Bev Pak v Caines Packaging

[2001] NSWSC 397

CITATION:	Bev Pak -v- Caines Packaging [2001] NSWSC 397
CURRENT JURISDICTION:	50003/01
FILE NUMBER(S):	SC 50003/01
HEARING DATE(S):	11.5.01
JUDGMENT DATE:	17 May 2001
PARTIES :	Bev Pak Australia Pty Ltd -v- Caines Packaging Pty Ltd
JUDGMENT OF:	Hunter J

COUNSEL :	Applicant: L J W Aitken Respondent: R J Weber
SOLICITORS:	Applicant: Abbott Tout Respondent: I E Duffield Solicitor
CATCHWORDS:	Pratice & Procedure - application to stike out contentions - Pt 13 r5 and Pt 15 r 26 - onus of proof in reliance damages.
LEGISLATION CITED:	Sale of Goods Act 1923 Trade Practices Act 1974
CASES CITED:	The Commonwealth of Australia -v- Amann Aviation Pty Ltd (1991) 174 CLR 64
DECISION:	Application dismissed with costs.

IN THE SUPREME COURT

OF NEW SOUTH WALES

EQUITY DIVISION

COMMERCIAL LIST

HUNTER J

THURSDAY 17 MAY 2001

50003/01 BEV PAK AUSTRALIA PTY LTD V CAINES PACKAGING PTY LTD

REASONS FOR JUDGMENT

1    This is an application by notice of motion dated 19 March 2001 to strike out contentions 12(a)(i), (ii) and 12(b) of the plaintiff’s contentions “as disclosing no cause of action or otherwise being embarrassing or prejudicial pursuant to Part 13 Rule 5 and Part 15 Rule 26 of the Supreme Court Rules.”

2    The subject contentions are as follows:

“C12. As a result of the said breaches of the agreement by the defendant, the plaintiff has suffered loss and damage reasonably within the contemplation of the parties at the time of the agreement.
Particulars
(a) In reliance on the defendant’s promises set out at paragraphs C5 to C7 above, the plaintiff incurred the following loss, expense and damage:
(i) The plaintiff suffered losses from sales made to supermarkets pursuant to the loss leading three litre cordial promotion. In the period 1 January 2000 to 30 June 2000 the plaintiff sold 290,838 cartons of cordial in three litre bottles to supermarkets at a loss of one dollar and twenty four cents ($1.24 per carton).
290,838 x $1.24 = $360,639
(ii) The plaintiff further incurred various expenses which were wasted due to the failure of the defendant to supply two litre and three litre bottles due to which the plaintiff ceased sales-
Label proofs - 17 @ $71 each - $1,207.00
Label plates - 85 @ $155 each - $13,175.00
Cutting die - 1 @ $1,000 each- $1,000.00
Carton stereos - 2 @ $450 each - $900.00
Carton die - 1 @ $1,000 each - $1,000.00
Starwheels - 2 @$5,000 each - $10,000.00
Total $27,282.00
Front labels 322,908 @$25.43 per 1000 $8,211.55
Back labels 322,908 @$10.92 per 1000 $3,526.16
Excess cartons 13,000 @ $325 per 1,000 $4,225.00
Total $15,962.71


(b) Further and in the alternative, the plaintiff has incurred costs in the manufacture of new moulds , which costs were necessary in order to mitigate the loss and damage caused to the plaintiff by reason of the defendant’s breaches. Those costs relate to the manufacture of new moulds and are quantified at $80,000.00 .”

3    The questions raised on the application are not complex. However, I reserved my judgment in order to more closely examine the ‘onus’ in reliance damages as discussed in TheCommonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64.

4    The proceedings arise out of a supply contract between the parties under which the defendant is alleged to have agreed to supply several hundred thousand three litre PET bottles between the months of January and December 2000 and, in addition, to supply several hundred thousand two litre PET bottles in the months of April 2000 to March 2001.

5    The grounding of a claim for reliance damages was expressed in the plaintiff’s contentions as follows:

“ C7A. In reliance on the defendant’s promises set out at paragraphs C5 to C7 above, the plaintiff:
(a) ceased purchasing two litre cordial bottles from Zamplas Australia Pty Limited , which it had previously used to sell cordials, and ceased marketing and selling its products in those bottles ;
( b) commenced marketing and selling its cordials in three litre bottles supplied by the defendant by way of a promotion in which the three litre bottles of cordial were offered for sale at the same price as the two litre bottles of the plaintiff’s products had hitherto been offered for sale at which price the plaintiff would incur a loss on each bottle sold (“the loss leading three litre promotion”). The loss leading three litre promotion was a marketing device to generate market interest in the new two litre packaged product and was to cease at the time that the new two litre product became available in April 2000 with the supply by the defendant to the plaintiff of the new two litre bottles; and

(c) incurred expenses in procuring the design and manufacture of labels and cartons for the purpose of marketing, distributing and selling its products in three litre bottles to be supplied by the defendant .

C7B.The plaintiff’s intention to take steps set out in paragraphs C7A above in reliance on the promises of the defendant, including its intention to incur a loss on the loss leading three litre promotion, was disclosed by the plaintiff to the defendant at the time of the agreement.
Particulars
The disclosure was oral and was made by Mr P.R Brooks to Messrs Hislop, Hislop and Beale at the meeting at the defendant’s premises set out in particulars to paragraph C4 above.”

6    Presumably the allegation in C7B was intended to attract the application of the second limb of the principle in Hadley v Baxendale, or s 55 of the Sale of Goods Act 1923. The breach alleged was a failure by the defendant, inter alia, to supply any two litre bottles, as a result of which the plaintiff purported to terminate the agreement.

7    The damages claimed are as set out earlier in these reasons. Those claimed under par C12(b) are claimed as mitigation costs, whilst the damages particularised in par C12(a) are claimed as reliance damages. During the course of the hearing the defendant sought a further order that par C16A(b) be struck out as damages not capable of being recovered under the provisions of the Trade Practices Act 1974. Par 16A(b) was in the following terms:

“(b) Further and in the alternative, the plaintiff has been deprived of profits from the sale of its products during the period 1 January 2001 to 30 June 2000 which it would have earned but for the representations as it would otherwise have continued to market, distribute and sell its products in the two litre Zamplas bottles. Based on sales of two litre cordial bottles in the corresponding six month period in 1999, 449,327 cartons of two litre cordial bottles would have otherwise been sold .
449,327 @ $1.60 = $718,923

8 Mr Aitken of counsel on behalf of the defendant submitted that such a loss of profits may be recoverable in contract but not pursuant to s 82 of the Trade Practices Act. However, the loss of profits particularised in par C16A(b) are not profits lost from the expected sale of products to be supplied by the defendant under the supply agreement. Rather, they are profits that would have been derived, it is alleged, from the continued sale of products under the existing business of the plaintiff, at the time the supply agreement was entered into and the subject representations allegedly made. That is clear from a reading of par C7A(a) and 16A(b) of the contentions. As such, they are capable of falling within the concept of reliance damages, or as damages recoverable by the plaintiff to put it in the position in which it would have been had the representations not been made, or the supply agreement not been entered into.

9    The damages claimed in par C12(b) are claimed as mitigation costs. It was submitted as follows on behalf of the defendant in relation to that head of damage:

“9. The third claim (paragraph 12(b)) is for “costs incurred in the manufacturing of new moulds” to replace the two litre PET bottles which it is alleged the defendant failed to deliver. The costs of such manufacture are not recoverable by the plaintiff. The plaintiff on its best case did not contract for the delivery of any moulds, only the bottles. It follows that these costs are not recoverable for any breach of the contract as alleged.”

10    That submission, in my view, does not address the question of principle, whether, arguably, the subject damages are recoverable by the plaintiff. As a matter of pleading the plaintiff alleges that those costs were “necessary in order to mitigate the loss and damage caused... by…. the defendant’s breaches”. I consider the defendant’s submissions go to evidentiary issues and not ones relating to the pleading of the plaintiff’s claim and do not call for any redress as sought by the defendant.

11    The reliance damages as particularised in par C12(a) are challenged by the defendant on the basis that the onus is upon the plaintiff to prove (and plead) that its reliance expenditure would have been recouped under the supply contract has it been performed by the defendant.

12    There was a general argument advanced on behalf of the defendant to the effect that the Sale of Goods Act 1923 is a code and the damages sought to be recovered are not recognised by either ss 53 or 55 of that Act. I am not sure that that argument was pressed. However, I think it is sufficient to say that the damages sought to be recovered are of a kind arguably falling within one of the two limbs of Hadley v Baxendale or under ss 53 or 55 of the Sale of Goods Act.

13    Returning to the onus question: the principal difference between the parties arises out of the submission of Mr Weber of counsel that the plaintiff is entitled to an evidentiary presumption as discussed, in particular, by Mason CJ and Dawson J in Amann as follows:

“Onus of proof
Why the law appears to assume that a plaintiff would at least have recovered reasonable expenses incurred in the case both of contracts not resulting in a net profit and of contracts in which a plaintiff maintains that it is not possible to determine what position the plaintiff would have been in had the contract been fully performed, and why the law puts the burden of displacing this assumption on a defendant are questions to which we now turn.
In other jurisdictions there is strong authority to the effect that, where a plaintiff claims damages for expenditure reasonably incurred, it is prima facie sufficient for that plaintiff to prove his or her expenditure and that it was reasonably incurred. The onus then shifts to the party in breach of contract to establish that such expenditure would not have been recouped even if the contract had been fully performed. If this onus is not discharged, a plaintiff's entitlement to reliance damages remains intact. In L. Albert and Son v. Armstrong Rubber Co., Chief Judge Learned Hand, after noting that the basis for the award of damages was not predicated on the notion that a defaulting promisor was an insurer for a promisee's venture, went on to observe (1949) 178 F.2d, at 189):
"[I]t does not follow that the breach should not throw upon [the defaulting party] the duty of showing that the value of the performance would in fact have been less than the promisee's outlay. It is often very hard to learn what the value of the performance would have been; and it is a common expedient, and a just one, in such situations to put the peril of the answer upon that party who by his wrong has made the issue relevant to the rights of the other. On principle therefore the proper solution would seem to be that the promisee may recover his outlay in preparation for the performance, subject to the privilege of the promisor to reduce it by as much as he can show that the promisee would have lost, if the contract had been performed."
See also Restatement of the Law: Contracts , section 349, where it is stated that, where a plaintiff seeks reliance damages, " it is open to the party in breach to prove the amount of the loss , to the extent that he can do so with reasonable certainty ... and have it subtracted from the injured party's damages ".
In Bowlay Logging Ltd . at pp 334-335, Berger J. expressed his agreement with the American approach. His Lordship held that the onus rested on the defendant to establish that, even if the contract had been fully performed, the plaintiff would not have even recovered his reasonable expenditure . In C.C.C. Films Ltd [1985 QB at pp39-40] ., Hutchison J. adopted the reasoning of Learned Hand C.J. in L. Albert and Son v. Armstrong Rubber Co. in holding (at pp 39-40) that the onus lies on a defendant to establish that a plaintiff is not entitled to reliance damages because the expenditure incurred would not have been recouped , even if the contract had been fully performed. Hutchison J. described the fact that the onus in this regard should fall on a defendant as "eminently fair".
The placing of the onus of proof on a defendant in the manner described amounts to the erection of a presumption that a party would not enter into a contract in which its costs were not recoverable . Cases such as Bowlay Logging Ltd. illustrate that such a presumption is not irrebuttable but, until that presumption is rebutted, a plaintiff may rely on it to recover his or her reasonable expenses both in the case of a contract which would not have been profitable and in the case of a contract where the outcome of the contract, if it had been fully performed, cannot be demonstrated, whether at all or with any certainty .

…

In the context of the discussion of onus of proof and the presumption relating to recovery of reasonable expenditure incurred which we have described, it is necessary to consider the decision of this Court in McRae.
….

McRae illustrates the proposition that a plaintiff has a prima facie case for recovery of wasted expenditure once it is established that the expense was incurred in reliance on the promise of the party in breach, there being a failure of performance by that party. By reason of its facts, the reasoning in McRae does not depend upon the presumption that an innocent party would not have entered into the contract unless it would at least have recovered its reliance expenditure under the contract had it been performed. But the reasoning is not inconsistent with the application, in appropriate cases, of that presumption which, in our view, has much to commend it. Indeed, it is just and fair that the repudiating party should bear the onus of showing that the party not in breach would have made a loss on the contract .”

(at 86-89) (emphasis added)

14    Brennan J expressed the principle rather differently, although in this case, I think to no different effect in the following passage:

“The doctrine of reliance damages: an alternative method of assessment.
Where a contract has been rescinded for breach, the amount which a plaintiff has reasonably expended in reliance on the defendant's promise and which is wasted by reason of the defendant's breach of his promise is a proper subject of damages for breach of contract: McRae v. Commonwealth Disposals Commission, at pp 412, 414. Damages assessed for wasted expenditure incurred in reliance on the defendant's promise may be described as reliance damages to distinguish them from damages assessed for loss of the benefits which the plaintiff expected from performance of the contract (expectation damages). A plaintiff who seeks to recover reliance damages must ordinarily prove that the net value of the benefits to which he would have been entitled if the contract had been performed ($B - $y) would have exceeded the wasted expenditure incurred in reliance on the defendant's promise ($x) and, to the extent that he fails to do so, his claim will fail. To discharge the onus of proof , however, the plaintiff may be able to raise and rely on an inference that a party would not incur expenditure in reliance on the other party's promise without a reasonable expectation that , on performance of the contract, the expenditure would be recouped. That is an inference of varying strength according to the circumstances. Sometimes, the inference would be of sufficient strength to enable the plaintiff to discharge the onus; sometimes, the inference would be too weak.
However, when a contract is rescinded for breach and that breach , by preventing the performance of the contract, has made it impossible for the plaintiff to prove that the net value of his contractual benefits ($B - $y) exceeds the wasted expenditure incurred in reliance on the defendant's promise prior to rescission ($x), it is just to shift to the defendant the ultimate onus of proving that , had the contract been performed, the net value of the plaintiff's benefits would not have covered the expenditure he had incurred before rescission. This was the basis on which Chief Judge Learned Hand placed the imposition of such an onus on the defendant in L Albert & Son v. Armstrong Rubber Co.
…
The sufficient and necessary justification for shifting the onus to the party in breach in the assessment of damages for wasted expenditure incurred in reliance on the defendant's promise before rescission for breach is that the breach of the contract itself makes it impossible to undertake an assessment on the ordinary basis.
A plaintiff's inability to quantify his lost benefits is no justification by itself for casting on the defendant an onus to prove that the plaintiff would not have recouped reliance damages had the contract been performed. What justifies the reversal of the onus is the defendant's repudiation or breach which denies, prevents or precludes the existence of circumstances which would have determined the value of the plaintiff's contractual benefits. Thus, in McRae's Case, where the breach assigned was that there was no oil tanker on Jourmaund Reef where the contract of sale warranted a tanker to be, the salvager purchasers who had wasted expenditure in reliance on the defendant's promise recovered reliance damages. Dixon and Fullagar JJ (1951) 84 CLR at p414 explained the reversal of the onus thus:
"The fact that the expense was wasted flowed prima facie from the fact that there was no tanker; and the first fact is damage, and the second fact is breach of contract. The burden is now thrown on the Commission of establishing that, if there had been a tanker, the expense incurred would equally have been wasted. This, of course, the Commission cannot establish. The fact is that the impossibility of assessing damages on the basis of a comparison between what was promised and what was delivered arises not because what was promised was valueless but because it is impossible to value a non-existent thing. It is the breach of contract itself which makes it impossible even to undertake an assessment on that basis. It is not impossible, however, to undertake an assessment on another basis, and, in so far as the Commission's breach of contract itself reduces the possibility of an accurate assessment, it is not for the Commission to complain."
In CCC Films Ltd. v. Impact Quadrant Films Ltd. [1985] QB 16 Hutchison J. acknowledged (at p 38) that McRae's Case supports - "the proposition ... that it is only where the breach itself makes it impossible to assess whether there would have been any returns sufficient to recoup the expenditure that the defendant is debarred from relying, to defeat the plaintiff's claim, on the normal rule that it is for the plaintiff to prove all ingredients of his claim for damages, including the fact that the expenditure he incurred would, had there been no breach, have been recouped".
The point of distinction between the method of assessment of expectation damages and the method of assessment of reliance damages is the reversal in the case of reliance damages of the onus of proof of the net value of the plaintiff's contractual benefits .

…

These are alternative methods of assessing damages, but the plaintiff does not have an election as to the method. The plaintiff who seeks recovery of reliance damages must show that justification for reversing the onus of proof exists. Otherwise, he must endeavour to prove his damages on the ordinary basis .”

(at 104 -108) (emphasis added)

15    Mr Aitken on behalf of the defendant also relied upon the following passage from Toohey J’s judgment:

“Equally, however, if the rule in Robinson v. Harman is to be applied properly, where a contract would have resulted in a loss to the plaintiff he is only entitled to damages equal to expenditure discounted according to that loss. If that loss would have been greater than the expenditure, only nominal damages can be awarded . In Bowlay Logging Ltd. v. Domtar Ltd. (1978) 87 DLR (3d) 325, at p 335, Berger J., , adopted this statement in Corbin on Contracts, vol.5, (1964), at pp 205-206:
"If, on the other hand, it is proved that full performance would have resulted in a net loss to the plaintiff, the recoverable damages should not include the amount of this loss. If the amount of his expenditure at the date of breach is less than the expected net loss, he should be given judgment for nominal damages only. If the expenditures exceed this loss, he should be given judgment for the excess." (Emphasis in Bowlay Logging Ltd. v. Domtar Ltd.)
If reliance damages are considered in this way, the quantification of damages by reference to expenditure is, as Mason C.J. and Dawson J. say, fully consistent with the primary rule that a successful plaintiff should be placed in the same position as if the contract had been performed.”
(at 135) (emphasis added)

16    Deane J approached the principle on which reliance damages are assessed in the following way:

“Reliance Damages
In a case where a plaintiff has incurred expenditure either in procuring the contract or in its performance but it is impossible or difficult to establish the value of any benefits which the plaintiff would have derived from performance by the defendant, considerations of justice dictate that the plaintiff may rely on a presumption that the value of those benefits would have been at least equal to the total detriment which has been or would have been sustained by the plaintiff in doing whatever was reasonably necessary to procure and perform the contract (see, e.g., McRae, at p 414; Holt v. United Security Life Ins. and Trust Co. (1909) 72 Atlantic Reporter 301, at pp 305-306; L. Albert and Son v. Armstrong Rubber Co. (1949) 178 F 2d 182, at pp 188-189). In my view, the rational basis of that presumption is that that total detriment represents what would reasonably have been in the contemplation of the parties themselves as the cost to the plaintiff of full performance by the defendant and constitutes some evidence , in proceedings between them , of the value of the total benefits which would have been derived by the plaintiff from such performance. It follows from it that, at least in a case where proof of value is impossible or difficult, it is presumed in the plaintiff's favour that the future net benefits (i.e. excess of future benefit over future detriment) which would have been derived from performance of the contract would have been of a value sufficient to recoup the past net expenditure reasonably incurred in procuring or performing it. Where that presumption is operative, it enables the recovery by a plaintiff of what are commonly referred to as "reliance damages", that is to say, damages equivalent to the wasted expenditure which has been reasonably incurred in reliance upon the assumption that the contractual promises of the defendant would be honoured. The presumption will be rebutted if it be self-evident or established that the plaintiff would have derived no financial or other benefit from performance of the contract or that any financial or other benefit which would have been derived from future performance would not have been sufficient in value to counterbalance the past expenditure. The presumption will not , however , be displaced merely by the circumstance that the benefits which the plaintiff would have obtained from performance by the defendant included the chance of some more remote benefit and it is a matter of speculation whether that ultimate benefit would have in fact been obtained or by the circumstance that the perceived "benefit" which the plaintiff sought and for which she incurred the past expenditure is something which is of value only to the plaintiff or which, for some other reason, is not capable of being objectively valued in monetary terms (see, e.g., McRae, at p 414; Fink v. Fink, at pp 134-135, 143). If it be established that the plaintiff would not, in any event, have derived the "benefit" which he sought from performance by the defendant or that any "benefit" which would have been derived is capable of being valued in monetary terms and would, when so valued, have been inadequate to recoup the expenditure, the plaintiff's recovery will be limited to the extent (if at all) to which it has not been established that that expenditure would not have been recouped (see, e.g., Bowlay Logging Ltd. v. Domtar Ltd. (1978) 87 DLR (3d) 325, at pp 332-335; affd 135 DLR (3d) 179). Even in a case where it is established that the plaintiff would have incurred a loss if the contract had been fully performed, reliance damages can be recovered in respect of wasted expenditure to the extent (if at all) that the past net expenditure exceeds that ultimate loss since, to that extent, the expenditure would have been recouped if there had been no breach (See, e.g., Sunshine Vacation Villas Ltd. v. The Bay (1984) 13 DLR (4th) 93, at pp 102-103).”
(at 126-127) (emphasis added)

17    I do not understand there to be any dispute between the parties that the plaintiff, in seeking to recover reliance damages must bring to account any losses likely to have been incurred had the contract been performed. Where they are in disagreement is whether the onus in this case, and, the defendant would say, the pleading onus, is upon the plaintiff to assert and prove that the reliance damages claimed would have been recouped under the contract, had it been performed. The plaintiff asserts that it had a reasonable expectation that the benefit to it under the contract, had it been performed, would have enabled it to recoup its reliance expenditure, with the burden cast upon the defendant to prove any likely loss in performance of the contract.

18    The case as pleaded by the plaintiff purports to cast the onus upon the defendant to prove that losses would have been incurred under the contract, had it been performed, such that the plaintiff would not have recouped its reliance expenditure. I think it is reasonably open to the plaintiff to plead such a case.

19    I think that it is so, whatever language is chosen from Amann dealing with the onus of proof and, hence, any pleading onus. If the language of Mason CJ and Dawson J is adopted, the onus of establishing that “the expenditure incurred would not have been recouped” lies upon the defendant, that onus amounting “to the erection of a presumption that a party would not enter into a contract in which its costs were not recoverable”: it being “just and fair that the repudiating party should bear the onus of showing that the party not in breach would have made a loss on the contract”.

20    On the reasoning of Brennan J, it is reasonably arguable in this case that the plaintiff is entitled to an inference “…of sufficient strength …to discharge [its] onus”: the ‘inference’ being that “a party would not incur expenditure in reliance on the other party’s promise without a reasonable expectation that [its reliance] expenditure would be recouped”.

21    Arguably, the pleading in pars C7 A and C16A(b) of the contentions is a pleading of expectation sufficient to discharge the plaintiff’s onus, on Brennan J’s reasoning, placing the burden of establishing any likely losses from performance of the contract upon the defendant.

22    To revert to the reasoning of Deane J, “considerations of justice dictate that the plaintiff may rely upon a presumption that the value of [the contractual] benefit would have been at least equal to the total detriment” represented by the plaintiff’s reliance damages: it being “difficult to establish the value of any [such] benefits”. In the case as pleaded, it was in the contemplation of the parties that the claimed reliance expenditure would be incurred and that “constitutes some evidence… of the value of the total benefits which would have been derived from performance of the contract”: that being “the rational basis of [the] presumption”.

23    Accordingly the application is dismissed. The defendant is to pay the plaintiff’s costs of the application.

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Last Modified: 05/25/2001