Pangallo Estate Pty Ltd & ors v Killara 10 Pty Ltd

LEGISLATION CITED : (NSW) Civil Procedure Act 2005, s 93

Associated Alloys Pty Ltd v Metropolitan Engineering & Fabrications Pty Ltd (1996) 20 ACSR 205 Caltex Oil (Australia) Pty Ltd v The Dredge "Willemstad" (1976) 136 CLR 529 Chapman Bros v Verco Bros & Co Ltd (1933) 49 CLR 306 Commissioner of Internal Revenue v San Carlos Milling Co Ltd (1933) 63 F (2d) 153 Deta Nominees Pty Ltd v Viscount Plastic Products Pty Ltd [1979] VR 167 Farnsworth v Federal Commissioner of Taxation (1949) 78 CLR 504 Kansas Flour Mills Co v Board of Commissioners of Harper County (1927) 54 Am LR 1164 Lamkin v RH Binder Pty Ltd (1984) ASC 55-354 CASES CITED : Lee v Griffin (1861) 121 ER 716 Re S Davis & Company Ltd [1945] Ch 402 South Australian Insurance Co v Randell (1869) LR 3 PC 101 Texts: Corpus Juris Secundum Halsbury's Laws of England N E Palmer, Bailment Sackville & Neave, Property Law Williston on Contracts

Pangallo Estate Pty Ltd (first plaintiff) PARTIES : Pasquale Barbalace (second plaintiff) Vanda Barbalace (third plaintiff) Killara 10 Pty Ltd (defendant)

COUNSEL : Mr G Sirtes (plaintiffs) Mr D Allen (defendant)

SOLICITORS : Cara Marasco & Co (plaintiffs) Catalyst Legal (defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EXPEDITION LIST

4665/07 Pangallo Estate Pty Ltd & 2 ors v Killara 10 Pty Ltd JUDGMENT (ex tempore) 1 HIS HONOUR: By summons filed on 20 September 2007 the plaintiffs Pangallo Estate Pty Limited, Mr Pasquale Barbalace and Ms Vanda Barbalace claim against the defendant Killara 10 Pty Limited a declaration that Killara 10 has no ownership or immediate right to possession of various wines then said to be situate at Killara 10's winery; an order pursuant to (NSW) Civil Procedure Act 2005, s 93, for delivery up of those wines; and, alternatively, damages for conversion. Under interlocutory arrangements made between the parties, such of the wines as Killara 10 accepts were then in the winery have been delivered up to the plaintiffs, leaving for determination whether the plaintiffs were the true owners of the wines and thus entitled to them; if not, they must account for the proceeds to Killara 10. The essential issues are:

(1) Whether the plaintiffs delivered their grapes to the winemaker Letitia Cecchini - who occupied the winery as tenant under lease from Killara 10 - under a contract of bailment for labour and works (in which case the plaintiffs retained title) or whether they sold their grapes to her for resale back to the plaintiffs once made into wine (in which case there was a passing of title to Ms Cecchini);

(2) If the grapes were sold to Ms Cecchini, so that title passed to her, then whether Killara 10 acquired them upon forfeiture of Ms Cecchini's leasehold interest for default under the lease;

(3) If the wines remained the property of the plaintiffs, then whether the wines claimed by the plaintiffs but not delivered up under the interlocutory arrangements have been converted by Killara 10. Background 2 Each of the plaintiffs is the proprietor of a vineyard in the Hunter Valley, on which they grew grapes. 3 On 9 February 2005, Killara 10 granted Ms Cecchini a lease for a term of five years of premises at 1210 Hermitage Road, Pokolbin, where she operated as a winery in which she made wines from grapes delivered to those premises. Situate in that winery were 35 stainless steel tanks of varying capacity, numbered for identification. 4 The plaintiffs (and other growers) made arrangements with Ms Cecchini for the delivery of their grapes to the winery, the processing of those grapes by Ms Cecchini into wine, and the return to the growers of the wine for sale under the grower's names. The evidence of Mr Pangallo, Mr Barbalace and Ms Cecchini as to the arrangements between them is essentially consistent: in particular, that Ms Cecchini would receive the grapes, crush them and make the wine, so that the wine could then be bottled and sold under the label of Mr Pangallo or the Barbalaces as the case may be; if the growers wished, the wine could be removed for bottling elsewhere; Ms Cecchini would charge a fee based on the tonnage of grapes delivered. 5 These arrangements took place from 2003 in the case of Mr Pangallo and 2004 onwards in the case of the Barbalaces. Each year they delivered grapes which Ms Cecchini crushed and turned into wine, which was then sold by the growers under their own names and for their own benefit. Each year Ms Cecchini rendered an invoice, for what the invoice described "contract winemaking charges" for certain tonnages of grapes; in most cases, the invoice provided for payment by monthly instalments.

6 On or about 23 February 2007, Pangallo delivered to Ms Cecchini's winery 19.796 tonnes of Shiraz grapes and 9.24 tonnes of Zibbibo grapes, which were processed that day by Ms Cecchini. On 6 March 2007 Ms Cecchini rendered an invoice for "contract winemaking charges for 19.796 tonnes of Shiraz grapes processed on 23 February 2007 at $950/tonne (excl GST) and contract winemaking charges for 9.24 tones of Zibbibo grapes at $950/tonne (excl GST)", with provision for a discount and twelve instalment payments. 7 Mr Barbalace delivered to Ms Cecchini's winery 20.67 tonnes of Summerville Verdelho grapes on 28 January 2007, 21.783 tonnes of Summerville Chardonnay grapes on 29 January 2007, and 20.851 tonnes of Summerville Shiraz grapes on 10 February 2007. She issued an invoice on 10 February 2007 for "contract winemaking charges" at $900 a tonne in respect of them. On 5 March 2007 she provided Mr Barbalace with a stocktake of his wines held at that date, as follows: 2005 Summerville Shiraz 14 oak barriques = 3,150 litres approx 2006 Summerville Shiraz 16 oak barriques = 3,600 litres approx 2006 Chardonnay: approx 12,000 litres 2005 Chardonnay: approx 2,800 litres 2006 Verdelho: approx 3,350 litres Differences in volumes from last stocktake explained in header letter. The 2005 Chardonnay and the 2006 Chardonnay has been "mixed" together. There is a straight 2006 Chardonnay, which won the medal, the 12,000 litre batch. I recommend that the 2006 Verdelho be backblended with the 07 Verdelho, as it is looking tired in the tank. Same with the Chardonnays. I would be bottling the 2006 Chardonnay. At least half of the volume, as it is looking tired in the tank. 8 On or about 29 August 2007 Mr Pangallo contacted Ms Cecchini to make arrangements to collect some wine for bottling. Ms Cecchini told him that she had been evicted from the winery and was not in a possession to release any wine. He contacted Mr Orr, the manager of Killara 10, who would not permit him to remove the wine. Subsequent attempts to collect the wine were unsuccessful until the interlocutory arrangements to which I have referred were made. 9 The grapes delivered by Barbalace and Pangallo Estates were crushed separately and stored into separate tanks according to their variety in the course of the winemaking process. 10 Killara 10 took possession of the winery on Monday 20 August 2007. Bailment, or sale and resale?

11 Mr Allen cites Sackville & Neave's Property Law (7th Ed), paragraph 4.5 for the proposition that if goods owned by A are changed by B's manufacturing process into an entirely different object, so that the original goods can no longer be identified (for example, as wheat is converted into bread), the new object is owned by B.

12 As will become apparent from the authorities discussed below, that proposition states the position rather too widely. Whether a farmer loses title to wheat upon a baker turning it into bread depends, fundamentally, on the legal relationship between the farmer and the baker, which may be a contract for sale of goods, or may be a contract for services. Some of the complexities are adverted to by Bryson J in Associated Alloys Pty Ltd v Metropolitan Engineering & Fabrications Pty Ltd (1996) 20 ACSR 205, (at 209): The question whether goods which have been used in some manufacturing process still exist in the goods produced by that process, or have gone out of existence on being incorporated in the derived product is, in my opinion, a question of fact and degree not susceptible of much exposition. When wheat is ground into flour it is reasonably open to debate whether the wheat continues to exist; when flour is baked into bread there could be little doubt that the flour does not. Many examples might be encountered or imagined, and each must be addressed separately. Where goods of a homogenous character are mixed co-ownership might be a correct conclusion; but that is a problem of a different kind. There is some discussion in the judgment of Bridge LJ in Borden (UK) Ltd v Scottish Timber Products Ltd [1981] 1 Ch 25 at 41; [1979] 3 All ER 961, addressing "a mixture of heterogeneous goods in a manufacturing process wherein the original goods lose their character and what emerges is a wholly new product …". Goff LJ in Clough Mill Ltd v Martin [1985] 1 WLR 111 at 119; [1984] 3 All ER 982 said: "Now it is no doubt true that, where A's material is lawfully used by B to create new goods, whether or not B incorporates other material of his own, the property in the new goods will generally vest in B, at least where the goods are not reducible to the original materials: see Blackstone's Commentaries , 17th Ed (1830), vol 2, at 404-5." 13 It is well established that a bailment may involve an obligation to return the goods in an altered form. Halsbury's Laws of England, 2nd edition, cites the definition of bailment in Bacon's Abridgment, in which it was said (emphasis added): A bailment, properly so called, is a delivery of personal chattels in trust, on a contract, express or implied, that the trust shall be duly executed, and the chattels redelivered in either their original or an altered form , as soon as the time or use for, or condition on which they were bailed, shall have elapsed or been performed. 14 This statement was cited by Cohen J in Re S Davis & Company Ltd [1945] Ch 402 (at 405). The same concept is apparent in the judgments of Rich and Starke JJ in Chapman Bros v Verco Bros & Co Ltd (1933) 49 CLR 306. Rich J said (at 314) (emphasis added): The arrangement is inconsistent with the very idea of bailment according to English law, which involves the redelivery of a specific thing in its original or some altered form to the bailor or to some other person in accordance with the terms of the bailment.

15 Starke J said (at 316) (emphasis added): If the identical subject-matter is to be restored, either as it stood or in altered form , the case is one of bailment. If, on the other hand, the identical subject-matter, either as it stood or in altered form, is not to be returned, but a different thing of equal quantity and quality may be given as an equivalent, then a bailment is not created; it is a transfer of property, and the title to the thing originally delivered vests in the transferee. 16 In Palmer's seminal work on Bailment, the author wrote (2nd Ed, at 135) (emphasis added): The essence of bailment is that the bailed property should be returned to the bailor or applied in accordance with his instructions when the bailment terminates. The goods need not be in their precise original form when this event occurs in order for the transaction to qualify as a bailment ; if this rule were imposed, it would remove many bailments (such as those for repair or alteration) from the sphere of that relation altogether. What is necessary is that the goods themselves, whether in altered or original form , should be returnable and not merely some other goods of equivalent character or value [citing Chapman Brothers v Verco Brothers ]. There must be a clear physical heredity between what has been delivered to the bailee and what must be returned.

17 The author continued (at 145): Whether or not a transaction of this kind is to be construed as a bailment locatio operis faciendi or as a sale and resale clearly depends upon the intention of the parties; the relative value of the materials supplied and the method of computing the cost of the work are clearly material factors.

18 In Deta Nominees Pty Ltd v Viscount Plastic Products Pty Ltd [1979] VR 167, Fullagar J referred to many of the authorities in this field and held that where there is a contract to manufacture goods and deliver them in the form of a chattel that will be a contract for sale of goods and not a contract for services. However, what his Honour said - in particular at 183 - admits of a distinction between a case where work is to be performed by the workman on the other party's material to make an article for the other party, and one where work is to be performed by the workman on his own materials for delivery to the other party.

19 Moreover, in Caltex Oil (Australia) Pty Ltd v The Dredge "Willemstad" (1976) 136 CLR 529 (not referred to in Deta Nominees, unsurprisingly as it was decided only days earlier), Stephen J said (at 561): It was no doubt in the light of these circumstances that counsel for Caltex was able to announce, in the course of the trial, that the parties agreed that the practice was to allocate oil at the refinery, the oil in the pipelines at the time of their fracture having been allocated to Caltex; thus while risk remained with AOR until delivery to the Caltex terminal ownership was in Caltex. In the course of that announcement reference was made to property having passed to Caltex; however, from the agreement, the terms of which will be decisive as to title ( Williston on Contracts 3rd Ed, vol 9, par 1030) it would appear that in fact property never left Caltex; the transaction was one of bailment, rather than of a sale and a subsequent buying back, that type of bailment commonly described as the hire of work and labour, locatio operis faciendi (Halsbury's Laws of England 4th Ed, vol 2, par 1562). The situation as to title which the agreement created is different both from that of the wheat considered in South Australian Insurance Co v Randell (1869) LR 3 PC 101 and in Chapman v Verco and from that of the fruit in Farnsworth v Federal Commissioner of Taxation (1949) 78 CLR 504. It approaches most closely to the position referred to in Corpus Juris Secundum vol 8, pp 345-6, where a reading of the cases there cited shows that in the case of fungible goods their commingling and manufacture into other products which are to be returned to the original owner may, if the parties so intend, be consistent with a bailment, property never leaving the bailor (see generally the annotation to Kansas Flour Mills Co v Board of Commissioners of Harper County (1927) 54 Am LR 1164 and Commissioner of Internal Revenue v San Carlos Milling Co Ltd (1933) 63 F (2d) 153).

20 This passage makes clear that in the case of fungible goods, their commingling, or their manufacture into other products to be returned to the original owner, does not result in property passing from the original owner, if the parties' intent is consistent with a bailment. Accordingly, the intent of the parties in ultimately determinative. 21 Lamkin v RH Binder Pty Ltd (1984) ASC 55-354 was concerned with a contract for the manufacture of wine by a contractor from wines supplied by the grower. The grower complained that the wines were not of good saleable quality. The trial judge found for the winemaker, on the basis that the case was one of "caveat emptor". The Full Court of the Supreme Court of South Australia allowed the grower's appeal, on the basis that there was imported into the contract a duty to exercise reasonable care and skill. The judgments do not analyse whether the contract was one for sale of goods or one for services, but in the distinct approaches of the trial Judge and the Full Court it is implicit that the trial judge treated the contract as one for the sale and resale of goods (in which the concept of caveat emptor might be applicable), whereas the Full Court treated the contract as one for services (in which a duty to exercise reasonable care and skill was imported). It follows that the Full Court's decision is authority, if not expressly so, for the view that the contract in that case - which is akin to that in the present case - was one for services, as distinct from a sale and resale. This is analogous to the distinction identified by Blackburn J in Lee v Griffin (1861) 121 ER 716 and cited in Deta Nominees by Fullagar J (at 182): If the contract be such that, when carried out, it would result in the sale of a chattel, the party cannot sue for work and labour; but, if the result of the contract is that the party has done work and labour which ends in nothing that become the subject of a sale, the party cannot sue for goods sold and delivered.

22 In my view, it is quite clear that the parties never entertained any intention that the growers sell their grapes to Ms Cecchini and then repurchase them. One of the most telling factors in that regard is that there was no suggestion that Ms Cecchini would pay for the grapes upon receipt, or at any other time: she was simply paid a fee per tonne for contract winemaking services. Similarly, the circumstance that the wines, once made, were sold under the name and label of the growers is telling.

23 The invoices support the view that Ms Cecchini was contracted to provide winemaking services, and did not buy and sell the grapes and wine. Even if it not be permissible to have regard to the initial invoice on the basis that it was post-contractual, nonetheless where there has been a course of dealings between the parties over several years, the invoices in respect of previous transactions are some evidence of the terms on which the parties intended to contract, according to the same pattern, in subsequent transactions.

24 As well as the conversations between the parties, their historical dealings over previous years, and the terms of the invoices, it is worth noting that, in Killara 10's case, the following evidence was given by Mr Brooks (in paragraph 3 of his affidavit sworn 3 October 2007): Cecchini utilized the winery to carry out wine making. As part of Cecchini's wine making business, she carried out wine making processes for clients. Typically, these clients would deliver to her grapes which would then be crushed, processed and fermented into wine. The wines would then be stored in tanks and/or barrels until the wines were ready for bottling. During this time of storage the wines be monitored with lab analysis and additives provided as was warranted. When the wines were ready for bottling, typically the wines would be filtered and then transported to a third party location for bottling and packaging. On some occasions the finished bottled wine produce was returned to the winery premises for storage.

25 Of course that is far from conclusive of the nature of the contract, but Mr Brooks' description of Ms Cecchini's business seems much more akin to a contract for services under which she made wines for the growers, than contracts for the purchase of grapes and resale of wines by Ms Cecchini. 26 Accordingly, I conclude that the contracts between the growers and Ms Cecchini were contracts for services, and not contracts for the sale of grapes and repurchase of wine. It follows that there was no passage of property at any stage to Ms Cecchini.

27 Except in one case in which some of Mr Barbalace's wine was, with his consent, mixed with that of another grower, Pendarves - and which, so far as the evidence shows, was intended to be owned by each of them - the juice generated from the grapes delivered by each of Mr Pangallo and the Barbalaces was kept separate, and while additives were introduced to it in the winemaking process, the underlying intention of winemaker and grower alike was that the introduction of those additives in the course of the winemaking process did not affect the status of the wine as the descendant, as a matter of heredity, of the grapes originally delivered by the relevant grower.

28 Killara 10's argument was, essentially, that the 2007 wines delivered to Ms Cecchini by the Barbalaces and Mr Pangallo belonged to Killara 10, because in respect of those wines the Barbalaces and Mr Pangallo still owed money to Ms Cecchini under the winemaking contract. This argument is misconceived on several grounds. First, assuming that there were moneys due and owing to Ms Cecchini, those moneys were fees for services rendered, not the purchase price for the goods; Ms Cecchini did not have property in the goods. Therefore, she could not in turn - whether under clause 16.08 of the lease or otherwise - transfer title to her landlord. Secondly, even if Ms Cecchini had some lien on the wines, clause 16.08 was not engaged, since a lien on wines is not within the concept of stock-in-trade. Thirdly, no money was in any event due and owing to Ms Cecchini, because she had forgiven any outstanding debt in the light of the impossibility of her completing the contracted services once her occupancy of the premises was terminated. Fourthly, it was not necessary that she forgive the debt: the contract for winemaking services was an entire contract, and once it became impossible for her to complete it she had no entitlement to receive any further instalments of her fee. Indeed, she might well have been liable to give restitution of those instalments she had already been paid on account of her total fee. 29 In his written submissions, Mr Allen invoked a warehouseman's lien, but that argument is no longer pressed. Had it been pressed, it would have been rejected: in short, there is no evidence that Killara 10 carries on the business of storing goods as a bailee for hire (which is one of the requirements of s 2 of the Act); nor is there any basis for concluding that the wine was deposited with Killara 10 for storage; to the contrary, Killara 10 has retained the wine against the plaintiffs' demands that it be delivered up.

Was clause 16.08 engaged? 30 In those circumstances, it is unnecessary to consider in any detail the operation of clause 16.08 of the lease, save to note that there are real obstacles to its taking effect where the tenant was denied the an opportunity to remove her stock-in-trade during the 14 days following re-entry. In any event, the wine was not her stock-in-trade, for reasons already explained.

The missing wines 31 That leaves the question of the so-called missing wines. In stock records prepared by Ms Cecchini shortly before Killara 10 re-entered the winery, she recorded, inter alia, that tanks 14 and 25 held a total of 7,580 litres of Pangallo 2007 Shiraz, and that tank 17 held 5,300 litres of 2007 Barbalace Chardonnay. However, when (under the interlocutory arrangements to which I have referred) the growers collected their wines from the Killara 10 winery, it transpired that there was no Pangallo Shiraz in tanks 14 and 25, and that there were only about 3,000 litres of Barbalace Chardonnay in tank 17.

32 Mr Orr says that he conducted an inspection of the tanks, on behalf of Killara 10, on 22 August 2007, and on that occasion there was no wine in tanks 14 and 25. He prepared a stock sheet which is consistent with that position. As to tank 17, he says that where there is ullage in a tank it is difficult to estimate with accuracy the precise amount of wine in the tank, and that he would not necessarily have appreciated that there might only have been 3,000 as opposed to 5,300 litres of the Barbalace Chardonnay in that tank.

33 While it is somewhat surprising that the circumstance that tanks 14 and 25 were empty was not drawn to the notice of Mr Pangallo on any of the several opportunities which had earlier presented themselves for Mr Orr to do so, I am unpersuaded that his evidence as to his inspection on 22 August is not truthful. Moreover, the winery records of the movements of wines between the different tanks on different dates, and the changes in quantities of Pangallo 2007 Shiraz between the tanks - and on at least one occasion oak barrels as well as tanks - leaves well open, if not probable, the theory that there never was any more 2007 Shiraz than has been delivered up. I am unsatisfied that any of it is, in fact, "missing".

34 So far as the Barbalace Chardonnay is concerned, there is also evidence that 3,000 litres was metered out of tank 17 at one stage for inclusion in the Barbalace/Pendarves mixed wine; again the theory is at least open, if not probable, that that may account for the reduction of the amount of Chardonnay in tank 17. I am unsatisfied that there is any "missing" Barbalace 2007 Chardonnay.

35 I will afford the parties, if they wish, an opportunity to address on the form of the appropriate orders. Subject to any such submissions, my orders are: 1. Declare that the first plaintiff Pangallo Estate Pty Limited is entitled to 6,200 litres of Zibbibo formerly in tank R18, 1300 litres of 2007 Rose formerly in tank B5, and 31 barrels of 2007 Shiraz, all formerly located at the defendant's winery.

2. Declare that the second plaintiffs are entitled to 5,100 litres of 2005/2006 Chardonnay formerly in tank 10, about 3000 litres of 2007 Chardonnay formerly in tank 17, 6,200 litres of 2007 Bordello formerly in tank 19, 6,200 litres of 2007 Chardonnay formerly in tank 20, and 1300 litres of 2007 Shiraz, formerly in tank B4, together with 21 barrels of 2007 Shiraz, all formerly located at the defendant's winery.

3. Order that the defendant pay the plaintiff's costs.

36 The Exhibits may be returned. **********

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.