North East Equity Pty Ltd v Proud Nominees Pty Ltd

Federal Court of Australia|2010-07-06|Before: Rares J

REASONS FOR JUDGMENT 1 I delivered my principal reasons after the trial of these proceedings on 12 August 2008 (North East Equity Pty Ltd v Proud Nominees Pty Ltd (No 2) [2008] FCA 1189) (my principal reasons). After directing the parties to address on the relief that flowed from them, I made orders on 2 September 2008 dismissing, among other things, North East Equity's claim with costs and permitting the parties to set off their respective costs orders (North East Equity Pty Ltd v Proud Nominees Pty Ltd (No 3) [2008] FCA 1430). In these reasons I will use the same nomenclature as I did in my principal reasons. 2 On 8 June 2010 the Full Court set aside those orders and ordered that the proceedings be remitted to me to formulate my reasons for my conclusion that s 51A of the Trade Practices Act 1974 (Cth) did not assist North East Equity and, if necessary, to further consider the question of damages: North East Equity Pty Ltd v Proud Nominees Pty Ltd [2010] FCAFC 60 (the appeal judgment). The Full Court said that the questions concerning damages did not arise if I were satisfied that Proud Nominees and Mr Proud had adduced some evidence to the contrary for the purposes of s 51A(2) and that North East Equity had failed to establish that Proud Nominees and Mr Proud did not have reasonable grounds for making the representations within the meaning of s 51A(1) of the Act: the appeal judgment [2010] FCAFC 60 at [180].

Proud Nominees' and Mr Proud's grounds for making the representations as to future matters 6 I had summarised the basis on which Proud Nominees and Mr Proud contended that they had reasonable grounds for making the representations as to further matters in an interlocutory ruling in respect of s 51A that I made during the trial: North East Equity Pty Ltd v Proud Nominees Pty Ltd [2007] FCA 1587 at [22]-[24]. In essence their contentions for them having such reasonable grounds were: "(1) Mr Proud's statement of his education and training. (2) Previous dealings between Proud Machinery and Mr Proud on the one hand, and North East Equity and Mr Tana on the other. (3) Mr Proud's knowledge of previous grading facilities at North East Equity's Sumich operation. (4) Mr Proud's knowledge and experience of a Bruynooghe system installed at the Kalfresh plant in Queensland. (5) Mr Proud's dealings with the Bruynooghe factory in Belgium. (6) Mr Proud's knowledge of the equipment at Sumich to be incorporated in the new production line. (7) Mr Proud's activities as agent for Bruynooghe and another manufacturer of packaging equipment used in the new production line, Gillenkirch, and his knowledge of the capacities of the equipment supplied by each of those manufacturers. (8) Matter disclosed in the two letters said to contain the representations sued on, namely, his and Proud Machinery's letters of 29 July 2002 and 30 September 2002. (9) The respondents also rely on the contents of one paragraph in Mr Tana's evidence in which he said: 'I agree that these machines may have this capacity in isolation, however when incorporated into a complex system they are not necessarily able to run at these capacities all of the time. The key to the actual operating capacity of each machine in the new line is the feed to it. The maximum design capacity is irrelevant unless the line can provide sufficient feed to the machine.' (10) Lastly, the respondents relied on the responsive statement of an expert called by the North East Equity, Mr David Harris, in the sense that he was asked to review Mr Proud's statement, and to 'provide any comment that he may have as to the matters raised'." 7 After hearing all the evidence and submissions, I was satisfied that Mr Proud had a sufficient and sound knowledge of the configuration, workings and general operation of North East Equity's grading facilities (the old line) existing at the time at which the representations were made, and of the operation of the Bruynooghe system installed at the Kalfresh plant. I was also satisfied that Mr Proud had extensive practical experience, built up over many years, from the time he was working towards qualifying for his diploma of mechanical engineering that he was awarded in 1970. He had experience in the early to mid 1970s as first, a fitter and turner and, later as a line manager before becoming involved in selling cars from 1976 to 1995. Since 1996 he had been the managing director of Proud Machinery. 8 I found Mr Proud was experienced in how production plants in the food processing industry operated (my principal reasons [2008] FCA 1189 [79]). He had done many courses including with Newtec, Gillenkirch and Bruynooghe to familiarise himself with his suppliers' equipment, and the operation of fruit and vegetable washing, grading and packing equipment and plants, including sophisticated ones of the kind he was discussing with Mr Tana. He had supplied a considerable number of machines, equipment and plants in the six years before the representations were made. This included supplying, over a period, 10 items of equipment to North East Equity that were used in the old line. He was, as I found, familiar with how Mr Tana and Mr Webster proposed to operate the new line with a split shift and why that was to be done: my principal reasons [2008] FCA 1189 [31]-[38]. 9 I found that a number of the representations that were made did not correspond to the pleaded case of North East Equity. That was because I found that each of those was qualified by an implication that the new line would be reasonably fit for the purpose that North East Equity had specified, in an unqualified way, in its pleaded representations. Thus, those pleaded representations were not proved and needed no consideration under s 51A. I did consider the factual questions relating to whether the new line was deficient in those respects, lest my findings were incorrect. But, no issue under s 51A arose, on the pleadings, because I had found that those pleaded representations were not made. 10 The Full Court upheld my findings as to the actual representations that I found were made. I considered then, and now, that no issue under s 51A could arise on the pleaded case in respect of those representations because the unqualified representations pleaded by North East Equity were not made by the respondents. I also considered that the claim under s 51A was hopeless on my findings because the new line performed (or was not shown not to have performed) to the standard of the representations I had found. 11 I considered each relevant representation in my principal reasons: [2008] FCA 1189 at [345]. For ease of comprehension of these reasons I will repeat that paragraph below and analyse the representations as to future matters by reference to the five categories identified in that paragraph. I will then explain why Proud Nominees and Mr Proud had adduced evidence to the contrary for the purposes of s 51A(2) so that they were not deemed not to have reasonable grounds for making the representations as to future matters. The onus of proof then shifted to North East Equity to establish that Proud Nominees and Mr Proud did not have reasonable grounds for each such representation, as the Full Court confirmed: [2010] FCAFC 60 at [35]. In my principal reasons ([2008] FCA 1189 at [345]) I said: "[345] I summarise below the contractual terms and representations which I have found Proud Machinery made to North East Equity and my findings on them. In analysing whether the new line, as installed, conformed with the purposes and terms referred to in 66-(e) above, I have had regard to the implication that the new line would be reasonably fit for those purposes (Helicopter Sales 132 CLR at 4, 6, 8, 15: see [64]-[66] above). (1) Pack out rate per hour I have not found that terms or representations were made exactly corresponding to those pleaded and set out at 66 and 67 above. Rather I have found (at [87] above) that, at the time of entry into the contract, the processing capacity was contained in a term and representation that: the new line would have the capacity to process and pack at a rate of production per operating hour of 18.75 tonnes final pack out on the pallet (later reduced to 17.55 tonnes). For the reasons given above, I am not satisfied that this was incorrect or misleading or deceptive. The new line had that capacity. And, by operating a split shift, the new line had the capacity to achieve a pack out in excess of 150 or, later (after the handline was deleted), 140.4 tonnes in eight working hours. (2) Temperature I have found that terms and representations were made which corresponded to those pleaded and set out at 66, (c) and 67 and 102 and (v), namely that the new line would, first, be designed so as to be reasonably fit to achieve: (b) the ability to process farm fresh carrots at field temperatures; (c) the core temperature of packed carrots to be not more than 5°C; and secondly, (h) achieve a guaranteed maximum of 5°C core temperature for North East Equity's carrots; (iii) have hydro-cooling tanks capable of producing constant product output; and (v) be capable of controlling the temperature of the carrots. I have found that I am not satisfied that the new line did not have these capacities if operated correctly. (3) Grading I have found terms and representations were made that corresponded to those pleaded and set out at 66 and [102] (ii) and (iv), namely that the new line would, first, be designed so as to be reasonably fit to achieve: (d) the ability to sort and grade carrots into eight distinct streams of size and length grades; and secondly, (ii) have nine hydro-cooling tanks which would allow one of those tanks for each length or size grade and provide the opportunity to have a spare tank; and (iv) provide quality length sizing for three separate lengths. I have found that I am not satisfied that the length graders (there being no complaint about the width or girth graders) were not reasonably fit for the purpose of providing quality length sizing in accordance with what both parties understood were their inherent limitations. I am not satisfied that the new line was not reasonably fit for the purpose of having the ability to sort and grade carrots into eight different streams of length and size. I am satisfied that the hydro cooling tanks conformed with representation (ii). (4) Efficiency I have found that terms and representations were made that corresponded to those pleaded and set out at 66 and 102, namely that the new line would first, be designed so as to be reasonably fit to: (e) achieve an increase in efficiency of labour usage compared to the existing Sumich line; and secondly, (vii) increase production while reducing the man hours required to achieve that production compared to the existing at the Wattleup plant line. I am satisfied that these were correct. As Mr Tana admitted in the meeting of 18 November 2003, labour costs per carton had reduced by 25% or more. (5) Reduction in damage to carrots I have found that a representation was made that corresponded to that pleaded and set out in 102 namely that the new line would greatly reduce damage to carrots and wastage. I am not satisfied that this was incorrect, misleading or deceptive. In any event there were no records of waste or damage to carrots so as to enable any finding to be made as to the position before or after the new line was installed. And, the quality of carrots delivered for processing after the new line was installed was very different from, and worse than, their earlier quality. North East Equity has not established that this representation was not met."

(1) Pack out rate per hour 12 In my principal reasons I found that both Mr Tana and Mr Proud knew the limitations on the brush washers and both had understood what was represented (in the sense I found) was that the new line would pack out at 18.75 tonnes per hour if operated in the way I found: [2008] FCA 1189 at [73]-[87]; see too at [88]-[91]. I said: "[87] I am not satisfied that North East Equity has established its pleaded allegations that Proud Nominees entered into a contract which included a term or represented that the new line would have '… the capacity to process and pack in excess of 150 tonnes of carrots in an 8 hour working day (being equivalent to 18.75 tonnes per hour)' (sub-par (a)) in the sense of a continuous day. Nor am I satisfied that the alleged term or representation in sub-par (g) existed in that sense. Rather, I find that, at the time of entry into the contract, there was a term or a representation that the new line would have the capacity to process and pack at a rate of production per operating hour of 18.75 tonnes in terms of final pack out on the pallet. This later reduced to 17.55 tonnes, once Mr Tana deleted the handline." (emphasis added) 13 As the emphasised words made clear, North East Equity had failed to prove its pleaded case on these representations and so I considered that s 51A had no relevance. But, in any event, Proud Nominees and Mr Proud had adduced evidence as to the basis on which the representations about the pack out rate were made. This included the use of a split shift and the operation of the new line as contemplated in Mr Webster's memorandum of 1 August 2002, having regard to the operating capacities of the equipment in the new line that I described in my principal reasons [2008] FCA 1189 at [73]-[91]. Mr Proud also had set out the basis of his calculations in his letter of 30 September 2002 as the Full Court noted: appeal judgment [2010] FCAFC 60 at [34]-[35]. 14 North East Equity failed to prove that Proud Nominees and Mr Proud did not have reasonable grounds to make these representations. First, Mr Proud made them in the context of the above evidence. Secondly, given that I found that the new line had the capacity represented, he was right. On the evidence at the trial, there was no credible basis to suggest that he (and Proud Nominees) did not have reasonable grounds to make those correct representations (cf [2008] FCA 1189 at [246]).

(2) Temperature 15 I found that representations were made corresponding to those pleaded (my principal reasons [2008] FCA 1189 at [92]-[99], [113]-[115], [117], [120]-[122]). Mr Proud had worked with Mr North in providing the new refrigeration system to Kalfresh. I found that Mr Proud had worked there with Mr North in circumstances where Mr North had been responsible for the design of both the refrigeration system for the Kalfresh plant and its control software. That plant also had nine cooling tanks, albeit located in an insulated room. However, it was different, and would operate in different circumstances, from the new line. Mr Proud told Mr North that Bruynooghe would be responsible for providing the control logic software for its system (my principal reasons [2008] FCA 1189 at [143]-[145]). 16 At the time that these representations were made, Mr Proud's past experience with Mr North and Kalfresh in the design and provision of a refrigeration system in a carrot processing plant, as well as Mr Proud's general experience, his awareness of the old line, the characteristics of the equipment to be used in the new line and competence of its suppliers, including Bruynooghe, were sufficient evidence to cast the onus imposed by s 51A(1) on North East Equity. 17 I found that the new plant was reasonably capable of processing carrots at 5°C or less, even if there were a small risk (that in any event was unlikely to affect the quality of the turn out in any material way) that a few carrots in the smaller volume sizes might slip through the system without having been chilled at 5°C (my principal reasons [2008] FCA 1189 at [324]). I was not satisfied that the refrigeration system did not operate in accordance with its contractual and represented capacity ([2008] FCA 1189 at [302]; see too at [174]-[175], [265]). And my finding as to the capacity of the new plant suggested (as I find was the case) that the skill and judgment Mr Proud had exercised in recommending the equipment and in making the representations as to temperature had a reasonable basis when Proud Nominees and Mr Proud made them. 18 In that context, it was significant when I examined the evidence, that the new line operated under conditions, and with carrots of a quality, that were materially differently from what had been contemplated at the time of the contract and representations. The quality of carrots was worse, the volume of reject carrots processed was greater and North East Equity did not have competent personnel operating the new line. I found that those were significant additional constraints on the contemplated operation of the new line that adversely affected it (my principal reasons [2008] FCA 1189 at [164]-[167], [238]-[240], [247], [250]-[252], [256], [279]-[280]). 19 Nonetheless, after both the test was conducted and the meeting held on 18 November 2003, Mr Tana had only four substantive complaints, none of which concerned refrigeration issues (my principal reasons [2008] 1189 at [295], [302]). Having regard to these matters, North East Equity failed to prove that Proud Machinery and Mr Proud did not have reasonable grounds for making these representations.

(3) Grading 20 I found that the length sizing or grading machines were of a standard acceptable in the industry at the time they were supplied (my principal reasons [2008] 1189 at [327]-[330], [116]). They worked as Mr Tana understood the representations were conveying they would work, as I found. Mr Proud had a similar understanding to Mr Tana of the inherent imperfections of length graders: [2008] FCA 1189 [327]-[329]. 21 Accordingly, North East Equity did not prove that Proud Machinery and Mr Proud did not have reasonable grounds for making the representations concerning the length graders. 22 I also found that the parties knew at the time that the contract and representations were made, that the sizes of the carrots delivered for processing on the new line affected its capacity. This was obvious ([2008] FCA 1189 at [320]-[330]). I was not satisfied that the new line was not reasonably fit for the purpose of having the ability to sort and grade carrots into eight different streams of length and size. I was not satisfied that Proud Machinery and Mr Proud did not have reasonable grounds to make representations about what the new line would be capable of processing. The parties understood that the performance and speed of the new line on any occasion depended on what volumes, quality, types and sizes of carrots were fed into it and how that input was managed in operating it: my principal reasons [2008] FCA 1189 at [115], [254], [315], [331]-[341]. 23 As I found, a representation was made that the hydro-cooling tanks could be controlled in a way that would make them capable of producing a constant product output for the packing line ([2008] FCA 1189 at [115]). And, it was obvious that by including the supply and installation of nine hydro-cooler tanks as part of the new line there was a reasonable basis to make the representations that it would have those tanks and that this would allow one of those tanks to be available for each length or size to be graded and provide the opportunity for a spare tank to be available. 24 It follows that North East Equity failed to discharge its onus of proof under s 51A in respect of the group of grading representations.

(4) Efficiency 25 I found that these representations were correct. As Mr Tana said at the meeting of 18 November 2003, labour costs had reduced by 25% or more: [2008] FCA 1189 at [290], [345(4)]. The automation proposed by Proud Nominees and Mr Proud for the new line, as they would have appreciated, would be very likely to reduce the number of employees North East Equity needed to work at the new line. So much was obvious. North East Equity failed to show that those representations had no reasonable basis. This plea raised a false issue. It was not necessary to deal in any detail with these representations in light of Mr Tana's admission.

(5) Reduction in damage to carrots 26 I found that I was not satisfied that this representation was incorrect, misleading or deceptive. 27 North East Equity pleaded in par 17 of its further re-amended statement of claim that this representation was false. It did not plead specifically why it was false. Rather, North East Equity pleaded in par 17(d) only that: "The opportunities for mechanical damage to carrots within the New Line have not been reduced." 28 In par 17.5 of their pleaded defence, Proud Nominees and Mr Proud asserted that the new line was fitted with extensive amounts of rubber padding to cushion the carrots from mechanical damage or the effect of them dropping as they passed along the new line. They also pleaded that the new line substantially decreased the risk of damage to carrots by eliminating the previous practice of putting the carrots into bins made of rough hewn sawn timber to be stored in the cool rooms pending packing. Otherwise they denied par 17(d). In its reply, North East Equity admitted that the rubber padding was added to various locations in the new line by it and the respondents after installation, but asserted that the opportunities for mechanical damage had not been reduced. 29 The parties' statements of issues and their written and oral submissions did not address this representation specifically at all. Mr Proud gave unchallenged written evidence that there had been considerable wastage in the old line because class 2 carrots had been removed from it during processing and placed once again in the wooden bins or crates. (I had found that these held about 410 kg of carrots: my principal reasons [2008] FCA 1189 at [181].) Those carrots initially, had been tipped with all the other carrots from wooden crates or bins into the beginning of the old line before being graded out and placed back into the bins. Mr Proud said that the bins with the class 2 carrots were taken into cool rooms, later brought back to the old line and the carrots were then tipped out of the bins a second time to be packed. He said that this double handling (i.e. tipping) greatly increased the damage to the carrots. Although Mr Tana responded in his written evidence specifically to this written evidence of Mr Proud, he did not deny what Mr Proud had said. Rather, Mr Tana merely described the new line's method of handling class 2 carrots without suggesting whether this caused any damage to them. All that Mr Tana said there or otherwise on the topic was: "The system for handling class 2 carrots in the new line is that they are graded out at the grading tables and thrown down chutes on the grading tables that go to a conveyor that takes the class 2 carrots to two Wyma wet hoppers where they are stored until they can be packed by machines 7 or 8." 30 Thus, the class 2 carrots held in the wet hoppers on the new line were not tipped with 410 kgs of other carrots back into the new line, as they had been on the old line. 31 North East Equity's pleaded basis of falsity, namely that the opportunities for mechanical damage to carrots within the new line had not been reduced, was different from the terms of its pleaded representation. Mr Proud gave evidence of the basis of his and his company's representation that was not confined to, or delimited by, mechanical damage. That basis gave him sufficient facts or circumstances existing at the time the representation was made on which (I find) he relied that were objectively reasonable and supported the actual representation that the respondents made: Sykes v Reserve Bank of Australia (1998) 88 FCR 511 at 513F-G per Heerey J, Sundberg J agreeing at 521F; see too North East Equity [2007] FCA 1587 at [15]. 32 Thus, Proud Nominees and Mr Proud led evidence of his knowledge of the previous grading facilities on the old line. That evidence was uncontested and accurate in dealing with a cause of damage to class 2 carrots by their double handling as a result of being put into, and later tipped out of, 410 kg bins a second time on the old line. He knew that the new line eliminated this element of processing and involved one continuous operation for grading all carrots introduced into it. In addition, he had knowledge and experience of the quality of his suppliers' equipment for the new line and of its fitness for its purpose as well as his experience at the Kalfresh plant in respect of that plant's handling of carrots. 33 As I found there were no records of waste or damage to carrots in evidence so as to enable any finding to be made as to the position before or after the new line was installed (my principal reasons [2008] FCA 1189 at [345(5)]). North East Equity failed to prove that Proud Nominees and Mr Proud did not have reasonable grounds for making this particular representation. 34 In addition, s 51A(2) requires consideration of the representor's state of mind at the time at which he, she or it made the representation. Mr Tana gave written evidence that carrots are susceptible to damage during all stages of processing by breaking, scratching, chipping or gouging. He asserted there that the old line rarely caused significant damage to carrots while they were being processed and that it was "effective and gentle on carrots". Thus, he too must have understood the representation to be referring to the elimination of the use of the 410 kg bins to store, and then re-tip, class 2 carrots that had been sorted after being introduced into the old line, as Mr Proud stated in his evidence. The new line would eliminate that method of double handling and, importantly, the tipping of class 2 carrots a second time from the heavy 410 kg bins into a place where they would commence being finally sorted and packed. North East Equity did not prove that Proud Nominees or Mr Proud lacked reasonable grounds for making this representation.

Conclusion 35 For these reasons, North East Equity's case under s 51A failed. The Full Court recognised that this conclusion would make it unnecessary for me to revisit the damages questions: [2010] FCAFC 60 at [180]. It follows that the orders that I made, which the Full Court set aside in order that I could consider the matters remitted, should be restored. I will so order.

Application to hear further address 36 When this matter was called for judgment today, North East Equity objected to me giving these reasons without it being afforded an opportunity to put further argument to me on the remitter. Order 2 made by the Full Court on 8 June 2010 relevantly provided: "… the matter be remitted to primary judge for: (a) the formulation of reasons for his conclusion that s 51A of the Trade Practices Act 1974 (Cth) did not assist the appellant …" 37 As that order made clear, the remitter was for the purpose of the provision of my reasons for the conclusion I had reached on the s 51A claims when I delivered my reasons on 12 August 2008: my principal reasons [2008] FCA 1189 at [346]. There, I said that "on the findings I have made, it is not necessary to consider these claims". The Full Court's order for remittal of the matter was not expressed to permit the parties to re-open their cases or their submissions. 38 No submissions were made by any party between 12 August 2008 and 2 September 2008 that I ought to have dealt with the s 51A claims or inviting me to do so at a time when no final orders had been made. 39 I am of opinion that the terms of the remitter that I have set out above do not provide for the parties to address now, on the formulation of my reasons, why consideration of the operation of s 51A would not have altered my conclusion that Proud Nominees and Mr Proud had not contravened s 52 of the Act in the sense explained by French J in Fubilan Catering Services Ltd v Compass Group (Australia) Pty Ltd [2007] FCA 1205 at [545] and [548] that were approved by the Full Court in the appeal judgment: [2010] FCAFC 60 at [29]-[33]. 40 I have explained above at [7]-[10] why I considered that Proud Nominees and Mr Proud had adduced enough evidence to cast the onus of proof under s 51A onto North East Equity and why, substantively, it had failed to show that the representations were incorrect; indeed I found some to have been true. I have also explained at greater length why I considered that there was no substance in North East Equity's s 51A claims. It is not necessary or appropriate to allow it to address on them further, nearly three years after it closed its case at the trial. For these reasons, I reject its application to make further submissions. I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.

Trade Practices Act 1974(Cth)

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