Sirway Asia Pacific Pty Ltd v Commonwealth of Australia - [2002] FCA 1152 - FCA 2002 case summary — Zoe

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Sirway Asia Pacific Pty Ltd v Commonwealth of Australia

[2002] FCA 1152

Federal Court of Australia|2002-09-18|Before: Sundberg J

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Source facts

Court

Federal Court of Australia

Decision date

2002-09-18

Before

Sundberg J

Source

Original judgment source is linked above.

Judgment (119 paragraphs)

[1]

BACKGROUND 1 The applicant has sued the respondent for a declaration that the respondent has unlawfully terminated a Standing Offer Agreement ("SOA") for the supply to the respondent of chinaware for use by Defence personnel, and for damages for breach of the SOA. It also seeks a declaration that the respondent has engaged in misleading and deceptive conduct in relation to the SOA contrary to Part IV of the Trade Practices Act 1974 (Cth) ("the Act") and damages under s 82 of the Act. Although the application does not seek relief under Part IVA of the Act, the amended statement of claim pleads a case under that Part.

[2]

THE FACTS 2 In June 1996 Eric Giammario, a director of the applicant, obtained a copy of a Request for Tender for the "supply of chinaware on standing offer for the period 30 September 1996 to 30 September 1999 for the Department of Defence (in accordance with Specification DEF (AUST) 5192C)". On 18 September 1996 the applicant submitted a tender together with samples of items of crockery identified on a packing list. The samples had been manufactured by the applicant's supplier in China. If the applicant's tender was successful, it was its intention to obtain any required chinaware from that supplier. 3 In early May 1997 Mr Giammario met with Gino Carrazza and Paul Windsor who were officers of the Materiel Management Group of the Department of Defence. One of them told Mr Giammario that some of his samples did not match DEF (AUST) 5192C ("the Specification"). The officer appears not to have identified the non‑conforming samples, though Mr Giammario said he would need to know this in order to inform his supplier. After the meeting Mr Giammario spoke to Rod Darby, an officer of the Army Technology and Engineering Agency. He asked Mr Darby what items had been referred to at the earlier meeting. Mr Darby said he was generally happy with the standard of the samples, though he had some concerns about the shape of some of them and the badging. He said Mr Giammario should obtain relevant details from Mr Carrazza. On 16 May Mr Giammario sent a fax to Mr Windsor asking for details of the items that did not match the Specification. 4 In late May Mr Giammario met with Mr Darby and handed him a sample of chinaware with badging on it. Mr Darby approved the badging. Mr Giammario said they then discussed the prices of three platters that Mr Darby thought were out of kilter with the prices of other items. Mr Giammario claimed Mr Darby intimated that the applicant's prospects of becoming the successful tenderer would be enhanced if the prices of the platters were reduced. Mr Darby denied he said this. He said his input was only of a technical nature. Issues of pricing were handled by Mr Windsor. I accept that Mr Darby did not make the observations attributed to him. Pricing was not part of his expertise or function, and it is unlikely he would have ventured outside his bailiwick in this regard. Mr Giammario said the price of the platters was again mentioned after a meeting on 30 July between Mr Giammario and Messrs Carrazza and Windsor. Again the parties' accounts differ. It will be necessary to return to the detail of what was said. See par 67. After the meeting Mr Giammario negotiated a price reduction on the platters with his supplier, and informed Mr Carrazza of the new price on 31 July. 5 By letter of 1 August Mr Carrazza informed the applicant that its tender had been accepted. On 4 August Mr Giammario signed the SOA constituted by the acceptance of the tender. The offer was for the period 1 August 1997 to 31 July 2000. The SOA had a number of terms and conditions. The following terms and conditions are relevant to the proceeding: "1.1 Any contract entered into pursuant to the Standing Offer shall be subject to the terms and conditions appearing herein …. 4.1 Supplies shall be in accordance with Specification DEF (AUST) 5192C. 10.1 The contractor shall submit to the Contract Authority or his representative a working sample in accordance with the contract standard within 20 working days of receipt of this Standing Offer. 10.3 Any approved sample will be labelled for purposes of identification. The contractor shall not commence manufacture of bulk supplies until notification of approval of a working sample has been received. 10.4 Notwithstanding anything in this clause or elsewhere to the contrary in the contract, the contractor shall be under an obligation to deliver supplies which shall conform to the specification in all respects unless express approval, in writing, of the Commonwealth has been given to a modification or alteration of such specification. 16.1 The Standing Offer shall be in force from 01 August 1997 to 31 July 2000 with an option of a further 12 month extension (01 August 2000 to 31 July 2001), if required by the Commonwealth but in the event of the Contractor failing in any manner to carry out any contract entered into pursuant to the Standing Offer to the satisfaction of the Commonwealth, the Commonwealth may forthwith determine the Standing Offer …." 6 At a further meeting between Mr Giammario and Mr Carrazza on 13 August, Mr Carrazza gave Mr Giammario samples of most of the chinaware items then in use to take with him to China so that moulds could be made up. He said he would obtain the balance of the items as soon as possible. Mr Giammario collected the outstanding items in early September, just before he left for China. The samples had been supplied by an earlier contractor, Australian Fine China ("AFC"), and met the Specification. 7 On or about 15 August the respondent raised the first purchase order under the SOA. Immediately preceding the list of items required appear the words: "All items are to be in accordance with Specification DEF (AUST) 5192C. The terms and conditions of this order are as per Standing Offer No FB27007."

[13]

9 The objective of the Standard is expressed to be "to provide a means of determining minimum performance levels of ceramic tableware in aspects which are relative to public health". Clauses 6, 7 and 8 are as follows: "6. WATER ABSORPTION When the tableware is tested in accordance with Appendix B, the mean of the two results obtained for each sample shall not exceed 0.4%. 7. CHIPPING When the tableware is tested in accordance with Appendix C, there shall be no chips of glaze and body removed and no development of a crack, visible to the naked eye, at more than one location tested. 8. THERMAL SHOCK When the tableware is tested in accordance with the procedure below, there shall be no cracking or glaze crazing." 10 On 22 August Mr Giammario met with Mr Darby at the latter's office. Mr Darby had in front of him a number of the applicant's samples delivered with its tender. He told Mr Giammario that the three types of platters were satisfactory, but all the other items would require new moulds. They went through the items listed in Annex A to the Specification, and Mr Giammario wrote in the right hand margin beside each either "OK" or "M", the latter indicating that a new mould was required. In the left hand margin he wrote the letter "S" to indicate that the "Army has supplied sample". This was a reference to samples of AFC crockery Mr Darby had with him, which met the Specification. For example, beside the two cup items Mr Giammario wrote both "S" and "M" and the words "Handle should be like our sample … ie enough room for finger". The "our sample" is the AFC sample produced by Mr Darby. The handle of the sample provided by Mr Giammario did not have enough room for a male finger. Beside the pepper shaker Mr Giammario wrote "S" and "M" and the words "Bung to be as per Army sample". The "Army sample" is again the AFC sample. In relation to the items Mr Darby said were unacceptable, he showed Mr Giammario an AFC product to indicate what, in terms of appearance, the Department wanted so as to make clear the difference between the desired product and the applicant's sample. Mr Giammario claimed Mr Darby said the applicant had to "replicate" the AFC product. Mr Darby denied having said this. He said he told Mr Giammario it was not a matter of copying the AFC products, because if he did that he would run the risk of double contractions or double shrinkages, making the new moulded samples 'out of spec' or 'out of tolerance'. I find that the conversation accorded with Mr Darby's account. Given the technical nature of his job, it is very unlikely he would have told Mr Giammario to replicate or copy AFC products if that involved the risks of which he was aware. At the end of the meeting Mr Giammario took the applicant's tender samples away with him. Mr Giammario said that either at the 22 August meeting or shortly thereafter Mr Darby told him he should submit two sets of working samples to replicate the AFC samples for inspection and testing by Mr Blake. If these were approved, they would be sealed as the contract standard for the SOA. Mr Darby denied he discussed any contractual matters with Mr Giammario. 11 Mr Giammario said he was upset by what was said at the meeting, because he was being requested to replicate another company's wares "without any tolerance". Notwithstanding this he added: "At the conclusion of this meeting I thought that because the applicant had already been offered the first purchase order under the Standing Offer Agreement it was worth the applicant persisting [with] the Standing Offer Contract and at least requesting the manufacturer try to produce the new chinaware. I thought the applicant should attempt to perform the agreement on the basis that the respondent now requested by replicating precisely the chinaware of AFC to the standard of the samples submitted by the applicant in September 1996." 12 On 24 August Mr Giammario wrote to his agent in China informing him of the successful tender. The letter continued: "Wang Li and I will leave Australia on the 05-06 September 1997 for China. We have all the samples of each item to show the manufacturer …. 1. The manufacturer must make new moulds to the sizes and specificationsfor items: 1, 2, 3, 4, 5, 11, 12, 13, 18 and 19. Items 9, 14, 15, 16 and 17 have been accepted as the correct size. 2. You must supply us, by 20/09/97 a working sample of each item. These samples must be completed according to the specifications and have all relevant markings according to clauses 4.3, 4.3.1 and 4.3.2. … 4. Once we have the working samples they will be brought back to Australia to be measured and approved by the government …. On approval I will notify you in writing to commence manufacture of our order. YOU MUST NOT COMMENCE MANUFACTURE OF BULK SUPPLIES UNTIL THIS NOTIFICATION OF APPROVAL HAS BEEN RECEIVED. 5. The working samples are required only once. They will be sealed by the government and kept as the standard of quality to be met on all other subsequent orders …."

[15]

13 On 30 September, having received samples from China, Mr Giammario had a meeting with Mr Blake. They discussed the visual aspects of the samples and in particular the dimensions of the breakfast cup. Mr Blake said it needed a larger handle. Other suggestions for the improvement of items were made. Mr Giammario told Mr Blake the manufacturer was concerned that it was being asked in effect to copy another manufacturer's product which was new to it. Mr Blake replied that the final working samples should be the best that could be produced. By letter of 3 October Mr Blake informed Mr Giammario that the samples had not been approved for reasons he set out. Mr Giammario responded on 6 October saying that the reasons Mr Blake had given for not approving the samples were "easily rectified and will be done". He said he wanted to meet Mr Blake "to finalise instructions so that the new working samples can be made". 14 On or about 17 October the applicant received a second purchase order. At meetings on 17 and 21 November Mr Giammario said he told Mr Carrazza the manufacturer had informed him it was not possible to reproduce the AFC items with zero tolerance. Mr Carrazza did not recall any reference to "zero tolerance", and said he did not ask or require Mr Giammario to reproduce the AFC products. Mr Giammario decided to go to China to oversee production of the working samples. He brought back with him new samples which he gave to Mr Carrazza on 23 December together with a packing list describing each item. He told Mr Carrazza these items were "the final working samples". By letter of 16 January 1998 Mr Blake informed Mr Giammario that the samples submitted on 23 December 1997 had been approved. The letter continued: "This acceptance in no way relieves the contractor of the obligation to meet all requirements of the specification and conditions nominated in the order. Please note that Production samples will be selected at random during the period of the Standing Offer and tested by an approved authority for compliance …." 15 On 27 January the applicant placed an order with its agent in China for goods to fill the first and second purchase orders. The order told the manufacturer to produce them in accordance with the Specification, and that all items were to be of the same quality as the approved working samples. The applicant received the goods from China in late April 1998. On 29 April in the company of Mr Giammario, Messrs Windsor and Blake attended the warehouse where the goods were stored and took away selected items for examination. On 1 May Mr Blake telephoned Mr Giammario and told him that on visual inspection all items appeared to be acceptable. He said he needed to see more of a particular platter because one of the random samples was slightly pitted. Mr Giammario provided a carton of the requested platter, and Mr Blake was satisfied. The applicant provided Mr Blake with a Certificate of Conformity stating that the goods "are in accordance with the requirements of the order/drawings and specifications relative thereto and conform in all respects with the conditions and requirements of the contract and all approved amendments". Mr Giammario said he told Mr Blake the applicant was not obliged to provide a Certificate because it was not the manufacturer, and would only sign it if the words "and all approved amendments" were added to the standard form: "to acknowledge that there had been amendments to the contract ie we were supplying a replication of the AFC product and not our original product as stated in the Standing Offer."

[17]

16 On 22 May Mr Windsor telephoned Mr Giammario and said that most of the items had not passed the water absorption test in the Standard, and that the applicant's Chinese agent should be asked to put everything on hold. On 27 May a meeting attended by Mr Giammario and Messrs Blake, Windsor, Hands and Lt Colonel Mathieson took place. Mr Hands was Director, Materiel Management, Combat Support. Colonel Mathieson was his deputy. Mr Giammario was asked to provide test reports from the manufacturer. There was some discussion about the future of the contract. After the meeting Mr Giammario asked the agent for water absorption test reports, but was told that reports were not available. Another meeting was held on 16 June, attended by those who were at the 27 May meeting. Again there was discussion about the future of the contract. Mr Giammario was told there were only two laboratories that could perform the tests on the chinaware required by the contract - Scientific Services Laboratory ("SSL"), a Business Unit of Australian Government Analytical Laboratories, and AFC. On 22 June Mr Hands sent Mr Giammario notification of non‑acceptance of the goods delivered under the first and second purchase orders. Test reports by SSL were enclosed. They disclosed that all items passed the water absorption test and all failed the chipping test. 17 On 29 June a further meeting occurred with the same persons present together with the applicant's solicitor, Mr Buchler. There was discussion about whether the respondent would help the applicant find another use for the goods. By letter dated 30 June Mr Buchler wrote to Mr Hands confirming the outcome of the meeting as follows: "Point 1: Agreement by you to apply your best endeavours to investigate all available avenues and means by which the current shipment of goods comprising the above Purchase Orders, which do not meet your standards, can be disposed of by Eric to give him the opportunity to mitigate his losses and refresh his finances …. Point 2: Agreement by Eric to investigate all means available to enable him to guarantee that any future shipment of goods meets all your specifications in relation to desired standards within an acceptable level of variation …. Point 3: Agreement by you to continue to permit Eric to store the goods comprising the abovementioned Purchase Orders on your premises … until 13 July 1998."

[24]

"We ask you to decide which option is acceptable. If none of the options are acceptable we need to negotiate a settlement and come to a mutual agreement to end the contract due to it being frustrated by the inability to produce chinaware that meets your requirement without variation." 20 On 6 October Colonel Mathieson asked Mr Giammario to suggest an expert by 8 October. Mr Giammario said he was having trouble finding an independent commercial expert. Finding an independent expert was discussed at a meeting on 7 October between Mr Giammario and Messrs Windsor, Hands and Colonel Mathieson. Mr Hands raised the question of reviewing the Standard to determine whether it was above normal commercial and Defence needs. There were further exchanges about the appointment of an independent expert. On 9 October Mr Giammario supplied further samples to Mr Blake. At this stage Mr Giammario had still not suggested an independent expert. Later on 9 October Mr Blake commissioned SSL to test the samples Mr Giammario had given him for chipping and water absorption. On 16 October SSL submitted its report ("the October test report"). Of the eleven items tested, three failed the water absorption test and seven failed the chipping test. On 20 October Mr Giammario wrote to Colonel Mathieson, referring to earlier discussions, and agreeing to Defence's suggestion that an unnamed retired Defence employee give an expert appraisal with reference to the third option. However he expressed his reservations at having a person with prior Defence involvement, and said he would prefer someone totally independent. It will be necessary to examine the events of this period in more detail later. See pars 39‑44. 21 A file note made by Mr Blake of a conversation with Mr Giammario on 22 October records that he informed Mr Giammario of the Department's intention to use SSL to assess the Standard, that Mr Giammario was still not convinced because SSL was associated with the government, but "he did not object to our request to go ahead and request report." On 23 October Mr Blake requested SSL to "review the [ceramic tableware] standard for overall relevance and specifically comment on the following: (a) Tolerances/test levels for chipping and water absorption and supply a basis for any proposed amendments and (b) The reliability/uniformity of test results from one production batch to another."

[26]

22 Mr Giammario said that when he was informed of the outcome of the Standard report, he complained that he had never agreed to the appointment of SSL. At a meeting on 16 December attended by Mr Giammario and Messrs Windsor, Hands and Blake and Colonel Mathieson, Mr Giammario was told the SOA was cancelled. He was handed a letter which is in part as follows: "You are advised that as a result of your company's breaches of the requirements of the above Standing Offer, including failing to deliver Supplies in accordance with the requirements of the Standing Offer and failing to take action to remedy these breaches upon being requested to do so, the Commonwealth now exercises its rights under clause 16.1 of the Standing Offer and terminates the Standing Offer forthwith. In the alternative, your company's breaches of the terms of the Standing Offer and failure to rectify these breaches demonstrates an inability to perform its obligations under the Standing Offer and accordingly the Commonwealth accepts this repudiation of the Standing Offer and terminates the Standing Offer." 23 A file note prepared by one of the Defence personnel at the meeting records the key matters discussed: "Mr Giammario questioned, under reletting of the contract how would his tender be viewed by Defence during the selection process. Defence representatives explained that Sirway would be treated equally. In addition, Mr Giammario expressed concern that the other tenderers would now know his price that he submitted under the original Standing Offer and therefore [he] would be disadvantaged in the reletting of the contract. Defence explained to Mr Giammario, that it would be unfair to other crockery suppliers if Defence were to lower the Standard and place further orders with Sirway, without giving those other suppliers an opportunity to tender for the new contract. Mr Giammario questioned why Defence had chosen to cancel, indicating that from the last meeting it was his impression that the Standard would be lowered and further orders placed with Sirway. Defence indicated that this was not the case and that Defence had always maintained that it would reserve the right to cancel the current Standing Offer if Sirway could not meet all testing requirements of the Standard and Specification. Mr Giammario questioned why no dialogue had occurred on the SSL validation test result. Mr Giammario further indicated that he informed Defence by facsimile, that he wanted to be advised in writing of the SSL results. Mr Giammario indicated that he could not understand the contents of the validation report. Defence representatives then explained to Mr Giammario the contents of the SSL validation report …."

[29]

CONTRACT CLAIMS Breach of Standing Offer 25 The applicant claims that what occurred at the meeting between Mr Giammario and Mr Darby on 22 August 1997 was a breach of the SOA. It is alleged that Mr Darby "informed the applicant that the contract standard for the Standing Offer Agreement was to be, in part, varied". The findings recorded in pars 10 and 11 do not support this characterisation of what transpired at the meeting. The context in which the meeting occurred is important. In early May 1997 Mr Carrazza told Mr Giammario that some of the samples delivered with the tender did not match the Specification. In a conversation following that meeting, Mr Darby said he had concerns about the shape and badging of some of the items. Mr Giammario sought details of the aspects of the samples that did not match the Specification, but these were not provided until 13 August when Mr Carrazza gave him samples to assist him to produce the configurations required by the Specification. See par 6. Mr Carrazza's file note records that he was to get the three outstanding items to Mr Giammario as soon as possible because he needed them to take to China. At the meeting on 22 August Mr Giammario and Mr Darby had before them the applicant's samples together with AFC products that conformed with the Specification. As appears from the account in par 10, Mr Darby pointed out the respects in which some of the samples did not accord with the comparable conforming items. Mr Giammario took away with him the list on which he had identified the items that were satisfactory, those that required new moulds, and those that had to accord with the AFC product. He also took away the applicant's tender samples. Although Mr Giammario was disappointed at the turn events had taken, he went along with the course proposed by Mr Darby. As appears from his evidence recorded in par 11, he decided he would attempt to perform the agreement on the basis that Mr Darby wanted him to "replicate" the AFC chinaware, though this is not the word Mr Darby used. Mr Giammario's conduct thereafter is entirely consistent with this. He instructed the applicant's agent to arrange with the supplier to make new moulds for the items marked "M" on the list. He took with him to China the AFC samples to show the manufacturer what the required items were to look like. In those circumstances it cannot be said that what happened at the meeting was a breach of the SOA. 26 Mr Giammario seems to have thought the effect of the meeting was to change the obligation the applicant had assumed under the SOA. It was not. The applicant was required by the terms of the SOA to produce chinaware in accordance with the Specification. There were two aspects to this. The first related to the shape or configuration (dimensions and capacities) of the items. The requirements in this respect were set out in Annex B to the Specification. The second aspect related to the technical requirements contained in the Standard - water absorption and chipping. At the time of the August meeting it was known that some of the samples did not satisfy the requirements in Annex B. The easiest way of identifying the respects in which they did not comply was to provide items that did. That is what Mr Darby did. The requirement that the chinaware comply with this aspect of the Specification was unchanged. Indeed the applicant was being assisted by the provision of AFC products to understand the changes that needed to be made to produce complying samples. That was why he took the AFC products to China to show the manufacturer. All the evidence was to the effect that the configurations in Annex B were the same as those of the AFC product. Mr Darby's evidence was that the request for tender configurations were based on the AFC items. In cross‑examination he repeated this and was not challenged about it. Mr Carrazza said that on 13 August 1997 he gave Mr Giammario samples of the chinaware then in use to assist him to produce the configurations required by the Specification. In cross‑examination Mr Giammario accepted that at the August meeting Mr Darby told him the drawings in the Specification were based on AFC's Macquarie range. He repeated this in re‑examination, saying "The drawings that appear in the Specification I believe are based on [the Macquarie] range". The other aspect of the Specification, the Standard, was also unchanged, though at the time of the meeting no issue relating to the Standard had arisen because the bulk of the samples did not have the required dimensions and capacities, and no occasion to test them against the Standard had arisen. 27 In its statement of claim the applicant alleges that

[45]

33 The parties were agreed that it was an implied term of the SOA that the respondent could terminate it at any time if the applicant was unable to perform its obligations thereunder. The respondent also relied, as a ground for termination, on the applicant's anticipatory breach of contract constituted by its stated inability to provide products that satisfied the Standard. Its alternative ground of termination stated in Mr Hands' letter of 16 December 1998 (par 22) appears to be directed to this latter ground. It refers to the applicant's breach of the terms of the SOA and its failure to rectify the breach as demonstrating an inability to perform its obligations under the SOA, a repudiation of the SOA which the respondent accepted. There is ample evidence that the applicant was unable to perform its obligations under the SOA. Mr Giammario agreed that at the time of the 16 December meeting he accepted that the applicant could not supply chinaware in accordance with the Standard. In his letter of 29 September 1998 he informed Colonel Mathieson that the manufacturer could not give a 100% guarantee that all the bulk produced chinaware would meet the Specification, especially when tested under the Standard. He went on to say the applicant had decided that the Standard was impossible for the manufacturer to achieve with 100% success, and that the contract was "frustrated by the inability to produce chinaware that meets your requirement without variation". Mr Windsor said that at a meeting at Victoria Barracks in late 1998 Mr Giammario said he couldn't guarantee to provide products that met the Specification. Finally, as a result of the October test report, it was clear that after several attempts to satisfy the Standard, the applicant was unable to do so. See par 20. 34 The applicant's propounds three answers to the respondent's case that it was entitled to terminate for breach of the implied term. The first is that the applicant performed its obligations by delivering chinaware in accordance with the samples it submitted on 23 December 1997 which the respondent approved by its letter of 16 January 1998. I have dealt with and rejected this contention in par 28. The second answer is that the respondent accepted the first delivery, and accordingly the applicant must be taken to have met its obligations under the first and second purchase orders. The first part of this answer is correct. The second is not. The parties compromised their positions in respect of the first delivery. The applicant reduced its price and the respondent accepted the goods. The price was reduced because the respondent refused to accept the goods as complying with the Specification, including the Standard. I find that they did not comply, and that is why the applicant reduced its price. In any event, the fact that the respondent accepted the goods provides no answer to its claim that the applicant was unable in the future to supply goods that met the Specification, including the Standard. 35 The applicant's third answer is that the respondent could not be satisfied the applicant was unable to perform its obligations as to the future, on and from 16 December 1998, because it had decided the Standard was too severe and had to be replaced. By 16 December SSL had submitted the Standard report. It recommended that the chip resistance level be relaxed. However the maximum water absorption level remained unchanged at .4%. In October eleven of the applicant's products had been tested by SSL for water absorption and three of them failed the .4% test. They absorbed too much water. Mr Hands' evidence was that it was the October test report that caused him to decide to terminate the SOA. The applicant could not guarantee to supply goods that met the water absorption test. It follows that while the respondent may, because of the Standard report, have been of the view that the Standard was too severe with respect to chip resistance, it was not of that view with respect to the maximum water absorption level. The respondent's goods had not satisfied the water absorption test because they absorbed too much water, and SSL did not recommend any change to the maximum permissible absorption. The applicant's third answer thus fails. 36 For the reasons given in par 33, the respondent was entitled to terminate the SOA pursuant to the implied term. In view of this conclusion, I need not decide whether clause 16.1 of the SOA (referred to in the termination letter) provided an alternative ground.

[60]

40 In his affidavit Mr Giammario said that after his 29 September letter Colonel Mathieson telephoned him to make an appointment for 7 October to discuss the matter, and said the third option was the most likely to be adopted. On 6 October Colonel Mathieson asked Mr Giammario to suggest an expert by 8 October. Mr Giammario told him he was having difficulty finding an independent commercial expert. At the meeting on 7 October the working samples were discussed, as was finding an independent expert. Mr Giammario said he was told the "contract specification were to be reviewed and testing levels downgraded". Mr Hands denied that anyone said the levels were to be downgraded. He said there was discussion about reviewing the Specification to see if it was appropriate to Defence needs, that is, whether it constituted a standard above normal commercial and Defence requirements. I accept this account of what was said in preference to Mr Giammario's version. The probabilities do not favour an account that has Mr Hands pre‑empting the result of the review. On 9 October Mr Giammario delivered new working samples to Mr Blake. He "believed this was done to initiate the appointment of an independent expert to appraise the working samples as had been agreed". On 19 October Colonel Mathieson telephoned and discussed choosing an independent expert. Mr Giammario says he told Colonel Mathieson that no expert was to be briefed or engaged before the terms of reference were seen by his solicitor and agreed by both parties. Colonel Mathieson agreed with this. Mr Giammario said he confirmed this in his letter of 20 October (pars 20 and 39). 41 In cross‑examination on this topic Mr Giammario said the respondent had agreed with the third option in a meeting. The cross‑examination continued: "That's an agreement to have an expert appointed by the parties to give a determination. The parties may decide that the determination is final or can use it as a basis for negotiating? --- Yes, that's what I put forward. Which part of that did they agree on? --- They agreed to have an expert appraisal. And do what with it? --- And then we were to review the Australian Standard. What was the appraisal going to be of? --- The appraisal was to be of the standard, Australian Standard, which was then done. Then what was to happen with that? --- Well, originally, when we first talked about it we were going to look at the Australian Standard and see if it was achievable. Once we had checked the Australian Standard, that's when we would have sat down and worked out what we were going to do. Prior to that, the agreement which I requested from them and they agreed to was based on them showing my solicitor the terms of reference."

[62]

42 Mr Hands, who was at the meeting on 7 October, disagreed with the suggestion that the applicant's samples were to be used in the appraisal of the Standard. In the course of cross‑examination this exchange occurred: "But getting back to … the samples that are delivered on 9 October, I suggest to you, were delivered for the purpose of this validating the standing offer agreement as agreed on 7 October …? --- That's not my understanding of it. These samples were further samples against the contract to confirm or deny the ability of the contractor to meet the spec. They were not for validation of what we might do in the future. They were against the contract. … I'm sorry, so your understanding of what is delivered [on 9 October] is that it was simply to see whether the material passed the standard as you saw it? --- No, this was the next lot of samples that we agreed to accept in one of the meetings there. Again, to see if it could meet our contract requirements and this is in satisfaction of the contract. In other words, 'Can you ever meet this' …. What they were saying is they would, you know, provide more samples and we would test these to see if they could actually meet the contract standard. I didn't see that as part of a validation of our specification because quite frankly we didn't need to test samples to validate our specification. We needed to review expert advice from any source that we could get and say, 'Is this an appropriate standard for us to keep for the future given that it's a tough one for people to meet'." 43 The applicant relies on numerous documents which it says evidence the making of the agreement alleged. Some of them merely record the view held in September 1998 and later that the Standard's levels for chipping and water absorption may be unrealistic. Several record that the decision to have the Standard validated by an accredited laboratory was "initiated by Defence and Sirway". Two documents record conversations between Mr Giammario and Mr Blake about locating an expert. The first, which is undated, records Mr Giammario saying SSL was too close to Defence. Mr Blake asked him to "source an appropriate arbiter and inform this office within the next couple of days … urgent". The second (22 October 1998) would appear to record a conversation shortly after the first. While Mr Giammario was "still not convinced" that SSL should be used, he did not object to using SSL. This is the file note referred to in par 21. 44 The applicant's letter of 29 September 1998 speaks of an "Expert appraisal", without indicating what it is that is to be appraised - sample chinaware or the Standard. The applicant's letter of 20 October throws no light on the matter. I am not satisfied that the parties agreed that the samples the applicant was to provide were to be tested to determine whether the Standard was appropriate for commercial production of chinaware. Mr Giammario's evidence is inconsistent with the agreement pleaded. In his affidavit he said that on 9 October he delivered six sets of new working samples to Mr Blake. He believed these samples were for use by an independent expert "to appraise the working samples as had been agreed". His fax to Colonel Mathieson of 8 October, advising that the samples would be delivered to Mr Blake the next day, supports the view that this was the purpose of providing the samples: "Also note that I will include an invoice for the cost of transporting the working samples to Australia from China and the cost of the six sets according to the standing offer price. We will bear all other costs associated with the batch productions to reach the current standard and all tests done in China." The emphasis has been added. Mr Giammario's account of his conversation with Colonel Mathieson on 19 October is to the same effect. Mr Giammario believed the expert was to "appraise the working samples as had been agreed". His statement in the discussion with Colonel Mathieson that no expert was to be briefed before the terms of reference had been agreed, is to be understood as a reference to the appointment of an expert who was to appraise the working samples. Further, Mr Giammario's evidence is that on 7 December Mr Blake telephoned him and asked whether he had seen SSL's report on the testing of the eleven crockery items. Mr Giammario said he had not, and complained that he had not been consulted about the identity of the expert and the expert's terms of reference. Once again, this account relates not to an appraisal of the Standard but to the testing of further samples. I accept Mr Hands' account of what was agreed, namely that the samples provided by Mr Giammario were to be tested against the contract, and not in order to validate the Standard. As Mr Hands said, Defence did not need samples of the applicant's products in order to validate the Standard. As I have said, Mr Giammario's evidence accords with Mr Hands' account. This conclusion is also supported by the only unambiguous contemporaneous document, namely the applicant's fax of 8 October. The applicant has failed to establish that the parties agreed that fresh samples of its product would be used to determine whether the Standard was appropriate for the commercial production of chinaware. It follows that the terms the subject of the first four dot points in par 38 are not made out. Further, Mr Giammario's evidence set out in par 41 demonstrates that the terms the subject of the last two dot points in par 38 are not established.

[66]

Standard not given to manufacturer 47 The source of the applicant's difficulty in satisfying the Specification lay at its own door. Mr Giammario had examined the Specification closely. He was familiar with its terms. In his evidence he showed a familiarity with the various clauses that bore on the events that had happened. He knew the chinaware had to satisfy the Standard. The Standard is mentioned in clause 1 of the Specification - the Specification must be "read in conjunction with AS 4371 CERAMIC TABLEWARE". Clause 2 informed the reader that reference may need to be made to AS 4371 - Ceramic Tableware. Clause 4.4.1 provided that testing of all items was to be in accordance with the Standard. 48 The applicant obtained the quotation and the tender samples from its supplier without drawing its attention to the Standard. The supplier was thus unaware of the need to comply with the water absorption and chipping requirements. The following exchange occurred in the course of Mr Giammario's cross‑examination: "Did you read the DEFAUST specification before you tendered? --- Yes. Did you notice that that referred to the Australian Standard? --- As a test? Yes? --- Yes. Did you get a copy of the Australian Standard at that stage? --- No. When was the first time you ever looked at the Australian Standard? --- Phil Blake said, 'Have you ever seen the Australian Standard' in about June, after all the crockery had been tested, and I said …. June what year? --- June 1998, sorry, and I said no. He said, 'Well, I better get you a copy', and he handed me a copy at a meeting at Victoria Barracks. You know now, because of all this fuss, that the Australian Standard has a measure of water absorption levels? --- Yes. It says in particular that the absorption should not exceed 0.4 per cent? --- 0.04 I think is the right figure. I might be wrong there. … And that the Commonwealth rejected the goods on the basis that some of them failed the water absorption test, among other reasons? --- Yes."

[81]

53 In McMillan Emmett J also sought to distinguish between those activities of the Commonwealth that are purely governmental and regulatory and those that constitute the carrying on of a business. In that case his Honour held that the Commonwealth, in the guise of the Australian Government Publishing Service ("AGPS"), was carrying on the business of providing general printing services, dispatch and distribution services, graphic design services and editorial services, albeit that the services were rendered in connection with government. In Mid Density Development Pty Ltd v Rockdale Municipal Council (1992) 39 FCR 579 Davies J held that neither the carrying out a function of government in the interests of the community nor the performance of a statutory duty in respect of which fees may be charged is a trading activity for the purposes of the definition of corporation in s 4(1). See also Saitta Pty Ltd v Commonwealth (2001) 162 FLR 35 ("Saitta"). 54 As s 4 provides, the pursuit of profit is not an essential characteristic of a business. Consequently, the Commonwealth's provision of services for a commercially inadequate fee does not preclude a finding that a business is being carried on: McMillan. Likewise, a business may still be carried on when the activities engaged in are purely altruistic or charitable in scope: Fasold. 55 The effect of s 2A is that the Act applies only insofar as the Commonwealth carries on a business. Thus the ambit of the business activities of the particular Commonwealth enterprise must be examined to see whether the impugned conduct was engaged in as part of the carrying on of a business. In McMillan Emmett J held that while the Commonwealth through the AGPS was carrying on the business of publishing, printing and distributing government information, the conduct under scrutiny had not been engaged in in the course of carrying on that business. The relevant conduct was the Commonwealth's issue of a request for tenders for the purchase of different areas of the activities of the AGPS and its dealings with the prospective tenderers. His Honour found that such conduct was divorced from the carrying on of the business as it was distinct from the activities performed by the Commonwealth through the AGPS, pertained to the cessation of the business, and had been the responsibility of officers of the Commonwealth who had nothing to do with the daily operations of the AGPS. His Honour said (at 356): "Persons dealing with the Commonwealth in relation to the actual conduct of a business will have the same protection as when dealing with a private trader who is carrying on such a business but will not have protection when entering into other dealings with the Commonwealth."

[88]

(i) The business of trading in china or acquiring china in industrial quantities 58 The Department's core function is the defence of Australia and its national interests. The business it is alleged to carry on is supportive of, if not integral to, that core function. That is, it is essential to the defence of Australia that army and air force barracks and naval vessels are furnished with chinaware so that the service personnel charged with the actual task of defending Australia can be fed in a civilised manner. In determining whether by acquiring chinaware for this purpose the Department is carrying on a business, it is relevant to bear in mind that the Department's primary activity does not amount to the carrying on of a business. 59 The applicant offered no evidence that the respondent was carrying on the business of trading in or acquiring chinaware in industrial quantities other than the fact that the Department called for tenders, accepted tenders and entered into the SOA and acquired large quantities of chinaware. The SOA itself indicates that the Department was to place orders for chinaware with the applicant from time and time during the intended three year period. Indeed it did so on two occasions prior to the demise of the parties' relationship. The respondent's evidence is more illuminating. Norm Thomas, an employee of the Department, who was responsible for procuring supplies including chinaware, said that chinaware purchased by the Department is delivered to a depot and issued on an "as required" basis to the army, navy and airforce ("the Services"). The Services do not pay the Department for the chinaware, nor is any damaged or excess chinaware re‑sold by the Department or the Services. The evidence also establishes that prior to entering into the SOA, AFC supplied chinaware to the Department. 60 The nature of the SOA, and in particular the contemplation that there be repeat transactions with the applicant for the supply of chinaware, suggests that there was some repetition, system and regularity. See McMillan, Hungier and Fasold. However, such indicia are not in my view sufficient to establish that the respondent was carrying on a business when the circumstances in which the business is alleged to operate are more confined than those that pertain to non-governmental enterprises. In this case, the alleged business relates to the acquisition of goods by the respondent from only one entity, that is the applicant, and the market for which the goods are acquired or to be traded in is not the world at large but is restricted to the Services. The oft cited example of a person making repeated deposits with a bank demonstrates that caution should be exercised when relying on regularity indicia. Closer to the present case is the shopper visiting his or her supermarket on a weekly basis. There can be no doubt that this shopper is not carrying on the business of acquiring provisions notwithstanding the existence of repetition, system and regularity. 61 The "as needs" basis upon which the chinaware is supplied to the Services by the Department, and the existence of a depot for distribution also evince some repetition, system and regularity in respect of the Department's handling of the chinaware once acquired. This is relevant to the trade aspect of the business. Section 2C of the Act, however, provides that for the purpose of s 2A, a transaction involving only persons who are acting for the Crown in the same right does not amount to carrying on a business. As the Department and the Services act for the Crown in the same right, any transactions between them for the distribution of the chinaware do not constitute carrying on a business. The applicant is therefore unable to rely on the interaction between the Department and the Services to support its contention that a business is being carried on. 62 Because the Department's trade in or acquisition of chinaware so obviously relates to the execution of a government function which is in the interests of the community, it does not have the characteristic of carrying on a business. See McMillan, Mid Density Development and Saitta. As I have said in par 58, the Department's acquisition of chinaware was done for the purpose of sustaining men and women of the Services so that the primary task of defending Australia and its national interests can be pursued. This activity does not constitute the carrying on of a business because it does not have the flavour of a commercial enterprise. Rather is inextricably linked with a function of government. Because I am considering an activity that is of a subsidiary priority when compared to the Department's main function, my conclusion regarding the true purpose for which the activity is performed is informed by the principal government duty that is discharged by the Department.