Court of Appeal (WA)|2011-03-18|Before: Lure P, Newnes JA, Murphy JA

MOTIUM PTY LTD -v- ARROW ELECTRONICS AUSTRALIA PTY LTD [2011] WASCA 65 (18 March 2011)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : MOTIUM PTY LTD -v- ARROW ELECTRONICS AUSTRALIA PTY LTD [2011] WASCA 65

Jurisdiction : DISTRICT COURT OF WESTERN AUSTRALIA

Citation : MOTIUM PTY LTD -v- ARROW ELECTRONICS AUSTRALIA PTY LTD [2009] WADC 184

Contract - Sale of goods - Respondent agreed to supply specified brand of electronic components to appellant - Appellant manufactured electronic equipment - Appellant incorporated components supplied by respondent in electronic equipment sold to third party - Components supplied by respondent were imitations of specified components - Electronic equipment delivered to third party replaced by appellant because of unrelated faults - Whether respondent liable in damages for failure to supply specified components - Appellant replaced some of the components in electronic equipment before delivery to third party - Whether entitled to damages for cost of replacement - Failure of appellant to prove damage

Trade practices - Misleading or deceptive conduct - Representation as to nature of product to be supplied - Whether representation as to future matter

Appellant awarded nominal damages for breach of contract

Adams v Classic Autocraft (Australia) Pty Ltd (1985) ATPR 40-612

Auspac Trade International Pty Ltd v Victorian Dairy Industry Authority & Campberdown-Glenormiston Dairy Co (Unreported, VSCA, 22 February 1994)

Baltic Shipping Co v Dillon [1993] HCA 4; (1993) 176 CLR 344

Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613

Bence Graphics International Ltd v Fasson UK Ltd [1998] QB 87

Biggin & Co Ltd v Permanite Ltd [1951] 1 KB 422

Bill Acceptance Corporation Ltd v GWA Ltd [1983] FCA 269; (1983) 78 FLR 171

Burns v MAN Automotive (Aust) Pty Ltd [1986] HCA 81; (1986) 161 CLR 653

Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304

Commonwealth of Australia v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64

Concrete Constructions Group Ltd v Litevale Pty Ltd [2002] NSWSC 670; (2002) 170 FLR 290

Dexters Ltd v Hill Crest Oil Co (Bradford) Ltd [1926] 1 KB 348

Gerrard v Slamar [2004] WASCA 253

Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd [1984] FCA 180; (1984) 2 FCR 82

H Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1977] EWCA Civ 13; [1978] QB 791

Hadley v Baxendale [1854] EngR 296; (1854) 9 Exch 341; (1854) 156 ER 145

Hammond & Co v Bussey (1887) 20 QBD 79

Hunt v ASME Engineering Ltd [2007] EWHC 1507; [2008] 1 All ER 180

JLW (Vic) Pty Ltd v Tsiloglou [1994] VicRp 16; [1994] 1 VR 237

Kaslar and Cohen v Slavouski [1928] 1 KB 78

Koufos v C Czarkinow Ltd (The Herron II) [1969] 1 AC 350

Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd [1938] HCA 66; (1938) 61 CLR 286

McSherry v Coopers Creek Vineyard Ltd (2005) 8 NZBLC 101

Motium Pty Ltd v Arrow Electronics Australia Pty Ltd [2009] WADC 184

Motium Pty Ltd v Arrow Electronics Australia Pty Ltd [2009] WADC 184 (S)

Renold Australia Pty Ltd v Fletcher Insulation (Vic) Pty Ltd [2007] VSCA 294

Richard Holden Ltd v Bostock & Company Ltd (1902) 18 TLR 317

Slater v Hoyle & Smith Ltd [1920] 2 KB 11

Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; (2009) 236 CLR 272

Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd [1998] HCA 38; (1998) 193 CLR 603

Westsub Discounts Pty Ltd v Idaps Australia Ltd (1990) 17 IPR 185

Wheeler v Ecroplot Pty Ltd [2010] NSWCA 61

Willshee v Westcourt Ltd [2009] WASCA 87

1 McLURE P: I have had the advantage of reading the judgments of Newnes and Murphy JJA. I agree with them for the reasons they give that the appellant failed to prove that the respondent's breach of contract entitled it to damages for the costs it incurred in replacing power supply units in surveillance equipment supplied and installed by DTI in General Electric buses in the United States.

2 The other category of loss was for costs incurred by the appellant in replacing mosfets in power supply units already sold to, but returned by, DTI to the appellant for that purpose. I agree with Newnes JA that the appellant failed to prove those costs. Accordingly, it is unnecessary to determine whether such costs, if proven, would have been recoverable. However, as differing views have been stated on that subject, I propose to shortly state my opinion.

3 The issue is this: can a purchaser recover from the vendor of defective goods costs voluntarily incurred in replacing the defective goods which the purchaser has incorporated into a product and on-sold to a third party without knowledge of the defect? By 'voluntarily' I mean to signify without any claim or proof of liability, contractual, statutory or otherwise, to the third party or any other person in relation to the defective goods.

4 The answer to the question depends on whether or not the loss falls within the principles in Hadley v Baxendale (1854) 156 ER 145, which are effectively incorporated in the applicable law, being the Goods Act 1958 (Vic), s 4, s 59(2) and s 60. The facts of this case do not raise the controversies surrounding Bence Graphics International Ltd v Fasson UK Ltd [1998] QB 87 and Slater v Hoyle & Smith Ltd [1920] 2 KB 11. As to which, see Treitel GH, 'Damages for Breach of Warranty of Quality' (1997) 113 The Law Quarterly Review 188. In those cases no costs had been incurred.

5 The Goods Act 1958 (Vic) incorporates both limbs of Hadley v Baxendale which have in more recent times been restated as a single principle requiring that, on the information available to the defendant when the contract was made, the defendant should, or a reasonable person in the defendant's position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that a loss of that kind should have been within the defendant's contemplation: Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64.

6 In my opinion, the very unusual circumstances of this case would bring the appellant's voluntarily incurred expenditure within the Hadley v Baxendale principle. The respondent had been seeking the appellant's business for some time. It can be inferred that it was aware at the time of entry into the contract of the nature of appellant's business, being the design, manufacture and sale of specialised electronic equipment for computers in motor vehicles. Further, the respondent was also aware at the time of entry into the contract that the appellant was 'fussy' about the brands it purchased. In a pre-contractual email from the appellant to the respondent, the appellant stated:

In addition to your order code, can you please advise the brand and manufacturer's order code (we are quite fussy on which brands we buy - particularly given some of the horror stories we've heard recently).

7 The contract specified Vishay mosfets with a breakdown voltage of 40 volts. The mosfets supplied by the respondent to the appellant were fakes; they masqueraded as products manufactured by Vishay with a breakdown voltage of 40 volts.

8 The voluntary recall of products is well known in the Australian marketplace. Inaction in the face of a known product defect or risk of product failure may injure a commercial reputation or increase the potential for the existence or scope of liability. The voluntary recall of products to remove fraudulent mosfets and replace them with those that met the appellant's contractual and design specifications is a loss of a kind that should have been within the respondent's contemplation.

9 NEWNES JA: This is an appeal from a decision of Scott DCJ in the District Court dismissing the appellant's claims against the respondent for damages for breach of contract and misleading and deceptive conduct: Motium Pty Ltd v Arrow Electronics Australia Pty Ltd [2009] WADC 184.

10 The appellant is a designer and manufacturer of specialised electronic equipment for computers in motor vehicles. The respondent is a supplier of electronic components, including metal oxide silicone field effect transistors (mosfets). It was an official distributor of mosfets manufactured by a company called Vishay.

11 In late 2006, the appellant received an order from Digital Technology International (DTI) for a quantity of power supply units. DTI is a company based in Perth which manufactures digital video-recorders

for surveillance in, among other things, buses. The power supply units were to be used by DTI in running surveillance equipment in General Electric buses in the United States.

12 One of the components of the power supply units was a mosfet. The appellant decided to use Vishay mosfets with a breakdown voltage of 40 volts in the manufacture of the power supply units. The appellant normally obtained Vishay mosfets from a supplier, Newark, in the United States (ts 240). On this occasion, Newark was out of stock of Vishay mosfets and could not deliver them for 18 weeks.

13 The respondent had been seeking the appellant's business for some time. On 21 December 2006, Mr Andrew Warenczak, the sole director and shareholder of the appellant, telephoned Mr Troy Collins of the respondent and asked him whether the respondent could supply some Vishay Si4840DY mosfets, what the lead time would be, and how much they would cost. (The description of the mosfets indicated that they had a breakdown voltage of 40 volts.) Mr Warenczak did not at any relevant time tell Mr Collins, or anyone else from the respondent, for what purpose the appellant intended to use the mosfets.

14 Mr Collins told Mr Warenczak that he thought the respondent had the mosfets in an overseas warehouse. A little later that day Mr Collins telephoned Mr Warenczak and told him that the mosfets were in stock in an overseas warehouse and it would take two weeks for them to reach Australia. Mr Collins said that he would forward a formal quotation to Mr Warenczak.

15 Later on 21 December 2006, Mr Collins emailed a quotation to Mr Warenczak for the mosfets and some other goods. In the quotation, under the heading 'delivery', there appeared against the description of the mosfets the notation, 'Ex stock 2 WKS'. Shortly afterwards, Mr Collins forwarded a credit account application by email to Mr Warenczak.

16 The credit account application form contained, relevantly, the following term:

All conditions and warranties expressed or implied by statute, the common law, equity, trade, custom or usage or otherwise howsoever are hereby expressly excluded to the maximum extent permitted by law. Where so permitted the liability of the [respondent] for a breach of a condition or warranty that cannot be excluded is limited (at the [respondent's] option) to the replacement or repair of the goods or the supply of equivalent goods or the cost of replacing or repairing the goods or of acquiring equivalent goods. The [respondent] shall not be liable in any way whatsoever for indirect or consequential loss or damage whatsoever (whether based on tort or contract or otherwise) (condition 10).

17 It also provided that the contract was to be governed by the laws of Victoria (condition 17).

18 Mr Warenczak signed the credit account application form and returned it to the respondent that day. The appellant was subsequently informed by the respondent, by letter dated 3 January 2007, that credit facilities for the appellant had been established to a limit of $9,000.

19 In the meantime, on the evening of 21 December 2006 Mr Warenczak sent an email to Mr Collins attaching a purchase order for, among other things, 5,000 mosfets at a price of $1.05 each. In the covering email, Mr Warenczak enquired whether the respondent could supply certain other goods, in which case Mr Warenczak said he would reissue the purchase order. Mr Warenczak also asked the respondent to provide not only their order code but also to advise the brand and manufacturer's order code, explaining 'we are quite fussy on which brands we buy - particularly given some of the horror stories we've heard recently'.

20 The following morning, 22 December 2006, Mr Collins forwarded a further quotation to Mr Warenczak. That quotation included 7,500 mosfets at $1.03 each and quotations for the additional items set out in Mr Warenczak's email of 21 December 2006 (exhibit E). It was not in issue that the description of the mosfets in the quotation was of Vishay mosfets having a breakdown voltage of 40 volts.

21 Several hours later, Mr Warenczak forwarded a revised purchase order to the respondent for the 7,500 mosfets at $1.03 each and certain additional goods.

22 On or about 3 January 2007, Mr Collins telephoned Mr Warenczak to say that the mosfets to be supplied were approximately two years old and because of their age the respondent required the appellant to execute a waiver against warranty claims if the mosfets did not solder correctly. Mr Collins forwarded a form of waiver to Mr Warenczak. The document was headed 'Advise [sic] of parts not being sourced direct from manufacturer (NSM) form' (original emphasis). Relevantly, it contained the following:

We would like to advise your organisation that these parts (detailed above or attached) are not being sourced directly from the manufacturer and are being sourced from a third party and are therefore outside the direct manufacturer's warranty. [The appellant] understands and acknowledges that [the respondent's] responsibility is limited to credit or replacement, of these parts, only if mutually agreed by both [the appellant] and [the respondent]. Any issues should be brought to [the respondent's] attention within 14 days of delivery. Please note that parts supplied with date codes over two (2) years old have no warranty whatsoever.

Mr Warenczak signed the waiver and returned it to the respondent.

23 The respondent delivered some of the mosfets to the appellant on or about 18 January 2007 and the balance on or about 5 March 2007. Unbeknown to both parties at the time, the mosfets had not been manufactured by Vishay but by some other manufacturer and they did not have a breakdown voltage of 40 volts. The respondent had obtained them from what was described in evidence as the 'grey market'; that is, from a supplier who was not the manufacturer or an authorised distributor of the manufacturer.

24 From early February to 28 March 2007 the mosfets were installed in the power supply units by a contractor, Pace Assembly Pty Ltd (Pace), which the appellant had engaged to assemble the power supply units. Seven mosfets were fitted to each power supply unit. The power supply units were then tested by the appellant to ensure they were operating correctly. Although the power supply units were designed to have a maximum operating voltage of 32 to 33 volts, the appellant tested them to only 30 volts because that was the limit of the capacity of the testing equipment it then had. After testing, the first of the power supply units were delivered to DTI in March 2007. DTI subsequently installed them in the surveillance equipment it had manufactured for use in the General Electric buses.

25 Somewhat surprisingly, it is unclear from the evidence how many power supply units were ordered by, or supplied by the appellant to, DTI. Initially Mr Warenczak gave evidence that DTI ordered 800 power supply units (ts 45). Later in his evidence, Mr Warenczak said that DTI had ordered 575 power supply units by a purchase order dated 1 December 2006 (ts 215; exhibit 36). He said that 692 power supply units were delivered to DTI. He was unable to explain the discrepancy between those figures. He said he did not know whether there was another purchase order for the balance or whether the appellant had decided to make '700' power supply units because they knew DTI had other orders in the pipeline (ts 215). In cross-examination, Mr Warenczak said that all of the 692 power supply units were delivered to DTI 'less the ones we ended up keeping' (ts 247). He did not say how many the appellant 'ended up keeping'. The evidence was left in that uncertain state. Unfortunately, it is not the only instance where the evidence is ambiguous.

26 In about middle or late March 2007, while repairing one of the power supply units, Mr Warenczak formed the view that the mosfets installed in it might not be genuine Vishay mosfets. Further enquiries arranged by the respondent as to the provenance of the mosfets confirmed Mr Warenczak's suspicions.

27 According to Mr Warenczak, in late March or early April 2007, DTI contacted the appellant to say that some of the power supply units installed in buses were failing. DTI required the power supply units to be replaced. Mr Warenczak tested one of the mosfets still in the appellant's possession and it failed at below 40 volts. He concluded that the mosfets were causing the problem. An employee of the appellant, Mr Gadellaa, was sent to the United States to replace the power supply units.

28 It appears from the evidence that Mr Gadellaa was in the United States from some time in August 2007 until about 14 September 2007. Together with an employee of DTI, Mr Gadellaa replaced the power supply units, including those in equipment already installed in buses, with new power supply units (ts 283). (The source of the replacement power supply units is not apparent.) Contrary to the suggestion of the appellant's counsel in the course of the appeal, it is clear from the evidence that it was the power supply units, not the mosfets in them, which were replaced by Mr Gadellaa.

29 On 14 September 2007, Mr Gadellaa sent the power supply units that had been replaced back to the appellant (ts 71, 285; exhibit 20). It is not clear from the evidence how many were returned.

30 In the meantime, on or about 14 August 2007 a further consignment of power supply units was sent to the United States, on this occasion by air cargo (the modified power supply units). It seems from Mr Warenczak's evidence that this consignment was a batch of power supply units which the appellant had retrieved from DTI in Perth, after the appellant discovered that the mosfets supplied by the respondent were 'grey market' mosfets. The appellant engaged Pace to replace the mosfets in those power supply units. DTI then sent the equipment containing the modified power supply units to the United States by air cargo in order to meet General Electric's deadline. Mr Warenczak gave evidence that the appellant paid the cost of the air freight. (That cost was not, however, included in the appellant's claim for damages in the action.) There is no evidence as to the number of mosfets contained in the modified power supply units.

31 Subsequently, Pace was engaged by the appellant to replace the mosfets in 567 power supply units at a total cost of $6,569.40 (exhibit 31). There appears to be no direct evidence as to precisely when that work was carried out but the invoices from Pace for that work are dated 22 August (59 power supply units), 13 September (101), 27 September (153), 27 September (74), 28 September (100), 29 October (49) and 28 November 2007 (31). It appears from the invoices that in each case the power supply units concerned were available either to be collected by or to be delivered to the appellant on the date of the invoice. I note in passing that based on the times at which that work was apparently carried out, the power supply units concerned could not have been the modified power supply units which were sent by air cargo on about 14 August 2007.

32 A contractor, Mr Nguyen, was also engaged by the appellant in August 2007, and again in October and November 2007, to replace mosfets in power supply units or test some of the units, at a total cost of $800 (exhibits 12, 32). It is not apparent how many power supply units were involved in that work.

33 On 13 September 2007, the appellant ordered 2,500 replacement mosfets from Newark (ts 82, 84; exhibit 30.2). The invoice from Newark to the appellant (exhibit 30.1) records that the mosfets were dispatched from the United States on that date, at a cost of US$2,876.18. The appellant subsequently sent another purchase order, dated 15 November 2007 (exhibit 33.2), to Newark for, among other things, a further 2,500 mosfets. The invoice from Newark to the appellant (exhibit 33.1) records that the mosfets were dispatched from the United States on 21 November 2007, at a cost of US$2,750 plus freight. Once again, the time at which those mosfets were ordered and supplied indicates that they were not used in the modified power supply units which were air freighted to the United States.

34 The appellant subsequently arranged for some of the mosfets supplied by the respondent to be tested by an expert, Mr Iemi of PI Engineering Pty Ltd, to ascertain whether the mosfets had a breakdown voltage of 40 volts. Those tests revealed that they did not, but that they had a breakdown voltage of 34 volts. Mr Iemi gave evidence at trial that none of the mosfets he tested failed at below 34 volts.

35 The appellant commenced proceedings in the District Court against the respondent claiming damages for breach of contract and for misleading or deceptive conduct under the Trade Practices Act 1974 (Cth). The appellant claimed damages in the total sum of $77,689.30.

36 The respondent denied any liability to the appellant and counterclaimed the unpaid price of the mosfets, an amount of $2,832.50.

37 The appellant pleaded, in substance, that the respondent was in breach of contract by supplying mosfets which were not manufactured by Vishay and which did not have a resistance of 40 volts, but a resistance of 25 or 30 volts.

38 It further alleged, in par 8 of the statement of claim, that implicit in the contract were representations to the effect that:

the mosfets to be supplied had been manufactured by Vishay; and
the mosfets to be supplied would correspond with their description in the contract.

39 In par 16 of the statement of claim, the appellant alleged that the making of those representations constituted misleading or deceptive conduct by the respondent, contrary to s 52 of the Trade Practices Act, in that the mosfets supplied by the respondent had not been manufactured by Vishay and did not correspond with their description in the contract. The appellant alleged in par 17 that it had suffered loss and damage by reason of the respondent's misleading or deceptive conduct. That loss and damage was particularised in the sum of $77,689.30.

40 The appellant also alleged that the waiver had been procured by the misleading or deceptive conduct of the respondent.

41 In its defence, the respondent did not admit that the mosfets had not been manufactured by Vishay or that they did not have a resistance of 40 volts. The respondent further alleged that, by the waiver, the appellant had acknowledged that the mosfets were being supplied by a third party. It also pleaded that any liability of the respondent was limited by condition 10 of the credit account application form and the waiver, and that if the respondent was liable to the appellant, its liability was limited to the cost of the mosfets or the cost of replacing them.

42 The primary judge rejected the appellant's claim under s 52 of the Trade Practices Act. His Honour concluded that the implied representations that the mosfets had been manufactured by Vishay and that they would correspond with their description in the contract were representations as to future matters, being the identity of the manufacturer and the description of mosfets to be supplied at some time in the future. They were not representations as to existing facts [41].

43 His Honour found that the claim for misleading or deceptive conduct was misconceived [44]. It was not sufficient simply to show that the mosfets supplied by the respondent were not manufactured by Vishay and did not correspond with their description in the contract. As the alleged representations were as to future matters his Honour considered that, pursuant to s 51A of the Act, it was necessary for the appellant to plead that the respondent had no reasonable basis for making the representations at the time when they were made [42], [45]. No such case was sought to be made out by the appellant. His Honour concluded it was therefore unnecessary to consider whether the alleged representations were conveyed.

44 The primary judge also found that, for the same reason, the allegation by the appellant that it had entered into the waiver by reason of misleading or deceptive conduct by the respondent was not made out, and accordingly the plea that the waiver should be set aside must fail [48]. However, his Honour found that, in any event, the waiver did not relevantly limit the respondent's liability in respect of the appellant's claims in the action [61].

45 In relation to the appellant's case in contract, the primary judge found that the credit application constituted part of the contract [16]. His Honour concluded, however, that condition 10 of the credit application, which excluded all conditions and warranties to the maximum extent permitted by law, did not affect the respondent's obligation to supply mosfets in accordance with the description in the contract, but it did exclude the respondent's liability for 'indirect or consequential loss or damage' [69] - [71].

46 The primary judge went on to find that the respondent had failed to supply mosfets in accordance with the description in the contract. His Honour found that the mosfets were not manufactured by Vishay [78] and they did not have a breakdown voltage of 40 volts, but a breakdown voltage of 34 volts [79], [84]. It followed that the respondent was in breach of the contract [86].

47 The primary judge concluded, however, that the appellant had failed to prove that it had suffered any loss or damage as a result of the respondent's breach [96]. His Honour found that the identity of Vishay as the manufacturer of the mosfets was irrelevant to any loss suffered by the appellant [89]. His Honour also found that the appellant had not proved that the cost of replacing the mosfets in the power supply units sold to DTI had been caused by the respondent's breach of contract. The appellant had not proved that the failure of the power supply units had been caused by the lower breakdown voltage of the mosfets. There was no evidence as to why the power supply units had failed and no evidence that any of the mosfets in the power supply units had failed. There was also no evidence as to the voltage at which the power supply units were operating when they allegedly failed and no evidence that the power supply units in the security units were required to operate, or did operate, at 34 volts or more [92] - [95]. His Honour dismissed the appellant's claim.

48 The primary judge also dismissed the respondent's counterclaim, finding that the appellant was not bound to return the mosfets to the respondent but it was for the respondent to retrieve them if it wished to do so [102]. The respondent does not challenge that finding.

49 On the question of costs, the primary judge ordered the appellant to pay 75% of the respondent's costs of the appellant's claim and made no order as to the costs of the counterclaim: Motium Pty Ltd v Arrow Electronics Australia Pty Ltd [2009] WADC 184 (S).

50 There are eight grounds of appeal, from which the following four contentions can be distilled:

the primary judge erred in law in finding that the representations pleaded were representations as to future matters, not existing facts (grounds 1 - 5);
the primary judge erred in law in finding that in order for the appellant to succeed in its claims for damages it had to prove that the DTI power supply units failed because the mosfets were not manufactured by Vishay or they did not have a breakdown voltage of 40 volts (grounds 6);
the primary judge erred in not finding that the appellant incurred costs of $77,689.30 in replacing the mosfets (ground 7); and
the primary judge erred in law in ordering the appellant to pay 75% of the respondent's costs of the action (ground 8).

51 It is convenient to turn at the outset to the way in which the appellant pleaded this part of its case. The relevant representations were pleaded in par 8 of the statement of claim as follows:

Implicit in the [contract] were representations ... by the [respondent] to the [appellant] to the following effect:

8.1 the [mosfets] to be supplied had been manufactured by Vishay ...;

8.2 the [mosfets] to be supplied would correspond with their description in the [contract].

52 The appellant also alleged, in par 9.1(a), that shortly before the mosfets were supplied to the appellant, the respondent had represented that the mosfets had definitely been manufactured by Vishay. The primary judge found, however, that that representation had not been made out [18] and that finding is not challenged.

53 In par 16 of the statement of claim, the appellant pleaded:

The making of the representations [in pars 8 and 9] was misleading or deceptive conduct by the [respondent] in the course of trade or commerce in contravention of s 52 of the Trade Practices Act insofar as:

16.1 contrary to the representations in [paragraphs] 8.1 and 9.1(a) the [mosfets] supplied had not been manufactured by Vishay ...; and

16.2 contrary to the representations in [paragraph] 8.2 the [mosfets] supplied did not correspond with their description in the [contract].

By reason of the [respondent's] misleading or deceptive conduct the [appellant] has suffered loss and damage.

55 At trial the appellant contended that the alleged representations were representations as to existing facts, not representations as to future matters. The question of the correct categorisation of the representations was canvassed during the opening address of counsel for the appellant at the trial, where the following exchange occurred:

SCOTT DCJ: Just looking if I can - I don't want to interrupt your flow. The misleading and deceptive conduct pleaded is in paragraph 16 of the statement of claim.

METAXAS, MR: Yes.

SCOTT DCJ: Is it said by the plaintiff that the representations were representations as to a future act?

METAXAS, MR: No, they were representations that the parts we were to be - that would be supplied - it's not pleaded as a representation to a future matter.

SCOTT DCJ: Why is it not a future matter, because isn't the representation that 'The parts that we are going to supply are going to be of a particular description'? What [sic, why] is that not a representation of a future matter?

METAXAS, MR: I'm sorry, your Honour may well be correct. I haven't pleaded it that way. I have pleaded it as the representation that the parts that would be supplied would be in conformity with what was stated in the quotation, but your Honour has put forward a different legal interpretation of the facts which I would have to concede - I don't think 'concede' is the right word. It makes eminent good sense from my client's perspective.

SCOTT DCJ: If it's right, then the question of the representation being misleading and deceptive would then be considered referable to the date upon which it was made. In other words, was it reasonably based at the time at which it was made?

METAXAS, MR: Yes, it would change the nature of the case.

SCOTT DCJ: It would.

METAXAS, MR: So I'm content with the pleading as I have got it.

SCOTT DCJ: All right (ts 5 - 6).

56 It is apparent from the transcript of the trial that the appellant did not depart from its contention that the representations it alleged were as to existing facts. In the appellant's written closing submissions at trial, counsel simply described the appellant's claim under s 52 as being 'based upon the misleading representation that the parts were [Vishay]'.

57 As the appellant's case at trial was put squarely on the basis that the representations were representations as to existing facts, no question arose as to whether at the time the representations were made the respondent had reasonable grounds for making them and accordingly that issue was not explored at trial.

58 On the appeal, the appellant submitted that the primary judge had erred in finding that the representations were as to future matters and contended that his Honour should have found they were representations as to existing facts. Counsel argued that they constituted representations that the respondent then had in its possession Vishay mosfets meeting the description in the contract which it would supply to the appellant (appeal ts 3 - 4). The fact that the time for delivery of the mosfets was in the future did not mean that the representations were as to future matters. As the representations were not as to future matters, the appellant did not need to rely on s 51A of the Trade Practices Act.

59 Whether a representation is misleading or deceptive is to be judged at the time the representation is made: Bill Acceptance Corporation Ltd v GWA Ltd [1983] FCA 269; (1983) 78 FLR 171, 178 - 179. Where it is alleged that a corporation made a representation as to an existing state of affairs the question is whether, at the time it was made, the representation was misleading or deceptive as to that state of affairs. Where, on the other hand, it is alleged that a corporation made a representation with respect to a future matter, the representation will be misleading or deceptive if, at the time it was made, the corporation did not have reasonable grounds for making it. Where such a case is alleged, the onus of establishing that it had reasonable grounds for making it lies on the corporation: s 51A. But a representation that a corporation will do something in the future will not be shown to be misleading or deceptive at the time it was made simply by showing that when the time came to do that thing the corporation did not do it: Bill Acceptance Corporation Ltd (179); Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd [1984] FCA 180; (1984) 2 FCR 82, 88; Concrete Constructions Group Ltd v Litevale Pty Ltd [2002] NSWSC 670; (2002) 170 FLR 290 [155].

60 It is clear, however, that a representation as to something which is to occur in the future may convey a representation of existing fact that is misleading: Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304 [36]. Thus in Westsub Discounts Pty Ltd v Idaps Australia Ltd (1990) 17 IPR 185, a representation that certain computer equipment and software would fulfil the requirements of the applicant's business was held to convey statements of fact about the system's capabilities and suitability for the applicant's purposes which were untrue. Similarly, in Adams v Classic Autocraft (Australia) Pty Ltd (1985) ATPR 40-612, a quotation for the cost of restoring a car was held to convey an incorrect statement of fact as to the extent of work necessary to restore the car.

61 In my opinion, the primary judge correctly found that the representations alleged by the appellant related to future matters, not to existing facts.

62 Although the representation pleaded in par 8.1(a) is not worded as clearly as it might have been, in the context the plea that 'the [mosfets] to be supplied had been manufactured by Vishay' is explicable only as a plea as to a future matter. The appellant's claim was not based on a contention that the respondent's conduct was misleading or deceptive because, at the time the representation was made, the respondent did not in fact have in its possession mosfets meeting the description in the contract, or that the mosfets which were in the respondent's overseas warehouse were not in fact Vishay mosfets.

63 The appellant's case was that the respondent's conduct was misleading or deceptive because it had represented that it would supply Vishay mosfets, but, contrary to that representation, it subsequently supplied mosfets which had been manufactured by someone other than Vishay: par 16.1 of the statement of claim. It was the respondent's conduct in supplying 'grey market' mosfets which it was alleged had caused the appellant to suffer loss and damage: par 17. That loss and damage was, in substance, the cost of replacing the power supply units because the mosfets which were supplied did not conform to the description in the contract.

64 When considered in the context of the appellant's case as a whole it is clear that the representation relied upon was a representation as to a future matter. The contention that the primary judge erred in so finding must fail.

65 In my view, the representation pleaded in par 8.2 that 'the [mosfets] to be supplied would correspond with their description in the [contract]' was, in its terms, plainly a representation as to a future matter.

67 The nature of the appellant's case on damages did not emerge from the pleadings. The appellant's particulars of loss and damage simply listed a number of invoices. However, in opening the case, the appellant's counsel told the primary judge that the claim for damages related to two categories of work. One concerned a shipment of power supply units which the appellant had retrieved from DTI before they left Australia and in which the mosfets had been replaced by Pace. (On the appeal, the appellant's counsel identified exhibit 31 as containing the relevant invoices from Pace (appeal ts 20 - 21).) The appellant's claim was for the cost of the replacement of the mosfets by Pace. The other part of the claim related to the cost of replacing the power supply units that had been delivered to DTI and used in equipment it provided to General Electric (trial ts 9). Both at trial and on the appeal the focus was on the latter.

68 The appellant submitted on the appeal that the primary judge erred in concluding that it was not entitled to damages for breach of contract because it had not proved that the power supply units it sold to DTI failed because the mosfets did not have a breakdown voltage of 40 volts. The appellant contended that it was unnecessary to do so. It submitted that it was entitled to damages to put it in the position it would have been in had the contract been performed by the respondent. If the contract had been performed, the power supply units the appellant supplied to DTI would have been equipped with Vishay mosfets with a breakdown voltage of 40 volts, instead of 'grey market' mosfets with a lower breakdown voltage. The costs claimed were therefore costs directly and naturally resulting in the ordinary course of events from the breach of warranty.

69 It is trite law that damages are compensatory in nature. It has long been a fundamental principle of the common law that where a person suffers loss by reason of a breach of contract, that person is, so far as money can do it, to be placed in the same position as it would have been in if the contract had been performed: Robinson v Harman [1848] EngR 135; (1848) 1 Exch 850, 855; [1848] EngR 135; (1848) 154 ER 363, 365; and see Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; (2009) 236 CLR 272 [13] where that is described as the 'ruling principle'.

70 The appellant's claim at trial was based on s 18 of the Goods Act 1958 (Vic). Section 18 provides that in a contract for the sale of goods by description there is an implied condition that the goods shall correspond with that description. The appellant alleged that the respondent was in breach of that condition. The right of the appellant to reject the mosfets used in the power supply units no longer being available, the appellant was compelled to treat the breach as a breach of warranty: Goods Act, s 16(3). Section 59(1) of the Goods Act entitled the appellant in those circumstances to bring an action in damages for breach of warranty.

71 Section 59(2) provided that the measure of damages was 'the estimated loss directly and naturally resulting in the ordinary course of events from the breach of warranty'. That provision reflects the first limb of Hadley v Baxendale [1854] EngR 296; (1854) 9 Exch 341; (1854) 156 ER 145. It does not, however, exclude damages being recovered under the second limb of Hadley v Baxendale, such a right being preserved by s 4(2) or s 60 of the Goods Act: see H Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1977] EWCA Civ 13; [1978] QB 791, 807; Bence Graphics International Ltd v Fasson UK Ltd [1998] QB 87.

72 The rule in Hadley v Baxendale has in more recent times been restated as a single principle requiring that, on the information available to the defendant when the contract was made, the defendant should, or a reasonable person in the defendant's position would, have realised that such a loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or loss of that kind should have been within the defendant's contemplation: Burns v MAN Automotive (Aust) Pty Ltd [1986] HCA 81; (1986) 161 CLR 653, 667; Commonwealth of Australia v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64, 92, 99.

73 In a contract for the sale of goods, where goods are defective the prima facie loss is the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had complied with the contract: Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613, 617. But that is not the only measure of loss. The question is always whether the defendant, or a reasonable person in the defendant's position, would have realised that a loss such as the plaintiff claims was sufficiently likely to flow from the breach to make it proper to hold that the loss flowed from the breach, or that such a loss should have been within the defendant's contemplation. There are many circumstances where the measure of damages will fall to be assessed on some basis other than the difference between the value of the goods at the time of delivery and their value if they had complied with the contract.

74 Thus, where it was within the reasonable contemplation of the parties at the time the contract was made that the buyer would, or probably would, resell the goods and that the sub-contract would, or probably would, contain the same or a similar condition as to the description or quality of the goods, and it was not unlikely that a breach of the condition by the seller would cause the buyer to be in breach of the sub-contract making the buyer liable in damages to the sub-buyer, the damages payable to the sub-buyer may be recovered by the buyer from the seller if it was reasonable to think that the seller was assuming responsibility for the loss: see Chitty on Contracts (30th ed vol 2, 2008) [43-463], and the authorities there cited. Where the buyer has taken reasonable steps to mitigate its loss arising from the breach, the reasonable costs of doing so may be recoverable from the seller: Chitty on Contracts [43-463].

75 There is also authority for the proposition that where the seller knows that the buyer intends to resell the goods, or to incorporate them into a product that it intends to sell, and ought reasonably to have contemplated that it was not unlikely a breach of the warranty as to conformity with description would cause the buyer to suffer loss or damage on the resale, the damages recoverable by the buyer must be related to - and may be limited by - the resale.

76 In Biggin & Co Ltd v Permanite Ltd [1951] 1 KB 422, Devlin J observed that where a subsale is not in the contemplation of the parties it cannot be used to augment or reduce the damages, but that where at the time the contract is made the parties contemplate that the purchaser will on-sell the goods and the measure of damages that is contemplated is the purchaser's liability to the ultimate user, then if the ultimate user made no complaint about a defect in the goods the purchaser cannot claim the difference in market value and disregard the subsale (436).

77 In a similar vein, in Koufos v C Czarkinow Ltd (The Herron II) [1969] 1 AC 350, in discussing the rule in Hadley v Baxendale, Lord Pearce said:

Additional or 'special' knowledge, however, may extend the horizon to include losses that are outside the natural course of events. And of course the extension of the horizon need not always increase the damages; it might introduce a knowledge of particular circumstances, eg., a subcontract, which show that the plaintiff would in fact suffer less damage than a more limited view of the circumstances might lead one to expect (416). (original emphasis)

78 In Bence Graphics, the defendants produced vinyl film which the plaintiffs used to make decals bearing words, numbers or symbols used to identify bulk containers. It was a condition of the contract that the film would remain in good condition for five years. The film was defective. The plaintiffs sold decals made with the film to container owners, who then on-sold the containers marked with the decals to other users. Some of the decals became illegible leading to complaints, but the only claim by a container owner was resolved by the plaintiffs. The plaintiffs brought an action for breach of warranty of quality against the defendants and claimed damages under s 53(3) of the Sale of Goods Act 1979 (UK) (which is in substantially the same terms as s 59(2) of the Goods Act (Vic)) for the difference in value between the goods as delivered and as warranted. The majority (Otton and Auld LJJ) held that where it had been in the contemplation of the parties at the time the warranty was given that the goods sold would be used in making a product which would then be on-sold, the proper measure of damages was based, not on the difference between the actual value of the goods on delivery to the buyer and their value if they had complied with the contract, but on the buyer's liability to subsequent or ultimate users of the product arising from the defects in the goods. That was the case whether the effect was that the damages would be higher or lower, and in the latter case it was not open to the buyer instead to elect the prima facie measure under the Act.

79 See, too, Renold Australia Pty Ltd v Fletcher Insulation (Vic) Pty Ltd [2007] VSCA 294 [22], and see generally Chitty on Contracts [43-446]; McGregor on Damages (18th ed, 2009) [7-161].

80 It is also the case that where a buyer reasonably incurs expenses as a result of the delivery of goods which did not conform to the contract description, it will be entitled to recover the reasonable amount of those expenses if it was within the reasonable contemplation of the parties at the time the contract was made that the buyer was not unlikely to incur additional expenses in the event of such a breach. Likewise, where the seller knew the buyer intended to resell the goods and ought reasonably to have contemplated that the delivery of goods which did not conform to the contract description would be not unlikely to cause the buyer to lose the profit it expected to make on the resale, the buyer may recover the lost profit: Chitty on Contracts [43-450], [43-455].

81 Similarly, where it was within the reasonable contemplation of the parties that if the goods did not conform to the contract description customers of the buyer may take their custom away from the buyer, damages may be awarded for expenses reasonably incurred by the buyer in attempting to minimise the possible loss of business: Richard Holden Ltd v Bostock & Company Ltd (1902) 18 TLR 317.

82 In considering whether in the present case the appellant was entitled to recover the damages claimed, I note at the outset that the appellant does not challenge the findings of the primary judge that:

the mosfets supplied by the respondent had a breakdown voltage of 34 volts [84];
there was no evidence that the power supply units in the security equipment were required to operate, or did operate, at 34 volts or more [91(4)];
there was no evidence that any of the mosfets in the power supply units had failed [93]; and
it had not been proved that the failure of the power supply units in the security units manufactured by DTI had been caused by the lower breakdown voltage of the mosfets. There was no evidence as to why those power supply units had failed [93], [95].

83 I should also say that there was no evidence that DTI required the appellant to use Vishay 40 volt mosfets in the power supply units. The contract between the appellant and DTI was not in evidence but it is to be inferred from Mr Warenczak's evidence that it was his decision to use Vishay 40 volt mosfets (ts 30, 85). It appears from Mr Warenczak's evidence that mosfets are typically either 30 volt or 40 volt maximum capacity and, as in this instance anything below 33 volts he described as 'borderline failure', he chose the 40 volt mosfets in order to provide a safety margin. It is not, however, evident that mosfets with a breakdown voltage of 34 volts were inadequate for the purpose.

84 In my view, the primary judge correctly rejected the appellant's claim for the cost of replacing the power supply units. The appellant replaced them, mosfets and all, at DTI's insistence because some of the power supply units had failed. The appellant did not establish that the failure of the power supply units had anything to do with the mosfets. There was also no evidence that DTI made any complaint about the mosfets or that any claim was foreshadowed or contemplated by DTI against the appellant arising out of the use of the mosfets. In the circumstances, it was not sufficient for the appellant simply to show that the mosfets did not conform to the contract description. The appellant had to prove that as a result it was entitled to damages for the cost of replacing the power supply units. It failed to do so. The cost of replacing the power supply units was not shown to be a consequence of the non-conforming mosfets.

85 In any event, in circumstances where the respondent was not informed of the use to which the mosfets were to be put, the travelling, accommodation and other costs involved in replacing the power supply units in the United States was not a loss that the respondent should reasonably have had in contemplation as a probable consequence of the breach.

86 It is necessary to turn then to the claim for the cost of engaging Pace to replace the mosfets in the modified power supply units. In my view, the respondent should reasonably have had in contemplation that such a cost would be incurred if the respondent supplied mosfets which did not conform to the contract specification. Mr Warenczak had made it clear before the contract was entered into that the appellant was particular about the brands it used because of 'horror stories' he had heard. It was apparent that Mr Warenczak was anxious to avoid using mosfets of uncertain provenance because of concerns about their quality and therefore about the possible consequences for the appellant's reputation and liability. Having then, unbeknown to it, been supplied with 'grey market' mosfets which it had installed in the power supply units, the appellant was entitled to recover the cost of replacing these mosfets with mosfets which conformed to the contract description.

87 The difficulty, however, is that the appellant did not establish at trial what that cost was.

88 As I have mentioned, on the appeal counsel for the appellant contended that the cost was the total amount of the Pace invoices in exhibit 31 (some $7,242.86). On the evidence, that could not be the case. Mr Warenczak identified the invoice dated 14 August 2007 (exhibit 25) as relating to the dispatch of the modified power supply units to the United States (ts 75). (I note that the invoice records that the air way bill is dated 31 July 2007.) However, the first of the Pace invoices is dated 22 August 2007 for 59 power supply units to be collected by the appellant that day. The rest of the invoices are dated between 13 September 2007 and 28 November 2007.

89 As with so much in this case, the actual position is obscured by inadequacies in the evidence, but, clearly enough, if the modified power supply units had been dispatched to the United States by 14 August 2007, they could not be the power supply units to which any of the Pace invoices related. Nor could the mosfets supplied by Newark have been used in those power supply units, as the appellant did not order the first batch of mosfets from Newark until 13 September 2007.

90 While Mr Warenczak gave evidence (ts 82, 83) that the Pace invoices represented the cost of replacing the mosfets in the power supply units, he did not say that the invoices (or any of them) related to the modified power supply units. In light of the period in which most of the Pace work appears to have been done, it is more likely that the invoices related to the power supply units which had been replaced in the United States and which Mr Gadellaa sent back to the appellant in Perth, and/or the power supply units which the appellant had retained. As I understand the appellant's case, no claim was made in respect of the cost of that work.

91 The onus lay on the appellant to prove both the fact and the amount of the damage: Commonwealth v Amann Aviation (80, 99, 118, 137 - 138). At trial the appellant failed to prove the cost it incurred in replacing the mosfets in the modified power supply units. There was no evidence which established the cost per unit of the work or the number of mosfets concerned, so there is no means by which any assessment of the cost could be made by this court. Any attempt to do so would be no more than guesswork and this is not a case where the court should engage in guesswork. The cost was a specific and identifiable business expense and there is nothing to suggest that precise evidence as to the cost could not have been led: see JLW (Vic) Pty Ltd v Tsiloglou [1994] VicRp 16; [1994] 1 VR 237, 241 - 242; Gerrard v Slamar [2004] WASCA 253 [32] - [34]. The appellant having failed to prove its damages at trial, I consider there is no reason why it should be afforded any further opportunity to do so: see Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd [1938] HCA 66; (1938) 61 CLR 286, 300. In my view, this aspect of the claim must also fail.

92 However, as the respondent's breach of contract was made out, the appellant was entitled to judgment for nominal damages. I would award nominal damages in the sum of $100.

93 The appellant says under this ground that the primary judge should have found that the appellant incurred costs in the sum of $77,689.30. The ground is based upon a concern that the primary judge did not make a positive finding to that effect.

94 It appears that no such finding was made because his Honour found that the appellant was not entitled to recover the cost of the work. In light of my conclusion that the primary judge was correct in that finding, it is unnecessary to consider this ground.

95 The appellant contends by this ground that the primary judge erred in finding that the appellant should pay 75% of the respondent's costs of the trial and says that, as the appellant was entitled to damages of $77,689.30, the respondent should have been ordered to pay the appellant's costs of the action.

96 This ground must fail in light of my earlier findings as to the claim for those damages. While I consider that the appellant was entitled to nominal damages, I would not disturb the orders of the primary judge on costs. The appellant's substantive claim failed and in the circumstances I consider that the orders his Honour made as to costs remain appropriate orders.

97 The respondent contended that even if the primary judge erred in finding that the appellant had failed to make out misleading or deceptive conduct on the part of the respondent, the appellant had not proved that it had suffered any loss by reason of that conduct in that it had not shown that the failure of the power supply units was caused by the mosfets supplied by the respondent. Accordingly, the claim under s 52 must fail on that ground.

98 In light of the conclusion I have reached on grounds 1 - 5, this issue does not arise for consideration. However, had it been necessary to do so, I would have upheld the notice of contention, there being no evidence that the appellant suffered any loss by the supply of mosfets which did not meet the contract description.

99 The substantive appeal must fail. But the appellant is entitled to judgment for nominal damages for breach of contract. On that basis only, I would set aside the judgment of the primary judge and enter judgment for the appellant in the sum of $100. I would not disturb the orders as to costs made by the primary judge.

100 MURPHY JA: I agree with Newnes JA in relation to grounds 1 to 5, and on the notice of contention. Save to the extent otherwise indicated I adopt, for the purposes of these reasons, his Honour's recitation of the background circumstances and the abbreviations used by his Honour.

101 My reasons in relation to grounds 6, 7 and 8 are as follows.

The learned trial judge erred in law in finding [89 to 92 of the Reasons] in effect that in order to be entitled to damages the appellant had to prove that the Security Units failed because the Mosfets Supplied were not manufactured by Vishay or because the Mosfets Supplied did not have a breakdown voltage of 40V insofar as:

6.1 the appellant was entitled to insist upon the goods supplied being in accordance with their description;

6.2 the goods supplied were not in accordance with their description;

6.3 the appellant was entitled to recover the cost incurred so that the PSU's [power supply units] did comply with the specification as such was the loss directly and naturally resulting in the ordinary course of events from the breach of warranty under section 59(2) of the Sale of Goods Act (Vic).

The learned trial judge erred in law in failing to find [paragraph 88] that the appellant had incurred costs of $77,689.30 to replace the Mosfets supplied with Vishay Mosfets in the PSU's [power supply units] delivered to GE [General Electric] insofar as:

7.1 evidence of the costs incurred was given by [the appellant];

7.2 evidence of the work performed was given by Andre Gadella [for the appellant]; and

7.3 evidence of DTI's insistence on replacement of the PSU's [power supply units] was given by ... DTI.

103 The appellant's pleaded case in contract was that:

(a) the respondent had agreed to supply a total of 7,500 mosfets (statement of claim par 4);

(ii) 2,500 mosfets on 5 March 2007 (statement of claim par 11);

(c) the mosfets supplied were not manufactured by Vishay and had a resistance of 25 volts or 30 volts, and not 40 volts, and, accordingly, the respondent was in breach of an implied condition that the goods would correspond with their description (statement of claim pars 7 and 14);

(d) by reason of the breach, the appellant had suffered loss and damage (statement of claim par 15).

104 The appellant particularised its claim to damages prior to trial in a document entitled 'Plaintiff's [appellant's] particulars of loss and damage'. It listed payments made to certain persons totalling $77,689.30 over the period 20 August 2007 to 16 May 2008. The particulars commenced with the words 'References such as "(P52)" are to the plaintiff's discovered documents'.

105 It appears, from my review of the evidence, that not all the documents referred to in the appellant's list of particulars were tendered at trial. In any event, in this appeal counsel for the appellant only drew attention to the following documents referred to in the particulars:

106 Although not referred to by counsel for the appellant, there was another 'Newark In One' invoice dated 13 September 2007 in the sum of $3,252.20.

107 The two 'Newark' invoices were for the supply of a further 5,000 Vishay 40 volt mosfets, at a total cost of $6,573.70. The original mosfets, purchased from the respondent under the contract in question, cost the appellant $5,150.

108 Mr Warenczak, the appellant's chief technology officer, gave evidence on behalf of the appellant as to why the appellant incurred the costs claimed. His evidence (ts 58 - 60) was to the effect that:

(a) Mr Warenczak held the subjective belief that the mosfets used in the power supply units sold to DTI were causing the equipment in America to 'blow up';

(b) Mr Warenczak said that DTI 'told Motium [the appellant]' that the appellant 'must send someone to America'; and

109 It was not established that Mr Warenczak had reasonable grounds for holding the belief which he held when he 'agreed' to the appellant undertaking the remedial work at the request of DTI. It was not suggested that DTI commenced proceedings against the appellant. Nor were we taken to any evidence, and I have been unable to find any evidence, to the effect that DTI wrote a letter of demand or otherwise made a formal demand on the appellant, or ever articulated any legal basis on which it was said, or could have been said, that the appellant was legally liable to DTI or General Electric.

110 To the extent that there was any negotiations over whether and if so why the appellant should undertake remedial work for the benefit of DTI, Mr Johnson, of DTI, who was called on behalf of the appellant, said that the 'discussions' or 'negotiations' had taken place primarily through DTI's 'R&D Manager' and not through him (ts 300). That person was not called as a witness.

Primary judge's findings and preliminary observations

(a) the contract required the supply of 7,500 mosfets manufactured by Vishay and with a breakdown voltage of 40 volts (reasons [16] and [76]);

(b) the respondent delivered the mosfets in two tranches, the first being 5,000 mosfets and the second being 2,500 mosfets (reasons [87] and [97]);

(d) the appellant properly rejected, and did not pay for, the second delivery of 2,500 mosfets (reasons [97]) and [102]; and

(e) the majority of the 5,000 mosfets supplied in the first delivery were installed in power supply units manufactured by the appellant, and those power supply units were then delivered to DTI, which, in turn, incorporated the power supply units into security equipment, which was sold to General Electric in America and installed in buses there (reasons [1], [87]).

112 There is no challenge to the above findings of fact.

113 In relation to his findings on damage, the judge said at [89] - [91], [92] - [96]:

In order for the plaintiff to recover damages from the defendant it must prove that by reason of the breach of these or either of these conditions (relevantly that the Mosfets were not manufactured by Vishay and or did not have a breakdown voltage of 40 volts) it suffered loss. To that end the identity of the manufacturer was not a relevant factor in the damages about which the plaintiff makes claim.

The relevant issue is whether the fact that the Mosfets did not have a breakdown voltage of 40 volts caused the plaintiff to suffer loss recoverable against the defendant.

I am not satisfied on the evidence that the plaintiff has proved that the fact that the Mosfets did not have a breakdown voltage of 40 volts was causative of the failure of the security units installed in buses or the power supply units [in America].

...

There was no evidence as to why it was that the security equipment in the buses failed or malfunctioned save for the evidence of Mr Gadella and Mr Johnson which was not other than what they had been told.

Further there was no evidence as to why it was that the power supply units which had been installed in the equipment manufactured by DTI had failed. There is no evidence that any of the Mosfets "blew up" in the power supply units.

There was no evidence as to the voltage at which the power supply units operated when it is alleged that they failed. It might be, for example that the power supply units failed at a voltage in excess of 40 volts. It may be that the power supply units failed because of a malfunction which was not associated with the Mosfets. To that end the power supply units are comprised of a number of components which were described by Mr Warenczak (T221-222).

I am left to speculate as to why it was that the security equipment and/or the power supply units failed or malfunctioned. I would have expected there to have been evidence as to these matters but there was not.

The plaintiff's claim sounds in damages. As a consequence of the finding by me that the plaintiff has not proved that it suffered loss and damage consequent upon the defendant's breach, the plaintiff's claim against the defendant must fail.

114 Three matters require mention here. First, the appellant's counsel told this court that there was no challenge to the judge's finding that the appellant had not proved that the mosfets supplied caused the problems of which General Electric had made complaint in America (ts 13). Secondly, as best as I understood counsel for the appellant's submissions, he said that the appellant did not adduce evidence at trial as to the cost (parts and labour) of replacing the mosfets, save to the following extent. He said there were a number of mosfets replaced in Perth by Pace Assembly on behalf of the appellant. As I understood it, it was said that these mosfets had been incorporated into power supply units and sold to DTI, but DTI had not yet dispatched to America the equipment containing these power supply units. These units were allegedly retrieved by the appellant and the mosfets in them were allegedly replaced by Pace Assembly in Perth. The Pace Assembly invoices, totalling $6,584.40 (exhibit 31) are said to relate to this work. Counsel also referred to one of the 'Newark' invoices. Thirdly, the judge did not find (and the appellant did not contend that the judge erred in failing to find) that the mosfets that ended up in power units in security equipment in America were replaced separately from the power supply units of which they were a part. In this regard, the evidence of Mr Gadellaa, called by the appellant, was to the effect that he went to America on behalf of the appellant, and replaced power supply units as a whole, some of which were in equipment already installed in buses and others of which were not (ts 282 - 283). The evidence was not to the effect that the mosfets alone were replaced.

115 The general principles concerning damages in respect of breach of contract were recently restated by the High Court in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; (2009) 236 CLR 272 [13] - [16]. The court said, inter alia:

The 'ruling principle', confirmed in this Court on numerous occasions, with respect to damages at common law for breach of contract is that stated by Parke B in Robinson v Harman:

The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.

Oliver J was correct to say in Radford v De Froberville that the words 'the same situation, with respect to damages, as if the contract had been performed' do not mean 'as good a financial position as if the contract had been performed' (emphasis added). In some circumstances putting the innocent party into 'the same situation ... as if the contract had been performed' will coincide with placing the party into the same financial situation. Thus, in the case of the supply of defective goods, the prima facie measure of damages is the difference in value between the contract goods and the goods supplied. But as Staughton LJ explained in Ruxley Electronics Ltd v Forsyth such a measure of damages seeks only to reflect the financial consequences of a notional transaction whereby the buyer sells the defective goods on the market and purchases the contract goods. The buyer is thus placed in the 'same situation ... as if the contract had been performed', with the loss being the difference in market value. However, in cases where the contract is not for the sale of marketable commodities, selling the defective item and purchasing an item corresponding with the contract is not possible. In such cases, diminution in value damages will not restore the innocent party to the 'same situation ... as if the contract had been performed'.

...

Oliver J in Radford v De Froberville [said]:

Now, it may be that, viewed objectively, it is not to the plaintiff's financial advantage to be supplied with the article or service which he has stipulated. It may be that another person might say that what the plaintiff has stipulated for will not serve his commercial interests so well as some other scheme or course of action. And that may be quite right. But that, surely, must be for the plaintiff to judge. Pacta sunt servanda. If he contracts for the supply of that which he thinks serves his interests - be they commercial, aesthetic or merely eccentric - then if that which is contracted for is not supplied by the other contracting party I do not see why, in principle, he should not be compensated by being provided with the cost of supplying it through someone else or in a different way, subject to the proviso, of course, that he is seeking compensation for a genuine loss and not merely using a technical breach to secure an uncovenanted profit. ...

See also Wheeler v Ecroplot Pty Ltd [2010] NSWCA 61 [75] - [81] and Willshee v Westcourt Ltd [2009] WASCA 87 [61] - [68].

116 Also, a party is not able to recover, for breach of contract, damages which the law regards as too remote. The law on remoteness is generally described in the context of the rule in Hadley v Baxendale [1854] EngR 296; (1854) 9 Exch 341; (1854) 156 ER 145. The rule has been interpreted to mean that damage is not too remote if (1) it results naturally from the breach and according to the ordinary and usual course of things (known as the' first limb' of the rule), or (2) the damage, whilst not regarded as arising in the usual course of things, is, nevertheless, damage which might reasonably be supposed to have been in the contemplation of the parties, by reason of the knowledge of some special circumstances known to them at the time of entering into the contract (known as the 'second limb' of the rule). The additional special knowledge known to both parties may widen or contract the scope of liability for breach. See Baltic Shipping Co v Dillon [1993] HCA 4; (1993) 176 CLR 344, 368. In that case, Brennan J also observed:

These rules have been merged in a single principle expressed by Lord Reid in C Czarnikow Ltd v Koufos and adopted in this Court:

The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realized that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation.

117 Prima facie, the measure of damages is the difference between the value of the goods had they conformed with the contractual description, and the value of the goods as delivered. The appellant did not put its claim on that basis, but even if it had, its damages would be, at best, very modest. It may be inferred that the value of 5,000 mosfets, had they conformed with the contractual description, would be $6,573.70 based on the 'Newark' invoices. As to the value of the 5,000 mosfets as delivered by the respondent, the appellant did not contend, or prove, that they had any particular value. Moreover, the appellant did not contend or prove that they had no value and were worthless. If it were assumed that the mosfets delivered were worthless, the difference in value would be $6,573.70.

118 Rather than claiming the difference in market value, the appellant claimed damages for the expenditure incurred at the request of DTI. In relation to this, the following observations may be made.

119 The power supply units manufactured by the appellant into which the majority of the mosfets were incorporated, were put together by Pace Assembly (ie, the same company which later allegedly replaced mosfets in certain power units in Perth before their export) and then sold to DTI. The power supply units were themselves then incorporated into other equipment by DTI prior to sale of that equipment to General Electric in the United States. Presumably, in the United States, General Electric, DTI, or another contractor installed the security equipment into the buses. At any point in that overall scheme, it is possible that either faulty workmanship or parts (beyond the mosfets) caused the difficulties with the ultimate product in America.

120 It is not contended by the appellant that it is entitled to damages in respect of the expenses incurred on the basis that some analogy is afforded by the cases in which a buyer claims a loss arising out of a sub-sale where the sub-sale is on terms containing the same or substantively the same condition as the main contract between the seller and the buyer: cf Randall v Raper [1858] EngR 575; (1858) 120 ER 438; Hammond & Co v Bussey (1887) 20 QBD 79; Kaslar and Cohen v Slavouski [1928] 1 KB 78; Biggin & Co Ltd v Permanite Ltd [1951] 1 KB 422; Dexters Ltd v Hill Crest Oil Co (Bradford) Ltd [1926] 1 KB 348. Indeed, there was no evidence of the terms of the sale of the power supply units by the appellant to DTI.

121 Nor is it contended, more broadly, that the appellant had established that it had incurred a legal liability either to DTI or General Electric by reason of the incorporation of the mosfets into the power supply units which had been on-sold and that it was entitled to damages in accordance with the reasoning of the majority in Bence Graphics International Ltd v Fasson UK Ltd [1998] QB 87. In Bence, the majority (Otton & Auld LJJ) held that the prima facie measure of damages for breach of warranty of quality, being the difference between the value of the goods at the time of delivery and the value of the goods had the warranty been fulfilled, did not apply in circumstances where the parties contemplated, at the time of giving the warranty, that the goods sold would be used in making a product which would be sold on, and the product was sold on. The majority held that in such a case the buyer's measure of damages for breach of warranty would be based on the buyer's liability to the subsequent or ultimate users of the product arising from the defects constituting the breach of the seller's warranty. Otton LJ (99) distinguished, and Auld LJ (104 - 106) disapproved of, the earlier decision of the English Court of Appeal in Slater v Hoyle & Smith Ltd [1920] 2 KB 11.

MOTIUM PTY LTD -v- ARROW ELECTRONICS AUSTRALIA PTY LTD [2011] WASCA 65 (18 March 2011)

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Judgment (252 paragraphs)

MOTIUM PTY LTD -v- ARROW ELECTRONICS AUSTRALIA PTY LTD [2011] WASCA 65 (18 March 2011)

Legislation Cited (2)

Cases Cited (17)