Santos Coffee Company Pty Ltd v Direct Freight Express Pty Ltd

PARTIES: Santos Coffee Company Pty Ltd Direct Freight Express Pty Ltd

COUNSEL: Mr J Donohoe Mr E White

JUDGMENT

1. Santos Coffee Company Pty Ltd (Santos) engaged Direct Freight Express Pty Ltd (Direct) to collect pallets of Santos product and deliver them to Santos customers. Santos hired the pallets from CHEP. It was agreed between Santos and Direct that there would be a weekly pallet reconciliation, whereby the full pallets that had been taken one week would be replaced by an equal number of empty pallets in the following week.

Under a weekly pallet control docket system, a daily record was made of the number of full pallets collected and the number of empty pallets delivered. Each Friday, the weekly docket was collected by Direct, enabling Direct to reconcile pallet numbers by delivering an equal number of empty pallets during the following week.

Between June 2004 and mid 2006, empty pallets were almost never delivered. Santos did not notice their absence, despite the fact that it was hiring an ever- increasing number of pallets from CHEP. From mid 2006, there were sporadic but substantial deliveries of empty pallets. By February 2007, Santos was paying CHEP for 1,067 'missing' empty pallets.

In February 2007, Santos undertook a reconciliation and demanded the return of 'missing' pallets. Direct responded that it was prepared to provide Santos with 200 pallets a month for five months, provided that Santos made no further claim. The offer was not accepted. Santos claimed for the daily hire from CHEP of the 'missing' pallets.

It is agreed that a sum of $16,559.13 owed by Santos to Direct is to be set off against any damages payable by Direct to Santos.

The parties agreed to vary the issues as pleaded and the following issues were argued.

(i) The content of any implied contractual term regarding the return of pallets. (ii) Was there a bailment? Was there conversion or detinue of the pallets? (iii) Did condition 3 of the transport agreement or clause 4 in each weekly pallet control docket form limit Santos's claim? (iv) Did Direct waive its right to rely on the exclusion clauses? Is it estopped from reliance? (v) Damages and mitigation of loss.

On 22 June 2004, Santos accepted Direct's written transport proposal, under which Direct was to transport Santos's pallets of goods. Santos knew that a weekly pallet control docket system would be used to effect a weekly reconciliation of pallets.

Mr Avramides of Santos gave evidence that, on 23 June 2004, Mr Moorfield of Direct provided Santos with a book of weekly pallet control dockets, told him that Direct would be responsible for the return of pallets, and said that the weekly pallet control docket system was an efficient system.

Relying upon that evidence and business efficacy, Santos argued that there was an implied contractual term that Direct would reconcile pallets on a weekly basis and ensure that all outgoing pallets were replaced. Direct disputed the terms of the conversation and denied that it had accepted exclusive responsibility for pallet reconciliation.

Mr Avramides was an honest witness. On the other hand, Mr Moorfield was a sales representative with something to gain by securing the contract. Much of his evidence was based on his usual practice rather than a specific recollection of his dealings with Mr Avramides. He sought to distance himself from the pallet control system. I accept that, from the outset, Mr Moorfield appreciated that the pallet control system was problematic, but I also accept Mr Avramides' evidence that Mr Moorfield used the expression 'efficient' when referring to Direct's pallet control system. It is possible that, in so doing, Mr Moorfield intended to refer to the efficiency of pallet replacement rather than the efficiency of pallet pickup. Regardless of what was said, the system itself assumed that Direct would take primary responsibility for pallet replacement.

I find that it was an implied term of the transport agreement that, on a weekly basis, Direct would deliver a number of empty pallets equal to the number of full pallets noted on the relevant docket, regardless of whether Santos made a particular request for replacement pallets. Such a term was acknowledged in clause 3 of each docket, which provided that 'Pallets owing will be returned the following week', and the term was necessary for business efficacy.

However, Direct did not accept sole and indefinite responsibility for pallet return. A passing reference to the efficiency of a system and agreement that Direct would take primary responsibility for pallet return are inadequate bases for inferring an implied condition that Direct would indefinitely 'guarantee' the replacement of pallets. The contract was agreed on 22 June, prior to the conversation about the system's efficiency and about responsibility for the system. The contract included condition 3, which purported to limit any claim in relation to pallets. The requirements of business efficacy support such a limitation clause as pallets were likely to become lost in 'the system' and their replacement was likely to be frustrated by delay. Further, a representative of Direct noted on the front of the first docket book that John Cork, a Direct employee, was to be contacted in relation to the return of pallets, suggesting that Santos may well need to chase up pallets. A comparison of writing indicates that the note was written by 'Dave', the Direct driver who collected the first consignment of pallets recorded in the docket book (Exhibit H). In this respect, Mr Avramides' memory was mistaken (he said that Mr Moorfield made the note).

Santos argued that Direct took pallets as a bailee and converted the pallets each week when it failed to replace them or, alternatively, detinue occurred in February 2007 when Direct failed to comply with Santos's demand for the return of pallets.

Bailment involves the redelivery of a specific thing in its original or some altered form to the bailor in accordance with the terms of the bailment: Chapman Bros v Verco Bros & Co Ltd (1933) 49 CLR 306 per Rich J at p 314. It is necessary that the goods themselves, either in altered or original form, are returnable and not merely some other goods of equivalent character or value. There must be a clear physical heredity between what has been delivered to the bailor and what must be returned: Palmer, Bailment, 2nd ed (1991), at 135; Pangallo Estate Pty Ltd v Killara 10 Pty Ltd [2007] NSWSC 1528, at [16]. The doctrines of bailment may apply to money or another commodity in which property would normally pass upon delivery (fungible, or essentially substitutable property), if it is clear from the terms of the bailment itself that the goods are to be returned in specie and not merely in an equivalent form: Palmer, at 13. If the parties agree that the bailor retains property in fungible goods, the comingling or manufacture of the goods into other products that are to be returned to the original owner may be consistent with the bailment: Pangallo at [19]; Mercer v Craven Grain Storage Ltd [1994] CLC 328, at 329.

Direct contended that there was no bailment as the pallets were fungible property and there was no arrangement for the return of specific pallets.

In BIS Cleanaway t/a CHEP v Tatale [2007] NSWSC 378, McDougall J found that, under the agreement between CHEP and the hirer, the pallets were fungible. There was no requirement to return the precise pallets. However, under the terms of hire, CHEP retained property in the pallets and the right to immediate possession. Both against a hirer who wrongfully disposed of the pallets and against a third party to whom the pallets were wrongfully delivered, CHEP could claim title to and the right to immediate possession of the pallets.

As was the case in Tatale, under the contact between Santos and Direct an equal number of pallets was to be returned. However, unlike the contract considered in Tatale, the contract between Santos and Direct reserved for Santos neither property in the pallets nor a right to immediate possession. The contract between Santos and CHEP was not in evidence.

Conversion entails an intentional dealing with chattels in a manner repugnant to the 'owner's' immediate right to possession. In addition, there must be an intention to deprive the 'owner' of its immediate right to possession. It is not conversion to transfer possession otherwise than for the purpose of affecting the 'owner's' immediate right to possession. Nor is it always conversion to lose the goods beyond hope of recovery: Penfolds Wines Pty Ltd v Elliott (1946) 74 CLR 204 per Dixon J at 229, Maynegrain Pty Ltd v Compafina Bank (1984) 1 NSWLR 258.

Even if there was a bailment of the pallets, there are two impediments to Santos's claim in conversion. First, Direct did not deal with the pallets in a manner repugnant to Santos's right to possession. It delivered them to third parties, as required by the transport agreement. Second, prior to the demand of February 2007, the necessary intention was absent as there was no deliberate or positive act of withholding pallets.

Detinue occurs when a bailee wrongfully parts with possession of the bailor's goods, the bailor demands their return, and the bailee refuses.

Even if there was a bailment, the claim in detinue must fail because there was no wrongful parting with possession by negligent loss of pallets or otherwise. Direct parted with possession of the pallets in accordance with the contract and it was expected that specific pallets would become 'lost in the system'. Perhaps this is merely a statement that there was no bailment in the first place.

On 22 June 2004, Santos accepted Direct's written transport proposal, which included a rates list and standard form contract conditions (Exhibit 1). Contract condition 3 states: '3. This consignment and services provided including storage, whether the goods are delivered or not, shall be subject to these conditions and shall be governed by the laws of New South Wales. No claim in respect to loss or damage of goods may be made unless a notice of claim is lodged in writing at the Registered office of the Carrier within seven (7) days after delivery was effected or would in the ordinary course of business have been effected. Further, the Carrier shall in any event be discharged from all liability whatsoever in connection with the goods unless suit is brought within three (3) months from their delivery or from the date on which in the ordinary course of business delivery would have been effected. The Carrier shall not be bound by any agreement purporting to vary these conditions unless such agreement shall be in writing and signed by an Executive Officer of the Carrier.' (emphasis added)

Pursuant to condition 1, 'goods' means 'the cargo accepted from the sender together with any container, packaging or pallets supplied by or on behalf of the sender' (emphasis added).

Santos complained that condition 3 was printed in pale ink, was difficult to decipher and was not specifically raised with Mr Avramides.

It is immaterial that condition 3 is difficult to read with the naked eye, that Mr Avramides was not taken to the condition and that he was unaware of its existence: Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165, 179. On 22 June 2004, he acknowledged in writing that the contract conditions were as printed on the reverse side of the rates list and he accepted those conditions on behalf of Santos (Exhibit 2): Santos was bound by condition 3.

Santos contended that Direct lost the protection of condition 3 by stepping outside the 'four corners of the contract' and mislaying pallets: Sydney Corporation v West (1965) 114 CLR 481. Santos argued that condition 3 should be read down in accordance with Darlington Futures Ltd v Delco Australia Pty Ltd at 510, applied in Kamil Export (Aust) Pty Ltd [1996] 1 VR 538 so that it did not defeat the main object of the contract.

West established that an exclusion clause does not exclude liability for acts that are neither authorised nor permitted by a contract. However, in this case, the act of parting with pallets was contemplated. The parties understood that specific pallets would fall into the hands of third parties. Further, condition 3 does not preclude any claim for failure to replace pallets. It merely limits the time within which any claim must be made.

The interpretation of an exclusion clause involves construing the clause according to its natural and ordinary meaning, read in light of the contract as a whole, giving due weight to the context in which the clause appears including the nature and object of the contract, and, where ambiguity exists, construing the clause contra proferentem. Where a bailment is created by a contract, the extent to which the common law continues to apply depends upon a construction of the contract: Hill v Reglon Pty Ltd [2007] NSWCA 295. Common law rights are excluded or overridden only by very clear contractual terms: Waterways Authority of NSW v Coal and Allied (Operations) Pty Ltd [2007] NSWCCA 276.

When construed according to its natural and ordinary meaning, condition 3 is clear. Direct is 'discharged from all liability whatsoever' in relation to pallets that were 'lost' more than three months before a complaint was made. Having regard to the non-specific nature of pallets, their tendency to go astray and become 'lost in the system' and the fact that the pallets were peripheral in the sense that the transport agreement was essentially about the transport of Santos's product, there is no reason to construe condition 3 otherwise than in accordance with its natural meaning, ie as limiting liability for 'lost' pallets both at common law and in contract.

The weekly pallet control dockets were delivered to Santos on 23 June 2004. On that day, Mr Moorfield explained the operation of the pallet control system to Mr Avramides.

Direct pleaded that the weekly pallet control docket system was an ancillary contract to the main contract, which was concluded on 22 June 2004. However, in submission and without objection, Direct contended that the weekly pallet control docket system was a separate contract.

Clause 4 in each weekly pallet control docket states: 'No claim for pallets owing by Direct Freight will be accepted after 90 days.'

Each weekly pallet control docket relates to a specific Monday - Friday period and, pursuant to clause 2 on the docket, was to be returned to Direct on the Friday of the relevant period.

Santos argued that clause 4 is ambiguous as to the commencement of the 90-day period.

Each pallet control docket was dated the relevant Friday, therefore the system operated on a Monday to Friday basis, each 90-day period must commence on the relevant Friday.

I accept that the weekly pallet control docket system is a separate and later contract. It follows that the pallet system is governed by the principal contract, clause 4 does not form part of the principal contract and clause 4 cannot operate to exclude any claim for pallets after 90 days from the relevant Friday (variation was not argued). However, as clause 4 is practically identical to condition 3 of the transport agreement, this point does not assist Santos.

When a deficiency (said to be 1177 pallets) was drawn to the attention of Mr Moorfield, on 28 February 2007 he said: "We'll have all those pallets de-hired from your CHEP account by the end of this week."

That did not occur. On 9 March, the sales manager of Direct, Mr Lopino, said that he would get back to Santos, commenting: "We don't just have 1200 pallets lying around the yard that we can bring back to you."

In March/ April 2007, Santos terminated the contract.

On 16 April, Mr Avramides wrote to Direct, demanding the return of 1177 CHEP pallets by transfer from Santos's CHEP account to Direct's CHEP account. Direct responded that the 'de-hire' proposal was unacceptable, but it was prepared to provide Santos with 200 pallets a month for five months, provided that Santos made no further claims against Direct. That offer was not accepted.

Santos contended that, by its conduct between February and April 2007, Direct waived its right to rely on any condition limiting its claim because it 'unequivocally elected not to exercise its rights under any exclusion clause' and to continue performing the contract. Alternatively, because of its April offer, Direct is estopped from relying on any exclusion clause.

There was no waiver of the exclusion. First, there was no unequivocal election. Between February and March/ April, when Santos terminated the contract, Direct's response to the claim for pallet return was equivocal. Second, the April offer was an attempt to resolve the dispute on a business basis. It was not an abandonment of rights.

Estoppel does not apply. Santos was unable to identify any reliance upon the April offer or any consequent detriment.

Although I find that Direct succeeds on liability, I will briefly consider the damages and mitigation issues.

Direct argued that, as Mr Moorfield was not told and did not know that Santos operated a CHEP account, there was no causal connection between any breach of contract and the extra CHEP hire charges incurred by Santos.

I do not accept that argument. Direct may not have been told that Santos operated a CHEP account. However, Direct was well aware that it was collecting CHEP pallets (on each docket, they were noted as CHEP pallets) and Direct knew that the only way in which CHEP pallets could be acquired legitimately was by hire from CHEP.

Direct contended that there was a novus actus interveniens, namely Santos's decision to continue hiring additional pallets rather than demand that Direct replace them.

A decision (or non-decision) by a plaintiff that involves a continuation of conduct of the type in question cannot constitute a novus actus interveniens.

Direct argued that it should not be held liable for the hire of excess pallets as such damage was too remote. Direct referred to the decision in Stuart Pty Limited v Condor Commercial Insulation Pty Limited [2006] NSWCA 334.

Damages for a breach of contract include losses that may fairly and reasonably be considered to arise either naturally, according to the normal course of things from such a breach of contract (the first limb - general damages) and losses that may reasonably be supposed to have been in contemplation of both parties at the time that they made the contract as the probable result of breach (the second limb - special damages): Hadley v Baxendale (1854) 9 Ex 341.

Stuart v Condor concerned only the second limb in Hadley v Baxendale. Santos contended that the claim for hire of excess pallets was a claim for general damages within the first limb. As Direct knew that the Santos pallets were CHEP pallets and that the only way in which CHEP pallets could be acquired legitimately was by hire from CHEP, the need to hire additional CHEP pallets may fairly and reasonably be considered to arise from the failure to replace pallets, ie as falling within the first limb of Hadley v Baxendale.

Direct fails on the damages arguments. Therefore, I consider the hire charges associated with 'loss' of pallets in the three months before a claim was made.

There was vague evidence in relation to several earlier complaints, but the only complaints about which the evidence was clear were those made by Mr Nicholas Avrimedes on 22 January 2007 (Mr Avramides affidavit of 17 September 2008, [15]) and by Mr Avramides on 27 February 2007 (affidavit of 3 June 2008, [50]).

Applying condition 3 and limiting Direct's liability for 'lost' pallets to the period of three months preceding any claim, I am not satisfied that Direct failed to replace pallets. Between 31 October 2006 (approximately three months before 22 January 2007) and 28 February 2007, Santos hired an additional 168 pallets (2078 - 1910 pallets, Exhibit 5). If one compares the figure for 31 October 2006 (1910) with that for 31 March 2007 (1898), the level of pallet hire was almost unchanged. Exhibit JPA5 shows that, between 22 October 2006 and 27 February 2007, the 'accumulative pallet balance' dropped from 1192 to 1075, ie Direct returned more pallets than it removed. I am not satisfied on the balance of probabilities that Santos hired excess pallets in the three-month period preceding the claims.

Santos was required to take reasonable steps to mitigate its loss flowing from the breach. Reasonable steps included requesting the replacement of pallets. Direct had provided Santos with a contact person, John Cork. In 2007, when Santos did demand the return of pallets, Direct complied by replacing the approximate number of pallets taken in the preceding three months.

In any event, having ascertained that it was hiring excess pallets and having terminated the contract, Santos should have mitigated its loss by paying CHEP the sum of $29.50 per pallet (Exhibit 7), or $31771.50 for 1077 pallets.

(i) It was an implied term of the transport agreement that, on a weekly basis, Direct would replace pallets with an equal number of empty pallets. (ii) There was no bailment, and the claims in conversion and detinue fail. (iii) Condition 3 of the transport agreement limits the claim period in relation to both contract and bailment and clause 4 is irrelevant. (iv) There was no waiver by Direct and there is no estoppel. (v) Direct fails in its damages arguments, but Santos suffered no loss in the relevant three month period/s. Santos failed to mitigate any loss.

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