Santos Coffee Company Pty Ltd v Direct Freight Express Pty Ltd

18 The fourth issue as to the meaning of cl 4 concerned the meaning of the word "claim". Mr White, who appeared for Direct, submitted that the clause required a degree of specificity and precision as to number and period identified in the relevant communication. We doubt that proposition. There was no appeal from the primary judge's finding in [53] that a relevant claim was made on 22 January 2007. Whether or not some earlier general assertion by a storeman at Santos that "we are owed pallets" or "we haven't had a delivery of pallets for some time" would amount to a claim is a question appropriate to answer only in the context of a particular communication. For reasons that will become apparent, we do not need to decide this question. The application of cl 4 here 19 Santos argued that there was sufficient evidence of informal requests for more pallets throughout the period 2004 to 2007 to raise an inference that cl 4 may not apply in terms. It submitted that Direct had failed to discharge the onus of proof upon it to show that it fell within the metes and bounds of the clause. 20 Direct objected to this point being taken. It submitted that the case at trial had not involved any triable issue as to whether any communication before January 2007 was a claim for the purposes of cl 4. 21 A reading of the pleadings, the transcript and the written submissions bears out Direct's submission that this was not an issue for trial. 22 Santos pointed to the evidence of Mr Moorfield in chief in which he referred to some occasions when requests were made for pallets and to Direct's co-operative and compliant response to same. The context and purpose of this evidence was, however, another issue altogether. Direct had pleaded a failure by Santos to mitigate its damage. One aspect of seeking to make out this defence was to show that Santos had not been reasonable in its own administration of the contract. If Santos had attended to its own contractual entitlements reasonably it could have made requests which would have been met. Whether or not such an argument could properly found a plea of mitigation is a question that need not be answered. But that was the clear context and purpose of the evidence. No issue was presented for determination by the pleadings or the conduct of the case that there were claims before January 2007 sufficient to answer the description in cl 4. 23 It would be unfair to allow this point to be raised on appeal. It was a factual question requiring enunciation, focus and evidence. It is a point which could possibly have been met by evidence, including focused cross-examination; and should not be allowed to be argued on appeal: Coulton v Holcombe [1986] HCA 33 at [9]-[10]; 162 CLR 1 at 7-8. 24 The terms of [53] of the primary judge's reasons do not negate or undermine this conclusion. There her Honour said: "[53] 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])."

25 This paragraph might lead one to expect that the status of earlier communication as claims for the purpose of cl 4 was litigated. In fact, it was not. 26 Clause 4 applies. The relevant claims to which attention was directed were those that commenced on 22 January 2007. Santos could therefore only pursue breaches of contract commencing 90 days prior to 22 January, and continuing until the end of the relationship. 27 The approach of the primary judge to this issue can be found at [54] of her reasons (in applying condition 3, rather than cl 4): "[54]. 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."

28 As can be seen the primary judge dealt with the period in question as one unit of time and concluded that because Direct delivered more pallets in the period than it had taken, Santos had not suffered any loss. 29 In dealing with this question, it must be recalled that the breaches were weekly. If, in the week following a given week in which more pallets had been taken than delivered, Direct did not make good the previous week's deficit of pallets, it was in breach of contract. There was no dispute about that proposition on appeal. The 90 day period then commenced. Thus, the 90 day period prior to 22 January 2007 (commencing on 24 October 2006) starts with the number of pallets that should have been then returned in that week, referable to the previous week's deficit (if any). Thus, one goes back 97 days to understand the commencing point of the obligation of Direct to return pallets. 30 From 17 October 2006 (97 days before 22 January) until 22 January 2007 there were no returns of pallets. Thus, a series of breaches of contract occurred at the end of the weeks commencing in the week following 17 October 2006 until 22 January 2007. 31 On 22 January 2007, 150 pallets were returned; on 9 February 2007, 3; on 12 February 2007, 150; on 19 March 2007, 60; on 23 March, 2. The question arises how these returns are to be allocated or attributed. On these dates, there was an accumulated number of overdue pallets arising from the various weekly breaches from 2004. There was no debate but that returned pallets should be allocated first to fulfil Direct's current week's obligation in respect of the previous week to avoid Direct being in breach of contract. If the number returned exceeded that number, how was the excess to be allocated? The available possibilities are:

(a) to the earliest historical breaches from 2004 (on a first in first out or FIFO basis);

(b) to the earliest historical breaches within the 90 day period (on a last in first out or LIFO basis);

(c) if (b) were chosen and there were still an excess of returns, would that excess could be (i) allocated to past breaches (that is before the 90 day period) or (ii) kept on account for attribution to future contractual obligations after the commencement of the 90 day period. 32 The primary judge's approach was to employ (b) and to use the second alternative in (c) above. Her Honour ignored the earlier period prior to the commencement of the 90 day (in her reasons, the three month period). Santos argued for the approach in (a). 33 The period commencing in October 2006 and concluding with the termination of the contract on 29 March 2007 is not a self-contained block of time reflecting one breach of contract. It is a period of time in which the parties continued a commercial relationship that had commenced in 2004. The relationship was characterised by frequent, though not continuous, breaches of contract by Direct failing to return pallets in number to make up a deficit from the previous week. 34 The returns from 22 January should be allocated in accordance with the intention of the parties, in the first instance, in so far as that intention (express or inferred) can be discerned. Honest business common sense forms the backdrop to the ascertainment of that intention. If no relevant intention can be discerned, it is necessary to impose a rule.

35 One needs to examine the behaviour of the parties, in particular Direct. When Mr Avramides explained the problem to Mr Moorfield, Mr Moorfield and Direct's sales manager, Mr Lopino, accepted that Direct was responsible for resolving the problem. The primary judge referred to two pieces of evidence in this regard at [37] and [38] of her reasons:

"[37]. 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."

[ 38]. 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." 36 Later, in April, Direct offered to provide Santos with 200 pallets a month for five months, subject to no further claims. 37 Direct did not seek to rely on its rights arising from either limitation clause (condition 3 or cl 4) until proceedings were commenced. 38 The returns made on and after 22 January 2007 can be seen in a factual context in which Direct was accepting that it had failed to return pallets and that it should make good substantially all the deficiency in pallets. They could not all be obtained at once and so they would be returned in blocks as and when they could be. From this we would infer that the parties, and in particular Direct, were intending to return pallets against the whole "account" owing. 39 The effect of cl 4 in law was to bar the claim for earlier pallets. Nevertheless, Direct, during the relevant period (January to March 2007) was delivering pallets greater than the previous week's contractual obligation in an attempt to reduce the overall number of pallets owing from the commencement of the operation. There was no evidence as to whether this was a mistake based on a failure to appreciate the legal significance of cl 4 or whether a conscious choice was made to return all pallets notwithstanding the appreciation of the legal significance of cl 4. 40 Clearly, there was no express appropriation. It can be inferred that Direct was returning pallets in an attempt to mollify an existing customer and against its whole liability for pallets owing. It can be readily inferred that Mr Moorfield and others at Direct were aware of the terms of cl 4 on the face of the docket. It was not an obscurely placed limitation clause in small font in standard terms. In the face of cl 4, Direct was intending to return pallets to make up substantially the whole deficiency. That inference, however, falls short of an inferred intention that the returns be allocated or attributed to the oldest "indebtedness" first. The parties did not address allocation or attribution. Neither side on appeal submitted that the conduct of the parties manifested any relevant intention to allocate or appropriate pallets returned. In the absence of an express or inferred intention of the parties, it is necessary to turn to the law for a legal rule. Neither party submitted that there was any appropriation or allocation by any act in the conduct of the litigation, including by the pleadings. 41 Santos relied on the rule in Clayton's Case (Devaynes v Noble (1816) 1 Mer 572 at 608-609; ER 35 781 at 792-793) as the operative rule of law. It sought to draw an analogy between a running account between banker and customer and the cumulative total of pallets owing from weekly breaches. The analogy with a running account is imperfect. The accumulated deficiency was the product of multiple weekly breaches of contract by Direct. Where there is truly a running account, there is a single balance which is the product of mutual dealings in the past. 42 As to appropriation and statute barred debts, the rule is that where there is no true running account, if neither party makes an election it will be assumed that claims that have not become statute barred are paid before those that have become barred: Nash v Hodgson (1855) 6 De GM & G 474 at 482-487; 43 ER 1318 at 1321-1323; D Oughton et al Limitation of Actions (1998 LLP) at 158; A McGee Limitation Periods (5th ed 2006 Sweet & Maxwell) at 390; and P R Handford Limitation of Actions; the Laws of Australia (2nd ed 2007 Thomson Lawbook Co) at 279-281 [5.10.2220]. If, on the other hand there is a true running account (absent intention) it is incorrect to apportion the payment among the various items making up the balance: Re Footman Bower & Co [1961] 1 Ch 443. 43 The appropriate rule here is that drawn by analogy from statute barred debts where there is no running account, but separate debts. No running account was ever kept. The contractual arrangements did not provide for one. Rather, the contractual arrangements provided for weekly satisfaction of a contractual obligation. The barring of the claim by cl 4 is the equivalent of a statute bar. In Atlantic Shipping v Dreyfus at 261 Lord Sumner said that the parties to the contract "provided their own statute of limitations". To all intents and purposes cl 4 removes Direct's legal responsibility to return the earlier overdue pallets. Any such liability is extinguished. That Direct nevertheless intended to return them can be accepted, but the operation of cl 4 can be seen either to destroy the earlier obligation or at least to change its character to one that was not enforceable. 44 The rule that we would employ conforms with the coherent business operation of cl 4. Further, just as Santos urged an approach which viewed the pallet account as the equivalent of money for the operation of Clayton's case, the close analogy of pallets owing with money owing makes it appropriate to apply by analogy the clear rule as to statute barred debts viewed as debts incurred each week.

45 Thus, the correct approach, in our view, is to apply returns after October 2006:

(b) then to the earliest historical breaches within the 90 day period, and

(c) if there remains any excess from that particular body of returns then to past (barred) breaches before the 90 day period. 46 This being the correct approach, the question arises as to the measure of damages. Santos pressed for a calculation based on the cost of hire of the number of pallets not returned up to a point shortly after the termination of the relationship in late March 2007. From that date, Santos accepted that it was obliged to "buy out" the pallets owed from Chep at $29.50 per pallet, rather than continuing to pay hire. This buyout sum should be added to the rent to that point. If there are any pallets outstanding this approach is appropriate. 47 A differential calculation will also have to be made in respect of some pallets outstanding from October 2006. If pallets owing from October 2006 were returned, but not on time and a hiring charge was paid in respect of the pallets from the time when in accordance with the contract the return should have been made to the time when it was made according to the allocation, that sum is due by Direct. 48 During the appeal the Court raised the question whether the hire cost to Chep of every non-returned pallet was the correct measure of damage. It raised the question whether Santos should have proved that it would have returned each and every pallet promptly to Chep. No such point was taken below. The damages below were claimed on a hiring cost basis. Prima facie the hiring paid to Chep was a cost incurred by Santos that would not have been incurred had Direct complied with its contract, rather than almost continually breach it. In circumstances where the matter raised by the Court was not litigated, we would not consider it appropriate or permissible to rely on it. 49 Direct also submitted that Santos had failed to mitigate its damage. On the view we have taken as to the effect of the conduct of the trial, it is unnecessary to deal with this point. Certainly there was no failure to mitigate after 22 January 2007. Conclusion 50 The correct approach differs in principle, to a degree, from the approach used by the primary judge. There may, however, only be a small sum to which Santos is entitled. The parties should bring in short minutes reflecting a calculation of damages in accordance with these reasons and summarised as follows: (a) Clause 4 applies to limit liability to a period 90 days before 22 January 2007.

(b) The pallets owing in this period are referable to weekly breaches and should not be calculated by reference to one block of time as the primary judge did.

(c) Rather, returns of pallets should be allocated: (i) first, to any prior week's deficiency to avoid a breach of contract, and (ii) secondly, from the earliest breaches in the period of 90 days prior to 22 January 2007, and (iii) thirdly, should any pallets remain unallocated from a return, then to overdue pallets from weekly breaches before the commencement of the 90 day period.

(d) The damages should be calculated as the hire cost from Chep of all such pallets not returned in accordance with the contract after the relevant date 90 days prior to 22 January until their return or the termination of the contract (29 March 2007) at which time any such pallets not returned should be bought out at $29.50 per pallet.

(e) Prejudgment interest should be calculated from the dates of the relevant breaches. 51 We would permit the parties to file short written submissions on costs below and on appeal. 52 The orders we would make are that on or before 5 March 2010 the parties file (1) an agreed draft short minute of order or, failing agreement, competing draft short minutes of order to give effect to these reasons and (2) submissions as to costs below and on appeal. **********

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