The Commonwealth of Australia v Amann Aviation Pty Ltd

ng business". Kodak carried on business as a supplier of graphic, photographic, colour separation and image setting equipment and systems. Mr White and Mr Brodie were employees and agents of Kodak. Mr Knox and Ms Johnson were employees and agents of Canvas. In or about May 1991, both Ms Johnson and Mr Knox, on separate occasions, informed Mr White that Canvas had previously purchased an Agfa ColorScape system which was incapable of producing colour. After being told this by Mr Knox, Mr White "offered his assistance on behalf of Kodak to overcome the Agfa colour output problems". In or about July 1991, Mr Knox told Mr White that he was "looking for an alternative colour production system" in order to "establish a significant position in the newspaper colour market". Mr White told Mr Knox that "Kodak was releasing a colour separation system called Prophecy". Representations made by Mr White prior to 8 August 1991 In early August, Mr White informed Mr Knox that "Kodak was about to release a fully integrated colour system ("Prophecy") that handled all aspects of commercial colour separation" and that Prophecy had a "processing speed and capacity well in excess of that available from Macintosh" and was "fully integrated from scanner to image setter". Mr White told Mr Knox that Prophecy would be "ideal for Canvas Graphics and would resolve its colour output problems". Demonstration of Prophecy system on 8 August 1991 Mr Knox attended a demonstration of the Prophecy system on 8 August 1991 and was informed by Mr Brodie that Prophecy provided "closed loop colour calibration", included a "Scantext Image Setter" which had been "extensively tested" and also provided "accurate colour matching of screen to proof". Mr Brodie informed Mr Knox that Prophecy gave high productivity because of its ability to operate at high speed and that it was capable of producing moiré-free colour separations. At the demonstration, Mr Brodie gave Mr Knox a brochure entitled "Kodak Prophecy System - a revelation in colour" (Doc.9), which stated that Prophecy was faster than old technology, that it contained "closed loop colour calibration technology" and that it could "accept, manipulate, evaluate and output professional high quality graphic art colour images in any open or networked environment compatible with the PostScript language". At the demonstration, Mr Brodie told Mr Knox that the Prophecy system would "image colour separations in approximately 25 minutes". Entry into Rental Agreement on 2 September 1991 Induced by these representations, on 2 September 1991, Canvas entered into a written rental agreement with Kodak to lease a "Kodak Prophecy Desk Top Publishing System" ("the equipment") for a period of 5 years at a monthly rental of $7,149. It was an implied term of the rental agreement that the equipment would be of "merchantable quality", would be "suitable for Canvas Graphics' purposes", would "perform the functions and produce the high quality product" as had been represented and would be "delivered and commissioned within 5 weeks of Canvas signing the rental agreement". Canvas complaints about the equipment and conduct of Kodak Canvas pleaded that the Prophecy system did not function as represented and was not "commissioned" because of specified defects in the equipment and defaults by Kodak. The particularised defects and defaults were also relied upon as particulars of negligence, breaches of statutory duties and breaches of the implied term. Loss Canvas claimed to have suffered the following loss: a) Operating loss incurred to 30 June 1992 $362,562 b) Loss of profits for the period 1 July 1992 to 31 October 1992 $3,057,004 $3,419,566 Claims for relief Canvas claimed damages or compensation pursuant to the Trade Practices Act, the Fair Trading Act (SA), the Misrepresentations Act (SA) and for breach of contract and for negligence in the above amount. THE CASE PLEADED IN KODAK'S AMENDED DEFENCE Kodak's defence to the amended statement of claim admitted the occasions of the pre-contract discussions and demonstration alleged, but denied each of the substantive allegations upon which liability depended. Further, Kodak pleaded an accord and satisfaction, claiming that on 10 April 1992, the day after Canvas commenced proceedings, the parties verbally agreed to settle all outstanding differences between them. Kodak also raised a defence of "causation", claiming that any difficulties Canvas experienced with the operation of the equipment resulted from the actions of Mr Knox, extensive particulars of which were pleaded. The particulars included allegations that Mr Knox failed to submit Canvas operators to adequate training, interfered with the Prophecy system software, failed to adhere to instructions given by Kodak, and failed to afford Kodak reasonable access to the equipment by, inter alia, "consistently and persistently" subjecting Kodak staff to abuse. Finally, Kodak alleged that Canvas had failed to mitigate its loss in that it repudiated the settlement that had been agreed between the parties on 10 April 1992, and had failed to obtain alternative equipment after purporting to rescind the Kodak rental agreement on 6 April 1992. THE CASE PLEADED IN THE CROSS-CLAIM BY KODAK In June 1993 Kodak filed an amended cross-claim against Canvas which alleged that: • Pursuant to the rental agreement the equipment was delivered to Canvas on 21 October 1991. • Canvas failed to pay any monthly rental charges and was indebted to Kodak in the sum of $57,192 for rental charges due to June 1992, at which date Canvas was insolvent. • On about 13 April 1992, Canvas repudiated the accord and satisfaction made on 10 April 1992. Kodak accepted the repudiation on 29 June 1992. • On 29 June 1992, Kodak accepted Canvas' breaches, sought delivery up to it of the equipment, and terminated the rental agreement. • Before June 1992 the parties had entered into further agreements under which Canvas was supplied with additional equipment and Canvas agreed to purchase from Kodak over a period of time consumables to the value of $200,000. Consumables to the value of $20,475.29 were supplied but not paid for. • The equipment was not delivered up to Kodak until 18 December 1992, and then pursuant to an order of the Court. Kodak claimed unpaid rental, moneys due for consumables, and damages for wrongful detention of its equipment. THE FINDINGS AND REASONING OF THE TRIAL JUDGE There was substantial dispute between the parties as to the information which Mr Knox gave to Kodak representatives and as to what Mr White and Mr Brodie said to Mr Knox about the Prophecy system and its capabilities during the discussions and the demonstration prior to entry into the rental agreement on 2 September 1991. His Honour held that from May 1991 Mr Knox had made clear his intense dissatisfaction with the Agfa equipment, and had told Mr White that he was looking for an alternative colour production system; and that Mr White represented to Mr Knox that the Prophecy system was "ideal" for Canvas and was capable of resolving its colour output problems (p.2251). His Honour found that at the demonstration it was agreed that Prophecy provided closed loop colour calibration and had the ability to do major colour correction, colour retouching, image cloning and masking. His Honour accepted Mr Knox' description of closed loop calibration as meaning that the image on the output film produced by the equipment exactly matched the image which the operator observed on a computer monitoring screen. This meant that whatever adjustments might be made to the image on the screen by the operator would be accurately reflected in the final product. His Honour was also satisfied that at the demonstration Mr Brodie offered an output speed time of 25 minutes. His Honour concluded that, having regard to the information which Mr Knox gave to Mr White and to Mr Brodie, the rental agreement contained implied conditions of merchantability and fitness for the purpose for which the Prophecy system was acquired. On the issue of fitness, his Honour found that Kodak held out that the Prophecy system would be suitable for Canvas to use for the purpose of PostScript colour output, and as to merchantability, there was an implied term that the system would be operational and capable of fulfilling its promised functions (p.2219). The Prophecy system was installed on 21 October 1991 but satisfactory output was not achieved. Mr Knox was at all times thereafter dissatisfied with the capabilities of the system. After canvassing Mr Knox' complaints in detail, his Honour concluded that the system was not fit for the purpose for which it was acquired because of the following deficiencies: (p.2252). • It had an inadequate 500 Mb drive system. During a visit by Mr Knox to Kodak Electronic Printing Systems ("KEPS") in America in March 1992, he was informed that a 1 Gb system drive was required to achieve the image area that he had expected, and Kodak installed the larger drive, rectifying this defect, on 19 March 1992. • The monitor did not have closed loop calibration. • The system could not consistently produce colour images because of a black plate problem. This was rectified by Kodak on 9 January 1992. • There was a "45 degree angle problem". This was not corrected until 11 December 1991, and his Honour observed that it should never have occurred. • Output time was too long for commercial productivity, and greatly exceeded the 25 minute time represented. Mr Knox had ascertained from the KEPS personnel that output time could be improved by the installation of a High Performance Group card (an HPG card). One was ordered by Kodak after Mr Knox returned from America. It arrived in early April 1992 and its proposed installation featured significantly in the settlement negotiations which occurred at the time of the alleged accord and satisfaction. The HPG card was not inserted but was available to Kodak at that time. • It would not interface with the Scantext 2051 PD Image setter. This item was not a Kodak product but his Honour held that it was supplied as part of the system and was subject to the Kodak warranties. The image setter was replaced by Kodak with a Linotronic 530 image setter on 2 December 1991. His Honour also held that the equipment was not of merchantable quality referring to "the magenta caste, to the black plate, to the 45 degree problem, and to the Scantext image setter" (p.2253). A persistent complaint by Mr Knox had been that the output was prone to display a magenta caste, a defect related to the closed loop calibration feature. As counsel for Kodak put it, "the caste was simply the alleged manifestation of the failure to obtain closed loop calibration". The findings that the equipment was not fit for the purpose for which it was acquired, and was not of merchantable quality constituted breaches of contract. His Honour held that the failure of Kodak to make the system operational after it had been installed for over 6 months was sufficient cause for Canvas to rescind the rental agreement. His Honour also concluded that Kodak, through Mr White and Mr Brodie, had been guilty of misleading and deceptive conduct, in particular in relation to Mr White's statement that the Prophecy system was "ideal" for Canvas, and Mr Brodie's statement as to the speed of output. His Honour rejected the plea by Kodak that any difficulties experienced by Canvas in the operation of the equipment was caused solely by the conduct of Mr Knox. His Honour rejected as unfounded the suggestion that there had been interference with the Prophecy software. On the question of inadequate training due to Mr Knox' conduct, his Honour noted that this was a complaint raised for the first time in Kodak's pleadings. His Honour held that Kodak was bound by the evidence of its senior trainer, Mr Gardiner, that Mr Knox and his staff had been sufficiently trained by March 1992 although his Honour doubted this. On the other hand, his Honour considered that the lack of operator training until March 1992 (when Mr Gardiner conducted a training session) was contributed to by Mr Knox' conduct and that his degree of responsibility was a matter to be taken into account in any assessment of damages. The plea of accord and satisfaction was rejected. On the question of damages his Honour was presented with reports prepared by Mr Martin, a chartered accountant, on behalf of Canvas, which sought to quantify both the actual losses of Canvas to 30 June 1992 and to 30 June 1993, and the loss of profits. The amount claimed in the amended statement of claim was based upon one of the reports by Mr Martin. The reports were substantially similar to those presented on behalf of Canvas in the Heidelberg case. It is implicit in his Honour's reasons that he rejected the evidence of Mr Martin in the Kodak case for substantially the same reasons as he did in the Heidelberg case, although those reasons were not repeated in detail in his judgment in the Kodak case. His Honour considered that the starting point for the calculation of the damages of Canvas attributable to Kodak was October 1991 when the Prophecy system was installed. His Honour rejected the argument that it was appropriate to assess Canvas' losses upon the premise that all establishment costs and all operating costs from that date were Kodak's responsibility. Canvas already had an operating business, and with effect from early December 1991 when Kodak provided the Linotronic 350 image setter, Canvas, through the scanners and various workstations it operated independently of the Prophecy system, had the capacity for colour output in addition to its other avenues of business. His Honour said: "In this regard it is necessary to make an observation which is similar to an observation that I made in the judgment in the Agfa proceedings: Canvas Graphics had acquired equipment - not a business - as a result of its contract with Kodak. In other words, this litigation is concerned with the losses that are attributable to faulty equipment or lack of operator training; it is not to be assumed that such losses equate with all losses that were incurred in the operation of the business in the same period." (p.2257A-B). His Honour identified that there were at least three reasons why Mr Knox and Canvas would have faced severe difficulties in making a successful entry into the PostScript colour bureau market: "First, he was starting a new business of which he had little experience, in recessionary times. Secondly, he was starting from a very poor financial base with a prospect that there would be a delay in cash flow until the system had been made operational and the operators had become proficient in the use of the equipment. Thirdly, he had a very strong market competitor in Adelaide Apple Bureau and, in addition, the traditional colour houses have since become a new force and new competitors in the PostScript colour market." (p.2262) His Honour proceeded to make a global award of $185,000. It is apparent that in doing so his Honour has had regard to the evidence of Mr Baker, a chartered accountant called on behalf of Kodak, who had analysed the financial statements of Canvas and sought to identify incremental costs incurred by Canvas attributable to the Kodak equipment failure. His Honour said that the global figure took into account Mr Baker's calculation of $42,079 as his estimate of past losses to 30 June 1992, and it also took into account loss of profits up to October 1995, and interest to date. On the cross-claim his Honour awarded Kodak $13,947 for consumables about which there was no contest, but otherwise dismissed the cross-claim without indicating specific reasons for doing so. THE APPEAL AND CROSS-APPEAL The appeal by Canvas is limited to the question of damages and, consequentially to the question of costs if the appeal on damages succeeds. Kodak by cross-appeal challenges the adverse finding of liability, the assessment of damages, the dismissal of part of its cross-claim and the order for costs. The grounds raise the following issues: • that the Prophecy system did have closed loop calibration and the alleged magenta caste was not the result of a defect in the equipment, but was due to operator error; • that the Prophecy system did have a commercially viable output time; • that the other problems found were simply "bugs" in the system which had been rectified by 6 April 1992, and that Canvas was not justified in rescinding the contract of lease on that date; • that there was no contractual obligation on Kodak to provide training; • that there was an accord and satisfaction; • that the assessment of damages was manifestly excessive; • that the cross-claim for rental payments and damages for conversion was made out at trial; • that the trial judge erred in the exercise of his discretion as to costs. Kodak seeks orders dismissing the Canvas application and for judgment on the cross-claim of $116,473 together with costs. CONCLUSIONS ON THE APPEAL AND THE CROSS-APPEAL It is convenient to deal first with the grounds in the cross-appeal which go to Kodak's liability. On the first four grounds, Kodak submitted that of the six deficiencies in the Prophecy system found by his Honour, only two could have been regarded as continuing deficiencies at the date of the purported rescission by Canvas on 6 April 1992, namely the alleged absence of the closed loop calibration and the output time. Kodak submitted that his Honour was in error on both topics. It would follow that justification for the rescission on 6 April 1992 did not exist and that damages should be limited to the period of teething troubles from October 1991 until the various deficiencies proved at trial had been rectified. Magenta caste/closed loop calibration Notwithstanding the clear finding that the equipment lacked closed loop calibration made by his Honour, Kodak submitted that his Honour should have found that the cause of the magenta caste was operator error, as that conclusion was supported by evidence that the caste was an intermittent problem and that Kodak was able to produce caste-free output in tests conducted on the equipment after possession of it was retaken by Kodak. Moreover, Kodak contended that his Honour found at one point in his reasons that the magenta caste resulted from an inadequacy of training of Mr Knox. Reliance by Kodak on this alleged finding led it to mount the further argument that his Honour erred in finding that it was an essential term of the contract between Kodak and Canvas, that Kodak would provide adequate training for Mr Knox and Canvas staff to allow the Kodak equipment to be operated properly. It was common ground, as found by his Honour, that Mr Knox had complained about the presence of a magenta caste in the colour product of the equipment from early January 1992. His Honour noted that one cause of the magenta caste may have been inadequate closed loop calibration in the equipment. He also noted that it was Kodak's case that the occurrence of the magenta caste was due to operator error. Whilst his Honour did not refer expressly to all the evidence of the Kodak test results, about which there was considerable contest at the trial, there is no reason to think that his Honour overlooked it. His Honour was impressed with the evidence of a Mr Clausen who attended a demonstration of the equipment at Canvas' premises on 18 June 1992 at the invitation of Kodak. Mr Clausen was a colour grader whose skills were used for precise colour corrections in the use of such equipment. Mr Clausen gave evidence that at the completion of the demonstration a magenta caste was evident in the proof produced by the equipment, a non-commercial product. He confirmed the evidence of other witnesses that monitors must be calibrated on a regular basis and that any substantial movement in the monitor may cause a loss of calibration. Mr Clausen acknowledged that he had attended a later demonstration by Kodak where a proof was produced free of magenta caste. This fact however did not cause him to alter his opinion about the performance of the equipment on 18 June 1992. At the conclusion of his evidence he was asked: "When you left the premises of Canvas Graphics on 18 June having observed some matters that you have told his Honour about, did you consider that any substantial works were needed to be done to correct any equipment which you saw? - I still believed when I left that it was a fairly simple case of monitor calibration that would solve the problem." The passages from his Honour's judgment upon which Kodak now rely are as follows: (pp.2240-2241) "Mr Clausen's evidence establishes that in June 1992 Canvas Graphics' Prophecy system was outputting with a magenta caste. His evidence suggests that this may have been caused as a result of a deficiency in the equipment; and perhaps that deficiency arose because of a need to recalibrate; that, in turn, may indicate operator error. He did however lean towards a deficiency in the equipment, for he said in his report of 17 October 1992 to Mr Knox (Doc.178): 'You have requested my assessment of the difficulties in obtaining correctly colour balanced reproductions when using the Kodak Prophecy system. My assessment is that the difference observed in colour temperature between the optical viewing source and the grading monitor would make fine and precise colour correction difficult if not impossible.' Although his evidence does not establish, on the balance of probabilities, whether it was the one or the other, his evidence does establish that Mr Knox either did not know how to recalibrate the Prophecy system or did not know how to operate it correctly. This finding of inadequacy is, in turn, traceable back to an insufficiency in Mr Knox's training." Mr Clausen did not in his evidence, suggest that the magenta caste that he observed on 18 June was caused by operator error on the part of Mr Knox. Mr Clausen in response to a general question in cross-examination, acknowledged that accurate and consistent colour grading is difficult and that operator skill is paramount in obtaining consistent results; and to this end training in the operation of equipment such as the Prophecy system was a significant requirement. However, he did not suggest that lack of training on Mr Knox' part was the explanation for what he saw. Moreover, whilst he suggested that recalibration would solve the problem, he did not suggest that recalibration was something which an operator such as Mr Knox should perform. On the contrary, he agreed with Kodak's counsel that calibration was something to be done by "a particular engineer" using sophisticated calibration software or equipment to perform the task. The evidence of Mr French, an equipment specialist at Kodak, was to the effect that calibration was performed with a Thoma tool, the only one of which was kept in his office in Melbourne and which was only to be used by specially trained personnel. Recalibration of the kind being referred to by Mr Clausen was clearly outside the role or allowable actions of Mr Knox. Mr Clausen was not referring to correction tools in the software which would be routinely used by an operator to achieve a desired result. We agree with his Honour that Mr Clausen's evidence shows that Mr Knox did not know how to recalibrate the Prophecy system but we have difficulty following what his Honour had in mind in saying that a calibration deficiency in the equipment may indicate operator error or be traceable to an insufficiency in Mr Knox' training. His Honour has plainly held that the Prophecy equipment did not have closed loop calibration which would prevent output with a magenta caste. That finding implicitly resolves the question whether the magenta caste was due either to deficiency in the equipment, or was due to operator error. Whilst his Honour expressed the view in the above passages of his reasons that the evidence of Mr Clausen did not establish on the balance of probabilities between one or other explanation, the evidence of Mr Clausen was not the only information before the Court on that topic. His Honour noted earlier in his judgment that on 31 January 1992 after Mr Knox' complaints of the magenta caste had been considered, Mr O'Sullivan of Kodak wrote to Mr Knox saying that he believed the magenta caste was due to: "The precision ICC software being inactive or a need to recalibrate the scanner". The topic of the magenta colour caste was raised by Canvas in its pleadings, but Kodak did not plead to the allegation, claiming that it was a matter of evidence. However in opening his case for the defence, counsel for Kodak addressed the question of magenta caste with the observation that the system had been commissioned; it was said to be operative and such obligations, if any, as thereafter arose as a result of deficiencies in the quality of output, were merely matters of servicing and maintenance. These statements do not lend support to the case that colour caste caused by an error in calibration was the responsibility of Mr Knox through operator error. Perhaps his Honour intended no more, from his references to possible operator error being associated with the explanation that the magenta caste was due to a need to recalibrate, than to draw attention to the fact that Kodak were on the horns of a dilemma once he accepted the evidence of Mr Clausen that the Prophecy system was outputting a magenta caste in June 1992: the caste was due either to a deficiency in the equipment or to a deficiency in training, and in either event Kodak was responsible. The submissions of Kodak recognised the dilemma, hence the attack upon the finding that it was an essential term of the contract between Kodak and Canvas that Kodak would provide adequate training for Mr Knox and Canvas staff. Kodak submits that it was under no such obligation. This submission has its genesis in the fact that the rental agreement makes no reference to training. However as his Honour pointed out in his reasons, training was specifically mentioned in a letter dated 30 August 1991 which was written in the expectation that Canvas was then about to enter into the rental agreement. In the opening sentence Mr White said: "...we would like to formalise our proposal and summarise the services and benefits which are being offered to you". And at a later stage in the letter there appears the following passage: "As the training costs are an upfront expense to Kodak, we would need to invoice you for this amount at the date of installation. The cost of one week's training (Monday to Friday) for two operators is $3,500." (p.2231) It is hardly surprising therefore that the case of both sides at trial was presented upon the premise that training was an essential term of the bargain. His Honour had in mind that the sophisticated equipment leased to Canvas could only be made operational by Canvas if adequate training was provided by Kodak for the staff Canvas would use to operate the equipment. It was in that sense that his Honour treated the delivery of training as an essential term of the contract and the absence of that training as a cause of the equipment being non-operable. In its defence at trial, Kodak sought to make the case that Canvas had either failed to produce staff for training, or had failed to allow Kodak personnel access to the equipment to test and service it and eliminate faults. That defence involved a full-blooded attack by Kodak upon Mr Knox both as to his conduct and his competence. His Honour weighed very carefully the evidence relevant to that aspect of Kodak's defence and found that although the conduct of Mr Knox exacerbated a strained relationship between Mr Knox and Kodak, and that on occasions his behaviour was not excusable, the fact remained that Mr Knox had continued to seek instruction from Kodak as to how the deficient product of the equipment could be corrected. His Honour did not accept that Kodak's reliance upon this defence was other than an ex post facto rationalisation of its failure to adequately instruct Canvas' personnel. The conclusions made by his Honour were based on inferences his Honour drew from consideration of the evidence and from his assessment of the reliance to be placed on the witnesses according to the impression the delivery of their evidence had made upon him. It is patently clear that it was open to his Honour to find on that evidence, according to the weight his Honour gave to aspects of it, that the training of the Canvas personnel was an essential term of the bargain between the parties and that Kodak did not meet its contractual obligations with respect to operator training (p.2239). Output time On the question of the slow output capacity of the equipment, his Honour found that it had been represented to Canvas that the equipment was capable of delivering a colour product in 25 minutes whereas the output time was substantially longer than that, apparently up to 55 minutes. Kodak submitted that at the time the equipment was delivered in late 1991, the output time was accepted by other operators around the world and that the absence of a shorter output period did not make the performance of the equipment non-commercial. His Honour found, however, that the representation of speed of performance was false and that the installation of a high performance group card ("HPG card") to speed up the time of output was essential to make the equipment commercially useful. The installation of an HPG card had been offered by Kodak but not carried out at the time Canvas rescinded the agreement. Having found that the productive time of the equipment had been misrepresented, a finding not seriously challenged in the appeal, there was ample material on which his Honour could base his conclusion that the misrepresentation occasioned loss and that the slowness of output made the equipment unsuitable for the purpose for which it had been acquired, a purpose made known to Kodak early in the negotiations. It follows that the combination of the continuing repetition of magenta caste and the inability of the equipment to meet the output time represented, being a time accepted as part of the purpose for which the equipment was acquired, provided a sound foundation for his Honour's finding that Kodak had failed to make the system operational after it had been installed for over six months, giving sufficient cause for Canvas to rescind the contract to lease the equipment (p.2253). Accord and Satisfaction We turn now to Kodak's submission that an accord and satisfaction was made on 10 April 1992. On the day after Canvas commenced proceedings against Kodak and before the proceedings were served on Kodak, Dr Switkowski (Deputy Managing Director of Kodak) and Mr Knox spent some time on the telephone discussing the differences between Canvas and Kodak and ascertaining whether those differences could be reconciled. In its defence Kodak claimed that on behalf of Canvas and Kodak, Mr Knox and Dr Switkowski agreed that in consideration for the performance of certain promises by Kodak, Canvas agreed to discharge Kodak from liability under the causes of action that Canvas had against Kodak. As pleaded, it was not part of the promises to be performed by Kodak that the equipment be made operational forthwith. When Dr Switkowski engaged in discussions with Mr Knox on 10 April 1992, it was in the knowledge that Canvas had advised Kodak that it was ready to commence litigation against Kodak but was prepared to discuss settlement in lieu of litigating its claims. Offers and counter offers for settlement had been exchanged in correspondence in the week before the meeting, although at the end of that correspondence, it appeared that Canvas had withdrawn from discussion of settlement. Dr Switkowski initiated the contact with Mr Knox by telephone on 10 April 1992. A significant part of the proposal was the provision of finance by Kodak to Canvas in the sum of $100,000 interest free for five years, loan repayments to be made monthly in advance and to commence on 1 November 1992. According to Dr Switkowski, the final telephone call ended with Mr Knox saying words to the effect of "all right, its a deal", and with Dr Switkowski advising Mr Knox that he would send "a written confirmation" on Monday 13 April 1992 together with a draft release. It was Mr Knox' evidence that he had said in the final telephone call that he would agree to the proposals put by Kodak subject to the Prophecy system being made to work immediately. A draft deed of settlement and release was forwarded by Kodak to Canvas' solicitor, David Berman, on 13 April 1992. The draft deed did not contain any promise to install the HPG card or properly calibrate the monitor screen immediately. At trial, Kodak submitted to his Honour that it was one of the terms of the oral agreement that Kodak so install the speed enhancing equipment and calibrate the screen monitor. His Honour accepted the evidence of Dr Switkowski in most respects but with a significant qualification. His Honour found that Dr Switkowski genuinely, but mistakenly, believed that a settlement had been negotiated with Mr Knox on 10 April 1992. His Honour found that the position arrived at by the parties on this date did not constitute a binding agreement at law. It was not in issue before his Honour that an accord and satisfaction could be constituted by an oral exchange of executory promises. (see: British Russian Gazette and Trade Outlook Ltd. v Associated Newspapers Ltd. [1933] 2 KB 616 per Scrutton LJ at 643-644; Fraser v Elgen Tavern Pty Ltd [1982] VR 398 per Murphy J at 400-401). However, it is a question of fact whether an intending plaintiff has accepted in place of a cause of action an executory promise or the performance of the promise. As Dixon J said in McDermott v Black (1940) 63 CLR 161 [at 183-185]: "The essence of accord and satisfaction is the acceptance by the plaintiff of something in place of his cause of action. What he takes is a matter depending on his own consent or agreement. It may be a promise or contract or it may be the act or thing promised. But, whatever it is, until it is provided and accepted the cause of action remains alive and unimpaired. The accord is the agreement or consent to accept the satisfaction. Until the satisfaction is given the accord remains executory and cannot bar the claim. The distinction between an accord executory and an accord and satisfaction remains as valid and important as ever. An accord executory neither extinguishes the old cause of action nor affords a new one. The decision of the Court of Appeal in British Russian Gazette &c. Ltd. and Talbot v. Associated Newspapers Ltd. (1933) 2 K.B. 616, though doubtless some of the reasons display less zeal for principle than for reform, does not appear to me to be inconsistent with the received doctrine that no new cause of action is given by an accord executory. In that case, the agreement constituting the accord was made as a compromise of three several causes of action vested in three persons respectively. It was made by one of them purporting to act not only on his own behalf but also as agent for the other two. In fact he had no authority to do so, and he was held liable for damages for breach of warranty of authority. This result might perhaps be supported, even if the agreement were an accord executory, on the ground that, at all events, the opposite party had acted to some extent on his representation of authority, but the intention of the parties appears to have been that the agreement of compromise should itself have been accepted as in satisfaction of the causes of action, so amounting to an accord and satisfaction. The case, therefore, provides no more than a late illustration of the doctrine, finally established perhaps by Flockton v. Hall (1849) 14 Q.B. 380, that of accord and satisfaction there are two cases, one where the making of the agreement itself is what is stipulated for, and the other, where it is the doing of the things promised by the agreement." Dixon J went on to say [at 184-5]: "The distinction depends on what exactly is agreed to be taken in place of the existing cause of action or claim. An executory promise or series of promises given in consideration of the abandonment of the claim may be accepted in substitution or satisfaction of the existing liability. Or, on the other hand, promises may be given by the party liable that he will satisfy the claim by doing an act, making over a thing or paying an ascertained sum of money and the other party may agree to accept, not the promise, but the act, thing or money in satisfaction of his claim. If the agreement is to accept the promise in satisfaction, the discharge of the liability is immediate; if the performance, then there is no discharge unless and until the promise is performed." (See also Tallerman & Co. Pty. Ltd. v. Nathan's Merchandise (Victoria) Pty. Ltd. (1957) 98 CLR 93 per Dixon CJ, Fullagar J at 114). His Honour found that having regard to Mr Knox' character and his consistent pattern of conduct, it was most unlikely that Mr Knox would accept the mere promise of performance instead of the performance of the act of making the Prophecy system fully operational, as a basis for Canvas giving up causes of action against Kodak; rather (it was held): "He would demand action: he would want, as a precondition of settlement, a fully operational Prophecy system." (p.2216) Secondly, his Honour found that the concession made by Dr Switkowski in his evidence that Mr Knox may well have said during the course of the telephone conversations on 10 April 1992 that the "Prophecy system must be working", supported the former conclusion. Accordingly, his Honour found that Kodak had not made out the defence of accord and satisfaction. On the hearing of the appeal, counsel for Kodak suggested that there was some inconsistency in his Honour's finding that "it was a material term of the concluded negotiations that Kodak had to get the Prophecy system operational immediately. Until that condition was fulfilled, the parties were not bound to the agreement." (p.2216) But there is no inconsistency in his Honour's statement. In the words used, his Honour drew the distinction between an accord executory and an accord and satisfaction, and found that at best, the result concluded between the parties was no more than an accord executory, insufficient to bar Canvas' claims against Kodak. In correspondence from Canvas to Kodak before the telephone conversations on 10 April 1992, Mr Knox had made it quite plain that an essential part of any agreement would be that the Prophecy system be made to work immediately. The preponderance of material suggested that it was more likely that Canvas, through Mr Knox, maintained that position throughout its negotiations with Kodak. It may well be that at the conclusion of the negotiations on 10 April 1992, Canvas had accepted a combination of executory promises and performance of an act in satisfaction for foregoing its causes of action against Kodak. However as his Honour found, Canvas was not prepared to give up these causes of action without performance of the act of making the Prophecy system operational, and until that act was performed, the accord between Canvas and Kodak was wholly executory and provided no bar to Canvas' causes of action against Kodak. Damages We now turn to the submissions on the appeal and the cross-appeal on the question of assessment of damages. In summary, Canvas submitted that the damages assessed were manifestly inadequate; Kodak submitted that they were manifestly excessive. Although his Honour found that Kodak had engaged in misleading or deceptive conduct in contravention of s.52 of the Act under which assessment of damages pursuant to the tortious measure would be appropriate (Gates v City Mutual Life Assurance Society Limited (1986) 160 CLR 1; Wardley Australia Limited v The State of Western Australia (1992) 175 CLR 514 at 526, 534, 553-554), his Honour was satisfied that the amount so assessed could not exceed damages assessed for breach of contract, and it was appropriate to assess damages under the latter measure (p.2256). The history of the business conducted by Canvas, and the nature of that business, is described in the reasons for judgment delivered in the Canvas v Heidelberg appeal. The losses suffered by Canvas as a result of its experience with the Agfa equipment provides part of the setting against which the damages against Kodak fell to be assessed. Mr Martin's opinion evidence, led at trial by Canvas as to the loss of profits suffered by Canvas because the Prophecy system did not come up to its expectations, was largely based on the same survey evidence which his Honour considered in the Heidelberg case. His Honour rejected that evidence in the Kodak case by reference to his earlier ruling in the Heidelberg case. His Honour also rejected Mr Martin's evidence as to past losses. As in the Heidelberg case, his Honour did not accept that Canvas was entitled to recover all trading losses incurred in the operation of the bureau business in the period that Canvas operated its business with the non-performing Kodak equipment between October 1991 and April 1992. In other words, his Honour appeared to be satisfied that the business conducted by Canvas would have traded at a loss in any event, but the loss was inflated by expenditure wasted on account of the non-performing equipment. Not only was there ample evidence to support the grounds upon which his Honour rejected Mr Martin's evidence, to have found otherwise would have been to disregard the evidence that the introduction of PostScript colour was never intended to be the sole business of the Canvas bureau. It was merely to be an addition to the other services which the bureau was already providing, and continued to provide after the installation of the Prophecy system. His Honour accepted that if the equipment had performed as contracted, an expectation of improved returns for the business through the use of that equipment would have been properly held by Canvas. His Honour said that it was impossible to assess, in an arithmetical sense, the financial future that awaited Canvas. But, having weighed the favourable and the unfavourable commercial contingencies, his Honour concluded that Canvas would have earned profits in the period to October 1995, being the point of time at which his Honour accepted that the equipment would probably have become obsolete; and in any event the rental agreement was due to expire at that time. His Honour assessed damages in the sum of $185,000 being (i) past losses allowed at approximately $42,000, (ii) loss of profit to October 1995, and (iii) interest. If interest were allowed by his Honour at 11 percent, which was the rate applied by his Honour in the Heidelberg matter, the loss of future profits would have been calculated at approximately $110,000. The sum of $42,000, estimated to be the proportion of loss incurred to June 1992 attributable to the non-performing equipment, was drawn from a calculation made by Mr Baker, an expert called by Kodak. The loss so assessed was a net figure after deducting wages and consultancy fees to be paid over a period of four months for "training costs". In our opinion that is a mistaken approach. A loss attributable to the breach of contract is recoverable as such and is not liable to be reduced by an off-set for costs that would be expended if the contract were not breached. Such expenditure may be taken into account in assessing the loss of expected net income had the equipment performed as contracted, but it does not reduce the loss incurred. Mr Baker calculated the amount of loss to 30 June 1992 without deduction of training costs at approximately $124,000. In addition, the loss calculated did not include any component for liability for rental incurred which, in the relevant period October 1991 to June 1992, would have been approximately $24,000. Given that the equipment housed in the premises was part of a business which it was anticipated would be conducted as an integrated concern, it would be reasonable to allow for the time that the equipment was so housed, say, one-half of the rental as part of the loss attributable to the breach of contract to provide an operational system of pre-press colour printing. The loss to 30 June 1992 that should have been allowed for breach of contract was, therefore, in the order of $136,000. With regard to the assessed loss of profit up to October 1995 had the equipment performed as contracted, his Honour had little concrete material on which to work and did his best with what was put before him. His Honour was entirely unpersuaded that there was ground for an optimistic prognosis for the earning potential of the business with the aid of a fully operational pre-press colour printing system. His Honour took into account that earnings from that division would require time and capital support. Canvas had a base from which it could work to attract clients in that area, but it was difficult to gauge what measure of success it would have enjoyed. Matters his Honour took into account which presented difficulties in making successful entry into the PostScript colour market are set out earlier in these reasons. We are not persuaded that his Honour misdirected himself or misunderstood the evidence in relation to this aspect of the assessment of Canvas' damages. In our view the sum should stand as apparently assessed by his Honour, namely, approximately $110,000. The total amount to be awarded, therefore, should be $236,000 plus interest at 11 percent for two years compounded on yearly rests. The total sum assessed, therefore, should be increased from $185,000 to $290,775. Cross-appeal on dismissal of parts of Kodak's cross-claim It is common ground that Canvas was indebted to Kodak for $13,947, but Kodak now contends that his Honour erred in not allowing additional items on the cross-claim. Our conclusion that it was open to his Honour to find as he did, that an essential term of the lease contract was not performed and that Canvas had cause to rescind the agreement, is fatal to Kodak's cross-appeal against the dismissal of its claim for damages based upon the claim that Canvas had breached that agreement by repudiating the agreement by purporting to rescind it. Whether Canvas had a right to rescind at law, or a right to obtain an order under s.87 of the Act setting aside the agreement, was probably immaterial. It is clear from his Honour's reasons that he was satisfied that Canvas was entitled to be relieved of its obligations under that agreement by reason of Kodak's misleading conduct which Canvas had relied upon to enter the agreement, or by reason of Kodak's failure to perform an essential term of the agreement to put Canvas in a position to be able to operate Kodak's equipment. The cross-claim for payments of rental under either the original rental agreement or the accord and satisfaction must therefore fail. There remains the cross-claim for damages for wrongful detention of the goods from June 1992 until delivery was made pursuant to order of the Court on 18 December 1992. The Prophecy system was not returned during this period as Canvas asserted the need, if not the right, to maintain the equipment intact for use as evidence in its claim against Kodak. Ultimately, the Court did not order the return of the equipment until a demonstration had been conducted at the premises of Canvas before the trial Judge. It is not necessary to determine whether in the circumstances the detention of the equipment by Canvas was wrongful, as Kodak led no evidence of damage suffered by it in consequence of Canvas retaining possession. No evidence was led that other use could or would have been made of the equipment by Kodak to earn revenue. The evidence disclosed that upon the return of the equipment to Kodak it was then held intact under the control of Kodak's solicitors for use as evidence. In short, even if there were a wrongful detention, it was not in the peculiar circumstances the cause of loss to Kodak. This ground in the cross appeal must also fail. Compound interest at the rate of 11 percent should be added to the debt due for consumables increasing the amount to be set off against the assessed damages of Canvas to $17,184. The judgment entered at trial for $171,053 in favour of Canvas against Kodak should therefore be varied to $273,591, being the net difference between the claim and cross-claim. Costs of the trial The question of costs remains. It is an issue raised by the cross-appeal which contends that his Honour erred in awarding two-thirds of the costs of the action against Kodak. On the judgment, Canvas was the apparent victor, but it succeeded only to a small extent compared with the claim that it had prosecuted throughout the trial for in excess of $3.4 million. After judgment was delivered his Honour was informed that settlement negotiations had occurred between the parties. First there had been the attempt by Dr Switkowski to settle the matter with Mr Knox in April 1992 which almost succeeded. On 5 and 9 November 1993, about five weeks before the trial commenced, Kodak made an open offer of $100,000 being $42,079 for the claim and $57,921 for costs. On 10 December solicitors for Canvas rejected the offer commenting that their client was now seeking, effectively, $3.24 million at least from Kodak. The trial commenced on 13 December 1993. After 9 days of hearing the matter was adjourned to 31 January 1994. On 1 February 1994 Kodak's solicitors wrote increasing its offer to $150,304 plus $100,000 for costs. Canvas did not reply to this letter. The trial continued for a further 38 days. Following the reasons of Spender J in Smallacombe v Lockyer Investment Co. Pty Ltd (1993) 42 FCR 97 his Honour held that the offers by letter made by Kodak did not constitute "Calderbank" offers, as they did not contain offers of a sum certain plus costs to be agreed or taxed. In any event, the amount offered in respect of the claim was somewhat less than the amount awarded in the judgment. His Honour gave the following reasons for awarding less than full costs to Canvas: "...I consider that these letters, like Dr Switkowski's attempts at settlement, are matters that are to be taken into account as relevant subjects when considering questions of costs. It is difficult to quantify in dollar terms the value of Dr Switkowski's offer so as to compare it with the judgment debt, but one (can) of course make the obvious comment that the judgment debt exceeded the dollar values in the November and February letters that were written on behalf of Kodak. If the applicant had quantified its claim at, say, a modest $250,000 or even slightly more, but had only succeeded to the extent of the judgment debt, one might be inclined, all other things being favourable and notwithstanding these attempts at settlement, to award the applicant its costs on the basis that a successful party is entitled, in normal circumstances, to its costs. But in a case where a litigant received only a small fraction of its claim which claim has been classified as a gross exaggeration, and where there is hard evidence of reasonable and genuine efforts by the respondent to settle the matter, the court should step in and use its power to determine questions of costs as an instrument of control over unreasonable litigants. In my opinion, this can occur, albeit rarely, even though the amount of the offer was less than the amount of the judgment debt. Kodak is entitled to some small recognition of its genuine attempts to settle this matter, although falling short, its assessment of the situation was much closer to the final result than that of Canvas Graphics'." We endorse fully the observations of his Honour in the penultimate paragraph of this passage. Long cases clog the Court lists. Long cases by unreasonable litigants delay access to the courts by other litigants with genuine claims. Moreover the high cost of litigation, both to the parties and to the community who must fund the courts, is a matter of notoriety. Caseflow management and control of litigation is now an important function of the courts. In the circumstances of this case his Honour was entirely right to penalise Canvas for pursuing a grossly exaggerated and unreasonable claim for damages. To do so was in accordance with authority: Latoudis v Casey (1990) 170 CLR 534 at 544 per Mason CJ and 565 per Toohey J and Cummings v Lewis (1993) 41 FCR 559 at 602-603. The question however raised by Kodak is whether his Honour sufficiently penalised Canvas. The award of costs was a matter in the discretion of the trial judge. In our view his Honour did not err in principle in exercising the discretion. We cannot say that the award was outside the proper limits of that discretion. However, as the amount of damages awarded to Canvas has been increased on the appeal it is necessary for the discretion as to costs to be re-exercised by this Court. In the circumstances we think that an order that Kodak pay two-thirds of the costs of Canvas at trial is still appropriate. The judgment significantly exceeds the offer that was made part way through the trial on 1 February 1994, and the reduction of one-third in the award of costs to Canvas makes an appropriate allowance for the time wasted on the claim for exaggerated damages which should not have been pursued at trial. ORDERS The appeal should be allowed. The judgment entered for $171,053 should be varied by increasing that sum to $273,591. The cross-appeal should be dismissed. The respondent should pay the appellant's costs of the appeal and the cross-appeal. I certify that this and the preceding pages are a true copy of the Reasons for Judgment of the Court Associate: Dated: Counsel for the appellant and cross-respondent : Mr N W Morcombe QC and Mr D Berman Solicitor for the appellant and cross-respondent : Messrs White Berman Counsel for the respondent and cross-appellant : Mr W J Wells and Mr P A Heywood-Smith Solicitor for the respondent and cross-appellant : Messrs Thomsons Dates of hearing : 17 & 18 November, 1994 Date of judgment : 30 June 1995