B.F. Machinery v Australian Plastics Extrusions
[2014] VMC 8
•11 APRIL 2014
| IN THE MAGISTRATES’ COURT OF VICTORIA |
AT MELBOURNE
CIVIL DIVISION
Case No. C13375348
| B.F. MACHINERY PTY LTD | Plaintiff |
| v | |
| AUSTRALIAN PLASTICS EXTRUSIONS PTY LTD ACN 062 931 015 | Defendant |
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MAGISTRATE: | GINNANE |
WHERE HELD: | MELBOURNE |
DATE OF HEARING: | 19, 20 & 21 AUGUST 2013 |
DATE OF REASONS: | 11 APRIL 2014 |
CASE MAY BE CITED AS: | B.F. MACHINERY v AUSTRALIAN PLASTICS EXTRUSIONS |
REASONS FOR DECISION
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Catchwords: Agreement for the supply of recycling machine – provision in agreement for penalty for late delivery – whether time commenced from shipment to Australia from European North sea port – indicia to apply in finding parties’ intentions – meaning of immediate commissioning and use – implication of terms in agreement – whether machine of merchantable quality – fitness for purpose – section 19 (b) Goods Act 1958 – set off of amounts required to make machine capable of commissioning.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff Defendant by Counterclaim Pty Ltd | Mr Black | White Cleland |
| For the Defendant Plaintiff by Counterclaim | Mr Nicholas | Rodda Legal |
HIS HONOUR:
The plaintiff sues the defendant for the sum of $54,306.15 comprising the balance of amounts owing under an agreement for the purchase of a piece of recycling equipment used by the defendant in the operation of its business. The recycling machine is an expensive and relatively rare piece of machinery. It is manufactured in Germany.
The plaintiff is a company that conducts business in the plastics industry. It operations involve the sale of plastics and plastics processing machinery such as injection moulding and extrusion machinery. The defendant is a specialist polyethylene recycling company. The machine the subject the plaintiff’s claim for the balance of purchase price is one that facilitates the recycling of polyethylene film and comprises a palletiser of extruded material and facilitates the re-bagging of end product.
The sum sued for is identified in an invoice dated 31 July 2012. It is not disputed that the balance under the sale agreement has not been paid by the defendant. However by way of counterclaim and set off the defendant agitates two matters. The first relates to the construction and operation of a penalty clause providing for the delivery of the machine within 4 months of the date of the placement of the order and that the defendant alleges did not occur. In consequence of the delay in delivery the defendant says it was required to outsource its production and claims damages from the plaintiff. Utilising the penalty clause in the agreement expressed in Euro, the defendant claims a period of delay 14 weeks at €5250 per week totalling €73,500. If the defendant’s claim is successful it will be necessary to hear the parties further as to the appropriate conversion rate and the time at which that rate should be struck.
The defendant also raises by way of set-off the cost of electrical services it incurred in correcting wiring and related electrical circuitry and other matters required to put the machine into operational use. This sum claimed calculated in accordance with various invoices relied on by the defendant amounts to $34,563.10.
The plaintiff takes a very different approach to the claims made by the defendant by way of counterclaim and set-off and argues that the agreement between the parties regulating the time when a penalty clause would commence to run is to be read in such a way that it required the machine to be delivered within 4 months to a European North sea port and then subsequently to Australia in accordance with a stipulated and fixed time all of which occurred as a matter of fact and hence there is no scope for the imposition of the penalty provision.
The determination I reach as to the interpretation of the penalty clause will largely but not wholly determine the matter between the parties. Other issues are agitated by the defendant.
In addition to the alleged late delivery and penalty provision arguments, the defendant also claims that the plaintiff engaged in conduct amounting to a representation that the recycling machine would be delivered to it in a state capable of “immediate commissioning and use” by it. The defendant also alleges that it was a condition in law and under statute that the machine would be of merchantable quality and reasonably fit for the purposes for which it was required and that it failed to meet these imperatives and therefore such matters amounting as they do to representations, were false or misleading or likely to mislead or deceive, in consequence of which it has suffered loss and damage. The defendant particularised a litany of features associated with the recycling machine which it contended failed to meet the imperatives of merchantability and fitness for use.
At the hearing of the proceeding the plaintiff was represented by Mr Black of Counsel and the defendant was represented by Mr Nicholas of Counsel. The hearing occupied 3 days.
Evidence for plaintiff was given by Mr Stuart White who had been employed by the defendant for 15 years and negotiated the sale of the machine to the defendant. Evidence for the defendant was given by Mr Peter Zanatta and Mr Robert Zanatta, the directors of the defendant, together with evidence from Mr Oswald Grande electrician regarding installation and electrical set up, and Mr Frank Chan, an Industrial Engineer and a qualified electrician.
Background
Robert Zanatta and Stuart White are known to one another and their relationship stretches over many years to when they were both undertaking apprenticeships. They had also had a prior commercial relationship based on the purchase of a recycling machine.
In 1999 the defendant purchased from the plaintiff a previous model of the machine the subject of this proceeding. The previous machine was installed and commissioned by the plaintiff. As part of the commissioning process, the plaintiff brought a technician employed by the manufacturer, Sikoplast from Germany to Australia to assist in the commissioning process. The period of commissioning took approximately 2 weeks. In addition the plaintiff supplied a number of its own local technicians to assist in the commissioning of the machine. The costs of this process were factored into the price paid by the defendant.
In about March 2011 the previous machine was damaged in a fire at the defendant's premises. It appears that it was beyond repair and the defendant pursued a claim on its policy of insurance for its loss. During the period that the previous machine was out of commission, the defendant outsourced its recycling to third parties. The defendant anticipated a satisfactory resolution of its insurance claim and therefore inquiries commenced of the plaintiff of the possible purchase and provision of a replacement recycling machine. It appears from the evidence that these inquiries were initially undertaken for the defendant by Cyberclean, a company apparently appointed by the defendant’s insurers who requested a quote from the plaintiff.
Preliminary discussions
Mr Peter Zanatta said in his evidence that the central consideration underpinning the purchase of a new machine was the time it would take to obtain it from the manufacturer and have it delivered to Australia.
A number of options for the purchase of a replacement machine were discussed between the three principal players and several quotations were supplied by the plaintiff to the defendant for its consideration. The quotations varied to some extent in relation to price and also in regard to the services the defendant required the plaintiff to supply. Initially the defendant tod the plaintiff that it wanted it to decommission the old machine and commission and install the new machine. However it changed its mind and ultimately decided that it would only require the purchase and delivery of the new machine from the plaintiff and it took upon itself the duties of installing it on site at its premises. This of course came at a reduction in cost.
The quoting process
Each quote provided by the plaintiff to the defendant other than an “Order Confirmation” dated 22 December 2011 was expressed as a “proposal” although nothing turns on the nomenclature.
The plaintiff’s first quote was dated 24 August 2011 (Exhibit P1) and allowed for the decommissioning and removal of the previous machine and the supply, installation and commissioning, start up and training of a new machine. The proposal was predicated on the services being undertaken in two stages, the first stage constituted by the decommissioning of the previous machine, its disassembly and the preparation of site and a second stage comprising the supply, commissioning, start up and training of the new machine. The quoted price was $628,358.75. The quote included a clause headed “Delivery Time” and was expressed as follows:
“4.5 months from receipt of order and payment of deposit, FOB European North sea port
38 days Direct conference Sea freight service to Melbourne port
3 days customs clearance and delivery to Apex Films
5 days installation, commissioning, start up and training
To be reconfirmed during definition of order and clarification of all technical and commercial details and receipt of the down-payment
Mr White testified in detail about the steps that would be involved with the first phase of the quote dated 24 August 2011. The process included the cost of a technician being sent from Germany to Australia. He estimated the cost of the supply of personnel at approximately $35,000 to $40,000 based on 3 locally sourced technicians and utilising Grande Electrical to do the hook up required by the defendant. He estimated the time involved at approximately 5 – 6 days on site for 10 hours each day at the defendant’s premises.
Mr White said and the defendant accepted that the proposal and quoting process was revised on several occasions. One aspect remained constant throughout and that was the defendant required the machine delivered to its door.
A quote dated 29 November 2011(Exhibit P2) included the delivery of the machine to the defendant’s door. The second stage referred to in the first quote was excluded. The cost was reduced by excluding an air compressor and slope conveyor. The quoted price was $557,633.52. Mr White said the he was asked by the defendant if the delivery time expressed in the first quote could be reduced and he said he contacted Sikoplast in Germany and was able to achieve a reduction in time and this was reflected in the second quote under the clause headed “Delivery Time” which was expressed as follows:
“3.5 months from receipt of order and payment of deposit, FOB European North sea port
38 days Direct conference Sea freight service to Melbourne port
3 days customs clearance and delivery to your door”
Approximately two weeks later Mr White said he was asked to produce a further proposal for the defendant and he held discussions with either Peter or Robert Zanatta. He could not recall which of the two directors it was with whom he met. The upshot was that a further quotation was provided dated 12 December 2011 (Exhibit P3). This reverted to the plaintiff decommissioning the previous machine and the supply, installation, commissioning and start up and training of the new machine. The quoted price was $598,520.47. The clause dealing with Delivery Time was expressed in the following terms:
4.5 months from receipt of order and payment of deposit, FOB European North sea port
38 days Direct conference Sea freight service to Melbourne port
3 days customs clearance and delivery to your door
5 days installation, commissioning, start up and training
To be reconfirmed during definition of order and clarification of all technical and commercial details and receipt of the down-payment”.
The appearance of a penalty clause
Mr White’s testimony was that a penalty clause was first mooted in conversation with Peter Zanatta who said that the cost of outsourcing was proving prohibitively expensive. Mr White said he contacted Germany in an endeavour to obtain its consent to the inclusion of a penalty clause. In the course of the hearing I queried why the plaintiff required recourse to securing the consent of the manufacturer. It is explicable because the machine was to be shipped Free on Board (FOB) meaning that the price for goods including delivery at to a specified point was at the seller’s expense.
A penalty clause first appeared in the plaintiff’s quoted dated 14 December 2011 (Exhibit P4). This quote also reverted to only the supply and delivery of the machine by the plaintiff and the clauses pertaining to penalty and delivery were expressed as follows:
DELIVERY TIME
3.5 months from receipt of order and payment of deposit, FOB European North sea port
38 days Direct conference Sea freight service to Melbourne port
3 days customs clearance and delivery to your door
PENALTY
Penalty for late delivery: Euro 5,250.00 per week, counting will start 4 months from order, clarification of technical details and receipt of deposit monies
The price quoted was $528,066.08.
Mr White said that it was his understanding from his discussions with Peter Zanatta that delivery time meant the calculation of time from when the manufacturer got the machine to a European port. Mr White said this understanding was reflected in the 14 December 2011 proposal (Exhibit P4) in which the penalty is expressed as commencing “4 months from order, clarification of technical details and receipt of deposit monies”. He said that he went through the proposal “point by point” with Peter Zanatta.
The plaintiff furnished a further quote dated 20 December 2011 (Exhibit P5). Mr White said that as best he could recall it was discussed with Peter and not Robert Zanatta. The quote included a further price reduction to $495,624.38 as a result of a discount the plaintiff obtained from the German manufacturer which it passed on to the defendant. The language of the clause for Delivery Time was the same as expressed in the 14 December 2011 quote (Exhibit P4).
The defendant completed a Purchase Order dated 20 December 2011 (Exhibit P6).
A deposit of $198,249.75 was paid on 20 December 2011 (Exhibit P7).
A conversation occurred between Mr White and Peter Zanatta on 20 December 2011. Mr White said he explained to Mr Zanatta that the period of 4 months began to run from FOB. He said that Mr Zanatta commented that it as it stood 4 months was the period of time allowed for delivery to the defendant’s door from placement of order. Mr White said he responded by saying to Mr Zanatta that such an interpretation could not be correct given the times stipulated for delivery. Mr White said the omission of the reference to FOB in the 14 December 2012 quote (Exhibit P4) was an oversight as it was in the 20 December 2011 quote (Exhibit P6) but it was corrected in the Confirmation Order of 22 December 2011 and it did no more than reflect the apparent facts of the matter and the prior explanatory conversation held between the two men.
The plaintiff secured somewhat more favourable exchange rates at the time of the booking and passed this on to the defendant and this is reflected in the slightly reduced price contained in the Order Confirmation dated 22 December 2011 (Exhibit P9). White said he personally delivered (Exhibit P9) to Pete Zanatta at his offices.
Peter Zanatta
Peter Zanatta testified. In addition to holding the position as director of the defendant he is a builder by trade. His responsibilities with the defendant are sales and marketing, stock control and purchasing.
Peter Zanatta gave evidence in regard to the purchase of the previous machine. He said the purchase was made through the offices of Stuart White He acknowledged that the previous machine was installed by the manufacturer Sikolplast who deployed a technician from Germany and local technicians arranged through Mr White.
He said that as regards his knowledge of (Exhibit P1) and( Exhibit P2), he thought it more likely than not that Robert Zanatta was “dealing with the matter at that time”. In regard to (Exhibit P3), dated 12 December 2011 comprising the quote from Mr White addressed to both him and Robert Zanatta he said that “he may have seen this but it would have been Robert I believe who would have gone through it”.
When taken to (Exhibit P4), the plaintiff’s quotation dated 14 December 2011 he said that he “may have seen it but I have no real recollection”. However he said that Robert Zanatta had advised him of the amount referred to in the 14 December 2012 quote and he also said he recalled speaking with Mr White about it “when he came in just before 20 December. I remember asking him to have a look at the price to see what he could do”. He said the conversation was in relation to the 14 December 2012 quote.
Peter Zanatta said he spoke with his brother about the insertion of a penalty provision and “we came up with the figure of 5,250 Euro.” He said that the figure was arrived at by reference to the costs the defendant was incurring by outsourcing its production.
Mr Zanatta was asked by Mr Nicholas if he spoke about the penalty with Mr White, and he said he had and that the conversation occurred outside the dispatch area of the defendant’s premises and he said, “if we go ahead we will put in a penalty clause of 5,250 Euro”. He said that Mr White replied, “put something down and we will see. I will put it to them”. Peter Zanatta understood the reference to “them” to refer to Sikoplast. This was the extent of his recollection of the discussion regarding the matter.
Mr Nicholas asked Peter Zanatta if he could recall having seen (Exhibit P5), the plaintiff’s quote dated 20 December 2011. Peter Zanatta said, “Yes. I recall seeing this absolutely because it is the quote I wrote the order up in relation to”. He said that sometime between 14 December 2011 and the quote dated 20 December 2011, Mr White came to the defendant’s premises and “I told him we had settled with the insurers and we were ready to go”. He said he asked Mr White whether he could go back to Sikoplast and see if they can do any better a price. He said that Mr White came back into their premises on 20 December 2011 and that it was the quote of that date (Exhibit P5) which he read through and based the purchase order (Exhibit P6). There was no discussion on 20 December 2011 in relation to the penalty provision according to Mr Zanatta.
Mr Zanatta was directed to (Exhibit P9), the plaintiff’s Order Confirmation dated 22 December 2011. He said he could not recall the document. He said it was not provided to him and he had not seen it prior to the commencement of the litigation. He said that the language used in the penalty provision had not at any stage been discussed with him. The penalty was expressed in the following language:
PENALTY
Penalty for late delivery, FOB European North sea port: Euro 5,250.00 per week, counting starts 4 months from order, clarification of technical details and receipt of deposit monies being 21.12.11
The clause as expressed in (Exhibit P9) dated 22 December 2011 differed from the penalty expressed in the quote dated 14 December 2011 (Exhibit P4) in that it added the words, “FOB European North sea port” and identified the date payment of deposit had been made. Otherwise though Mr Zanatta said ta discussion had occurred with Mr White in regard to tariff concession. Mr Zanatta said that Mr White told him that “you should have no problem getting this”.
Mr Zanatta testified that the machine became operational on or about 18 August 2012.
Robert Zanatta
Robert Zanatta is a director of the defendant and is a fitter and turner by trade having completed his apprenticeship in 1982. He said he had experience in moving and installing new and pre owned equipment of the type used in his business and related industries. The defendant operates a 24 hour production process and is involved in packaging polyethylene film. The company was formed in 1995 and his fellow director is his brother Peter Zanatta.
The defendant commenced operations in Thornbury, Victoria and moved to its present address in 1999-2000. The company made a purchase of a previous model of the machine in 1999 and it was installed by the plaintiff. It was an analogue machine whereas the machine in issue in this proceeding has digital componentry. The defendant elected to have the plaintiff facilitate the installation of the previous machine because of time constraints then prevailing.
Robert Zanatta identified the plaintiff’s proposal expressed in an email dated 12 December 2011 (Exhibit P3). He said that he didn’t require the plaintiff to undertake the decommissioning of the previous machine.
Mr Zanatta was asked about the contents of a proposal by the plaintiff contained in a quote dated 14 December 2011 (Exhibit P4) and a reference to a “penalty”. He said that this was “our idea” and that the reference to the penalty expressed in Euros was “related to the costs of outsourcing”.
Robert Zanatta said that there was no discussion with Mr White between 14 December 2011 and 20 December 2011. However, on the latter date he received a quote (Exhibit P5) and he understood that his brother Peter Zanatta drew up an order that was placed with the plaintiff. He said that this then concluded his involvement with the transaction between the company and the plaintiff.
Robert Zanatta was directed to the quote dated 22 December 2011 (Exhibit P9). He said that the first time he saw it was when he attended at his solicitor’s office as part of the conduct of the litigation. He eschewed any knowledge of the authorship of the provision and the particular language in which the provision was then expressed.
Robert Zanatta said he was in attendance when the containers arrived at the defendant’s premises. The first issue of concern he recalled was that the base or plinth onto which the container containing the boxes into which parts of the machine arrived, was the wrong size. The plinths did not fit and after telephoning Mr White the matter was rectified with a delivery from Sydney the following day having been organised by Mr White.
Robert Zanatta said the next issue that he discovered was that the cyclone had not been delivered. There are it would seem to be in the order of 7 principal components going to make up the machine, of which the cyclone is the final main component. Again Robert Zanatta telephoned Mr White. The cyclone arrived in the middle of or the third week of July 2012.
Robert Zanatta also testified that he was aware of certain electrical issues including the absence of the tagging of wires.
Robert Zanatta said that the machine became operational about the end of the first week of July 2012 that is at least sometime before the delivery of the cyclone.
In cross examination Robert Zanatta acknowledged that the plaintiff had told him that the cost for an installation of the machine if undertaken by the plaintiff would be approximately $30,000 to $40,000.
Mr Black directed Robert Zanatta’s attention to two further quotes from the defendant dated 29 November 2011 and 12 December 2012 and he agreed that the stipulated period the machine would be at sea and be required to clear customs in Australia were expressed to be the same in each instance.
Robert Zanatta agreed that the quote dated 14 December 2011 was limited to a sale and delivery of the machine and was some $70,000 less than the price quoted on 12 December 2011 (Exhibit P3). However, the delivery time based on days at sea and time to clear customs was not different.
Robert Zanatta said he had discussions with Peter Zanatta regarding the inclusion of a penalty for late delivery. The first time a penalty appeared in the plaintiff’s quotes was on 14 December 2011 (Exhibit P4). He agreed that the mention of a penalty had been raised in discussion with Mr White but he could not recall if Mr White had told him that he would need to revert to Sikoplast in Germany to see if he could obtain their agreement.
The delivery time and penalty time anomalies
The plaintiff’s argument is that the proposal agreed between it and the defendant is expressed in the 22 December 2011 Order Confirmation (Exhibit P9). It is different from the 20 December proposal. That is acknowledged by the plaintiff. Although the delivery times expressed in both documents are the same the 22 December Order Confirmation included the words, “FOB European capital” and these words were not present in the 20 December 2011 proposal. The plaintiff says this is explicable.
Mr Black directed Robert Zanatta to the provisions expressed in the 14 December 2012 quote (Exhibit P4) and the evident dichotomy in it that whereas it refers to a delivery period of a total effective allowance of almost 5 months ( ie 3.5 months from receipt of order and payment of deposit, FOB European North sea port, 38 days Direct conference Sea freight service to Melbourne port, 3 days custom clearance and delivery to your door) the penalty is expressed such that, “…counting will start 4 months from order, clarification of technical details and receipt of deposit monies”. When it was suggested to Mr Zanatta that he was aware that the machine may not be delivered in less than 5 months and that therefore the language of the penalty was altered to correct the anomaly that would otherwise be apparent in any counting of a penalty Robert Zanatta said that he “doubted he read it”, that is, (Exhibit P4). He was however very certain that he read the 20 December 2011quote (Exhibit P5). He said he read it on the factory floor on 20 December 2011 but said that he was not conscious of a discrepancy between the language expressed for delivery time and the time expressed before the commencement of counting for penalty. Nonetheless under cross-examination he agreed with Mr Black that “delivery” commenced to be counted as and from delivery to a North European sea port. If that be so, the machine was delivered in accordance with the agreement.
The evidence is that the machine was delivered to the port of Hamburg on 16 April 2012. The recycling machine was then delivered to the door of the defendant in various component parts from on or about 1 June and 18 July 2012. Thus the plaintiff says there is no basis for the imposition of a penalty.
The cyclone to the machine was delivered on or about 18 July 2012 .Mr White was asked about an email he sent to Germany dated 15 June 2011 (Exhibit D1) that included: “I cannot make it more simpler than to advise the below parts are required to complete the order that is the venturi blower and cyclone, piping and frame”. The late delivery of the cyclone became a matter of some elevated importance in the course of the defendant’s final submissions and that I will address in due course.
Identifying the Agreement
Two matters of primary importance call to be considered in determining the content of the sale agreement for the purchase of the machine. The first is the meaning to be ascribed to the clause providing the time of delivery of the machine to the defendant. The second and related matter is the interpretation of the penalty clause for late delivery and, in particular, the point in time at which the calculation of the penalty clause is to commence and whether on the facts of the case there is occasion to count and calculate a penalty.
Was the agreement express or both express and implied
I am mindful that a factual conflict exists in the proceeding of whether or not the 22 December 2011 order was provided by the plaintiff to the defendant. The account of evidence given by the defendant’s directors was not always consistent on the matter. Initially the defendant’s witness evidence was that the quote had not been supplied to it. However it's Affidavit of Documents reveals its to be among the documents in its possession and it is described in the schedule to its affidavit of documents as comprising both an original and copy. Indeed it discovered the document executed by Mr White. As a result, the defendant stepped back from arguing that Mr White had not provided it with the document and instead eschewed any recollection of having seen the document at or about the date it bears and not otherwise until the litigation had commenced.
The importance of the provision of this document can be understood in the context that it is a record of the first occasion that penalties imposed in a series of invoices and quotations provided by the defendant to the plaintiff is predicated on FOB European North sea port. Chronologically it makes sense that it appears expressed in these terms in the quote at the date it bears.
The defendant’s argument is that the counting of time for a penalty started when it ordered the machine from the defendant and concluded at the date of delivery to its door. This line of argument is not consistent with the concession made by Robert Zanatta that “delivery” commenced to be counted as and from delivery to a North European sea port. That concession conforms to the plaintiff’s primary submission that the calculation of penalty if any commences from the date of FOB at a North European port. It seems apparent to me that Robert Zanatta’s concession sits conformably with Mr White’s evidence that he discussed with him the necessity to clarify the inconsistency in the language between the operation of the penalty clause when read in conjunction with the time permitted for delivery and that Robert Zanatta agreed with him. Therefore on the balance of probabilities I prefer and accept Mr White’s account of the conversation in preference to the accounts of Peter and Robert Zanatta and I find it more probable than not that the Order Confirmation was the concluded and agreed expression of the clause regulating penalty.
There also exists surrounding circumstances that have assisted me in reaching my conclusion. In my view the reference to the delivery to a European North Sea port as the point of commencement of calculation of any penalty makes sense and makes sens when considered in light of the static times expressed in all quotes for delivery from a European North Sea port to Australia. In my judgement it is incongruous that the defendant appreciating as it agreed it did, that the delivery time for the machine to its door would be allowed in the order of approximately 3.5months would contract for the inclusion of a penalty, the commencement of calculation of which would be 4 months. I regarded Mr White's evidence attendant with a better recall of the matters that were discussed with the Zanattas.
Mr Peter Zanatta’s evidence was that upon the price for the delivery of the machine being agreed with Mr White, the balance of the terms of the agreement was a matter for Robert. However, Robert Zanatta’s evidence did not fill me with great confidence and I am satisfied that he gave no more than a cursory consideration to the terms negotiated in relation to penalty and the interaction if any between it and the clause for the time for delivery.
In the face of a conflict between the evidence of the parties I have resolved the matter based on the reasoning expressed above in favour of the plaintiff and I therefore conclude that the machine was required to be delivered to the defendant within 4 months to a European North sea port. This is what occurred and therefore occasion for the imposition of a penalty does not arise.
I make mention in deference to the submission advanced by Mr Nicholas that the task for me was to endeavour to harmonise two conflicting clauses in the agreement. In my judgment this is not a case in which two clauses are in conflict in the classic sense.
Immediate commissioning and use
The defendant by its Amended Notice of Defence and Amended Counterclaim pleaded that the machine would be delivered in a state fit for immediate commissioning and use.
To the extent it was an express term the defendant referred to a statement made in a conversation between Robert Zanatta and Stuart White that the machine on delivery had to be “ready to go”. The defendant did not lead evidence that the statement attributed to Mr White was made to the Zanattas and there is no other basis for me to find that there was an express term to this effect in the agreement struck between the parties. I decline to do so In any event the expression “ready to go” without elaboration is ephemeral and insufficient to constitute a term of agreement. Also the defendant knew at least from the experience with the previous machine and from the detailed quotes that the machine not such that it could be delivered, unpacked and plugged and played.
Therefore the term pleaded not amounting to an express term the question then becomes whether or not it can be implied into the agreement. The law approaches the most reliable way to find the terms of an agreement reached between parties by identifying the written or spoken words the parties have committed to. This naturally makes sense because the written words used by the parties or direct language will often comprise the considered expression of the parties’ intentions. If there is no written agreement then sometimes parties will rely on statements one of them made to the other and ask the Court to find that it was always understood between them that the something would occur.
The law has developed over the years a fairly stringent set of rules to determine if something is a term that should be implied. In Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 352, Mason CJ (with whom Stephen and Wilson JJ agreed upon the issue of ad hoc implied terms) stated (for Australia) his now famous “true rule”governing the admission of evidence of surrounding circumstances in an exercise of contractual interpretation for a written instrument. At 149 CLR 352 Mason CJ said:
“The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed”.
In Wilson v Anderson (2002) 213 CLR 401 at 418 [8], Gleeson CJ explained this objectivity principle in reference to commercial contracts:
“The law of contract seeks to give effect to the common intention of the parties to a contract. But the test is objective and impersonal. The common intention is to be ascertained by reference to what a reasonable person would understand by the language used by the parties to express their agreement. If the contract is in the form of a document, then it is the meaning that the document would convey to a reasonable person that matters. The reason for this appears most clearly in the case of commercial contracts. Many such contracts pass through a succession of hands in the course of trade, and the rights and liabilities of parties other than the original contracting parties are governed by them … It is only the document that can speak to the third person”.
The alleged promise made by the plaintiff to the defendant that the machine would be ready for immediate use and commissioning is not lent support based on any written term of any quoted proposal and is in fact contradicted by the one prior dealing between the parties for the purchase and installation of the previous machine. On that occasion “immediate use” was conditional on a considerable degree of commissioning. The term alleged by the defendant is not required for “business efficacy" meaning those facts necessary to find in order for the contract to work in the way that both parties, as reasonable people, must have intended. For a term to be implied "in fact" into a contract in writing, it must:
· be reasonable and equitable;
· be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
· be so obvious that "it goes without saying";
· be capable of clear expression; and
· not contradict any express term of the contract
In considering whether a term should be implied in an agreement that is not expressly provided for, it is apt to consider the “officious bystander" test and ask, "What would the parties have said if an “officious bystander” had suggested including the term in the contract?" If their response had been something like "of course" or "that goes without saying", this suggests the term should be implied. Whilst the law requires that the term must be necessary and not merely reasonable, this does not mean the contract must be completely inoperable or ineffective without it. Rather, the term must be necessary for the contract to operate in the way that the parties, as reasonable people, must have intended. This intention is assessed by examining the contract as a whole, in the context of the surrounding circumstances known to both parties (aka the "factual matrix"). In New South Wales v Banabelle Electrical Pty Ltd (2002) 54 NSWLR 503 Einstein J said:
"the term must be necessary to make the contract effective and workable according to the presumed intention of the parties, as disclosed by the terms of the contract and the admissible surrounding circumstances".
In Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337: Codelfa contracted with the Rail Authority to build a railway. At the time of contracting, both parties assumed work could occur around the clock as legislation would prevent third parties from restraining it. However, the legislation was ineffective and an injunction prevented Codelfa from working nights and Sundays. The High Court declined to find an implied term that, if Codelfa's working hours were restricted, the Authority would indemnify it against additional costs. That term was not sufficiently obvious or necessary, as it was just one of several solutions the parties might have agreed had they considered the possibility of work being restrained.
Applying the legal principles to the facts of this case, in my judgement based on the complexity of the machine, the prior knowledge and experience the defendant had of the previous machine and the defendant having freely negotiated inclusions and ultimately exclusions of the plaintiff’s proposals for installation and commissioning and training, the alleged term does not meet the test for implication. The officious bystander would not utter the riposte, “It goes without saying”. There is insufficient basis on which I could be satisfied that the term relied upon should be implied and this aspect of the defendant’s counterclaim must fail.
It follows too that I am not satisfied on the evidence of the existence of the representations claim made by the defendant.
Merchantable Quality
The defendant alleges further that that it was a term of the agreement that the goods would be of “merchantable quality” and that this requirement is implied in law and pursuant to statute, namely s 19(b) of the Goods Act 1958 which is expressed as follows:
19 Implied conditions as to quality or fitness
Subject to the provisions of this Part and of any Act in that behalf there is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale, except as follows—
(a)where the buyer expressly or by implication makes known to the seller the particular purpose for which the goods are required so as to show that the buyer relies on the seller's skill or judgment and the goods are of a description which it is in the course of the seller's business to supply (whether he be the manufacturer or not) there is an implied condition that the goods shall be reasonably fit for such purpose: Provided that in the case of a contract for the sale of a specified article under its patent or other trade name there is no implied condition as to its fitness for any particular purpose;
(b)where goods are bought by description from a seller who deals in goods of that description (whether he be the manufacturer or not) there is an implied condition that the goods shall be of merchantable quality: Provided that if the buyer has examined the goods there shall be no implied condition as regards defects which such examination ought to have revealed;
(c)an implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the usage of trade;
(d)an express warranty or condition does not negative a warranty or condition implied by this Part unless inconsistent therewith.
The defendant argued that the machine was not of merchantable quality. In Australian Knitting Mills v Grant (1933) 50 CLR 387 Dixon J (as he then was) carved out a classic and still relevant distinction between those instances in which the particular goods supplied are defective in the sense of not normal for goods of the description sold and others. The plaintiff submitted that because the machinery was made operational by August 2012 it cannot be said that it conforms to the character of being defective. The plaintiff indeed submitted that, “If it operational it cannot be defective”. In my view, that is too broad and all encompassing an assertion to be adopted as a statement of principle. The better position in law is I think that a statutory warranty that goods will be reasonably fit for their intended purpose may arise where the following conditions are satisfied:
·The customer notifies the supplier of the particular purpose for which the goods are required;
·It is within the course of the supplier’s business to supply the particular goods or services;
·There is nothing in the agreement between the parties which expressly excludes implication of such a term; and
·The customer relied on the supplier’s skill and judgment.
The definition of the particular purpose will vary according to the particular contract or agreement under scrutiny (see: Lloyd QC, “Problems of Fitness of the Product (1990) 6 BCL 10).
The defendant has satisfied me on the balance of probabilities on the evidence of the first three bullet points I have mentioned for the giving effect to the statutory warranty for fitness for purpose. The evidence from Mr White is that he knew the purpose behind the purchase of the machine by the defendant and also that it was in the course of the plaintiff’s business to supply for sale recycling machines such as the model purchased by the defendant. There is nothing in the agreement between the parties that excludes the implication of a term of merchantability. I am also satisfied by the evidence should it be necessary for me to find, that terms as to fitness for purpose and merchantability arise by implication by the conduct of the parties in their dealings and by reason of s 19 of the Goods Act.
The consideration that is not as readily apparent as others is the extent that the defendant relied on the plaintiff’s skill and judgment in the supply of the machine. It had after all some experience to draw on from the past machine but the fact is that it was to the plaintiff, and only the plaintiff, in a practical sense that the defendant could and did look to and it relied on its skill and judgment in sourcing and supplying the machine from the German manufacturer.
However, in relation to “merchantability” the plaintiff argued and placed considerable emphasis on the conscious decision of the defendant to contract with the plaintiff for the delivery of the machine but not its commissioning and installation. According to the plaintiff, had the defendant elected to do so, as it had done before with the previous machine, the issues it encountered with the machine would have been dealt with by the plaintiff in the ordinary way as part of the cost of the purchase of the machine. I reject that submission. The natural extension of counsel’s argument is that a defendant having purchased an expensive and complicated piece of machinery and having elected not to pay for installation and commissioning was “at risk” of encountering many of the problems that arose with this machine. Counsel further submitted that having chosen not to pay for installation and commissioning it was reasonable that the defendant was at risk of incurring some costs on its own account in doing that it which it had elected to do in preference to paying the plaintiff. In addition Mr Black submitted that there existed the possibility that it would take a third party greater time and cost to install and commission and rectify any anomalies encountered with the machine than would have been the case had it been left to the plaintiff.
I think the submission made by Mr Black may be responded to thus: First, I accept his submission that the defendant could not reasonably expect to merely unpack the machine, plug it in and turn it on and find it operational. As I have already said, it was a sophisticated piece of machinery and had various parts going to make it up that required careful assembly and calibration. In my judgment it is reasonable to conclude in light of Mr White’s evidence estimating the installation and commissioning taking perhaps 5 to 6 days at a cost of between $35,000 to $40,000, with the deployment of up to three local technicians in addition to an expert from the German manufacturer, all of which was disclosed to the defendant, that it ought have been apparent to the defendant that there would be a cost to it of installation and commissioning. The question therefore that I am left to determine is the extent to which if at all and the amount f if any of the expenses incurred by the defendant to Grande Electrical should be offset against the final unpaid invoice for the machine. Any such amounts can only properly be set off if they constitute the reasonable costs for rectification or repairs of defects to the recycling machine and not because they amount by another name to the reasonable costs of installation and commissioning that the defendant elected to bear and should reasonably have anticipated.
The deficiencies identified
Mr White said he was present at the time of delivery of the machine and was aware of a problem that immediately presented itself with the plinth rods on which the cabinet containing the machine was placed. The machine was contained in 4 boxes of which only two were the correct size for the plinth. Mr White said he secured replacement parts that day out of Sydney and had them delivered to the defendant.
Problems were then brought to Mr White’s attention in connection with heating. The heating element was incorrectly wired.
Oswald Grande
Oswald Grande is an “A” Grade Electrician. He has been a registered electrical contractor for 38 years. His expertise has been acquired principally in the area of industrial machinery, its installation and maintenance. He was engaged to assemble and install the recycling machine.
Mr Grande said he was assisted in the assembly of the machine by Robert Zanatta. He said the assembly took him approximately 5 to 6 weeks. He said he was substantially engaged for this period of time in the assembly process.
According to Mr Grande the heating system in the machine was incorrectly wired and he said one of the heating elements “blew up”. He encountered problems with the machine’s heating element in about the third week of the assembly.
About the fourth week into the assembly he discovered that the motor was running in reverse. Information was sought from Germany and in consequence a rewiring was required.
Software problems were encountered such as, for example, when the stop button failed to work which was traced to a software issue and a software update was required to be performed by Mr Frank Chan who was brought into to assist. The bunker that held the shredder also occasioned a problem because of incapacity tin it o push through different load capacities. This too was resolved as a software update by Fran Chan.
Wires were not tagged and were missing cable ends in order to identify them as being pre wired. Mr Grande said he had to strip ends and redo the ends of the wires, a process that took 2 weeks.
The over temperature was not working and it was a matter he treated with some concern as he classified it as a safety issue. The over temperature control was designed to provide a cut off and, given the defendant’s past experience with fire causing damage to the previous machine, it is understandable that it was regarded as a matter of concern and of importance.
Mr Grande accepted under cross-examination that he had not been involved in the installation of the previous machine in 1999 and his experience with like machinery was limited to perhaps two or three of similar ilk. Mr Grande also accepted that one of the problems encountered and occasioned by the absence of sufficiently long cabling was in fact informed by the placement of the control cabinet in any given set of premises and that in relation to the placement of the control cabinet in the defendant’s factory it was that fact that created the difficulty and nothing inherently defective in the provision of the cabling.
Counsel for the plaintiff also sought to adduce under cross-examination that a number of invoices identified what he described as “standard installation costs” or, in other words, those costs which the defendant should have reasonably have anticipated the need to incur.
Frank Chan
Frank Chan (Chan) is an Industrial Engineer and a qualified electrician. He had been employed by Siemens until 2007. He said that he was contacted by Mr Grande to look at the Program Logic Controller of the recycling machine. He performed such software work to the machine.
The defendant introduced into evidence a large number of invoices (Exhibit D19) many of which were the subject of close cross examination by the plaintiff whilst some others were not. They totalled $30,102.60 (see Amended Notice of Defence – Particulars of Loss and Damage). In the course of submissions the defendant’s counsel made a number of concessions that resulted in a reduction of the amounts pursued.
In addressing the extent of the works undertaken by Mr Grande and reflected in the invoices, the plaintiff submitted that the defendant bears the onus of proof in establishing on the balance of probabilities that the problems with the machine and to which Mr Grande applied his skill and labour were in regard to defects in the machinery as opposed to problems encountered with installation and commissioning.
I am satisfied that some invoices should be treated as reflecting costs incurred as part of a commissioning and installation of the machinery and thus ought to have reasonably been anticipated by the defendant and therefore should not be borne by the plaintiff but that is not the conclusion I have reached in respect to them all.
I have approached the determination of the amounts claimed in the invoices by a consideration of each invoice and the work reflected in them together with evidence given as to the circumstances giving rise to the need for the work performed. The process of evaluation is not without the necessity to apply some discretion and by calling into aid my own judgement in light of the evidence particularly of Mr Grande.
Mr Black submitted that the Grande invoices identify no more than a “series of complaints”. He contended that complaints such as the lack of password and user codes, the reverse polarity of the motor operation, the reverse wiring or incorrect relay wiring or the over temperature were not defects in the sense that they rendered the inherent functionality of the machine unfit for purpose. I am unable to accept that submission in its entirety. Wiring is elemental to the proper regulation and operation of the machine whereas passwords and user codes engage or ignite the functionality of the machine. There is I think a proper distinction to be had to all of these matters. They are not black and white. I accept for instance that the costs incurred in the tagging of wires and their correct identification does not render the machine inherently unfit for its intended purpose but it is self evidently the case that in such a state the machine is not fit to be “commissioned into use” and if time and cost need be incurred to identify the correct tagging of wires in order to embark on the commissioning process the defendant should not be out of pocket. Hence I will allow the cost of such of those invoices that related to tagging.
I am satisfied on the evidence that the following invoices in the sums stated represent the necessary application of costs in order to put the machine into use and not in consequence of what would amount to the necessary commissioning but rather to rectify errors attendant in the elementary componentry of the machine that without rectification rendered it unfit and unable to be commissioned for its intended operational use. Such amounts as I have not included by necessary implication represent the costs I regard the defendant as reasonably having expected to incur for commissioning.
11099 $792.00
11100 $792.00
11101 $792.00
11102 $891.00
11103 $891.00
11110 $1181.00
11111 $1,650.00
11113 $1,254.00
11117 $594.00
11120 $495.00
11134 $754.60
11136 $198.00
111108 $198.00
111109 $1,485.00
111130 $606.00
111131 $198.00
----------------------------------------TOTAL: $12,771.60
Mr Black submitted that the defendant had no right to expect a perfect machine. There was no evidence for example, led by the plaintiff that had it become aware of the extent of the matters required to be attended on the machine prior to delivery it would not have accepted the machine. Whilst I accept that the defendant had no right to expect the recycling machine to be in “perfect” condition, the extent of the identified problems were not minor and they impeded and prevented the machine from operating in such a manner as to give effect to its design and engineered functional purpose. In my judgment the defendant is entitled to set off the costs undertaken to make it fit for purpose in the amounts identified above.
The Cyclone
The defendant argued that the machine was not delivered in conformity with the time for delivery set in the agreement because a necessary component, the cyclone was not delivered with the machine components. The cyclone was described as that component that brings the granulated product into a bin. The machine was operational without the cyclone although not to optimal productivity. The absence and alleged delay in the cyclone was not pleaded by the defendant and the penalty clause has no operative effect in regard to it. Moreover the machine was not rendered defective in the period before its delivery as explained by Dixon J in Grant’s case.
Conclusions
Accordingly, for the reasons stated the plaintiff is entitled to an order on the claim in the amount of $41,534.55 being the sum of $54,306.15 less the amount of $12,771.60 by way of set off and the defendant’s counterclaim is dismissed.
I will hear the parties in relation to the precise orders required in relation to interest and costs and reserve liberty to apply.
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