APS Satellite Pty Ltd (formerly known as Sky Mesh Pty Ltd) v Ipstar Australia Pty Ltd

[2016] NSWSC 1898

Supreme Court

New South Wales

Medium Neutral Citation:	APS Satellite Pty Ltd (formerly known as "SkyMesh Pty Ltd") v IPSTAR AUSTRALIA PTY LTD [2016] NSWSC 1898
Hearing dates:	7-24 November 2016
Date of orders:	22 December 2016
Decision date:	22 December 2016
Jurisdiction:	Equity
Before:	Rein J
Decision:	See [148]
Catchwords:	TRADE PRACTICES- Statute-Plaintiff sought recovery from the Defendant pursuant to s.74B, s.74D, and s.74H of the Trade Practices Act and s.54, s.55 and s.274 of the Australian Consumer Law of the cost of service calls and replacement parts for a satellite kit imported by the defendant - equipment said to be not reasonably fit for purpose, not of merchantable quality, not of acceptable quality. HELD: Plaintiff established that almost all of the subject items were not functioning for reasons inherent with the equipment and were therefore not fit for purpose, not of merchantable quality, not of acceptable quality; issue of high failure rate of equipment discussed; TRADE PRACTICES-Statute- Where Plaintiff claimed it was forced by reason of the defective equipment imported by defendant to engage additional support staff to deal with the high number of complaints that resulted from the defective goods resulting in a loss of money spent on wages HELD: The factual basis for the claim not established; also the indemnity provided for by s.74H is for cost or damage suffered by the consumer for which the intermediate seller has compensated the consumer and not the costs of the intermediate seller itself. Plaintiff’s claim rejected. TRADE PRACTICES- Statute -Unconscionable conduct of supplier to internet service provider- Plaintiff claims that a price increase imposed on it by defendant, a satellite service provider, involved unconscionable conduct on the part of the defendant in breach of s.21 and s.22 of the Australian Consumer Law HELD: The Defendant had engaged in unconscionable conduct principally by requiring the Plaintiff to pay to it an amount equivalent to the defendant’s assessment of what it would cost to meet the statutory indemnity imposed by s.74H and s.274 ACL, as a result of claims made by the Plaintiff on the defendant for defective goods.
Legislation Cited:	Australian Consumer Law (Schedule 2 to the Australian Competition and Consumer Act 2010 (Cth) Sale of Goods Act 1923 (NSW) Australian Securities and Investment Commission Act 2001 (Cth) Trade Practices Act 1974 (Cth) Trade Practices Amendment (Australian Consumer Law) Act (no. 2) 2010 (Cth)
Cases Cited:	Ashford Shire Council v Dependable Motors Pty Ltd (1960) 104 CLR 139; [1961] AC 336 Attorney-General (NSW) v World Best Holdings Ltd (2005) 63 NSWLR 557; [2005] NSWCA 261 Australian Competition and Consumer Commission (ACCC) v ACN 117 372 915 Pty Ltd (in Liq) (formerly Advanced Medical Institute Pty Ltd) [2015] FCA 368 Australian Competition and Consumer Commission (ACCC) v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253; [2000] FCA 1365. Blatch v Archer (1774) 1 Cowp 63; (1774) 98 ER 969 Blomley v Ryan (1956) 99 CLR 362 Bristol Tramways & Carriage Company Ltd v Fiat Motors Ltd [1910] 2 KB 831 Canon Australia Pty Ltd v Patton [2007] NSWCA 246 Christopher Hill Ltd v Ashington Piggeries Ltd [1972] AC 441 Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447; [1983] HCA 14 Dare v Pulham (1982) 148 CLR 658; [1982] HCA 70 Emery v Johns Period Furniture [1989] SASC 1624 Fubilan Catering Services Ltd v Compass Group (Australia) Pty Ltd [2007] FCA 1205 Grant v Australian Knitting Mills (1935) 54 CLR 49; [1936] AC 85 Hampton Court Ltd v Crooks (1957) 97 CLR 367 Henville v Walker (2001) 206 CLR 459; [2001] HCA 52 Lithgow City Council v Jackson (2011) 244 CLR 352 Medtel Pty Ltd v Courtney (2003) 130 FCR 182 Merck Sharp & Dohme (Australia) Pty Ltd v Peterson (2011) 196 FCR 145; [2011] FCAFC 128 Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199; [2015] FCAFC 50 Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28, (2016) 333 ALR 569 Peterson v Merck Sharpe & Dohme (Australia) Pty Ltd (2010) 184 FCR 1; [2010] FCA 180 Protec Pacific Pty Ltd v Steuler Services GmbH & Co KG [2014] VSCA 338 PT Ltd v Spuds Surf Chatswood Pty Ltd [2013] NSWCA 446 Purkess v Crittenden (1965) 114 CLR 164 Rogers v Parish (Scarborough) Ltd [1987] QB 933 Thomas v Foreshore Marine Exhaust Systems Pty Ltd [2005] NSWCA 451 Tonto Home Loans Australia Pty Ltd v Tavares; FirstMac Ltd v Di Benedetto; FirstMac Ltd v O'Donnell [2011] NSWCA 389 Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; [1988] HCA 7 Watts v Rake (1960) 108 CLR 158
Texts Cited:	Benjamin’s Sale of Goods (9th edition 2014 Sweet and Maxwell) Suttons’ Sales and Consumer Law, (4th ed 1995, LBC Information Services)
Category:	Principal judgment
Parties:	APS Satellite Pty Ltd (formerly known as "SkyMesh Pty Ltd") (Plaintiff) IPSTAR AUSTRALIA PTY LTD (Defendant)
Representation:	Counsel: D.L Williams SC, R.D Glover (Plaintiff) S.R Donaldson SC, M. Sealey (Defendant) Solicitors: Thomson Geer (Plaintiff) Norton Rose Fulbright (Defendant)
File Number(s):	2011/380786
Publication restriction:	Nil

Judgment

1. The plaintiff (SkyMesh) for whom Mr D.L Williams SC and R.D Glover appear, is an Australian owned licensed telecommunications carrier, which uses fibre, satellite and wireless technologies to provide its customers with broadband internet. A significant part of its business has, until recently, been the sale of internet services to customers in rural and regional areas of Australia using the Ipstar satellite platform.

2. The defendant, Ipstar, is an Australian wholesaler of satellite broadband services. Ipstar is a wholly owned subsidiary of a Thai company “Thaicom.” Mr S.R Donaldson SC and Mr M. Sealey appear for Ipstar.

3. In 2007 SkyMesh and Ipstar entered into an agreement whereby Ipstar sold broadband capacity to SkyMesh at a price per megabytes per second (Mbps) per month. The pricing basis changed over several periods. On 28 February 2011 there were negotiations for a new price and in what is described as the 2011 Addendum (or the Second Addendum) the price fixed by Ipstar was $2,933 per Mbps.

4. SkyMesh has three claims against Ipstar arising out of their relationship:

1. Ipstar imported into Australia equipment that was intended to enable customers to connect to the Ipstar satellite. That equipment was sold by Ipstar to SkyBridge Pty Ltd (“SkyBridge”) which sold it to SkyMesh who then sold it to consumers. Although there is a similarity in the style of names there is no suggestion that SkyMesh and SkyBridge are related companies. SkyMesh alleges that the equipment was not of merchantable quality and not fit for the purpose for which customers required the equipment. SkyMesh contends that as the “seller” to consumers it (SkyMesh) is entitled, pursuant to s.74B and s.74D of the Trade Practices Act 1974 (Cth) (“TPA”), and alternatively pursuant to s.74H of the TPA to recover from Ipstar the amounts paid to SkyBridge to replace the faulty equipment including the cost of service calls. As importer of the equipment Ipstar is deemed to be the manufacturer of the equipment (see s.74A of TPA). SkyMesh also relies on similar provisions of the Australian Consumer Law (Schedule 2 to the Australian Competition and Consumer Act 2010 (Cth)) (“ACL”) which became effective on 1 January 2011 and are relevant to equipment sold after 1 January 2011: s.54 and s.55 Schedule 2 and s. 274 of the ACL. “The defective goods claim” has a value of $2.2 million approximately but it is accepted that Ipstar would be entitled to a credit of $400,000 already paid by SkyBridge to SkyMesh, if SkyMesh were otherwise successful. There is, as I shall explain, a linkage between “the defective goods claim” and the third head of claim.

2. The second claim is consequential on the defective goods claim. SkyMesh claims that because of the very high number of consumer calls and complaints it was required to increase its support staff at considerable expense. The quantum of this claim, which I shall refer to as “the wages claim” has been agreed, without admissions other than as to amount, at $750,000.

3. SkyMesh contends that the $2,933 per Mbps was imposed upon it in circumstances that constitute unconscionable conduct on the part of Ipstar. It contends that it should be required to pay no more than $2,500 per Mbps, which translates to an overpayment to Ipstar, on SkyMesh’s claim, of $3.4 million. SkyMesh claims that it is entitled to this remedy by virtue of s.21 and s.22 of the ACL. I shall refer to this as “the unconscionable conduct claim.” SkyMesh claims $3.4 million under this head.

The Legislative Framework Relevant to all Claims

5. The following sections of the TPA are relevant (as in effect up to December 2010):

74B  Actions in respect of unsuitable goods

(1)  Where:

(a) a corporation, in trade or commerce, supplies goods manufactured by the corporation to another person who acquires the goods for re‑supply;

(b) a person (whether or not the person who acquired the goods from the corporation) supplies the goods (otherwise than by way of sale by auction) to a consumer;

(c)  the goods are acquired by the consumer for a particular purpose that was, expressly or by implication, made known to the corporation, either directly, or through the person from whom the consumer acquired the goods or a person by whom any antecedent negotiations in connexion with the acquisition of the goods were conducted;

(d)  the goods are not reasonably fit for that purpose, whether or not that is a purpose for which such goods are commonly supplied; and

(e)  the consumer or a person who acquires the goods from, or derives title to the goods through or under, the consumer suffers loss or damage by reason that the goods are not reasonably fit for that purpose;

the corporation is liable to compensate the consumer or that other person for the loss or damage and the consumer or that other person may recover the amount of the compensation by action against the corporation in a court of competent jurisdiction.

(2)  Subsection (1) does not apply:

(a)  if the goods are not reasonably fit for the purpose referred to in that subsection by reason of

(i) an act or default of any person (not being the corporation or a servant or agent of the corporation); or 

(ii) a cause independent of human control;

occurring after the goods have left the control of the corporation; or

(b) where the circumstances show that the consumer did not rely, or that it was unreasonable for the consumer to rely, on the skill or judgment of the corporation.

74D  Actions in respect of goods of unmerchantable quality

(1)  Where:

(a)  a corporation, in trade or commerce, supplies goods manufactured by the corporation to another person who acquires the goods for re‑supply;

(b)  a person (whether or not the person who acquired the goods from the corporation) supplies the goods (otherwise than by way of sale by auction) to a consumer

(c)  the goods are not of merchantable quality; and

(d)  the consumer or a person who acquires the goods from, or derives title to the goods through or under, the consumer suffers loss or damage by reason that the goods are not of merchantable quality;

the corporation is liable to compensate the consumer or that other person for the loss or damage and the consumer or that other person may recover the amount of the compensation by action against the corporation in a court of competent jurisdiction.

(2)  Subsection (1) does not apply:

(a)  if the goods are not of merchantable quality by reason of:

(i)  an act or default of any person (not being the corporation or a servant or agent of the corporation); or

(ii)  a cause independent of human control;

occurring after the goods have left the control of the corporation;

(b)  as regards defects specifically drawn to the consumer’s attention before the making of the contract for the supply of the goods to the consumer; or

(c)  if the consumer examines the goods before that contract is made, as regards defects that the examination ought to reveal.

(3)   Goods of any kind are of merchantable quality within the meaning of this section if they are as fit for purpose or purposes for which goods of that kind                         are commonly bought as it is reasonable to expect having regard to:

(a) any description applied to the goods by the corporation;

(b) the price received by the corporation for the goods (if relevant);

(c) all the other relevant circumstances.

74H  Right of seller to recover against manufacturer or importer

Where:

(a)  a person (in this section referred to as the seller) is under a liability to another person (in this section referred to as the consumer) in respect of loss or damage suffered by the  consumer as a result of a breach of a condition or warranty implied by a provision of Division 2 in a contract for the supply of goods (whether or not the goods are of a kind ordinarily acquired for personal, domestic or household use or consumption) by the seller to the consumer; and

(b)  a third person (in this section referred to as the manufacturer):

(i)  is liable to compensate the consumer in respect of the same loss or damage by reason of a provision of this Division; or

(ii) in a case where the goods referred to in paragraph (a) are not of a kind ordinarily acquired for personal, domestic or household use or consumption—would, if the provisions of sections 74B,74C, 74D and 74E applied in relation to those goods, be liable to compensate the consumer in respect of the same loss or damage by reason of any of those provisions

the manufacturer is liable to indemnify the seller in respect of the liability of the seller to the consumer and the seller may, in respect of the manufacturer’s liability to indemnify the seller, institute an action against the manufacturer in  a court of competent jurisdiction for such legal or equitable relief as the seller could have obtained if the liability of the manufacturer to indemnify the seller had arisen under a contract of indemnity made between the manufacturer and the seller.

6. The following sections of the ACL (as in effect as at January 2011 are relevant):

21 Unconscionable conduct

(1) A person must not, in trade or commerce, in connection with the supply or possible supply of goods or services to another person, engage in conduct that is, in all the circumstances, unconscionable.

Note:       A pecuniary penalty may be imposed for a contravention of this subsection.

(2) Without in any way limiting the matters to which the court may have regard for the purpose of determining whether a person (the supplier) has contravened subsection (1) in connection with the supply or possible supply of goods or services to another person (the consumer), the court may have regard to:

(a) the relative strengths of the bargaining positions of the supplier and the consumer; and

(b) whether, as a result of conduct engaged in by the person, the consumer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; and

(c) whether the consumer was able to understand any documents relating to the supply or possible supply of the goods or services; and

(d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the consumer or a person acting on behalf of the consumer by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the goods or services; and

(e) the amount for which, and the circumstances under which, the consumer could have acquired identical or equivalent goods or services from a person other than the supplier.

(3) A person is not to be taken for the purposes of this section to engage in unconscionable conduct in connection with the supply or possible supply of goods or services to a person by reason only that the person institutes legal proceedings in relation to that supply or possible supply or refers a dispute or claim in relation to that supply or possible supply to arbitration.

(4) For the purpose of determining whether a person has contravened subsection (1) in connection with the supply or possible supply of goods or services to another person:

(a) the court must not have regard to any circumstances that were not reasonably foreseeable at the time of the alleged contravention; and

(b) the court may have regard to conduct engaged in, or circumstances existing, before the commencement of this section.

(5) A reference in this section to goods or services is a reference to goods or services of a kind ordinarily acquired for personal, domestic or household use or consumption.

(6) A reference in this section to the supply or possible supply of goods does not include a reference to the supply or possible supply of goods for the purpose of re-supply or for the purpose of using them up or transforming them in trade or commerce.

(7) Section 4 applies for the purposes of this section in the same way as it applies for the purposes of Division 1 of Part 3-1.

22 Unconscionable conduct in business transactions

(1) A person must not, in trade or commerce, in connection with:

(a) the supply or possible supply of goods or services to another person (other than a listed public company); or

(b) the acquisition or possible acquisition of goods or services from another person (other than a listed public company); 

  engage in conduct that is, in all the circumstances, unconscionable.

Note:   A pecuniary penalty may be imposed for a contravention of this subsection.

(2) Without in any way limiting the matters to which the court may have regard for the purpose of determining whether a person (the supplier) has contravened subsection (1) in connection with the supply or possible supply of goods or services to another person (the business consumer), the court may have regard to: 

(a) the relative strengths of the bargaining positions of the supplier and the business consumer; and 

(b) whether, as a result of conduct engaged in by the supplier, the business consumer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; and (c) whether the business consumer was able to understand any documents relating to the supply or possible supply of the goods or services; and

(d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the business consumer or a person acting on behalf of the business consumer by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the goods or services; and

(e) the amount for which, and the circumstances under which, the business consumer could have acquired identical or equivalent goods or services from a person other than the supplier; and

(f) the extent to which the supplier’s conduct towards the business consumer was consistent with the supplier’s conduct in similar transactions between the supplier and other like business consumers; and 

(g) the requirements of any applicable industry code; and

(h) the requirements of any other industry code, if the business consumer acted on the reasonable belief that the supplier would comply with that code; and

(i) the extent to which the supplier unreasonably failed to disclose to the business consumer:

(i) any intended conduct of the supplier that might affect the interests of the business consumer; and 

(ii) any risks to the business consumer arising from the supplier’s intended conduct (being risks that the supplier should have foreseen would not be apparent to the business consumer); and

(j) if there is a contract between the supplier and the business consumer for the supply of the goods or services:

(i) the extent to which the supplier was willing to negotiate the terms and conditions of the contract with the business consumer; and 

(ii) the terms and conditions of the contract; and

(iii) the conduct of the supplier and the business consumer in complying with the terms and conditions of the contract; and

(iv) any conduct that the supplier or the business consumer engaged in, in connection with their commercial relationship, after they entered into the contract; and

(k) without limiting paragraph (j), whether the supplier has a contractual right to vary unilaterally a term or condition of a contract between the supplier and the business consumer for the supply of the goods or services; and

(l) the extent to which the supplier and the business consumer acted in good faith.

(3) Without in any way limiting the matters to which the court may have regard for the purpose of determining whether a person (the acquirer) has contravened subsection (1) in connection with the acquisition or possible acquisition of goods or services from another person (the small business supplier), the court may have regard to:

(a) the relative strengths of the bargaining positions of the acquirer and the small business supplier; and

(b) whether, as a result of conduct engaged in by the acquirer, the small business supplier was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the acquirer; and

(c) whether the small business supplier was able to understand any documents relating to the acquisition or possible acquisition of the goods or services; and

(d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the small business supplier or a person acting on behalf of the small business supplier by the acquirer or a person acting on behalf of the acquirer in relation to the acquisition or possible acquisition of the goods or services; and

(e) the amount for which, and the circumstances in which, the small business supplier could have supplied identical or equivalent goods or services to a person other than the acquirer; and

(f) the extent to which the acquirer’s conduct towards the small business supplier was consistent with the acquirer’s conduct in similar transactions between the acquirer and other like small business suppliers; and

(g) the requirements of any applicable industry code; and

(h) the requirements of any other industry code, if the small business supplier acted on the reasonable belief that the acquirer would comply with that code; and

(i) the extent to which the acquirer unreasonably failed to disclose to the small business supplier:

(i) any intended conduct of the acquirer that might affect the interests of the small business supplier; and

(ii) any risks to the small business supplier arising from the acquirer’s intended conduct (being risks that the acquirer should have foreseen would not be apparent to the small business supplier); and

(j) if there is a contract between the acquirer and the small business supplier for the acquisition of the goods or services: 

(i) the extent to which the acquirer was willing to negotiate the terms and conditions of the contract with the small business supplier; and

(ii) the terms and conditions of the contract; and

(iii) the conduct of the acquirer and the small business supplier in complying with the terms and conditions of the contract; and

(iv) any conduct that the acquirer or the small busines supplier engaged in, in connection with their commercial relationship, after they entered into the contract; and

(k) without limiting paragraph (j), whether the acquirer has contractual right to vary unilaterally a term or condition of a contract between the acquirer and the small business supplier for the acquisition of the goods or services; and

(l) the extent to which the acquirer and the small business supplier acted in good faith.

(4) A person is not to be taken for the purposes of this section to engage in unconscionable conduct in connection with:

(a) the supply or possible supply of goods or services to another person; or

(b) the acquisition or possible acquisition of goods or services from another person;

by reason only that the first-mentioned person institutes legal proceedings in relation to that supply, possible supply, acquisition or           possible acquisition or refers to arbitration a dispute or claim in relation to that supply, possible supply, acquisition or possible acquisition.

(5) For the purpose of determining whether a person has contravened subsection (1):

(a) the court must not have regard to any circumstances that were not reasonably foreseeable at the time of the alleged contravention; and 

(b) the court may have regard to circumstances existing before the commencement of this section but not to conduct engaged in before that commencement.

(6) A reference in this section to the supply or possible supply of goods or services is a reference to the supply or possible supply of goods or services to a person whose acquisition or possible acquisition of the goods or services is or would be for the purpose of trade or commerce.

(7) A reference in this section to the acquisition or possible acquisition of goods or services is a reference to the acquisition or possible acquisition of goods or services by a person whose acquisition or  possible acquisition of the goods or services is or would be for the purpose of trade or commerce.

(8) Section 4 applies for the purposes of this section in the same way as it applies for the purposes of Division 1 of Part 3-1.

54 Guarantee as to acceptable quality

(1) If:

(a) a person supplies, in trade or commerce, goods to a consumer; and

(b) the supply does not occur by way of sale by auction;

   there is a guarantee that the goods are of acceptable quality.

(2) Goods are of acceptable quality if they are as:

(a) fit for all the purposes for which goods of that kind are commonly supplied; and

(b) acceptable in appearance and finish; and 

(c) free from defects; and

(d) safe; and

(e) durable;

as a reasonable consumer fully acquainted with the state and

condition of the goods (including any hidden defects of the goods),

would regard as acceptable having regard to the matters in

subsection (3).

(3) The matters for the purposes of subsection (2) are:

(a) the nature of the goods; and

(b) the price of the goods (if relevant); and

(c) any statements made about the goods on any packaging or label on the goods; and

(d) any representation made about the goods by the supplier or manufacturer of the goods; and

(e) any other relevant circumstances relating to the supply of the

goods.

(4) If:

(a) goods supplied to a consumer are not of acceptable quality; and

(b) the only reason or reasons why they are not of acceptable quality were specifically drawn to the consumer’s attention before the        consumer agreed to the supply;

the goods are taken to be of acceptable quality.

(5) If:

(a) goods are displayed for sale or hire; and

(b) the goods would not be of acceptable quality if they were supplied to a consumer; 

the reason or reasons why they are not of acceptable quality are taken, for the purposes of subsection (4), to have been specifically drawn to a consumer’s attention if those reasons were disclosed on a written notice that was displayed with the goods and that was transparent.

(6) Goods do not fail to be of acceptable quality if:

(a) the consumer to whom they are supplied causes them to become of unacceptable quality, or fails to take reasonable steps to prevent        them from becoming of unacceptable quality; and

(b) they are damaged by abnormal use.

(7) Goods do not fail to be of acceptable quality if:

(a) the consumer acquiring the goods examines them before the consumer agrees to the supply of the goods; and

(b) the examination ought reasonably to have revealed that the goods were not of acceptable quality.

55 Guarantee as to fitness for any disclosed purpose etc.

(1)   If:

(a) a person (the supplier) supplies, in trade or commerce, goods to a consumer; and

(b) the supply does not occur by way of sale by auction;

there is a guarantee that the goods are reasonably fit for any   disclosed purpose, and for any purpose for which the supplier represents that they are reasonably fit.

(2) A disclosed purpose is a particular purpose (whether or not that purpose is a purpose for which the goods are commonly supplied) for which the goods are being acquired by the consumer and that:

(a) the consumer makes known, expressly or by implication, to:

(i) the supplier; or

(ii) a person by whom any prior negotiations or arrangements in relation to the acquisition of the goods were conducted or  made; or

(b) the consumer makes known to the manufacturer of the goods either directly or through the supplier or the person referred to in paragraph (a)(ii).

(3) This section does not apply if the circumstances show that the consumer did not rely on, or that it was unreasonable for the consumer to rely on, the skill or judgment of the supplier, the person referred to in subsection (2)(a)(ii) or the manufacturer, as the case may be.

274 Indemnification of suppliers by manufacturers

(1) A manufacturer of goods is liable to indemnify a person (the supplier) who supplies the goods to a consumer if:

(a) the supplier is liable to pay damages under section 259(4) to the consumer for loss or damage suffered by the consumer;

and

(b) the manufacturer is or would be liable under section 271 to pay damages to the consumer for the same loss or damage.

(2) Without limiting subsection (1), a manufacturer of goods is liable to indemnify a person (the supplier) who supplies the goods to a consumer if:

(a) the supplier incurs costs because the supplier is liable under this Part for a failure to comply with a guarantee that applies to the supply under Subdivision A of Division 1 of Part 3-2;

and

(b) the failure is:

(i) a failure to comply with the guarantee under section 54;

or

(ii) a failure to comply with the guarantee under section 55 in relation to a disclosed purpose that the consumer made known to the manufacturer either directly or through the supplier or the person referred to in section 55(2)(a)(ii); or

(iii) a failure to comply with the guarantee under section 56 in relation to a description that was applied to the goods by or on behalf of the manufacturer of the goods, or with the express or implied consent of the manufacturer.

(3) The supplier may, with respect to the manufacturer’s liability to  indemnify the supplier, commence an action against the manufacturer in a court of competent jurisdiction for such legal or equitable relief as the supplier could have obtained if that liability had arisen under a contract of indemnity made between them.

(4) The supplier may commence the action at any time within 3 years after the earliest of the following days:

(a) the day, or the first day, as the case may be, on which the supplier made a payment with respect to, or otherwise discharged in whole        or in part, the liability of the supplier to the consumer;

(b) the day on which a proceeding was commenced by the consumer against the supplier with respect to that liability or, if more than one such proceeding was commenced, the day on which the first such proceeding was commenced.

276 This Part not to be excluded etc. by contract

(1) A term of a contract (including a term that is not set out in the contract but is incorporated in the contract by another term of the contract) is void to the extent that the term purports to exclude, restrict or modify, or has the effect of excluding, restricting or modifying:

(a) the application of all or any of the provisions of this Part; or

(b) the exercise of a right a conferred by such a provision; or

(c) any liability of a person in relation to a failure to comply with a guarantee that applies under Division 1 of Part 3-2 to a supply of goods or services.

(2) A term of a contract is not taken, for the purposes of this section, to exclude, restrict or modify the application of a provision of this Part unless  the term does so expressly or is inconsistent with the provision.

(3) This section does not apply to a term of a contract that is a term referred to in section 276A(4).

Background

7. The background which I set out below is taken from the plaintiff’s closing submissions (“PCS”), and with which Mr Donaldson took no issue.

8. SkyMesh’s business activities in the relevant period were affected by the Australian Broadband Guarantee Program (‘ABGP’). The ABGP was an Australian Government initiative, which subsidised the cost of provision of internet services in rural and regional areas of Australia. In return for receiving various government subsidies, approved Internet Service Providers (“ISPs”) such as SkyMesh entered into contractual arrangements with the Commonwealth pursuant to which the terms of their contracts with their customers were regulated. This included a requirement to provide customers for three years with a satellite service that met specified conditions: D10/6442 , 6455, 6491-6496.

9. SkyMesh entered into a series of funding agreements in relation to funding for the ABGP, which ended on 30 June 2011.

10. In a schedule to each of the funding agreements, there was a standard form service agreement that SkyMesh was required to enter into with each of its customers. Those standard form agreements included warranties that SkyMesh was required to provide to its customers.

11. SkyMesh and Ipstar entered into the following service provider agreements and variations:

1. An agreement dated 27 September 2007 “the Bandwidth Agreement” Exhibit D1/652-694;

2. An addendum dated 1 August 2008 “the First Addendum” Exhibit D2/922-923; and

3. An addendum dated 27 April 2011 “the Second Addendum” Exhibit D4/2669-2680.

12. The express warranties contained in agreements between Ipstar and its purchasers were initially limited to a period of 12 months only. Ipstar eventually accepted that it was bound to honour the manufacturer’s warranties set out in the TPA and ACL. From about February 2011 Ipstar began to provide a three year warranty for defects in manufacturing and workmanship of the Ipstar products imported.

13. The Ipstar satellite and broadband equipment provides broadband internet services via two Earth Stations (in large satellite dishes) located in Kalgoorlie, Western Australia and Broken Hill, New South Wales. These dishes send signals to Thaicom’s satellite Ipstar-1 in geostationary orbit above the earth, which relays signals to and from smaller Ipstar satellite dishes located at the premises of ISPs customers.

14. At its peak Ipstar had 80,000 user terminals in operation in about 2010-2011. The number has diminished as a result of the introduction of the NBN and the penetration of the Telstra 3G network into rural Australia.

15. SkyMesh and APN have been the two largest Ipstar ISPs. APN is the largest. As at 2011 when the new bandwidth pricing terms were being imposed on SkyMesh, SkyMesh had 28,302 customers with active terminals and APN had 30,216 customers representing 38% and 41% respectively of the total Ipstar terminals. The total fleet was 74,009 in 2011 and had declined to 27,290 in 2014. In 2014 SkyMesh had 36% of that fleet and APN 47%: Exhibit D6/4060A. The significant decline in users is, at least in part, a result of the introduction of NBN network.

16. The Ipstar broadband service is a proprietary service and all users must have a proprietary User Terminal (‘UT’) supplied by Ipstar. Terminals supplied by any other service are not capable of accessing the Ipstar broadband service. The UT supplied by Ipstar does not function with any other satellite service.

17. The Ipstar UT consists of an Outdoor Unit (‘ODU’) interconnected to an Indoor Unit (‘IDU’) by two coaxial cables. The ODU contains a:

1. Satellite dish antenna and mounting frame of 84 cm diameter; and

2. Satellite RF (Radio Frequency) transceiver assembly consisting of:

1. an antenna feed horn which collects RF signals received by, and radiates transmitter RF power to, the satellite dish antenna;

2. a Low Noise Block (‘LNB’) down converter which amplifies the received RF signal in a Low Noise Amplifier (‘LNA’) then converts it to a lower frequency suitable for processing by the IDU;

3. a Block Up Converter (‘BUC’) with an output power of either 1 or 2 watts which converts the transmit signal generated by the IDU to a higher frequency and power level suitable for transmission to the satellite; and

4. an OrthoMode Transducer (‘OMT’) and Transmit Reject Filter (‘TRF’) which connects the LNB and BUC to the feed horn enabling both to share the same satellite dish antenna without interfering with each other.

Although the ODU includes the satellite dish it is the Satellite RF transceiver assembly which is the subject of the defective goods claim in this case and I shall use ODU to mean that assembly, a photograph of which can be found at Exhibit D/1036.

18. The IDU is essentially a modem which links to the customer’s computer.

19. A high level block diagram of an Ipstar broadband UT is shown in Figure 2 on page 11 of Peter Burns’ report dated 8 November 2012 Exhibit D6/3504.

20. The Ipstar satellite system known as the “VSAT system” operates in the Ku and Ka-Band segments of the RF spectrum. These spectrum bands are part of the broader microwave frequency spectrum used by radio communications links operating between two terrestrial locations separated by a clear line of sight path as well as between a satellite and an earth station.

21. The ODUs are designed to receive and send signals to utilise the particular spectrums available and are quite sophisticated pieces of equipment.

22. In or about 2008 Ipstar commenced supplying internet bandwidth to SkyMesh (as a wholesale supplier of internet bandwidth) in accordance with the Bandwidth Agreement and began supplying SkyMesh with the products necessary (the UTs) for SkyMesh customers to connect with the Ipstar satellite. Within a few months Ipstar ceased to supply these products directly to SkyMesh and referred SkyMesh to one of its three distributors, SkyBridge, through which to purchase and install its products. SkyMesh has not sought to make out a case based on the direct sale to it by Ipstar in the first four months.

23. SkyBridge was not only a distributor for Ipstar but authorised by Ipstar to install and service Ipstar products. In formal contractual terms Ipstar supplied UTs to SkyBridge which in turn supplied them to SkyMesh. SkyMesh then supplied them to its customers. SkyBridge installed the Ipstar UTs on SkyMesh’s behalf for SkyMesh’s customers and SkyMesh provided bandwidth to those customers via the Ipstar satellite. SkyBridge provided service calls when requested by SkyMesh to respond to customer problems with their internet satellite service, including problems with Ipstar’s equipment.

24. SkyMesh entered into the following agreements with SkyBridge:

1. an agreement dated 16 January 2008 for the calendar year 2008;

2. an agreement dated 17 March 2009.

No further written agreements were entered into and the agreement dated 17 March 2009 continued to govern the relationship between SkyMesh and SkyBridge.

25. Until March 2011, the provision of bandwidth to SkyMesh by Ipstar was governed by the Bandwidth Agreement and the First Addendum. In March 2011 the Second Addendum took effect and it is the Second Addendum which is the subject of the unconscionable conduct claim.

26. There is no dispute that Ipstar, SkyBridge and SkyMesh had, by 2010, come to realise that there were two significant problems in connection with the Ipstar equipment. The first was that an extensive number of ODUs had a water ingress problem. Water ingress problems were first noted in July 2007: see Exhibit D3/1569. The ODUs are located on the satellite dish outdoors and were frequently not adequately sealed against the rain.

27. The second major problem which revealed itself in the period 2008 to 2010 and beyond related to the modem supplied by Ipstar as part of its kit. Many of the modems suffered what Ipstar described as a “drop out,” “freezing” or “hang” issue. There is agreement between the parties that the drop out issue was a result of firmware issues. Firmware is software embedded in a product such as a modem which enables the product to function and communicate with for example, a network or other devices. If a modem ‘hangs’ or ‘freezes’ or drops out, it prevents the consumer from using the product as it was intended to be used since access cannot be gained to the network. This problem was identified by Ipstar and it is described as a known issue in a document created by Ipstar in April 2010 Exhibit D3/1635:

“One of the known root causes that IPSTAR is currently targeting to address with the upgrade of the UT [ User Terminal] firmware is the UT software hanging problem. In theory, UTs will not transmit on the same time slots when they are in TDMA [Time Division Multiplexity Algorithm]. However, they demonstrate this behaviour when they hang or fail to response to the Gateway for a certain period. Under this circumstance, UTs will continue their transmission on the old time slots if their data buffer is not empty. These data packets then collide with others (good) Uts data in the same time slots and result in high CRC errors. Eventually, the connection of GW [Gateway] and the good UT is reset causing drop out experience.”

28. There is no dispute that if either the ODU or modem were not functioning properly the customer could not access the Ipstar satellite system. The kit was installed by SkyBridge and not by the customer: T207.21. The ODU and modem were not permitted by Ipstar to be opened by the customer or the service technician from SkyBridge.

29. SkyMesh’s case is not limited to water ingress problems and modem dropouts but its ability to rely on other equipment defects in the ODUs and IDUs is contested by Ipstar for reasons I shall later explain. Much of the focus of the case has been on the water ingress problem and the modem drop out problem, and I shall expand on these topics below.

30. There is extensive evidence concerning the help desk arrangements that SkyMesh, SkyBridge and Ipstar had in place. There is no dispute that customers of SkyMesh who had service difficulties first contacted the SkyMesh help desk, and if SkyMesh personnel could not solve the customer’s problem the customer was put through to the SkyBridge helpdesk. If the SkyBridge personnel could not solve the problem (even with the assistance of Ipstar personnel if that was thought appropriate: see T499-500) SkyBridge arranged to send out a technician to the premises of the customers.

31. The SkyBridge technicians would attend at the customer’s premises with such replacement equipment as they had been instructed by their base to take with them. They would follow a testing protocol designed to eliminate simple faults such as incorrect cabling or power faults outside of the Ipstar equipment. If the SkyBridge technician, often in consultation with a more senior person at SkyBridge’s base, determined that an item of Ipstar equipment should be replaced he or she would do so. SkyBridge would invoice SkyMesh for the service call and the cost of replacement equipment.

32. There was evidence from one of the SkyBridge technicians, a Mr Anthony Wonish (Mr Wonish’s affidavit 2 July 2016) as to procedures adopted and he was not challenged on that evidence. Documentation was created by SkyBridge in relation to the service calls in respect of the 4000 claims which are the subject of these proceedings. The experts retained by SkyMesh and Ipstar agreed that there was no flaw in the help desk process Exhibit D7/ 4464-4465 and there was no suggestion that SkyBridge did not proceed in accordance with the guide issued by Ipstar called the “Ipstar Level 1 Troubleshooting for Service Providers” (Exhibit D13/1332). The technicians’ notes which are part of Exhibit O1-O3 have not been shown to be, or suggested to be, inconsistent with Mr Wonish’s evidence.

33. Indeed more generally there were very few contested facts and there were no submissions made that I should not accept the evidence of any of the witnesses called.

The Defective Goods Claim

34. SkyMesh claims indemnity and/or damages in respect of Ipstar products’ claimed unfitness for purpose and unmerchantable quality for two distinct periods (to deal with the introduction of the ACL in place of the TPA):

1. Products supplied in the period prior to 1 January 2011 in breach of the TPA;

2. Products supplied in the period subsequent to 1 January 2011 in breach of the ACL.

35. The transitional provisions of the Trade Practices Amendment (Australian Consumer Law) Act (no. 2) 2010 (Cth) provide that the TPA continues to apply in relation to acts or omissions that occurred before the commencement of the ACL.

36. Following negotiations between the parties in 2010, Ipstar, on 26 November 2010, confirmed to Paul Rees, a director of SkyMesh, that its legal advice was that a statutory warranty did exist and that it was therefore prepared to pay for parts and labour for three years from the date the equipment was installed at the end-user customer’s premises. The substance of the discussion is confirmed in an email sent after the meeting on 28 November 2010 (see First Affidavit of Paul Rees sworn 27 September 2010 [29]; Exhibit D3/1944).

37. After Ipstar indicated its acceptance of obligations pursuant to the TPA there followed correspondence, which I summarise as follows:

1. Ipstar indicated that it would need to consider individually each of SkyMesh’s claims.

2. There was discussion about the form in which information would be provided by SkyMesh to Ipstar.

3. SkyMesh did provide information to Ipstar about the claims in the form of schedules.

4. Ipstar examined the schedules. Mr Leeflang, Ipstar’s Director of Operations, considered that some of the claims met the criteria for payment and many others did not because the actual unit that had been replaced had not been returned to Ipstar or other information was incomplete. The requirement that allegedly defective goods must be returned to Ipstar had been in place as between Ipstar and SkyBridge and APN. SkyMesh had not been a party to that agreement.

5. Mr Supoj Chinveeraphan, who was in charge of Ipstar’s operations in Australia, instructed Mr Leeflang not to pay any of SkyMesh’s claims

6. None of the claims were paid to SkyMesh by Ipstar until the commencement of these proceedings, following which a relatively small number were paid by Ipstar. Those items for which payment of approximately $60,000 was made by Ipstar to SkyMesh have been removed from the SkyMesh claim.

7. Some claims relating to SkyMesh customers were paid by Ipstar to SkyBridge – those claims have been the subject of payment by SkyBridge to SkyMesh (also after commencement of these proceedings). SkyMesh accepts that if it is successful on all of its claim an amount of $400,000 must be deducted, being the total amount that it has received from SkyBridge relevant to the extant claims.

38. After SkyMesh had lodged its claims and at a time that SkyMesh was seeking a response and payment by Ipstar the Bandwidth Agreement fell due for renegotiation. Ipstar in January 2011 informed SkyMesh of its new pricing for bandwidth. I shall deal with the unconscionabilty claim separately below.

39. I should note that the Court Book consisted of some 38 volumes (D1-38) to which were added some further volumes. It was agreed that the Court had no need to pay regard to any document not the subject of specific mention by Counsel for either party, but in any event much of the documentary material became superfluous when agreement was reached in respect of a sampling process which I describe below at [40].

40. SkyMesh’s defective goods claim is made up of 4000 individual claims for which there are more than 20,000 documents. Thankfully the parties agreed that it was not appropriate for the Court to have to examine each one of those 4000 claims and a sample of 102 claims was chosen. The parties agreed on a batching process and asked me to select at random 99 cases from the different batches. The parties then agreed that a further three samples should be added to the 99 randomly chosen by me. The documentation in respect of those 102 claims was tendered and became Exhibits O1, O2, and O3 and I shall refer to these as “the 102 Representative Items.” Later a schedule was prepared by SkyMesh’s solicitors summarising the content of the documents (Exhibit U). The parties agreed that the Court was to apply to such of the 102 items as are found not to be of merchantable quality or not fit for purpose a dollar value as follows:

“The parties agree that to the extent that the Court is required to resolve the plaintiff's claims in respect of goods that were not of merchantable quality and/or not fit for purpose as set out in schedules AB and D to the Third Further Amended Commercial List Statement (Product Claims) by an assessment of individual claims, the Court shall adopt the following process:

1.The Court shall determine whether the defendant is liable to the plaintiff in respect of each of the 102 claims comprising the random sample selected by Rein J from MFI 2 (Sample Claims).

2. The plaintiff's entitlement to damages/indemnity from the defendant in respect if the whole of the plaintiff's Product Claims is to be assessed by the application of the following formula:

Step 1

SCR

x PCV = PRC

SCV

Step 2

PRC - Credit = Verdict

Where:

Credit means the $400,000 Skybridge amount.

SCR (Sample Claim Recovery) means the total value of the amounts awarded by the Court to the plaintiff in respect of the Sample Claims.

SCV (Sample Claim Value) means the total value of the Sample Claims.

PCV (Product Claim Value) means the total value of the plaintiff's Product Claims.

PRC (Plaintiff's recovery on Product Claims) means the plaintiff's recovery on the Product Claims before the application of the Credit.

Verdict means the verdict in relation to the Product Claims

41. The approach to the 102 Representative Items is the subject of dispute to which I shall return. It is also not the only way in which SkyMesh seeks to establish that the Ipstar kit was neither of merchantable quality nor reasonably fit for purpose. The three levels of the SkyMesh case are:

1. The Ipstar kit was prone to failure and therefore not reasonably fit for purpose and not of merchantable quality. This ‘prone to failure’ case is limited to the water ingress problem of the ODUs and the modem firmware issue causing drop out.

2. The kits which included the equipment the subject of the 102 Representative Items failed and therefore were not reasonably fit for purpose and or not of merchantable quality (or acceptable quality).

3. If SkyMesh does not succeed on (1) or (2) it contends that it can establish on the balance of probabilities that the kit was not working and that it should be able to recover for each item unless Ipstar can establish that the cause of failure was not something inherent in the ODUs or modems themselves when shipped: see PCS92.

Ipstar’s Threshold Arguments

42. I propose to consider at this stage what might be viewed as the threshold arguments advanced by Ipstar. Ipstar contends that even if it is established by SkyMesh that the Ipstar kit (or parts of it, such as the modem and the ODU) was (or were) not reasonably fit for purpose within the meaning of the TPA/ACL or not of merchantable quality (TPA) or not of acceptable quality (ACL), SkyMesh cannot succeed in recovering from Ipstar under the TPA or the ACL because:

1. s.74B and s.74D of the TPA are not available to SkyMesh, as a matter of construction,

2. the payments made by SkyMesh to SkyBridge were voluntary payments, and so s.74H (TPA) and s.274 (ACL) do not apply.

43. Dealing first with [42] (1) Ipstar argues that even if the goods were not fit for purpose or of merchantable quality s.74B and s.74D are remedies for consumers not intermediate sellers. There is agreement by Ipstar that the first three subsections of s.74B (and s.74D) are met because:

1. Ipstar is a corporation which in trade or commerce supplied goods manufactured by Ipstar to another person (SkyBridge) who acquired goods for resupply: (1)(a),

2. SkyMesh supplied the goods to consumers (1)(b),

3. the goods were acquired by the consumer for a particular purpose (i.e. to access the Ipstar satellite broadband service) (1)(c),

but even assuming it is established that the goods were not reasonably fit for that purpose (or not of merchantable quality) within the meaning of s.74B(1)(d) and s.74D(1)(d), s.74B and s.74D are not applicable because of the last part of these sections.

44. Ipstar contends that “that other person” in the last part of subs (1) is a reference to “a person who acquires the goods from, or derives title to the goods through or under the consumer,” and not to the person referred to in (1)(a) as “another person who acquires the goods for resupply.”

45. Thus Ipstar contends, a corporation is liable to compensate the consumer and “persons who acquired the goods from or derived title to the goods from the consumer” and has, by operation of s.74B or s.74D no obligation to compensate the intermediate seller.

46. In my view the construction for which Ipstar contends is clearly correct. This view is reinforced by two matters:

1. S.74H is a section specifically designed to enable intermediate sellers to sue the manufacturer, and there is therefore no need for s.74B and s.74D to deal with sellers’ claims against manufacturers.

2. If “that other person” meant the intermediate seller then persons who acquired goods through the consumer would have no remedy. The construction advanced by Ipstar is far more in tune with the remedial aspect of the TPA.

47. It follows that in my view SkyMesh has no claim against Ipstar under s.74B or 74D of the TPA.

48. The only section of the TPA which is relevant to the defective goods claim therefore is s. 74H. S.274 is the equivalent provision of the ACL.

49. Turning now to the voluntary payment argument. Ipstar contends that if the goods were not of merchantable quality or not reasonably fit for purpose then SkyMesh should not have paid SkyBridge any amount for the visit or the replacement equipment since SkyBridge was bound to meet its obligations under the TPA. Mr Donaldson says that the situation is similar to SkyMesh paying SkyBridge $5000 for a service call and modem replacement that should have cost only $1000. He submits that SkyMesh could not in those circumstances claim pursuant to the indemnity the additional $4000 from Ipstar. He also submitted that it is not a question of whether SkyMesh acted reasonably in endeavouring to deal with the complaints of customers to whom, on this assumption, SkyMesh was liable because it had sold them goods that were defective. If SkyMesh’s conduct was to be determined by the yardstick of reasonable conduct then in my view what it did was entirely reasonable. It arranged, after SkyMesh and SkyBridge help desks could not solve the customers’ difficulties, for SkyBridge to send a technician to assess the problem and fix the problem by whatever means SkyBridge could do so including replacement of ODUs and modems where appropriate. SkyMesh was under pressure from the industry Ombudsman and the department responsible for administering the ABGP to which SkyMesh customers were also directing their complaints and it is hardly surprising that SkyMesh sought to deal with its customers’ lack of access to the internet without engaging in some protracted legal dispute with SkyBridge. There is no suggestion that the amount charged by SkyBridge for the service call or the replacement parts was excessive.

50. I think the answer to Ipstar’s contention is to be found in the words of s.74H. S.74H has these components:

1. SkyMesh was liable to the consumer and is therefore the seller referred to in s.74H(a).

2. Ipstar is the manufacturer who was liable to the consumer in respect of the same loss or damage i.e. the costs of replacing the defective goods.

3. Ipstar is the manufacturer liable to indemnify SkyMesh “in respect of the liability of the seller to the consumer.”

4. The seller is entitled to indemnify for its liability to the consumer as if there was a contract of indemnity made between SkyMesh and Ipstar.

51. The liability of the seller to the consumer was the liability of SkyMesh to replace the defective goods and it met that liability by organising the service call and the replacement of the goods, for which it then paid SkyBridge. It had paid those monies to solve the consumer’s problems and in my view it is not relevant to the statutory inquiry for the purposes of s.74H to examine whether SkyMesh might have had a right to claim against SkyBridge either under contract or under statute. The statute, by its specific wording, does not introduce any qualification to the indemnity which the statute grants the seller. Even if SkyMesh had a right to claim against SkyBridge contractually or under statute (which has not been demonstrated) it had a right to claim from Ipstar and was entitled to choose which of the two parties liable to it to pursue. It has exercised that choice. If the voluntary assumption of a burden had any role to play it would be as between SkyMesh and the consumer but that is not what is asserted.

52. In relation to s.274 ACL the position is the same save that s.274 requires that the seller “incurs costs.” Mr Donaldson submits that SkyMesh did not ‘incur’ costs because it was not liable to SkyBridge. In my view, whilst SkyMesh may have had a basis to seek to recover the costs of an invoice from SkyBridge (a basis not established in this case) once it was confident that it could prove the sort of matters that it seeks to prove against Ipstar in this case I do not think it is correct to say that when it requested SkyBridge to attend and implicitly to replace equipment found to be faulty with no prior agreement that it would be undertaken by SkyBridge under warranty, that it did not incur a cost. Another way of looking at it is to say that had it been sued on the invoices by SkyBridge it may have had a defence of set off- or cross claim. I do not accept that the payment of SkyBridge’s invoices was voluntary in any relevant sense or that it did not incur a cost by virtue of requesting SkyBridge to attend at the consumer’s home or premises and replace defective equipment.

The Defective Goods Claim: Beyond the Threshold

53. It is appropriate before returning to the detail of the claims to outline the general considerations relating to the terms ‘reasonably fit for purpose,’ ‘merchantable quality,’ and ‘acceptable quality’.

54. The liability imposed by s.74B arises where the goods are not reasonably fit for a purpose made known to the seller and the liability imposed by s.74D arises where the goods are not of merchantable quality. These concepts are well known in English and Australian Law see s.19(1) and s.19(2) of the Sale of Goods Act 1923 (NSW), see Suttons’ Sales and Consumer Law, (4th ed 1995, LBC Information Services), pp. 238-242, 274-292 Grant v Australian Knitting Mills (1935) 54 CLR 49; [1936] AC 85, Ashford Shire Council v Dependable Motors Pty Ltd (1960) 104 CLR 139; [1961] AC 336, Rogers v Parish (Scarborough) Ltd [1987] QB 933 and Bristol Tramways & Carriage Company Ltd v Fiat Motors Ltd [1910] 2 KB 831, p.837 in which it was held that buses manufactured by the defendant which were too slightly built for heavy city traffic were both not fit for purpose and not of merchantable quality.

55. S.74D provides that for goods to be of merchantable quality they must be as fit for the purpose or purposes for which goods of that kind are commonly bought as it is reasonable to expect having regard to the description, price and all other relevant circumstances. This definition moves away from the restrictions of the previous law surrounding s.19(2) Sale of Goods Act1923 (NSW) and its analogues.

56. In Peterson v Merck Sharpe & Dohme (Australia) Pty Ltd (2010) 184 FCR 1; [2010] FCA 180 [962] –[968], Jessup J, in dealing with s.74B, held that fitness for purpose of goods is to be measured against what it was reasonable to expect at the time of supply of the goods to the consumer. On appeal the Full Court in Merck Sharp & Dohme (Australia) Pty Ltd v Peterson (2011) 196 FCR 145; [2011] FCAFC 128 per Keane CJ Bennett and Gordon JJ described s.74B as containing an objective test [174] of reasonable fitness.

57. In Medtel Pty Ltd v Courtney (2003) 130 FCR 182 at [81] Branson J (with whom Jacobson J agreed) said that the test in s.74D requires the goods in question to be measured against what is objectively reasonable to expect in terms of fitness for purpose.

53. So far as the facts of this case are concerned there appears to be no real point of practical difference between the liability imposed by s.74B and 74D, and hence what is sought to be passed on to the manufacturer by s.74H.

54. S.54 of the ACL does not use the term “merchantable quality” but rather “acceptable quality.” For present purposes s.54(2) of the ACL adds a specific requirement that the goods were free from defects as well as not fit for the purpose for which they were commonly supplied.

55. In my view it must follow that if the goods are not reasonably fit for purpose under s.74B of the TPA they cannot be of acceptable quality under s.54 of the ACL, and are not reasonably fit for purpose under s.55 of the ACL.

56. There is no dispute that Ipstar knew the purpose of the ODUs and IDUs supplied to the consumer. Ipstar did not dispute that an ODU which had suffered water ingress was not fit for purpose and not of merchantable quality or acceptable quality.

57. The real dispute in this case seemed to centre on whether SkyMesh had established that the equipment the subject of the 4000 claims was, when purchased, in fact not fit for the purpose intended.

58. The question of what it is in this case that is said to be unfit for purpose (or unmerchantable) caused some controversy. Mr Williams emphasised that the equipment was sold as a kit and the failures occurred at the latest within a few years of purchase, well within the expected life of the equipment. If the ODU was not working the kit was not working and was not fit for purpose. The same applied if it was the modem that was not working. Mr Donaldson pointed out that if the ODU was defective that did not mean the modem was defective. If the ODU is defective the kit is not fit for purpose but it does not follow that the modem is defective. In none of the claims was a customer seeking to return the entire kit because the ODU or the modem or both were not functioning. What the customer required was to be able to log into the internet. The point may have some significance where the UT is not working and it is not clear whether it is the modem or the ODU which is the cause. The technician is required to ensure that the UT is working not merely a part of it.

59. The scale of the problem of water damaged ODUs can be demonstrated by the fact that:

1. Ipstar paid out to SkyBridge a total of $2.9 million in claims for water ingress failures of the ODUs: T295-T296. That amount includes payment for some of the units that ended up with SkyMesh customers. Ipstar paid in the order of $3 million to APN, which received its equipment directly from Ipstar, in respect of water damaged ODUs: see T292.

2. Ipstar had a policy as between itself and SkyBridge and APN that all ODUs that were removed from customers’ premises due to a concern that they had been damaged by the ingress of water had to be returned to Ipstar who would then forward the ODU to Thaicom in Thailand for testing. Thaicom used a company called Antech to test the ODUs. In the period of October 2009 and November 2012 Ipstar received some 9485 ODUs thought to be water damaged. Mr Chinveeraphan told Mr Rees, that based on the statistics he got from Thaicom “for every 100 ODUs shipped back for water ingress testing 72% confirmed leaking, 8% ODU failure, 18% no fault found” see Exhibit D3/1962. The failure rate for water ingress represented 12% of the total numbers of ODUs deployed by Ipstar in Australia: D3/1860. The units which did not fail the leak test but did fail the other tests had defects in the LNC and BUC components of the ODU: see T413 and Exhibit D3/ 1873-1876, 1926, 1944, and 1196.

3. There were by 2010 some 65,000 Patriot ODUs in the fleet (T303.15-50). There were 27360 units deployed in 2008 of which 3772 had failed due to water ingress (Exhibit D3/1862). This equates to 12% of the total fleet but there were estimated to be likely to be failures totalling, for example, 36% of the 2008 stock: T374.21-375.4. There was some dispute between the parties as to whether the 65,000 were all first generation Patriots or not. Exhibit D3/1562 does not give any detail as to that. What is known is that new Patriots were first introduced in Australia in March 2009: Exhibit D3/1708 but Mr Leeflang accepted that old style Patriots appear to have been sold as late as January 2011: T511.21-31.

4. Ipstar also set up a field audit to attempt to assess the problem: see Exhibit D3/1864. According to that audit 29 out of 50 sites had water ingress problems with equipment Exhibit D3/1889.

5. Ipstar arranged a forum of ISPs and SkyBridge to discuss the problem (in February 2010)- see Exhibit D3/1558-1605.

6. Mr Wonish’s evidence was that Ipstar ODUs regularly suffered from water ingress problems that would cause them to fail often after heavy rain: para 21 Exhibit D10/6366; he estimated that 50% of the calls related to water damage in the ODUs: T211.15-22.

7. Mr Burns’ evidence at Exhibit D6/3510 is that the Patriot ODU was not of acceptable quality because:

1. the two piece Patriot OMT had a design which, based on his experience, could allow water and moisture to enter the RxTx (send and transmit) feed assembly and,

2. the original plastic feed horn cover appeared to deteriorate when exposed to the elements to the point that it allows water to enter the front of the feed horn

8. Ipstar’s own document records:

“Investigations by IPA [Ipstar] Thaicom and the manufacturers, Patriot, found that it [water ingress problems] was due to the OMT:” see Exhibit D6/3510

9. Ipstar regarded the failure rate of the Patriot ODUs as unacceptable and Mr Leeflang told Mr Chinveeraphan who was aware of the problem: T285-T286, T306.48-T307.17. The rate of failure was not acceptable to Ipstar: T359.39.

10. It was the complaints by service providers that led to the February 2010 forum (see T302.29) and later Ipstar entered into a memorandum of understanding (“MOU”) with APN and SkyBridge.

11. Mr Leeflang accepted that low signal level, log offs and ‘hang’ were symptoms of ODU water ingress and would render the equipment not fit for purpose: T312-T313 and see T278-9.

12. Even the second and third generation Patriots had water ingress: see T315-317, T386 and T389-394.6 and see Exhibit G and Ravens made by a different manufacturer as the replacement for the Patriots also had problems: see T399, and Exhibit L.

13. Evidence of oxidation in the ODU was, contrary to the suggestion in some Ipstar documentation, evidence of a water ingress problem: T336-337.

14. Even in 2015 Mr Kevin Johns an operational assistant was spending three to four days a week between January 2015 and January 2016 testing the IDUs and ODUs that were perceived to be faulty: T577. The ODUs included Ravens as well as Patriots.

15. Ipstar developed what is described as a proactive replacement program for first generation Patriot ODUs although it was limited to APN: T344.45. Under the MOU with APN there was some 6000 ODUs to be made available as buffer stock: T403-407.

16. Ipstar terminated supply from the Patriots’ manufacturer and switched to Ravens.

65. Mr Johns recorded the results of testing: T577 and Thaicom did an analysis of the received Patriots T310.45. The test results for the ODUs and IDUs were not put in evidence by Ipstar. Tests performed by Thaicom on later generation ODUs were not in evidence: see T333-336.

66. I have referred to testing of ODUs in Thailand by Antech. The experts retained by SkyMesh and Ipstar respectively, Mr Burns and Dr Hamilton, were agreed that the testing performed by Antech was not adequate to detect all the water ingress problems because the tests would not detect water ingress through the feed horn cover seal or the joint connecting the feed horn to the rest of the ODU assembly and because the focus was on the OMT and its interface with the BUC and the LNB and not the ODU generally see Exhibit S1 at 25915.51 and see T657.21-658.12 and T659.

67. The scale of the modem problem can be demonstrated by:

1. The fact that Ipstar had put up to 10% of its customers as at February 2010 on a service known as Special Class of Service (“SCOS”): see Exhibit D3/1647-1649 and T363.40-43 (Mr Leeflang) SCOS is a very wide bandwidth which when utilised is far easier to access than the normal broadband service. It is costly for Ipstar to use SCOS for that purpose.

2. The February 2010 forum was arranged to discuss that problem as well.

3. That even to this day the problem has not been solved: Mr Cross the director of sales of Ipstar: T542.10-25

Q.  Without placing these customers on these special class of service the modem firmware wouldn't operate in the manner in which IPSTAR expected it to; would it?

A.  No.

Q.  The special class of service was seen to be an interim solution whilst the problem was sought to be remedied; wasn't it?

A.  Yes.

Q.  I hadn't been remedied by, at least, January 2011; had it?

A.  No.

Q.  Indeed it still hasn't been remedied; has it?

A.  To my awareness it has not.

4. Ipstar, in its follow up to the February 2010 forum (dated 16 April 2010), indicated interim responses to the problem but under the heading Long Term Implementation Plan said:

“The latest releases of UT firmware for both M2/M3 (image version SG029) and M4 (image version 075) versions aim to be the permanent fixes to the UT hanging problem.

The benefits

• To fix the root cause of UT Software hang

•To improve efficiency of satellite bandwidth utilization by removing UT from SCOS pool

•To fix known operational constraints of the current UT firmware in the field” (p.1638)

The document notes that amongst APN customers the percentage having more than five per day drop outs decreased from 32% to 3% (see T638)

5. Mr Wonish’s evidence was that in his experience the Ipstar white modems with external power supply failed regularly (Exhibit A/6367).

6. Ipstar organised 4000 modems to deal with the demand and which required replenishment T349-T350 and T373.22-36; buffer stock ran out very quickly with customers being left without replacement terminals: T331-332.

7. The following admissions in the cross-examination of Mr Leeflang T278.29-T279.20:

“Q. The purpose of the user terminal was to enable the consumer to have stable access to the internet, wasn't it?

A. The user terminal being the modem? Is that what you're asking?

Q. The product that you were providing

A. Yes

Q. that you described as the user terminal

A. Okay, so the complete kit?

Q. The complete kit?

A. Okay.

Q. --had at its purpose to enable the consumer to have stable access to the internet, didn't it?

A. That was the design, yes.

Q. That was its purpose?

A. Yes.

Q. You would accept, wouldn't you, that a user terminal that didn't permit stable access to the internet would not be a product which you would wish to put into the market?

A. That would be correct, yes.

Q. And you wouldn't wish to put into the market a kit that only enabled intermittent access to the internet, would you?

A. That is correct, yes.

Q. You wouldn't want to put into the market a kit that permitted internet access but with frequent dropouts?

A. That is correct, yes.

Q. Because you accept, don't you, that stable access to the internet doesn't involve dropouts occurring?

A. That is right, yes.

Q. This product was designed and its purpose was to allow consumers to connect to the internet without dropping out?

A. Yes, that is right.”

         and see Dr Hamilton’s evidence at T657.8-18.

8. Mr Burns said (see Exhibit D6/3514):

“My principal concern with the M4 series (iCON) devices was the number of dropouts the IDU experiences. Reconfiguration of the worst affected  customers to a Special Class of Service (SCOS) as an interim "work around" measure as proposed by IPA is, in my view, recognition by IPA of the  seriousness of the issue. In my experience, VSAT terminal dropouts are rare and usually only occur during extreme rain conditions or when the  satellite passes between the sun and the terminal or central earth station. Furthermore, the relatively high number of dropouts allegedly  experienced, the release of multiple firmware upgrades that were intended to resolve this issue and comments in the exchange of emails  between  Malai Perumal (IPA) and Kear Stephens (SkyMesh) suggests that the underlying problem is either not fully understood by IPA or  difficult to  remedy.”

9. The summary of modem problems annexed to Mr Burns’ affidavit as Annexure C.

10. The firmware was part of the problem of drop outs: T304.40, T305.45-T306.15.

11. Mr Burns’ evidence was that although the modem in other respects appeared to be well made equipment he regarded the number of drop outs as of concern and regarded the SCOS interim work around implemented as recognition by Ipstar of the seriousness of the issue. In his experience VSAT terminal drop outs are rare: Exhibit D6/3514. Mr Burns said that fundamental firmware deficiencies in a mass produced product should have been positively resolved before release to the public or shortly thereafter. Given Mr Cross’s evidence it would seem more likely that the problem is one which is difficult to remedy.

12. The evidence of Mr Johns is relevant here too: T577.

68. I shall now deal with the three levels of the SkyMesh case in connection with s.74H of the TPA and s.254 of the ACL.

The Prone to Failure Case

69. The “prone to failure case” is based on the ODU water ingress problem and the modem drop out problem.

70. The first way in which SkyMesh puts its case is based on Medtel. A number of patients who had the Medtel pacemaker fitted had found their pacemakers to be defective. The defect was that yellow solder had been used in the product which had a tendency to develop dendritic connections which, when present, would cause the pacemaker to fail. The applicant, in what was a class action, had had his Medtel pacemaker removed out of concern about the identified dendritic problem but on removal his pacemaker was not found to have a dendritic condition and it was functioning normally. The Trial Judge held nevertheless that the pacemaker supplied to Mr Courtney was not of merchantable quality by reason of the risk of failure arising from the presence of the yellow solder. An appeal to the Full Court was unsuccessful.

71. Mr Williams contends that the kit that was manufactured by Ipstar was not fit for purpose because it was prone to failure- i.e. because the ODU used by Ipstar had an unacceptably high risk of failure due to water damage, and the modem had an unacceptably high risk of dropout.

72. Mr Donaldson disputes that Medtel has any relevance to the present case.

73. The principle judgment in the Full Court was that of Branson J (with whom Jacobson J agreed). SkyMesh relies on the following passages:

[58] Before turning to that question, it is important to note that the parties accept that s74D(1) is concerned with the quality of the particular goods, or product, supplied to the consumer who seeks to recover compensation under the section. That is, so far as Mr Courtney's individual claim is concerned, the quality of the particular pacemaker supplied to Mr Courtney. It follows, in my view, that for the purposes of the subsection, it is not appropriate to attribute to Mr Courtney's pacemaker any qualities derived by statistical analysis of the total population, or pool, of pacemakers from which Mr Courtney's pacemaker came. So, for example, while statistical analysis of the total population of pacemakers from which Mr Courtney's pacemaker came might show that pacemakers of that type have a 2 per cent chance of premature failure, that analysis would reveal nothing about the quality of Mr Courtney's particular pacemaker.

[59] So far as Mr Courtney's pacemaker is concerned it is not suggested that it was known, or could have been known, at the time that it was supplied to him that it was unmerchantable. On the information then available there was no reason for either the appellant or Mr Courtney to suspect that it was other than fit for its intended purpose, which was the purpose for which pacemakers are commonly bought. That purpose, as the primary judge found at [202], was the purpose of being implanted into a patient on the advice of a medical practitioner so as to restore and maintain a normal heart beat by providing an electrical impulse carried through leads to the heart.

[74] I reject the argument that the mere fact that it was known at the time of trial that Mr Courtney's pacemaker had not failed prematurely meant that it could not be demonstrated that Mr Courtney's pacemaker was not of merchantable quality within the meaning of s74D at the time of its supply to Mr Courtney.

[78] In my view, having regard to the evidence before the primary judge (see [59] above), no error can be shown to have been involved in his Honour's conclusion that a pacemaker that has only the ordinary or usual risk of premature failure is more fit for the purpose of being used as a pacemaker than a pacemaker that has, by reason of the method of its manufacture, an appreciably higher risk of premature failure. In this case it was reasonable to expect, at the time of the supply to Mr Courtney of his pacemaker, that Mr Courtney's pacemaker had been manufactured in a way which gave rise to only the ordinary or usual risk of premature failure. However, the use of yellow spool solder in the manufacture of Mr Courtney's pacemaker meant that Mr Courtney's pacemaker had an appreciably higher risk of premature failure than the ordinary or usual risk of premature failure to be expected in pacemakers.

[79] The above analysis has deliberately been undertaken without reference to the existence or otherwise of dendritic growth in Mr Courtney's pacemaker. What, in my view, made Mr Courtney's pacemaker, at the time that it was supplied to him, less fit for use as a pacemaker than it was reasonable in the circumstances to expect was its method of manufacture (ie that it was manufactured with yellow spool solder). It was that method of manufacture which created, because of the white residue, the 'superadded' risk of dendritic growth. While proof of actual dendritic growth in Mr Courtney's pacemaker at the time of its supply to him would have constituted proof that the pacemaker was not of merchantable quality within the meaning of s74D, absence of proof of actual dendritic growth at that time did not logically lead to the contrary finding.

74. The third member of the Court, Moore J had the same view and held too that the goods were not fit for purpose saying:

[41] That question can, in the first instance, be addressed by reference to the facts as found by the primary judge. The condition of Mr Courtney's pacemaker at the time of supply and acquisition had several features. It had been manufactured using yellow spool solder. It had been manufactured approximately nine months earlier. Because it had been manufactured using yellow spool solder it contained a white residue which might have trapped (or possibly been a source of) ionic contamination. It contained moisture and an electrical bias. While no finding was made that it then had dendritic growth, the conditions existed for such growth to have by then commenced. If dendritic growth had by then commenced, premature failure by battery depletion would be likely to occur. Was a pacemaker in that condition fit for the purpose for which pacemakers were bought? In my opinion it was not, essentially for the reasons given by the primary judge. Because of its physical condition having regard to how it was manufactured, there was a real prospect it would fail prematurely, and the risk of it doing so was greater than might otherwise have been expected. That being so it was not fit for the purpose or purposes for which goods of that kind are commonly bought.

75. Medtel was considered in Protec Pacific Pty Ltd v Steuler Services GmbH & Co KG [2014] VSCA 338.

76. As Mr Donaldson pointed out, in Medtel it was accepted that proving that Product A has a statistically high rate of failure does not establish that any particular example of Product A is not fit for the purpose intended. There is no question that a 12% or 20% failure rate in a product is a very high and unacceptable level of failure (Ipstar was hoping for less than 1% failure rate and Mr Paul Burns thought anything above 5% was unacceptable: see Exhibit D6/3518) but the prospect of any particular item randomly selected from the batch failing is not higher than a 12% or 20%- thus without more one cannot conclude on the balance of probabilities that the randomly selected item is likely to fail. The reason that Mr Courtney’s pacemaker was not fit for the purpose was because it had been made with yellow solder and the yellow solder was prone to create dendritic conditions which would cause the item to fail. One of the possible causes of failure of the Patriots identified by Mr Burns was that the screws of the outer assembly of the ODU had been over tightened. If an ODU had such over tightened screws that would render it prone to failure even if its defect was not recognised and water had not yet entered the unit.

[105] Perhaps for these reasons, in Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389; 15 BPR 29,699, Allsop P (with whom Bathurst CJ and Campbell JA agreed) suggested (at [293]) that Spigelman CJ in A-G v World Best Holdings may have stated a "too stringent" test, although Allsop P left the issue open. His Honour said that:

“What is required is some degree of moral tainting in the transaction of    a    kind that permits the opprobrium of unconscionability to characterise    the    conduct of the party.”

In a subsequent case, the Full Federal Court (Allsop CJ, Jacobson and Gordon JJ) said that the word "unconscionability" means "something not done in good conscience" or "conduct against conscience by reference to the norms of [the] society that is in question": Australian Competition and Consumer Commission v Lux Distributors Pty Ltd [2013] FCAFC 90, at [41]. The formulations in Tonto v Tavares and Lux Distributors have the advantage of adhering closely to the statutory language.

[106] The difficulty of imposing a definitive constraint on the meaning of "unconscionability" is illustrated by other comments made by Allsop P in Tonto v Tavares, at [291]:

Aspects of the content of the word "unconscionable" include the following: the conduct must demonstrate a high level of moral obloquy on the part of the person said to have acted unconscionably: Attorney-General (NSW) v World Best Holdings Ltd (2005) 63 NSWLR 557; [2005] NSWCA 261, at [121]; the conduct must be irreconcilable with what is right or reasonable: Australian Securities and Investments Commission v National Exchange Pty Ltd (2005) 148 FCR 132; [2005] FCAFC 226, at [30]; Australian Competition and Consumer Commission v Samton Holdings Pty Ltd (2002) 117 FCR 301; [2002] FCA 62, at [44]; - 46 - Qantas Airways Ltd v Cameron (1996) 66 FCR 246 at 262; factors similar to those that are relevant to the [Contracts Review Act 1980] are relevant: Spina v Permanent Custodians Ltd (2009) 14 BPR 26,923; [2009] NSWCA 206, at [124]; the concept of unconscionable in this context is wider than the general law and the provisions are intended to build on and not be constrained by cases at general law and equity: National Exchange at [30]; the statutory provisions focus on the conduct of the person said to have acted unconscionably: National Exchange at [44]. It is neither possible nor desirable to provide a comprehensive definition. The range of conduct is wide and can include bullying and thuggish behaviour, undue pressure and unfair tactics, taking advantage of vulnerability or lack of understanding, trickery or misleading conduct. A finding requires an examination of all the circumstances. (Emphasis added.)

(Tonto v Tavares involved ss 12CB and 12CC of Australian Securities and Investments Commission Act 2001 (Cth). The text of ss 12CB and 12CC was borrowed from s 51AC of the TP Act.)

127. Turning now to the content of what is intended by unconscionable conduct discussed in Paciocco to which I have added references to other decisions on unconscionable conduct :

1. Courts should be wary of attempting to substitute for the phrase used in the statute “unconscionable conduct,” other phrases such as ‘moral obliquy’ and treat those phrases as if that is what the statute provided.

2. The Court needs to consider all the circumstances of a case in order to reach a conclusion on unconscionability. Thus obviously it is not just a question of what is contained in the contract.

3. The statute, by referring to matters to which attention can be given, provides guidance as to what the legislature regarded as conduct which is or might be regarded as unconscionable and see Australian Competition and Consumer Commission (ACCC) v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253; [2000] FCA 1365.

4. The standard of conduct expected as a person in the commercial context is not that of a fiduciary.

5. The enumerated matters are not exhaustive and see: Australian Competition and Consumer Commission (ACCC) v ACN 117 372 915 Pty Ltd (in Liq) (formerly Advanced Medical Institute Pty Ltd) [2015] FCA 368 at [25].

6. A contracting party is not required to subordinate its interests to those of the other party.

7. Unconscionable conduct is not conduct which is unjust or even unfair, but it need not be dishonest World Best Holdings at [120]-[121] and see Advanced Medical Institute at [39].

8. At [296] Allsop CJ said:

“The working through of what a modern Australian commercial, business or trade conscience contains and requires, in both consumer and business contexts, will take its inspiration and formative direction from the nation’s legal heritage in Equity and the common law, and from modern social and commercial legal values identified by Australian Parliaments and courts. The evaluation of conduct will be made by the judicial technique referred to in Jenyns. It does not involve personal intuitive assertion. It is an evaluation which must be reasoned and enunciated by reference to the values and norms recognised by the text, structure and context of the legislation, and made against an assessment of all connected circumstances. The evaluation includes a recognition of the deep and abiding requirement of honesty in behaviour; a rejection of trickery or sharp practice; fairness when dealing with consumers; the central importance of the faithful performance of bargains and promises freely made; the protection of those whose vulnerability as to the protection of their own interests places them in a position that calls for a just legal system to respond for their protection, especially from those who would victimise, predate or take advantage; a - 88 - recognition that inequality of bargaining power can (but not always) be used in a way that is contrary to fair dealing or conscience; the importance of a reasonable degree of certainty in commercial transactions; the reversibility of enrichments unjustly received; the importance of behaviour in a business and consumer context that exhibits good faith and fair dealing; and the conduct of an equitable and certain judicial system that is not a harbour for idiosyncratic or personal moral judgment and exercise of power and discretion based thereon.”

9. At [347] Allsop CJ said:

“In all the circumstances, in particular, the lack of any proven predation on the weak or poor, the lack of real vulnerability requiring protection, the lack of financial or personal compulsion or pressure to enter or maintain accounts, the clarity of disclosure, the lack of secrecy, trickery or dishonesty, and the ability of people to avoid the fees or terminate the accounts, I do not consider the conduct of ANZ to have been unconscionable. To do so would require the court to be a price regulator in banking business in connection with otherwise honestly carried on business in which high fees were extracted from customers.”

10. In relation to good faith this requires an obligation on the parties to cooperate in achieving the contractual objects, compliance with honest standards of conduct, and standards of conduct that are reasonable having regard to the interests of the parties and conduct which unreasonable, unfair, harsh, oppressive and wanting good faith may constitute, having regard to the relationship between the parties, unconscionable conduct: see ACCC v Simply No Kneed [44] – [47].

11. The Court must “assess and characterize the conduct of the impugned party in trade or commerce against the standard of business conscience, reflecting the values and norms recognised by parliament” to which his Honour referred.

12. Inequality in bargaining position alone is insufficient and Keane J remarked in Paciocco at [293]:

“the existence of a disparity in power which is an all pervading feature of a capitalist economy does not establish that the party which enjoys the superior power acts unconscionably by exercising it.”

128. In relation to 127(10) I should interpolate that whilst absence of good faith is a matter to which regard can be had by reason of s.22(l) failure to act in good faith, without more, does not amount to unconscionable conduct within the meaning of s.22 of the ACL.

129. Mr Williams identified as relevant to SkyMesh’s claim the following subsections of s.22: (a)(b)(d) (but limited to pressure), (e) (f) (j) and (l).

130. The Bandwidth Agreement was due for renegotiation in March 2011. On 4 February 2011 Mr Cross of Ipstar wrote to Mr Rees at SkyMesh attaching an addendum to the contract part dated 7 February 2011 with a new bandwidth price of $3,060 per Mbps per month plus GST. The draft Addendum also included warranty terms and reference to an ‘RMA’ process (Return Merchandise Authorisation). The covering email stated:

“We trust you understand that the new pricing is [a] a reflection of the substantial increase in cost of doing business with SkyMesh” (Exhibit D4/2143)

131. There followed correspondence whereby Mr Rees sought clarification if what was meant by the words ‘increase in cost of doing business with SkyMesh’.

132. Eventually Ipstar advised that its final offer for bandwidth was $2,933/Mbps per month. Although Ipstar did not advise SkyMesh of this at the time or indeed at any time prior to commencement of these proceedings, the figure of $2,933 was calculated by Mr Cross and was arrived at by determining what would be, based on a broad brush approach, the anticipated cost to Ipstar of meeting its statutory warranties for equipment purchased by SkyMesh from SkyBridge: see Exhibit D4/2627-2628 and paragraphs 65 and 66 of Mr Cross’s affidavit of 4 April 2014. That figure was assessed at $1,005,840 and Mr Cross then calculated how that amount could be recovered through an increase of bandwidth charges- i.e. an additional $433 per Mbps per month. Mr Cross accepted in cross-examination that he was calculating the cost of warranty claims in respect of equipment already received by SkyMesh customers: T552.20-42.

133. At the time of receipt of Ipstar’s final offer Mr Rees indicated that he objected to the increase and that as SkyMesh had no choice he would be signing an addendum ‘under protest:’ Mr Rees had become aware that no other ISP (large or small) was the subject of a price increase, and he did not regard the declining number of users as relevant since the downturn applied to all ISPs.

134. Proceedings were commenced by SkyMesh in 2011 in relation to the unconscionability claim and the defective goods claim.

135. I summarise the factual matters upon which SkyMesh relies to assert that Ipstar acted unconscionably:

1. Ipstar sought to impose, as a price increase, an amount that it calculated would be the likely cost to it of meeting the statutory warranty claims of SkyMesh. That was not designed to protect a legitimate interest of Ipstar.

2. It did not disclose to SkyMesh the true basis of the price increase calculation but asserted that the price increase was as a result of a higher cost of doing business with SkyMesh based not only on SkyMesh exercising its statutory warranty rights but also on its failure to comply with Ipstar’s RMA policy and a high number of service calls from SkyMesh since 2010.

3. It continued to provide untruthful answers to questions posed by SkyMesh concerning the price increase. I set out a portion of the cross-examination of Mr Cross relied on, at T563.1-T564.9:

Q. You say, "We have already seen a huge increase in the number of service calls from SkyMesh since December which is disproportionate to other providers, then you say (and I do not mean your statutory warrant retro claims."

A. Yes.

Q. You were intending to suggest, weren't you, that the reason for the price increase was not to do with the statutory warranty claims?

A. No, I'm just saying there's a huge increase in the number of service calls since December.

Q. Come on, Mr Cross, have a look at this. "We've seen a huge increase in the number of service calls from SkyMesh since December which is disproportionate to other providers" and then you specifically state, "And I do not mean your statutory warranty retro claims", don't you?

A. Yes.

Q. In other words you're talking about issues other than the statutory warranty claims?

A. Yes.

Q. You're seeking to justify the price increase on the basis of matters other than the statutory warranty claims; aren't you?

A. Yes.

Q. That's not a true reflection of the reasons for your price increase; was it?

A. No.

Q. You accept, don't you, that this third time that you've dealt with this concept didn't involve a frank and honest response from you? You accept that; don't you?

A. Partially, yes.

Q. Insofar as you were purporting to give an explanation for the increased cost of doing business it was a false explanation; wasn't it?

A. Yes.

Q. The reason you gave a false explanation is because you did not want to reveal the true reason for the price increase, that's right; isn't it?

A. Yes.

Q. Can we go then to the first time you deal with this issue, it's at 2386. You don't in that email reveal the true reason for the price increase; do you?

A. No.

Q. You tried to keep secret from SkyMesh the true reason for the price increase; didn't you?

A. No.

Q. Really? Is that really your evidence?

A. We didn't reveal the reason for the price increase.

Q. We know that, you tried to keep it secret; didn't you?

A. Not intentionally.

Q. Mr Cross, you intentionally kept secret from SkyMesh, from the time that you were asked questions about it, what the real reason was for the price increase; didn't you?

A. Yes.

and see T552.15-50, T553.42-47, T558.37-39, T560.41-47, T560.31-T561.26    and T573.9

4. It imposed a price increase on SkyMesh and on no other internet service provider and SkyMesh had a similar number of customers using Ipstar as APN whose bandwidth price was lower than that of SkyMesh even without the price increase.

5. It was aware that SkyMesh could not move its customers away from Ipstar because:

1. SkyMesh would have had to purchase approximately $60 million worth of new hardware since none of the Ipstar hardware would work with other systems: see T567.35-568.9,T570.39-46,

2. no other provider was available for the amount of bandwidth SkyMesh required: see T570.40-T571.40,

6. Ipstar had not paid any of the claims for statutory warranty as at the date of the price increase notwithstanding that it had been determined by Mr Leeflang that some of the claims were valid.

7. It introduced as part of the addendum an RMA policy even though SkyMesh was not purchasing equipment from Ipstar.

8. It introduced as part of the Second Addendum warranty terms.

9. Ipstar asserted that the cost of doing business with SkyMesh was higher than other providers but no review was ever undertaken by Ipstar in support of that contention see: T561.2-40.

136. Mr Donaldson made the following points:

1. Much of SkyMesh’s ‘unconscionability’ case was not pleaded.

2. Since SkyMesh’s case is that it had no choice but to accept the price increase required by Ipstar there is an illogicality to SkyMesh’s case on a number of points. SkyMesh was not tricked or misled into signing the addendum or because Ipstar applied any pressure.

3. Ipstar does not accept that it was dishonest in its dealing with SkyMesh but even if it was that dishonesty does not go anywhere. Had Ipstar said: “We have calculated the average rate of claims on defective products to be $x million per year and that requires us to increase the bandwidth price to $y extra per million Mbps per month, the situation would have been no different.

4. Mr Donaldson accepted that there was little prospect of bandwidth being obtained from any other supplier and that the cost of equipment for an alternative network even if available, was prohibitive, but contended that if SkyMesh found itself in a weak bargaining position as at January 2011 because it had 35,000 customers who had purchased Ipstar equipment and could not transfer to another network that arose because it had not arranged for a fixed price for all of the period that it was contractually bound to its customers. It had created its own vulnerability. It was in no different position to a café owner who had established the café in rented premises, and had to renegotiate a new rental at the end of the lease period or a commodity trader who had bought up a substantial quantity of a product the demand for which has suddenly increased dramatically. If commodities or services have become rare there is nothing unfair or unjust, let alone unconscionable, in one party seeking to obtain a higher price than the other party had previously paid. This is supported by Keane J’s observation in Paciocco which I have set out at [127] (12) above.

5. The increase was effectively a 15% increase and not unduly harsh and relevantly the price of $2999 per Mbps was actually less than the price that SkyMesh had paid for an earlier period.

6. With all the talk of SkyMesh’s predicament when it agreed (albeit under protest) to a 15% price increase it sold its business a few months ago for $8.6 Million dollars (T669).

7. The Court is not a price regulatory authority: see [347] of Paciocco.

137. The recoupment of statutory warranties was a matter specifically raised in opening by Mr Williams at T27.14-T28.35. I shall refer to this as “the back door recovery point.” When Mr Donaldson responded on this topic by way of opening see T272-T274.44 he put forward various arguments which are picked up in the DCS but he did not at that point allege that the back door recovery point was not open on the pleadings. That contention is mentioned at DCS 64 and became amplified in the final oral submissions: T748.19-749.4. Mr Donaldson claimed that it was a matter on which Ipstar could have addressed evidence. Mr Williams responded to these pleading points: T784-787. In my view it is open to SkyMesh to advance the back door recovery point for a number of reasons:

1. SkyMesh pleaded at para 14 of the Commercial List Statement (Exhibit D1/45) that the price increase was not reasonably necessary for the protection of the legitimate interests of Ipstar,

2. s.22 requires consideration of all circumstances (“a wide ranging enquiry” per North J in Advanced Medical) and that is a relevant circumstance- indeed this links to the third point,

3. Ipstar sought to justify the price increase in its evidence- and relied on various matters which SkyMesh challenged- “the substantial increase in the cost of doing business” was clearly put as an important circumstance by Ipstar.

4. Mr Donaldson’s failure to protest against the back door recovery point after Mr Williams had opened, whilst not decisive, is relevant.

138. Whilst on the subject of pleading points in relation to unconscionability Mr Donaldson also claimed that SkyMesh had never articulated a claim:

1. that Ipstar had acted unconscionably because it was refusing to pay the warranty claims.

2. Ipstar was not paying warranty claims for the purpose of applying commercial pressure,

3. Ipstar’s introduction of the RMA terms and the terms of future warranties was together with the price increase part of a “three pronged approach”.

139. In relation to the matters in [138] (a)-(c) even if they could be relied on they do not really advance SkyMesh’s unconscionability claim because its case is that it had to agree to the price increase because without such agreement it could not provide the service to its customers for which they had contracted not because Ipstar had not paid the warranty claims or required compliance with the RMA. I do not base my decision on any of these matters.

140. Given that SkyMesh received $8.6 million for the totality of its business it is not possible to assess what it received for the satellite component. It does not in any event appear to me to have any relevance to the unconscionability claim. Nor for that matter is it relevant that APN had negotiated terms that, if they had been offered to SkyMesh, would have reduced the amount payable by SkyMesh by $8.4 million rather than the $3.4 million claimed, or the fact that SkyMesh had for one earlier period been paying more than $2,933 per Mbps per month.

139. So far as a lack of honest dealing on the part of Mr Cross in responses to SkyMesh is concerned even though such conduct is the type of conduct within the purview of the ACL there is no evidence from Mr Rees that he was misled or did anything (or did not do something) because of what Mr Cross or anyone else from Ipstar told him. Mr Cross’s admission that he gave a false explanation to Mr Rees for the price increases and intentionally held back the true reason is however indicative of a recognition that recovery of the statutory warranty for past sales would not be an appropriate or permissible course of action.

140. Had Ipstar simply wished to increase the price for bandwidth by 15% because it was in its commercial interest to do so to maintain its profit margin notwithstanding the burden of meeting warranty claims or potential product failure in the future and because it believed that SkyMesh would be willing to pay that increased price and because not to do so would have been commercially unwise on the part of SkyMesh I very much doubt that its conduct could be characterised as unconscionable, and I say that even recognising that SkyMesh was in a predicament because it had purchased Ipstar equipment and agreed to abide by the ABGP terms and conditions, and Ipstar well knew that. I also am inclined to think that a seller who chooses to seek a higher amount from one purchaser as compared to another, or indeed all others, is free to do so. There can be no expectation by a purchaser that the price that he or she is paying is equal to the price that any other customer is paying (absent any express representation to that effect).

141. However, I regard of paramount importance the fact that what Ipstar decided to do, through Mr Chinveeraphan and Mr Cross, was to calculate in a broad fashion what the statutory warranty would be likely to cost Ipstar for UTs supplied to consumers by SkyMesh and to impose that cost on SkyMesh. S.74K of the TPA renders any term of a contract (even if incorporated into another term) which purports to exclude, restrict or modify or has the effect of excluding, restricting, or modifying any liability of a person to compensate or indemnify another person, void. I think the legislature was thereby making clear that a person such as a seller or importer who is required to meet a liability for defective goods imported into Australia and sold by it, must carry the burden of indemnifying the consumer, or an intermediate seller who has compensated the consumer.

142. I am of the view that it must be inferred that the legislature did not regard it as in the legitimate interests of Ipstar to require SkyMesh to pay to it an amount calculated as the cost to Ipstar of meeting its statutory warranties.

143. What Ipstar has done, in effect, is to require SkyMesh to indemnify it for the statutory liability Ipstar had to SkyMesh, which was not in protection of its legitimate interests. In imposing that requirement Ipstar did do so in an environment where SkyMesh had no real practical alternative but to accept the price increase because the requisite bandwidth was only available from Ipstar and the cost of new equipment required if SkyMesh changed service provider was prohibitive. Mr Cross accepted in cross examination that Ipstar “held all the cards” see T571.38. I therefore find that Ipstar has engaged in conduct that is in all the circumstances unconscionable.

144. In addition, Ipstar did not seek to recover the cost of statutory warranties from other service providers, did not advise SkyMesh that the true basis of the calculated increase was solely Ipstar’s assessment of what it would have to pay for statutory warranties for claims already made and gave what Mr Cross admitted were not frank and honest answers to the questions asked by Mr Rees: matters falling within s.22 (a)(b)(e)(f) and (i). These matters of themselves would not be sufficient but when added to the matters referred to in [134]-[135] they reinforce the unconscionability of Ipstar’s conduct.

145. I therefore conclude that Ipstar acted unconscionably in requiring SkyMesh to meet an obligation that Ipstar was required by statute to meet itself. It should be required to refund to SkyMesh the amount so extracted being an amount of $3.4 million.

Conclusion

148. It follows that SkyMesh is entitled to judgment on its claim for indemnity in respect of the defective goods claim (excluding the wages claim) and on its unconscionability claim of $3,482,367 million. In relation to the precise amount for which judgment on the defective goods claim should be entered I have referred to the amount as $1,837,792 but this should be calculated by the parties to ensure that the correct figure is ascertained. It was agreed by Counsel that the question of interest should be deferred.

149. I will hear the parties on the precise form of orders and the issue of interest and costs.

Decision last updated: 22 December 2016