is to control other common soil borne diseases which cause diseases known as damping off". He said these pathogens are ubiquitous. I understood him to indicate that they would be present in the potting mix. He regarded the absence of steaming as having "little bearing on whether FON was in that potting media". From what he had been told about Territory Tree Nursery's operations, he formed the view "they ran … a reasonably good clean operation". He emphasised there had been no previous problem with FON.
Dr Martyn did not disagree with what Dr Everts said about seed sampling but took the view that a negative result "doesn't prove that it wasn't there" (488.15 T). Both Dr Everts and Dr Martyn accepted that seeds can be affected although the mechanism was not clearly understood. Dr Martyn suggested that once the pathogen enters the xylem it produces small microscopic conidia, or spores, that can travel from the roots all the way to the fruit and the seeds (461.36ff T). Dr Everts added that the pathogens can be present on the surface of the seed without having infected the seed itself.
Dr Martyn said he did not know exactly where the seeds supplied to Territory Tree Nursery in 2011 by the various growers came from, but from his general knowledge of the industry he thought it possible that multiple varieties originated in "the same fields in Chile". If FON was a problem "then it is possible that multiple varieties from different areas grown in the same general area would have had it" (502.25 T).
I think it can be said that the cross-examination of Dr Martyn by Mr McNally SC successfully undermined the expert's position. Dr Martyn agreed (491.5 T) that a "fair summary" of his response to question 5 identified two particular matters which led him to believe that the seeds were the likely source of the FON. They were one positive test from media in the quarantine room, and Territory Tree Nursery's previous record of FON-free trading. However, he eschewed the proposition that "they were the two main reasons" underpinning his opinion (491.15 T). He explained that those matters were supplementary to his basic reason which was that "the 2011 seed in fact tested positive for [FON]". I interpolate that the only 2011 seed that tested positive for FON was Mr Prior's seed. More positively, as the cross-examiner demonstrated, The Sweet Life's 2011 seed did not test positive for FON. He was asked the following questions (491.35-50 T): "Mr McNally: … That assumption that you've made, that the 2011 Nightshade seed that TTN used, tested positive to FON is a very, very important part and reason for your decision, isn't it? Witness Martyn: Yes. Mr McNally: Yes. And if it were shown that none of the seed, that was planted by TTN and supplied as Nightshade seedlings to the plaintiff, tested positive to FON then you'd have to review your opinion, wouldn't you? Witness Martyn: Yes. Mr McNally: And in fact, the most important factor that you'd taken into account in reaching your conclusion is your belief that 2011 seed, that was supplied by the [Sweet Life] to TTN and then transplanted (sic) by TTN, tested positive to FON. Witness Martyn: I don't believe it was the actual seeds used for the seedlings. It was other batches of that same seed, that were actually not grown."
Dr Martyn agreed that the consideration that five out of six customers of Territory Tree Nursery purchasing watermelon seedlings experienced FON on their seedlings was consistent with "a contamination problem in the greenhouse" (502.5 T). He also agreed that "in the vast majority of cases commercial seed is not infected with FON". Given the variety of types of seed, including Nightshade, Royal Armada and Storm, for a number of different growers, that had been affected he agreed it was possibly unlikely "that the source of all of those infections of FON was the seed" (502.15 T). He qualified this by his evidence that if all the seeds were sourced from the same general area there could be an endemic problem with FON. He did agree that the number of varieties apparently affected was a factor relevant to the question of probability of the source and was consistent with the nursery being the source rather than the seeds (502.35 T). Given that four batches of the plaintiff's seed tested negative to FON, this "suggests … that there was no FON likely on that batch of seeds" (502.50-503.5 T). The rate of infection of commercial seeds with FON was "1 per cent to 5 per cent" (503.25 T). This line of cross-examination concluded with the following exchange (503.35-45 T): "Mr McNally: And so it's clear, isn't it, that from the test results from [The Sweet Life's seeds], that there was, on the balance of probabilities, no FON in that particular batch. You'd agree with that, wouldn't you? Witness Martyn: Reluctantly, yes. Mr McNally: Reluctantly. Now, once on the balance of probabilities you agree there was no FON on those seeds … then that leaves the only other possible source of FON contamination in the seedlings as the nursery, doesn't it? Witness Martyn: Yes."
There were many questions about the extent of the infection of The Sweet Life's seedlings by reference to various photographs exposed and also about the effect of cold weather on commercial watermelon production. There was evidence of other conditions apparently affecting the seedlings according to the photographs. I interpolate that the consideration that the seedlings may have been affected by other diseases does not really assist Territory Tree Nursery given Dr Martyn's evidence about the purpose of phytosanitary measures adopted in commercial nurseries. However, it seems to me that these topics are more relevant to quantum questions and I will make reference to them when I deal with the third issue.

Decision about the second issue

The question of whether the plaintiff has proved on the balance of probabilities that Territory Tree Nursery was the source of the contamination of the seedlings with FON is to be determined in accordance with the dictum of Dixon CJ in Jones v Dunkel (1959) 101 CLR 298 at 304. The Chief Justice said: "In an action of negligence for death or personal injuries the plaintiff must fail unless he offers evidence supporting some positive inference implying negligence and it must be an inference which arises as an affirmative conclusion from the circumstances proved in evidence and one which they establish to the reasonable satisfaction of a judicial mind."
Although expressed in the context of a negligence case for personal injury, the statement of principle applies equally to the drawing of inferences in the civil jurisdiction generally. The question of the source of the FON is fundamental to an element of The Sweet Life's cause of action for breach of the statutory warranties. Only if it can proven on the balance of probabilities that the contamination of its seedlings occurred in the nursery or due to the practices adopted in the nursery will it establish breach of either the fitness for purpose warranty or the merchantability warranty. Given the absence of a direct scientific answer to the question, The Sweet Life needs to rely upon circumstantial evidence and inferential reasoning.
As Dixon CJ said (at 304-305), the High Court pointed out in Bradshaw v McEwans Pty Ltd (Unreported, 27 April 1951): "…you need only circumstances raising a more probable inference in favour of what is alleged … [but] they must do more than give rise to conflicting inferences of equal degree of probability so that the choice between them is a mere matter of conjecture … All that is necessary is that according to the course of common experience the more probable inference from the circumstances that sufficiently appear by evidence or admission, left unexplained, should be that the injury arose from the defendant's negligence. By more probable is meant no more than that upon a balance of probabilities such an inference might reasonably be considered to have some greater degree of likelihood." (See also Holloway v McFeeters (1956) 94 CLR 470 at 480-1.) The Chief Justice emphasised (at 305) that it is not permissible for "a court to choose between guesses, where the possibilities are not unlimited, on the ground that one guess seems more likely than another or the others".
In civil as in criminal cases, when deciding whether an available inference has been proved according to the requisite standard of proof, all of the circumstances established by the evidence are to be considered and weighed as a whole and not by a piecemeal approach to each particular circumstance: The Queen v Hillier (2007) 228 CLR 614 at 637 [46]. This is an important consideration to bear in mind when considering whether Dr Everts' opinion should be accepted in the process of weighing and determining the probabilities.
Quite properly Mr Cavanagh sought to chip away at the various integers, or factors, that Dr Everts identified as underpinning her view. With respect to learned Senior Counsel, this was not really to the point in the context where the proper approach was for all the evidence to be considered together. As explained by Dawson J in Shepherd v R (1990) 170 CLR 573 at 580, the necessary inference may properly be drawn having regard to the whole of the evidence, whether or not each individual piece of evidence relied upon is proved to the requisite, in the case at hand, civil standard. As his Honour famously remarked (at 580): "Indeed, the probative force of a mass of evidence may be cumulative, making it pointless to consider the degree of probability of each item of evidence separately."
I am satisfied on the balance of probabilities that the facts proved by The Sweet Life form a reasonable basis for a definite conclusion affirmatively drawn of which I am satisfied, that the seedlings delivered to the Sweet Life were germinated not from contaminated seeds, but were infected by FON in the nursery or due to the practices adopted in the nursery.
I accept the submission of The Sweet Life that it is not necessary to prove exactly how that contamination occurred. What is important is that it proves on the balance of probabilities that Territory Tree Nursery was responsible for the contamination.
I am led to this conclusion having regard to a number of circumstances. First, the only direct evidence of contaminated seeds relate to Mr Prior's seeds which were "seeded" in the nursery commencing 19 January 2011, some three months before The Sweet Life's seed. Secondly, in February 2011Territory Tree Nursery's steaming apparatus was out of service; this is important phytosanitary equipment and bleaching may not be as effective. Territory Tree Nursery's soil sample which tested positive for FON could not be bleached. Thirdly, one may accept that the pathogen normally resides in agricultural soil rather than the type of potting mix employed in the nursery. However it remains that the "soil" from benches in the quarantine room tested positive to FON (Ex 11, p 1 & 10). Even if the source of that FON was Mr Prior's infected seeds, they were germinated in the nursery some months before FON was identified as being present in the Northern Territory, and prior to germination of The Sweet Life's seed. Fourthly the absence of prior infestations in the nursery is really neither here nor there. There may always be a first time (495.5 T) and as Dr Martyn said, FON does show up "eventually almost always". I accept it was not previously known in the Northern Territory and I would discount the possibility referred to in the evidence that it may have existed at a low level on The Sweet Life's farm previously as being out of step with other compelling considerations. On this hypothesis, it must have been present at the same low level on the farms of each of the farmers who crops were infected, except perhaps for Mr Prior's. This seems improbable. Fifthly, none of the four tests carried out on the seeds supplied by the Sweet Life proved positive. The numbers may have been small, but so be it. The negative results are entitled to weight. Sixthly, five out of six customers of the Territory Tree Nursery suffered the infection in their seedlings in 2011. Seventhly, those customers were using three different varieties of seedless watermelon seeds. Eighthly, as FON had not been experienced in the Northern Territory previously it was unexpected by Territory Tree Nursery. As Dr Martyn explained, the phytosanitary measures adopted were directed at other common pathogens, not FON. Ninthly, only a very low proportion of commercially supplied seed may be contaminated with FON. Tenthly, I was impressed by Dr Everts' opinions and the reasons she gave for them. Eleventhly, Dr Martyn in the end agreed in the absence of positive test results implicating the seed supplied by The Sweet Life that "the only other possible source of FON contamination in the seedlings [was] the nursery".
Finally, I accept the evidence of Kane Younghusband, one of the watermelon farmers also affected by the outbreak of FON in 2011. Mr Younghusband's farm is at Mataranka, 450 kilometres south of Darwin. He commenced planting earlier than The Sweet Life. He sourced his Nightshade seed from Jarit, like The Sweet Life. His Royal Armada seeds were sourced from a supplier named Lefroy Valley. He received the first of several batches or instalments of seedlings from Territory Tree Nursery germinated from seeds supplied by him on 30 March 2011, more than a month after Mr Prior's seeds had been in the nursery. The second batch was received on 6 April 2011 and the third on 10 April 2011. He noticed problems with the third batch of seedlings which proved to be FON.
Importantly, for present purposes, it was his usual practice, which he followed in 2011, to direct seed between 10% and 15% of his crop, including both Nightshade and Royal Armada. The seeds to be planted directly were delivered to the farm and did not pass through the nursery. His evidence was that the direct seeded part of the crop was "fine". He was cross-examined about that answer by Mr Cavanagh SC by reference to an unsigned memorandum that had been made of his expected evidence. That document suggested by implication that there may have been some issue with the direct seeded crop but the transplanted seedlings "were much more severely affected" (210.45-212.25 T). Mr Younghusband was adamant that there was no problem with the direct seeded watermelons (212.25 T; 215.5-15 T).
Mr Younghusband struck me as a direct and frank type of person. The memorandum was unsigned. Having had the advantage of seeing and hearing him give evidence I accept that he was telling the truth and gave a reliable account. I repeat that I accept his evidence.
I am satisfied that the seedlings supplied by Territory Tree Nursery to The Sweet Life were not fit for purpose. I am also satisfied, to the extent it is necessary to say so, that they were not of merchantable quality. I am satisfied that Territory Tree Nursery breached the conditions implied by law in the contract for sale.
In making these findings I have not lost sight of the consideration that there is a live issue about the extent of the contamination. As I have said, it seems to me appropriate to deal with that matter as a quantum issue.

The third issue - quantum of loss

I repeat that The Sweet Life is a joint venture between a family of successful fruit growers operating out of Griffith in the Murrumbidgee Irrigation Area of New South Wales, and a family of successful produce merchants/wholesalers trading out of the Sydney Fruit Markets at Flemington. The latter use the corporate vehicle The Fresh Food Company Pty Ltd to run their business. The purpose of the venture is to combine the expertise of growers and marketeers. The property at Lambells Lagoon was acquired in about 2008 from a primary producer mainly growing bananas. It consists of about 900 arable acres. The joint venturers, as explained, switched to producing cucurbits. The available growing season in the tropical north substantially increased the period of availability of melons in southern capital cities from around July to December.
The Sweet Life's commercial operations commenced in the 2008 growing year, but this was the start-up phase and only sixty acres of watermelon were planted. Two hundred and twenty nine acres were planted in the 2009 year but Mr Garry Amaro, who was in charge of the day to day farming operations, considered he was adjusting to the requirements of farming in the tropical north which were somewhat different from the requirements in the Murrumbidgee Irrigation Area. By 2010, according to The Sweet Life's case but disputed by Territory Tree Nursery, the business had hit its straps and was running efficiently and profitably. Its actual performance in this year, the last year before the FON infection, is the subject of dispute. The Sweet Life says it planted 213.7 acres of watermelons, yielding 3,688,165 kilograms with gross sales of $2,714,442. The defendant says that the records show that the yield was 2,393,000 kilograms and sales totalled $1,782,000. The difference between them may be important because the plaintiff relies upon the 2010 year as a comparable year to demonstrate its losses in the 2011 year.
2013 is also relied upon as a comparable year. 2012 is not relied upon because the watermelons in that year were also affected by FON, although the seedlings were provided by a nursery in Queensland.
The quantum of The Sweet Life's claim for damages was originally based upon the analysis and assessment of Mr Peter Haley CA in his report of 24 September 2014 (Ex W). It is summarised at Table 15 (6.2.1) and originally had three components as follows: 1. Loss of expected net profit on watermelon sales: $3,067,659.00 2. Future losses due to recrudescence of FON in affected fields. On the plaintiff's case this could occur in two out of the ten years succeeding 3. 2011. The amount claimed is $974,321.00 4. Loss of the 2011 rockmelon crop. The FON crisis diverted energy and attention from other aspects of production. The loss of sales in 2011 in this regard is assessed at $815,478.00 As I have explained above, the second and third heads of damage were not pressed in final addresses.
It's apparent from the evidence that the management style brought by the Logozzo family to The Sweet Life's business was very strategic. Mr Robert Logozzo, a director with responsibility for financial management, explained that annual meetings were held during which performance was closely analysed and a firm production plan agreed upon for the coming season. I gained the impression that this latter aspect in particular was driven by Mr Joseph Logozzo and was based upon his keen and astute understanding of market movements and variation. Likely demand was forecast as closely as possible and production limited to that assessment. From this Mr Robert Logozzo agreed that it had not been necessary to utilise the whole of the available 900 acres of arable land to achieve the enterprise's business aims.
The claim for loss of profits on watermelons for the 2011 growing season is summarised at Table 11, page 31 [5.2.1] of Mr Haley's report (Ex W). The integers are that 206.9 acres were proposed to be planted with the watermelon seedlings to be germinated by Territory Tree Nursery. The contractual arrangements with Territory Tree Nursery provided for staggered germination and delivery in batches over the early part of the growing season, geared to The Sweet Life's planting program. This also provided for incremental harvesting for a steady supply to market spread over the season.
Mr Haley's analysis of the loss is calculated in terms of kilograms per acre. As I have said the proposed area for planting was 206.9 acres. The expected annual yield was 18,226 kilograms per acre, at a notional price of $1.44 per kilogram. These figures produce an expected gross profit of $5,430,181.54. Due to FON only 66.4 acres were planted; the yield was 10,820 kilograms per acre and the price achieved at market was 76 cents per kilogram. This generated an actual gross profit of $548,722. Further production of watermelons was abandoned because of the FON contamination and Mr Haley has estimated costs saved from lost production as $1,614,109. Allowing $205,721 (less than the figure ultimately agreed between counsel) as net profit from alternative production by planting additional rockmelons in mitigation, Mr Haley assessed the loss of profit for the remaining head of damage at $3,067,629.
Mr Robert Logozzo was closely cross-examined on the available financial record for The Sweet Life. The thrust of the cross-examination was that the assumptions made by Mr Haley were not supported by The Sweet Life's performance either before or after 2011, even if one excludes 2008 as the start-up year, 2012 as a season also affected by FON, and 2015 which was affected by quarantine for other reasons. There was much force in the cross-examination by reference to the financial records. The expected production of in excess of 3.7m kilograms has never been achieved in any year. The highest production in the years under review is about 2.8m kilograms in each of 2013 and 2014 when the seedlings were spaced closer together on the agronomic advice of Mr Wayne Andreatta. Likewise, the claimed expected gross profit of in excess of $5.4m for sale of watermelons. The best year has been 2013 when gross profit was about $2.9m. Gross profit is, of course, a function of the price per kilogram. 2013 was also the best year of actual production; the price was 99 cents per kilogram. The claimed price for 2011 is $1.44.
I have the impression that watermelons are the "flagship" cucurbit, especially the seedless variety as grown by The Sweet Life. The watermelons are graded according to: seedless premium, seedless medium, seedless small, seedless No 2 and seedless No 3. Seedless premium are the largest, best quality fruit. Obviously, so far as possible, production is geared in favour of that grade. Leaving aside 2011 and 2012, The Sweet Life has achieved a high proportion of seedless premium in its crop: in 2009 it was 79.5 per cent; 2010, 77.9 per cent; 2013, 49.1 per cent; and in 2014, 69.4 per cent of production. In estimating the 2011 losses, a ratio of 89 per cent of production for seedless premium has been adopted by Mr Haley to calculate the "average" price per kilogram.
Amongst the watermelons actually produced in 2011, seedless premium represented 76.4 per cent of the actual reduced production, achieving a price of $1.04 per kilogram at market. The other grades performed well below par. I accept that even the seedless premiums in 2011, because of FON, were smaller and of a lesser quality coming as they did from unhealthy plants. Moreover, I accept the evidence that because of a watermelon shortage during the Northern Territory growing season in 2011 prices were at an all-time high. However, this is problematic for the plaintiffs. First, the evidence before me indicates that the start of the 2011 season was cooler, even by Northern Territory standards, which would have affected the rate of production, even if, as Mr Logozzo says, slower growth rate often produces better fruit. But more importantly, the evidence demonstrates that a number of producers sourced their seedlings from Territory Tree Nursery. Many of these producers were also affected by FON. On the balance of probabilities, I am of the view that FON, and the cooler start to the season, significantly contributed to the shortages at market which drove prices up. Absent FON there would have been a lesser, relative shortage and prices would not have been quite as high. The lesser shortage would have been due to the effect of the cooler weather at the start of the season.
The question is the extent to which, as The Sweet Life argues, I should disregard the consideration that prices were high, in part due to market shortages which were brought about because Northern Territory production was down across the board as a number of growers were FON affected. The Sweet Life say that to hypothesise that prices would have been more like those demonstrated by its longitudinal performance would be tantamount to discounting their damages in Territory Tree Nursery's favour in an unwarranted way. Had Territory Tree Nursery not breached its contract, The Sweet Life's watermelon crop, unlike the crops of many of its competitors, would have been entirely unaffected by FON, enabling them to maximise their profit in a good year. There is force in this argument. After all, according to the evidence before me producers were actually receiving an average of $1.32 per kilogram in the Sydney, and $1.39 per kilogram in the Brisbane, wholesale market in 2011.
I repeat that $1.44 per kilogram as an average price is calculated on an 89 per cent proportion of seedless premium in The Sweet Life's watermelon crop. As Territory Tree Nursery argues, and The Sweet Life's financial records demonstrate, The Sweet Life has never performed quite this well. For example, 2013 produced a bumper crop, but demand was also high. The average price for The Sweet Life's watermelon production was 99 cents per kilogram. I repeat that the actual average price for those poorer grade watermelons that were sent to market by The Sweet Life in 2011 was 76 cents per kilogram. It seems to me that absent FON, The Sweet Life, given its past and subsequent performance, would have performed much better than this at market in 2011, but not quite as well as $1.44 per kilo, due to the effect of the cooler start to the season.

Decision on the third issue

It is well to bring to mind that the compensatory principle underpinning the assessment of damages for breach of contract is to calculate the sum of money necessary to put the successful plaintiff in the position it would have been in had the contract been performed according to its terms. This is a necessarily hypothetical question. As with all such questions there may be many imponderable factors and it often can be a mistake to attempt to bring an unreal appearance of precision to what must be an inherently inexact exercise.
The integers of the necessary calculation include not only price at market, but: output but for breach; production costs; selling agents' commission; and actual sales. Of these the parties have agreed: production costs of 60 cents per kilogram; commission of 10%; sales of $548,722 for watermelons actually brought to market; and $397,500 profit on the sale of additional rockmelons planted in areas intended for watermelons (Ex D).
The issues remaining to be addressed are: the average price that The Sweet Life would have received for its watermelon crop (given that different grades were brought to market) but for the FON affectation; the likely average watermelon yield in kilograms per acre; and the question of mitigation.

General approach

The parties have summarised their arguments on quantum by providing me with competing detailed schedules summarising the approach for which they contend. In the case of The Sweet Life, the schedule is MFI 31. MFI 31 runs to 5 pages and provides 21 alternative bases of calculation. Territory Tree Nursery's schedule is MFI 32 running to 4 pages. Each page provides an alternative summary of what Territory Tree Nursery says the evidence, including The Sweet Life's financial records, shows about actual performance between 2009 and 2014 in relation to watermelon production including total yield, area planted and yield per acre. The different schedules take account of different interpretations of the evidence, or in some cases competing evidence.
Helpful as these schedules are in terms of understanding the issues and in highlighting the complexities, it seems to me that one needs to bear in mind that, as I have said, this is a hypothetical exercise. Drilling down into overrefined detail is more likely to obfuscate than clarify the issues in a chimera of pseudo-precision.
Although their preferred approaches were different, both parties encouraged me to adopt a method of calculation which involved averaging performance over a number of years. The Sweet Life, however, urged a selective approach where they were inviting me to have regard to performance in the best years. The approach was not unprincipled. 2008 is the start-up year and both parties accepted it should be disregarded. 2011, of course, the year in question, should be put to one side other than for the purpose of bringing to account actual receipts. The plaintiff argued 2012 should be put aside because it too was a FON affected year, and it urged me to include 2013 and 2014. Ideally, The Sweet Life argued, I should adopt the three best years for comparative purposes of 2010, 2013 and 2014. I do not find this selective approach attractive.
Whilst accepting, as I have said, that 2008 should be put to one side, the Territory Tree Nursery said I should average all years including 2012. However, it argued that an adjustment needed to be made to the 2013 and 2014 figures. This arose out of the evidence that on agronomic advice, The Sweet Life had reduced the spacing between the watermelon seedlings in 2013 and 2014, increasing output. There is force in the argument that an adjustment has to be made for that consideration, but in reality the change in methodology really indicates that 2013 and 2014 are not sufficiently comparable to be useful for calculating damages. Nor could counsel agree on what adjustment was appropriate.
On one level, an approach which averages performance makes sense. Common with other business activities, primary production is cyclical involving years of boom and bust even if scientific farming methods seek to flatten what would otherwise be undulating performance. Averaging performance over a sufficient period may better reflect, at least on one level, likely outcomes in a given year. However, in my judgment as The Sweet Life had only been in business for three previous years at the commencement of the 2011 planting season, the preceeding average does not provide a sure guide. As I have said, 2008 was the start-up year which both parties accept should be put to one side. I accept that 2012 should be disregarded because of the FON affectation, and 2013 and 2014 involved a materially different approach to production. The need to make an adjustment in each of those years, to my mind, simply demonstrates, as I have said, they are not useful comparators.

Price

In my opinion there is little point in averaging results in other years to determine the likely price The Sweet Life would have received for its watermelons in 2011. In a free market, price is a mechanism by which equilibrium is achieved between supply and demand. The wholesale fruit and vegetable markets in the capital cities are relatively free markets and price will be susceptible to variation, even great variation, from year to year depending upon the particular relationship between supply and demand in a given year. In my opinion, rather than fashioning an artificial construct by reference to the proportion of premium seedless watermelons The Sweet Life has produced in other years relative to its overall production, the average price actually paid in the market is the best guide to what is likely to have occurred had the Sweet Life's crop not been affected by FON.
I accept that the unusually high prices paid in 2011 reflected shortage of supply, and in particular shortage of a quality product. It also seems likely to me that the shortage in supply was due not only to FON being introduced to the Northern Territory, but also to the cooler climatic conditions. As Dr Martyn and Dr Everts said in their joint report (Ex 5, p 7, [9] (i)): As a result of the cold temperatures, watermelon plants most likely would have exhibited slowed physiological growth that would have resulted in fewer and smaller fruit, fruit with less sugar and a delayed harvest. I appreciate that Dr Everts modified her opinion somewhat in evidence, but I am of the view that the opinion expressed in the joint report, in general terms, represents the better view (see also the report of Mr Tony Hartley, agronomist, 29 March 2016, Ex 12, p 9, [4.7] - [4.10]). These climatic conditions would have reduced yield and increased prices given that all producers are likely to have been affected by climatic conditions, more or less equally. The extent of the reduction is another question which I address below.
The delay is also of significance in terms of price. Generally speaking, The Sweet Life aimed to bring its produce to market between August and October when prices are at their best (Mr Robert Logozzo [112.40 - 113.30T]). In mid-October the average Brisbane price was $1.63 per kilogram and in Sydney $1.51 per kilogram. However, it should be borne in mind that 2011 was not only cold but also wet, which delayed preparation and planting. The combination of the cold and wet makes it unlikely that The Sweet Life would have achieved its objective of bringing its fruit to market early in the 2011 season.
On the other hand, assuming its crop was unaffected by FON, there is every reason to suppose that The Sweet Life would have achieved the average market price for its crop.
Splitting the difference between the Sydney and Brisbane averages for 2011 produces a figure I would round up to $1.36. Again rounding up the 10 per cent selling commission to 14 cents, I would work on the basis that The Sweet Life would have achieved an average of $1.22 per kilogram for its watermelons in 2011 had they been unaffected by FON.

Yield

There are two factors which in particular influence the estimation of the likely watermelon yield per acre for 2011 and they are the issue about the extent to which the watermelon crop was affected by FON, and the impact of the cold and wet start to the season. These questions are interrelated and Territory Tree Nursery is responsible for the effect of FON; it is not responsible for the effect of cold weather. For this reason there was a good deal of emphasis in the evidence on what could be deduced from the computer printout colour photographs of The Sweet Life's batches of seedlings supplied by Territory Tree Nurseries, some in trays and some planted out in the field, about the extent of the FON infection.
I bear in mind that great care must be taken to ensure that photographs are not used as the sole source from which a primary fact is inferred where that fact is not revealed on the face of the photograph: United States Shipping Board v The Ship St. Albans [1931] AC 632; Blacktown City Council v Hocking [2008] NSWCA 144; Warren v Gittoes [2009] NSWCA 24 at [2]. I also bear in mind "the sage advice" of Lord Reid in C. Van Der Lely N.V. v Bamfords Limited [1963] RPC 61 at 71: But the judge ought not, in my opinion, to attempt to read or construe the photograph himself; he looks at the photograph in determining which of the explanations given by the witnesses appears to be most worthy of acceptance. This statement was approved by Beazley JA (as the President then was) and Tobias JA in Angel v Hawkesbury City Council [2008] NSWCA 130; (2008) Aust Torts Reports ¶81 - 955 at [71] - [72]. In the circumstances of that case, their Honours said that the judge's own view of what the photograph depicted should not be permitted to trump the virtually unchallenged evidence of eye-witnesses.
I bear in mind that Dr Everts and Dr Martyn brought an expert eye to examination of the photographs and their interpretation. However, they both agreed "that not all affected plants will show signs of affectation when they're young, [but] that those signs might develop when they are more mature" (511.20 -40T).
Dr Everts said "when initial infection occurs, there will be some time before you see any symptoms" (511.25-30 T). They both accepted that plants which looked healthy in the photographs might go on to develop signs of the disease. Dr Martyn qualified his views about what the photographs showed by saying "it is very difficult to diagnose accurately from a picture" (510.50T). The experts set out their impressions of what the photographs showed at [7] of Ex 5, pp 4 - 6. Each of them identified photographs that showed symptoms and signs consistent with, or typical of, FON although they disagreed to some extent about what those symptoms were in oral testimony. They disagreed about whether "cupping" of leaves shown in some photographs was typical of the disease (516.15 - 520.30T).
They also agreed that there were signs of other unrelated conditions in some of the seedlings. As I have said, I am not sure that this assists Territory Tree Nursery. In any event, I accept that not all of the seedlings were affected, and not all that were affected were equally affected. However, my own impression aided by the lay and expert evidence is that a large proportion of the seedlings actually planted by The Sweet Life were adversely affected by FON. It is not necessary to go beyond this finding as Territory Tree Nursery "accepts the reasonableness [The Sweet Life's] decision not to continue planting the watermelon seedlings in the other fields (but not reasonableness not planting the fallow fields with any crop)". (Closing outline of submissions, p 24 [63]).
The Territory Tree Nursery went on to submit "it is unlikely that there was much of a loss in the fields actually planted", given the proportion of apparently healthy plants depicted in the photographs, plants affected by other pathological conditions, and plants depicted as affected by signs of FON, Territory Tree Nursery argued that no more than one-third of the watermelon seedlings actually planted, over about 70 acres, were affected by FON.
This assessment is in the final analysis based almost entirely upon impressions to be formed from what are in truth poor quality colour prints of photographs. In any event, I am of the view that this is not the correct approach to The Sweet Life's loss. The Sweet Life's claim is for loss of profit or economic loss, not for damage to property. The real measure of loss is the difference, if any, between the profit The Sweet Life would have made from the sale of watermelons in the 2011 season had the contract been performed according to its terms, and the profit actually made. Accepting this is a hypothetical question, the difference is measured in money terms by reference to the price paid for its crop at market, not by attempting to extrapolate what might have been earned by reference to the condition of the seedlings when planted out in the fields.
In any event, I generally accept the evidence of Garry Amaro about his observations of the condition of the seedlings which were corroborated by Wayne Andreatta, an agronomist who usually worked for The Sweet Life's seed merchant. Mr Andreatta came on the scene after the a problem became apparent.
The first batch of seedlings was delivered to The Sweet Life on 4 May 2011. Mr Amaro noted there was "the odd patch within the trays of seedlings that had no plants". Overall, however, it is fair to say that he was not concerned about the appearance of the seedlings then. The seedlings from this batch were planted out in blocks 27 and 28.
The second batch was delivered on 6 May 2011. Mr Amaro noticed some yellowing, but again he was not concerned. The seedlings were planted in block 28 and block 25. The third batch was delivered on 12 May 2011 and planted out in blocks 24, 22 and 21. Nothing adverse was noticed.
Given the evidence of the experts I have recounted above, it is not my view that one should infer that the watermelon seedlings in batches 1, 2 and 3 were all healthy. I think it probable that a proportion of them were affected by FON, but not exhibiting severe or obvious symptoms at the time these batches were planted out. And there was then no reason for Mr Amaro to suppose that the seedlings were other than sound.
It is not until 17 May 2011 that Mr Amaro had any reason to believe that something was amiss; this is only 2 weeks after the delivery of the first batch. On the 17th, Mrs Amaro's diary records that Mr Amaro did not plant any watermelons because of a "concern about bacterial disease at nursery".
A fourth batch of seedlings was delivered on 19 May 2011. The diary (Ex 10) records the following: … Watermelon seedlings - yellow blotches, dead leaves - maybe bacterial disease. Ones in paddock are showing similar signs … have gone to nursery to see what is going on - will not transplant today.
Mr Amaro visited the Territory Tree Nursery site again on 26 May 2011 to inspect the Sweet Life's seedlings. Those on wire racks were said to show good colour without yellowing. Ms Debarros informed him that they were having issues with the seedlings within some plastic trays. Mr Wayne Andreatta was present and removed the affected seedlings from the trays of the fourth batch. On 28 May the remainder of the fourth were planted in field 20. On 29 May Mr Amaro inspected the young plants from the third batch and noticed that the runners and leaves were dying. Mr Amaro and Mr Andreatta attended the Territory Tree Nursery again on 30 May 2011 and estimated about 18 trays looked to have badly affected plants in them. Mr Andreatta noticed from his inspection of watermelon crop that many were adversely affected.
The fifth batch was delivered on 13 May 2011 but none of them were transplanted. Mr Andreatta emailed Territory Tree Nursery on behalf of The Sweet Life on 17 June 2011 confirming that Territory Tree Nursery was not to germinate any further seedlings for The Sweet Life from the seeds supplied lest the disease turned out to be seed borne, and requesting that the Territory Tree Nursery take back the unplanted fifth batch.
It's not possible to precisely assess or estimate the full extent of the problem in the transplanted crop. I am, however, satisfied that it was widespread and it was reasonable for The Sweet Life not to plant the fifth batch and to cancel further delivery of seedlings. Given that the source of the infection had yet to be identified and the seeds supplied from The Sweet Life's seed merchant were a possible source of the infection, it was reasonable to desist from further germination and transplanting at that time.

Cold weather

I have already expressed my reasons for accepting that the yield in 2011 may have been affected by unseasonably cold weather at the commencement of the planting season. Moreover, it was unseasonably wet at that time which would have delayed the commencement of planting. In addition to the evidence from the experts, to which I have referred already, evidence from expert meteorologist Dr Cacilia Ewenz in her reports dated 8 May 2014 and 7 November 2014 (Ex L and M) indicate that the cold temperatures were not very unusual. Dr Ewenz said (Ex L, page 12) that "[t]he Northern Territory experienced especially cool dry seasons in 2011 and 2012. Night-time temperatures reached record lows in a number of days. At Darwin Airport in 2011 a total of 96 nights were below 20 degrees Celsius, the coolest nights on record. Additionally, 2011 was the second wettest year on record for Darwin Airport". Dr Ewenz pointed out at page 14: The dry season average daily maximum temperatures do not reveal such a distinct feature as the minimum temperature[s] do … In regards to the maximum temperature 2011 and 2012 are not as extreme as mentioned before …
She concluded that evaluation of maximum and minimum temperatures "set[s] the record years into perspective" (page 15). So far as the "cool conditions are concerned longitudinal studies show that 2 out of every 10 years are likely to have minima like 2011".
There is also some anecdotal evidence that notwithstanding the low temperatures, the seedlings continued to grow. Another grower in the Northern Territory, who was also a customer of the Territory Tree Nursery, monitored growth in the cooler weather. She wrote to Ms Debarros by email on 31 May 2011 reporting "I did an interesting experiment on the ones already in the ground. I decided to check their growth over 36 hours, 2 nights of 12.8 low. They grew anyhow. 19cm in the 36 hours. I could hardly believe it. Overnight they grew 4 cm with no sunshine and 12.8 degrees of cool. Fantastic growth. We have the bees here now because they are ready with female flowers and fruit".
As I have said, Dr Everts modified the opinion she joined in in the joint report (Ex 5) in oral testimony. Dr Everts said that growth below 12.78 degrees Celsius "would be negligible" (539.48T). She also referred to a concept of "growing degree days" (540.20T). The growing degree day was calculated as the average of the maximum/minimum temperature. On this basis she was of the view, looking at the average temperatures during the planting season of 2011, that the average temperatures for May and July were within the optimum for watermelon growth whilst June "was slightly below that optimum". She defined optimum range as between 21 and 29 degrees. In May the average was 24.1 and in July 23.7. She would have expected average growth in these months. She accepted that the literature suggested a degree of retardation from exposure to low temperatures for intermittent periods at night, but she took these "with a grain of salt".
Dr Martyn (541.24T) accepted many scientists used the "growing degree day" model. He was not one of them. In his opinion, when the temperature fell below the optimum, notwithstanding that it may again rise during the day, growth is retarded. In his opinion, plants suffer from the effects of a "start-stop growth cycle" and will not end up as large. Neither expert was able to put an accurate percentage on the degree of yield loss that may occur in a cooler season (543.10T). Dr Everts said at (542.35T): "… I think that undoubtedly cold temperatures can have an effect on yield and it's very possible that there was some effect on yield at the farm from the cold temperatures, but I would expect that it would have been much lower than 20 per cent because the plants were so much older [when transplanted], and I would, you know I would guess maybe from 1 to 10 per cent but that's a guess, because I don't think you can know …"
It is quite apparent that when both Dr Everts and Dr Martyn were cross-examined in detail about the actual minima from May to July (especially for June), it was impossible for them to be precise about the quantitative effect of the cold temperatures upon the yield. Dr Martyn pointed out that the scientific papers were dealing with very specific cold temperatures which were well below the temperatures which actually occurred in the 2011 growing season in the Northern Territory by a number of degrees (574.50T). The experts said that acute cold temperatures for short periods or marginally cold temperatures for longer periods would both affect growth and development of the plant "but they might affect them differently" (575.5T). What is shown in a study was not necessarily the same as would happen in the field. Dr Martyn made it clear that cold is not the only factor. He said, "if you have a cold, sunny day, there would probably be less effect on the quality of fruit in terms of sugars, than if you had a succession of cold cloudy days". Those factors were not addressed in the scientific papers (577.40T).
They were pressed to quantify the likely effect of the actual cold temperatures in a qualitative range specified as: from best to average, to below average to poor. Dr Martyn said "something below average". Dr Everts said "slightly less than average" (579.30 - .45T).
On balance, I am satisfied that the cooler temperatures in the planting season in 2011 would have had an effect on the yield of the type described in Ex 5. The difficulty is quantifying it. It need not necessarily have been great. Cross-examination demonstrated that all cucurbits were more or less equally susceptible to cold and it may be possible to look at the comparative performance of, say, rockmelons on The Sweet Life's farm in cold and warm years as a guide. In the end that approach was not pursued and MFI 31 and MFI 32 proceed on comparisons of yields of watermelons in a succession of seasons.
There are difficulties in calculating an average yield for this farm. 2011 and 2012 were both FON affected. The yield in each year was well below other relevant years and they should be put to one side. Nor do I think 2013 and 2014 are fair comparators because of the change in methodology adopted on agronomic advice. The expert evidence leads me to believe that it's not possible to make a simple adjustment to make them comparable. This only really leaves 2009 and 2010. Both of these years are controversial. The Sweet Life eschews reliance on 2009 because it too was early in the piece and Mr Amaro was still adjusting to conditions in Northern Australia. Territory Nursery eschews reliance on 2010 because there is a difference between the figures originally discovered by The Sweet Life and the figures produced by the accountant, Mr Farronato. I have no reason to question the figures produced by the accountant, although the total yield is out of kilter with other years including 2013 and 2014 when changes had been made to increase productivity. I am prepared to accept them as accurate and work on the basis that 2010 was a very good year. On the basis of that performance The Sweet Life planned for another good year in 2011. I accept the figures produced by Mr Farronato.
As at 2011 The Sweet Life was still a relatively new business. There was no long track record to draw upon to produce a reliable average of past performance. I feel it necessary to use the only two years capable of being comparable, that is 2009 and 2010, despite the reservations expressed by the parties. In 2009 the average yield of watermelons per acre was 10,419 kilograms. In 2010, according to the figures I have accepted, the average yield was 17,893 kilograms per acre. The average of these disparate figures is 14,156 kilograms per acre. Given the cold weather, I think it appropriate to discount this somewhat to produce a slightly below average to below average result. I propose to reduce that average by 10 per cent to take into account the cold weather. 10 per cent is 1,415.6 kilograms. I will disregard the .6. I find that the likely yield in 2011, but for the FON infection, is 12,741 kilograms per acre.
Subject to the issue concerning mitigation, I will offer the following interim calculation of The Sweet Life's loss of profit. Notional sales Proposed areas to be planted (acres) 206.90 Notional yield per acre (kilograms) 12,741 Total notional yield (kilograms, rounded up) 2,636,113 Notional price per kilogram (net of commission) $1.22 Total notional sales (rounded up) $3,216,058.00 Actual sales Less actual area planted (acres) 66.64 Actual yield per acre (kilograms) 10,280 Total actual yield (kilograms) 721,044.8* Total actual sales $548,722.00 Total notional sales less total actual sales $2,667,366.00 Less costs Cost of production per kilogram (agreed) $0.60 Total notional yield less total actual yield (rounded up) 1,915,068 Saved production costs $1,149,041.00 Gross loss of profit $1,518,325.00 Less net mitigation crop income (agreed) $397,500.00 Net loss of profit $1,112,825

*These figures were provided by the plaintiff and the defendant was apparently content to adopt them. I note that 66.64 x 10,280 amounts to 685,059.2, not 721,044.8.Mitigation

The defendant argued that the plaintiff had failed to take reasonable steps to mitigate its loss. The argument proceeded in this way. The total area proposed to be planted was about 207 acres. 70 acres had been planted with watermelon seedlings before planting was abandoned. The defendant makes no complaint about the abandonment of the planting. A further 67 acres, or thereabouts, were planted with other crops, mostly, I think, rockmelon. This left about a further 70 acres fallow. The defendant argues that this was unreasonable and that The Sweet Life should have likewise planted those 70 acres with an alternative crop. I accept that on the basis of Mr Andreatta's evidence (237T) that there was no technical or agricultural reason why the 70 fallow acres could not have been planted by direct seeding of other cucurbits like pumpkin or rockmelon which are unaffected by FON. In those circumstances, it would have been unnecessary to wait for the germination of seedlings by a commercial nursery, since the manpower that would have been deployed to plant watermelon seedlings would have been available for that purpose.
Mr Andreatta's evidence was that the decision to leave the fields fallow was made by the directors of the company in discussion. When asked whether he had made any recommendation about it he answered (249.50 - 250.5T), "[t]he only recommendations I would have made would have been not to have planted watermelons. They had the marketing knowledge as to what they could sell, what varieties were adapted better. I was only very new on the scene at that stage". The following exchange occurred at 250.15 - 250.30T: Q. Who made the decision to leave the [70 acres] fallow? A. That would have been made by the partners of the business, that would have involved marketing decisions, positions that I had no representation in and no knowledge of. Q. Did anyone consult you about that? A. That was a business decision by the partners. I was there to execute the farm program and to look after the crop so they were management decisions that were above me. Q. As far as you know from what was going on at the farm when you were there in mid‑2011, there's no reason why the other [70 acres] couldn't have been planted out with rockmelon. Is that right? A. There may have been other reasons for markets that I did not know. Q. Okay, so at least in terms of the farming side of things as opposed to the selling and marketing side of things, just focus on the farming side of things at the moment, I understand you weren't involved in the selling and marketing, is that right? A. That's correct. He said there was no reason from a farming point of view why the other 70 acres could not have been planted with one cucurbit or another. Mr Amaro's evidence was to the same effect (308.15 - 309.50T).
Territory Tree Nursery argue in these circumstances, absent evidence lead by The Sweet Life on the topic, the defendant has discharged "whatever evidentiary onus" it bears (submission page 29 [80]). It argues that no inference can be drawn that the plaintiff did not plant the fallow fields because it could not have sold the produce.
Mr Robert Logozzo did give an explanation for why further crops were not planted in mitigation (116.30T). He said that the mitigation crops were planted on short notice. When asked whether that causes problems from a marketing point view he said: It does. It doesn't allow you time to secure markets in sales and generally when stock is sent to the market to be sold without sales lined up you do struggle to sell the quantity and the volume at a premium price or any good price at all.
It should also be borne in mind that this commercial horticultural operation, as I have said, was organised on a very strategic basis. There was a plan (Exhibit D) which included an abundance of rockmelons. Mitigation crops were planted by 20 July 2011 and scheduled planting of other rockmelons was to commence from 24 July 2011.
At least in economic terms, there is a law of diminishing returns. Oversupply drives prices down just as shortages drive prices up. It gets to the point wher further production is counter-productive in terms of maximising profit across the business. The real question going to mitigation is not whether the fallow fields could have been planted, but whether the produce from them could have been sold at a good price without diminishing the price for the other cucurbits already scheduled to be planted and sold for 2011.
The Territory Tree Nursery carries more than an evidential onus in this regard; it carries the legal or persuasive onus of making good its argument on mitigation. It amply demonstrated that the fallow fields could have been planted; it has not demonstrated on the balance of probabilities that the produce of those fields could have been sold at a good price at market in 2011. In other words, it has not shown that the decision not to plant the fields left fallow was not a sound commercial decision made by forecasting the market for cucurbits grown in tropical Australia considered likely to prevail in 2011 by prudent business people at the time decisions had to be made, that is during the available window for planting.
The Sweet Life did take steps to mitigate its loss. It marketed the watermelons it had planted from the first four batches of seedlings supplied by Territory Tree Nursery and it planted other crops in about 67 acres of the area set aside for planting watermelons in 2011. As The Sweet Life points out, a party is not bound to take all possible steps to mitigate its loss, only those steps that are reasonable: Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603 by Hayne J at 654 [134]. As his Honour said: There is no injustice in leaving the wrongdoer to bear the consequences of the decisions made in response to that wrongdoing by the party harmed - so long as those decisions are reasonable.
I am not satisfied that Territory Tree Nursery has established that The Sweet Life failed to take reasonable steps to mitigate its loss of profit. I am satisfied that the decision to leave the 70 acres fallow was reasonable.

Conclusion

Accordingly, I assess its damages in the sum of $1,112,825.

Interest

The loss I have assessed would have crystallised by no later than 31 December 2011. The Sweet Life's planting season stretched from early May until the end of July. Allowing a three month growing season, all of its crops would have been taken to market by the end of October or the beginning of November to avoid the wet season.
Interest should be allowed on the damages in accordance with the rates prescribed for the purposes of s 100 Civil Procedure Act 2005 (NSW) on the whole of the amount on the economic loss I have assessed from 1 January 2012. I will leave it to the parties to agree on the amount of interest.
My orders are: 1. Judgment for the plaintiff in the sum of $1,112,825; 2. The first and second defendants to pay the plaintiff's costs; 3. I direct the parties to bring short minutes of order calculating pre-judgment interest to be added to the judgment by arrangement with my associate; 4. Liberty to apply in respect of arithmetical errors.

Amendments 13 September 2017 - Coversheet, Texts Cited "Atiya's" changed to "Atiyah's"; Paragraph [33], quoting Walsh J, "prints in duplicate" changed to "prints and duplicates"; Paragraph [58], "the Sweet Life" changed to "The Sweet Life"; Paragraph [58], quoting Lord Wright "or where it is to be limited" changed to "or whether it is to be limited"; Paragraph [59], quoting Lord Diplock "your Lordship's House" changed to "your Lordships' House"; Paragraph [129], "primary of fact" changed to "primary fact"; Paragraph [162], "all reasonable steps" changed to "all possible steps". DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 13 September 2017

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