Castel Electronics Pty Ltd v Toshiba Singapore Pte Ltd

[2010] FCA 1028

FEDERAL COURT OF AUSTRALIA

Castel Electronics Pty Ltd v Toshiba Singapore Pte Ltd [2010] FCA 1028

Citation:	Castel Electronics Pty Ltd v Toshiba Singapore Pte Ltd [2010] FCA 1028
Parties:	CASTEL ELECTRONICS PTY LTD (ACN 074 561 087) v TOSHIBA SINGAPORE PTE LTD (REG NO 197 401 688Z)
File number:	VID 141 of 2008
Judge:	RYAN J
Date of judgment:	28 September 2010
Dates of hearing:	3, 4, 5, 9, 10, 11, 12, 15-19 June 2009 inc;  17, 18, 20, 24, 25 and 27 August 2009 inc and 19-23 October 2009 inc
Place:	Melbourne
Division:	GENERAL DIVISION
Category:	No Catchwords
Number of paragraphs:	236
Counsel for the Applicant:	Mr R Garratt QC with Mr D Bailey
Solicitor for the Applicant:	Wilmoth Field Warne to 8 October 2009, then Browne & Co
Counsel for the Respondent:	Mr E N Magee QC with Mr A P Young
Solicitor for the Respondent:	DLA Phillips Fox

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION	VID 141 of 2008

BETWEEN:	CASTEL ELECTRONICS PTY LTD (ACN 074 561 087) Applicant
AND:	TOSHIBA SINGAPORE PTE LTD (REG NO 197 401 688Z) Respondent

JUDGE:	RYAN J
DATE OF ORDER:	28 SEPTEMBER 2010
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1.There be judgment for the applicant in the sum of $2,613,127.

2.The respondent’s cross-claim be dismissed.

3.The further hearing of these proceedings be adjourned to a date to be fixed in consultation with the parties for receiving submissions on the questions of interest on the judgment sum and the costs of the proceedings.

4.The time for filing and service by either party of a notice of appeal herein be extended until the expiration of 21 days from the making of final orders in respect of the matters referred to in paragraph 3 of this Order.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION	VID 141 of 2008

BETWEEN:	CASTEL ELECTRONICS PTY LTD (ACN 074 561 087) Applicant
AND:	TOSHIBA SINGAPORE PTE LTD (REG NO 197 401 688Z) Respondent

JUDGE:	RYAN J
DATE:	28 SEPTEMBER 2010
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

FACTUAL AND CONTRACTUAL HISTORY

1. The applicant, Castel Electronics Pty Ltd (“Castel”) which was incorporated on 25 June 1996 has, since that date, carried on in Australia the business, formerly conducted by a predecessor company, of a wholesaler and distributor of electrical and electronic products including television receivers, audio products, white goods including air conditioners and associated goods.  As a result of the introduction to Australia of high definition digital television broadcasting and the projected phasing-out of analogue television broadcasting, a demand was created from about 2003 for set-top boxes which enabled the digital signal transmitted by television broadcasters to be captured and displayed through an analogue television receiver.  As well as effectively converting analogue television receivers into digital receivers, more advanced set-top boxes incorporated a recording function which enabled programs to be recorded, rewound and replayed in more varied, complex and sophisticated ways than had been available using traditional VCR recorders to record material received by analogue television receivers. 

2. The respondent, Toshiba Singapore Pte Ltd (“TSP”) which is incorporated in Singapore is a wholly-owned subsidiary of Toshiba Corporation (“Toshiba”) and Toshiba Home Appliance Corporation (“THAC”) both of which are incorporated in Japan.  Toshiba has, for many years, been a large-scale manufacturer of electrical and electronic equipment and from about August 1997 arranged for TSP to distribute most of its products throughout Asia including to Russia and the Middle East.  Pursuant to that arrangement, TSP became the supplier to Castel of many “Toshiba” branded television products.  Many of the products so supplied were manufactured by TSP or by companies to which TSP had contracted their manufacture.

   The distributorship agreement between Toshiba and Castel

3. Before the advent of TSP, Castel had in 1996 entered into a non-exclusive distribution agreement with Toshiba.  That agreement was dated 8 August 1996 and contained, amongst others, the following provisions;

   ARTICLE 4 – INCOMING INSPECTION

   (1)CASTEL shall send TOSHIBA a written notice of any claim connected with the defect of the PRODUCTS, together with a proper evidence thereof, in time to be received by TOSHIBA within thirty (30) days from the date of the relative bill of lading of the PRODUCTS.

   Unless such notice accompanied by proper evidence is received by TOSHIBA within such thirty (30) days period, CASTEL shall be deemed to have waived any claim with respect to the PRODUCTS concerned.  If TOSHIBA, after the examination of such alleged claim, acknowledges that any of the PRODUCTS concerned is defective due to the fault or negligence of TOSHIBA or the manufacturer of such PRODUCTS, then TOSHIBA will at its option in each instance:

   (a)       replace, free of charge, such defective PRODUCTS or parts thereof.

   (b)       repair such defective PRODUCTS at TOSHIBA’s expense, or

   (c)reimburse CASTEL for the expenses incurred by CASTEL in correcting such defective PRODUCTS.

   THE FOREGOING STATES THE ENTIRE AND ONLY WARRANTY, EITHER EXPRESS, IMPLIED OR STATUTORY, MADE BY TOSHIBA WITH RESPECT TO THE PRODUCTS OR PARTS THEREOF DELIVERED TO CASTEL PURSUANT TO THIS AGREEMENT, AND ALL OTHER WARRANTIES, INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, ARE HEREBY DISCLAIMED:  and TOSHIBA shall not be liable for any special, indirect, incidental or consequential damages.

   ARTICLE 5 – DELIVERY, TITLE AND RISK OF LOSS

   TOSHIBA shall deliver the PRODUCTS to CASTEL, FOB Japan.  Title to and risk of loss of the PRODUCTS purchased by CASTEL hereunder shall pass to CASTEL upon such delivery.

   … … …

   ARTICLE 7 – MINIMUM PURCHASE

   CASTEL guarantees to purchase at least such quantity or amount of the PRODUCTS as set forth in EXHIBIT B, attached hereto, as the minimum purchase from TOSHIBA.  For the purpose of this Article, the PRODUCTS shall be deemed to be purchased when delivery of such PRODUCTS has been made in accordance with Article 5 (DELIVERY, TITLE AND RISK OF LOSS) hereof.

   ARTICLE 8 – SERVICE OBLIGATIONS

   (1)CASTEL shall provide its customers with a prompt and proper service and maintenance in respect of PRODUCTS at its own expense and responsibility.

   (2)For this purpose, CASTEL agrees to stock such reasonable quantity of service parts as is required to provide such service and maintenance for the PRODUCTS and agrees to maintain, and shall cause CASTEL’s dealers to maintain, appropriate service facilities, including a reasonable number of persons acquainted with installation and maintenance of PRODUCTS who shall be trained and qualified by TOSHIBA (or by CASTEL in case of its dealers).

   (3)During the term of this Agreement, TOSHIBA shall supply CASTEL with any available service parts required for the purpose of this Article in accordance with the then current price list for TOSHIBA’s service parts, for which prices may be changed from time to time by TOSHIBA.  TOSHIBA shall maintain the ability to supply to CASTEL its reasonable requirements for such service parts.

   In the event of expiration or termination of this Agreement, TOSHIBA’s obligation to supply CASTEL with such service parts, if any, shall remain on condition (and to the necessary extent) that CASTEL shall provide its customers with service and maintenance in respect of PRODUCTS sold by CASTEL prior to such termination or expiration;  provided however that in the event of termination of this Agreement by TOSHIBA pursuant to Article 15 (TERMINATION) (1) or (2) hereof, TOSHIBA shall be released from its obligation under (3) of this Article.

   (4)CASTEL shall maintain and submit to TOSHIBA, upon its request, field failure report, service report and the service records.

   … … …

   ARTICLE 10 – MARKETING AND ADVERTISEMENT

   (1)CASTEL shall undertake for its own account marketing, sales, advertisement and sales promotions of the PRODUCTS and shall use its best endeavours towards obtaining the largest sales volume of the PRODUCTS in the TERRITORY.

   (2)Any advertisement for CASTEL’s sales promotion of the PRODUCTS shall be made at CASTEL’s own discretion and expense unless TOSHIBA agrees in writing to share or pay such expense.

   (3)TOSHIBA agrees to provide CASTEL with a reasonable quantity of such advertising materials or other sales support as catalogues, leaflets and posters written in English, the quantity of which shall be decided upon by negotiation between the parties hereto.  CASTEL shall bear any freight, insurance, tax, duty, assessment and any other charge and/or expense which may be charged or imposed on such materials after delivery thereof to the carrier at Japanese port of shipment.

   ARTICLE 11 – INFORMATION AND REPORTS

   CASTEL shall furnish TOSHIBA with the following:

   (a)Quarterly order forecast of the PRODUCTS at least four (4) months before the beginning of such quarter period.

   (b)Reports on monthly inventory and sales results and forecast of the PRODUCTS in a form satisfactory to TOSHIBA by tenth (10^th) working-day of the succeeding month.

   (c)Information on market conditions and any other information in the TERRITORY which CASTEL shall collect at any time.

   … … …

   ARTICLE 14 – TERM OF AGREEMENT

   (1)This Agreement shall become effective on July 1, 1996 and shall continue to be effective until March 31, 1997 unless sooner terminated pursuant to the provisions of Article 15 (TERMINATION) hereof or by operation of law or otherwise.

   Thereafter, this Agreement will be renewed on a year-to-year basis if the parties hereto agree in writing upon terms and conditions for such renewal at least one (1) month prior to the expiration of the original period or any renewed period.

   Provided, however, the terms and conditions of any renewed agreement shall be negotiated in good faith substantially based upon the current terms and conditions of the Agreement.

   (2)Any shipment made by TOSHIBA after the expiration or termination of this Agreement shall not be construed as meaning an agreement by TOSHIBA to extend or renew this Agreement.

   (3)CASTEL shall not make any claim or demand against TOSHIBA for any damage, loss, expense or cost, if any, including but not limited to compensation for goodwill, incurred as a result of or in connection with the expiration and non-renewal of this Agreement.

   ARTICLE 15 – TERMINATION

   (1)If either party has defaulted in any provision of this Agreement and failed to remedy such default within sixty (60) days after receiving a written notice from the non-defaulting party, the non-defaulting party may terminate this Agreement without any further written notice.

   (2)      If there by:

   (a)       an insolvency of either party or

   (b)a substantial change in the control or management of either party which is unacceptable to the other party, the other party may terminate this Agreement forthwith upon written notice.

   … … …

   (5)Any termination of this Agreement under Article 15 (TERMINATION) (1), (2) or (3) hereof shall not prejudice any right and remedy available to the terminating party under law, trade custom or otherwise.

   … … …

   ARTICLE 20 – ENTIRE AGREEMENT

   This Agreement supersedes all prior discussions and writings and constitutes the entire and only agreement concerning the PRODUCTS between parties, and this Agreement may not be changed, altered or amended except in writing signed by duly authorized representatives of the parties.

   Exhibit B to that distributorship agreement recited:

   Minimum Purchase Quantity

   1.The minimum purchase quantity for the first period from July 1, 1996 to March 31, 1997:

   Color Television Receivers:  (1,000 sets)

   2.The minimum purchase quantity for the period(s) subsequent to paragraph 1 above shall be agreed upon between the parties ninety (90) days prior to the end of each current period.

4. On 15 July 1997 the distributorship agreement between Toshiba and Castel was amended and extended by a Memorandum signed by Mr Uchiike, Toshiba’s General Manager, International Operations – Information Equipment, Consumer Electronics and Appliances, and by Mr Kwong.  It recited;

   TOSHIBA CORPORATION, a corporation of Japan, having its principal place of business at 1-1, Shibaura 1-chome, Minato-ku, Tokyo 105-01, Japan (hereinafter called “TOSHIBA”) and CASTEL ELECTRONICS PTY LTD, a corporation of Australia having its principal place of business at 103-119 Gipps Str., Collingwood Victoria 3066, Australia (hereinafter called “CASTEL”) hereby agree as the following in connection with a Distributorship Agreement dated August 8, 1996 made between the parties hereto (hereinafter called “ORIGINAL AGREEMENT”).

   1.The term of the ORIGINAL AGREEMENT shall be renewed for one (1) year period from April 1, 1997 to March 31, 1998.

   2.The EXHIBIT A of the ORIGINAL AGREEMENT shall be revised to read as follows:

EXHIBIT A

PRODUCTS

1.      Color Television Receivers (including Projection TVs)

2.      CCD Cameras and their Peripherals

3.      Time Lapse VCRs

4.      Digital Still Cameras

5.     Home Appliances

(Washing Machines and Cloth Dryers, Vacuum Cleaners, Electric Fans and Ventilating Fans, Electronic Irons and Hair Dryers, Refrigerators, Water Coolers, Electric Kitchen Appliances, Accessories of the above Home Appliances)

CASTEL shall recognize that those products added to the PRODUCTS under this Memorandum are or will be manufactured by TOSHIBA, TOSHIBA’s subsidiary or TOSHIBA’s subcontractor elsewhere in the world.  Notwithstanding the provisions of Article 3 (Individual Order), Article 5 (Delivery, Title and Risk of Loss) and Article 6 (Prices and Terms of Payment) (1), the parties hereto may separately discuss and agree on the terms and conditions for the ordering schedule, delivery point, quotation of the prices (except the payment by means of a letter of credit) or the like for those newly added products.

3.The EXHIBIT B of the ORIGINAL AGREEMENT shall be revised to read as follows:

EXHIBIT B
Minimum Purchase Quantity

1.        The minimum purchase quantity for the period from April 1, 1997 to March 31, 1998:

(1)      Color Television Receivers:                1,000 sets

(2)      CCD Cameras and their Peripherals:      N/A

(3)      Time Lapse VCRs:   N/A

(4)      Digital Still Cameras:   N/A

(5)      Home Appliances  N/A

4.        This Memorandum shall become effective on April 1, 1997.

5.All other terms and conditions of the ORIGINAL AGREEMENT shall remain unchanged and in full force.

1. The distributorship agreement between Castel and Toshiba was renewed again for the period from 1 April 1998 to 31 March 1999.  As explained by a covering memorandum enclosed with a draft of the renewed agreement, the changes which it incorporated were by way of extending the agreement until 31 March, 1999, adding “DVD Video Players” to the products list and deleting for the period of the extension any requirement for minimum quantities to be purchased by Castel of any of the products in the products list.

2. By a further renewal for the period from 1 April 1999 to 31 March 2000 of the distributorship agreement between Castel and Toshiba, provision for the supply of electric fans, ventilation fans and air conditioners was deleted from that distribution agreement and future supplies of those products for Castel were to be sourced either from Toshiba Home Technology or Toshiba Carrier Corporation. 

   TSP becomes the main supplier to Castel of Toshiba products

3. After Castel had been advised in August 1997 that many of its Toshiba products were to be supplied in future by TSP, Castel followed a practice of submitting purchase orders to Toshiba in Japan or TSP or Toshiba Visual Products Pty Ltd in Singapore according to which company was the appropriate source of the relevant product.  Payment for the goods to be shipped FOB from Tokyo or Singapore as the case might be, was made in US dollars by letter of credit in favour of the appropriate supplier.  Later in the relationship between Castel as Australian distributor and Toshiba and TSP as suppliers, a practice was developed whereby each month Castel submitted a Purchase Sales Inventory (“PSI”) which indicated, on a monthly basis, Castel’s projected requirements for Toshiba products for the ensuing six months, “sales” or actual purchases by Castel for the month in question and sales of Toshiba products which had been made by Castel in the same month.  As well, in another column, were identified Castel’s orders for the ensuing month in respect of each Toshiba product.  Another column indicated the “inventory” or stock on hand of the same product held by Castel.  Upon receipt of each month’s PSI, Toshiba or TSP, as the relevant supplier, issued a pro forma invoice for the goods for which a firm order had been indicated in the PSI for a particular month. 

4. In about October 1997, Toshiba advised Castel that, henceforth, Toshiba colour television products would be shipped to Castel from Singapore by TSP.  From that time, most of Castel’s requirements were met by TSP, although Castel continued to obtain certain smaller volume “Toshiba” branded products from Toshiba in Japan and “Toshiba” wide-screen rear projection television receivers from Toshiba UK. 

   The advent of the set-top box and the development of the J35

5. In order to enable customers in Australia with the existing analogue television receivers to receive digital television broadcasts, manufacturers, including TSP, developed “set-top boxes” which could be positioned on top of analogue receivers and convert a digital signal to a format in which it could be viewed using those receivers.  TSP’s first version of a set-top box was the “S23” which was later followed by its “S25”.  Neither the S23 nor the S25 had features which markedly distinguished it from competitors’ set-top boxes which were also present on the Australian market at that time.

6. By email in September 2003, Mr Ronald So of TSP advised Mr Kwong, the Managing Director of Castel, that TSP proposed to introduce to the market an improved version of the “S25” set-top box with high definition capacity.  The email gave details of some specifications of the new model and invited Mr Kwong to indicate the price for which Castel expected to be able to sell it.  Mr Kwong responded by indicating the prices at which competitors’ set-top boxes were selling in Australia and suggesting that the “best”, i.e. undiscounted price, for which the new “Toshiba” unit could sell in Australia would be AUD$999 “on introduction in August [2004]”.

7. In the “Toshiba” colour television manual for 2004, issued to Castel in April of that year, it was indicated that the J25 set-top box would be available from October 2004.  In July 2004, Mr Kwong of Castel attended a “World Tour” in Singapore mounted by TSP to promote its forthcoming range of “Toshiba” products including the J35 set-top box and the “DLP” rear projection television receiver.  In the “Toshiba” manuals and product brochures, as well as orally by Mr So in the course of the “World Tour” it was represented that the J35 was capable of receiving high definition television digital signals in all Australian display formats and was capable of recording and replaying high definition television broadcasts.  It was also asserted that the J35 would be available for sale on the projected launch date in October 2004 or “such later date as will allow sufficient time to exploit the J35’s innovative character.”

1. Also at the “World Tour” in Singapore in 2004 TSP offered and promoted for the Australian market the “DLP” range of television receivers utilising digital light processing (“DLP”) technology which had been developed by Texas Instruments in the United States of America and had been incorporated in “Toshiba” television receivers which were already being sold in that country.  Attractive features of the DLP receivers were that they offered large screen sizes (up to 72 inches) and incorporated a “Phoenix” lamp which had a longer life than that achieved by other lamps. 

2. In December 2004, TSP provided Castel with a sample J35 set-top box and, early in 2005 issued a brochure containing the specifications for a J35 and detailing what were seen to be its attractive features including its 180GB Hard Disk Drive (“HDD”) which it was said;

   … brings you the finest picture quality” and “the solution of high and standard definition recording and playback.  With such a large capacity HDD, you can enjoy great convenience and freedom to capture 18 hours of high definition or 49 hours of standard definition of superior quality just like live screening.

3. Castel placed its first commercial order for J35s with TSP for delivery in January 2005. That was ordered in the PSI format described at [7] above and was for 2,380 units. However, that order was not filled according to its terms because delays had been encountered by Zinwell Corporation (“Zinwell”) a Taiwanese company to which TSP had subcontracted production of the J35. As a result, only 40 units were shipped to Castel in February 2005 with the stipulation that they were not to be re-sold but were for display purposes only. That difficulty had been foreshadowed in an email dated 13 December 2004 from Mr So to Mr Kwong of Castel which recited;

   Before the field [tests] in progress now in Australia, Toshiba and Zinwell engineers did the evalution [sic] of the HDD-J35 samples in Singapore last week.  The overall performance is not so satisfactory which requires a modification of hardware.  100 sets cannot be produced in Dec and the subsequent production will likely be affected, too.  Before the final result of Australian field test, Zinwell cannot give us a recovery schedule.  We will keep on inform you the progress closely.

   We apologize the inconvenience caused.  We also seek your understanding of the uncertainties and difficulties involved in developing leading technology.

4. Later, on 12 January 2005, Mr So forwarded to Mr Kwong by email a revised delivery schedule which provided for delivery of 2,280 units between 24 and 29 February and a further 2,280 units to be delivered at “end March”.  The launch of the J35 which had been deferred until March 2005 was further delayed because of the need to replace the software in the units which had been shipped to Australia.  To enable that to be done, the units were returned to Zinwell and, after re-working were again sent to Australia in time for a launch on the Australian market in April 2005.  After that launch, Castel placed with TSP further orders for commercial quantities of J35s. 

5. After the release of the J35s for sale in Australia, numerous complaints about them were made by retail purchasers and referred to Castel’s service department.  According to Mr Kwong, nearly every fault reported to Castel was “generic” in the sense that it was common to a batch of J35s as imported to Australia rather than being a “one-off” or isolated occurrence.  The proliferation of complaints required Castel to divert to responding to customer grievances members of staff who would otherwise have been engaged in visiting retailers and promoting sales.  Each “generic” fault required all units in a given batch to be rectified.  Notice of the occurrence of the fault was given to TSP but, as each new “generic” fault was identified, units in each preceding batch had to be recalled for repair or upgrade to correct the new fault.  According to Mr Kwong, “at least 54 generic faults of an epidemic nature” were encountered over the two years which followed the Australian launch of the J35.  Mr Kwong acknowledged, however, that many of the “epidemic” faults were identified in close proximity to each other so that the number of recalls was limited and faults were rectified in patches.  Other “one-off” faults in the J35 were identified from time to time but were not regarded as “epidemic”.  Nevertheless, the volume of “epidemic” defects revealed by consumer complaints during April and May 2005 were so large that, on 20 May 2005 Mr Kwong wrote to Ms Violet Oh of TSP in these terms;

   HDD-J35

   Re your email for the above we would not be able to take any more units for May because we have now stopped sales of the unit, as there are huge number of complaints from both retailers and consumers on the product.  Please refer to you QC [Quality Control] division as Victor has been in contact with them over the past weeks.  As to when we can resume delivery will depend on when we can rectify the problems and how we address the units (approx 2,000 units) already in the market.

6. After further correspondence from Castel, Mr Sato of TSP indicated to Mr Kwong by email dated 7 June 2005 that he believed that the major software problems with the set-top boxes had been solved but that Castel’s request “to recover returned sets of 1,549 from Taiwan by air by middle of June and another deliver of 1,526 by sea at the end of June” could not be met in so short a time and that to be on the “safe side”, Mr Sato would return them only as a July order.  By the same email, Mr Sato agreed to accept payment from Castel on 60 day terms for July and August and indicated that Zinwell would bear the air freight charges.  Despite that reassurance, Castel continued to encounter problems with the J35 units even after they had been reworked.  That prompted Mr Kwong to write on 5 July 2005 to Mr Sato in these terms;

   HDD-J35

   After 2 weeks of monitoring of the product in the market with the “reworked & upgraded” unit, we now find that we may have a SERIOUS, problem in hand. As a precaution I have suspended all further sales until we can identify the cause of the problems mentioned below.

   For the past 2 weeks since the “re-release” our staff have been attending, in increasing frequencies, to “fire-fighting” the complaints in the market re defects in the unit. I enclose herewith samples of the complaints as illustrated in our staff memos etc.

   The complaints may be identified as follows: -

   a)        Drop out of picture

   b)        Audio dropouts

   c)Freezing of picture (some customers are experiencing more freezing than before the upgrade)

   d)        Memory loss

   e)Interference to picture caused by switching off and on of other electrical products in proximity of the unit.

   f)Significant heat generated by the unit causing cabinet housing unit to be “hot” - concern of consumers that unit may spark a fire (though exaggerated) but we did receive a complaint that a Formica cabinet shelf had warped attributing the cause to the heat generated by the J35.

   At this stage of our preliminary survey it would seem that the cause of the above appears to be heat-related though we received several complaints of freezing after only half an hour usage. I am, of course, no engineer, but from my observation it would seem that most of the problems mentioned above (except perhaps for audio drop) seem to appear when the unit is “heated up”.  This is especially relevant if the J35 is housed in an enclosed area like a cabinet, and more so, if other appliances like an amplifier are enclosed with it.

   During the tests conducted when Toshiba and Zinwell personnel were here even though tests lasted weeks the units were then not housed in enclosed cabinets - Albeit foams were used to retain the heat of the units during testing. No abnormality was found then.

   It is noted on page 3, 4 & 5 of the owner’s manual that usage is restricted to operation temperature of -5°c to 40°c. It has been noted that in most of the faults experienced in the situations mentioned, the units were in environments exceeding the 40°c -

   (in enclosed cabinets etc). I do not know if all the above faults were heat - related.

   On the practical front, someone buying an expensive Set Top Box like the J35, would be those who have expensive entertainment set up at home - like appliance cabinets etc. Products like the J35 are normally “hidden” away in these cabinets. In such situation, heat can only build up and if the tolerance level of the J35 cannot meet such environment then one can understand why the faults arose. Also in now reading the user manual (page 5) the term “fan noise” is quoted. As we now know the fan has been eliminated in the unit. Why? No idea. In fact in the course of the exercise, Victor was the one who requested it) louvers to be incorporated in the cabinet top ii) heat sync to be added, but have no idea why the fan was dropped. However, the above contention is made on the basis that the cause of the faults is heat related.

   The above is not attributing blame but to highlight the situation and circumstances leading to the release of the unit. It is imperative that urgent remedies are put in place, as it is the situation has sapped more confidence in the brand than anything else in the past.

   In the meantime, as a holding exercise, we are advising all complaints that they should not house the J35 in a confined environment and to then see the result thereafter. Castel is, of course, conducting similar tests here to determine the cause of the faults. There is limit to our capability in this situation. May I suggest that a couple of senior personnel from Zinwell and some from Toshiba to come to Melbourne to assist us in working out a solution for this issue - and we need to attend to this URGENTLY.

7. After a response by Ms Oh, Mr Kwong again wrote to TSP on 8 July 2005 making, amongst other assertions, this comment on the J35;

   Until we are able to resolve the technical issues and quell the retailers & consumers complaints, there is no reason to take any more stock.  We have stopped all sales and we need URGENT attention as to how to resolve these issues first.  It is first a marketing issue on how and what to inform our customers to calm their concern.  The technical resolution is important but such can come subsequently.  If we cannot resolve the retailers/consumers concern we not only cannot sell them the J35 but also any other products!

8. A meeting was held in Melbourne on 12 July 2005 between River Chiang of Zinwell, Mr Chey of TSP and representatives of Castel to evaluate the problems with the J35 and Mr Kwong hoped to be able, on 14 July 2005, to make a decision “as to the on-going sales activities of the J35.”  In the meantime, he wrote, on 13 July 2005 to Mr Sato of TSP requesting him “to hold any more shipment of J35 to us – whether we paid for or opened [letter of credit] for.  If there is to be any reworked such should not be done here but at Zinwell.”

9. In about mid-September, Castel learned that a rival producer of set-top boxes, Sony, was about to launch on to the market its own version of the J35 which was also to be manufactured in Taiwan by Zinwell.  That prompted Mr Kwong of Castel to complain to TSP by email dated 15 September 2005 in which Castel expressed a belief that Toshiba had prior rights to the models which had been developed for Castel in collaboration with Zinwell and that similar models would not be available to competitors until Castel had enjoyed exclusive rights to sell the models in Australia for 12 months.  Mr Kwong’s email concluded;

   As you are aware both Toshiba personnel & Castel staff have struggled over the past 9 months with considerable effort expanded to come to a stage (only today) to substantially resolve all the bugs to be able to feet somewhat comfortable now to sell the J35 - we have over 5,000 units of the HDD-J35 to sell and possibly another 3,700 sold into the market to be recalled and modified. In addition to this we consented to take the HDC26H to sell. Now on the back of this problem we now learn that Sony was to release its HD-HDMI unit next month utilizing the same Broadcom chip (BCM - 7038), which both Toshiba & Castel staff helped to perfect but which we have not even launched (C26H).

   Castel is landed with a huge headache and Sony is given the right to sell an equivalent product into the market! Ronald emailed me today to say that the main board power supply & cabinet is different. Of course such have to be different but the main brain is exactly the same & so too is the picture quality. This is very unprofessional on Zinwell’s part. If Sony is to sell the unit, Castel must have at least 6 months to 1 year to clear our stocks before an identical competitor model is introduced here as in the case of the S23 & S25.

   For your information it is well known that Sony does not have technical facilities here in Australia.  They have shut off all these years ago. On this venture, it would appear that Zinwell have used Toshiba & Castel’s facilities to do all the field tests etc and then sell off the developed product to Sony to compete with us!

   I hope you can look into this urgently. We here are very unhappy over this matter & the lack of professionalism & morality on Zinwell's part.

10. Mr Sato of TSP responded on 19 September 2005 to the last-mentioned email contending that the Sony set-top box to be produced by Zinwell would be quite different from, and inferior to, the “Toshiba J35” but indicating that TSP could not restrict the use by Zinwell for Sony of a “Broadcom” IC chip as that was the property of the US manufacturer, Broadcom.  In the same email, Mr Sato observed;

    As for the Quality issue for J35, I do apology for many troubles.  I have to admit that the problems are bigger than we expected.  However, Zinwell accepted to have goods returned and modify them at their expense.  As for this product, we suffered lot as a pioneer of this kind of category and we just started to talk of new STBs and IDTVs, which is, in the long run, very important for us and as I mentioned everything does not go to other party.  No one can make same products by just having the same IC.

11. Despite that attempt to reassure Castel, Mr Kwong had some misgivings about the extent to which development and improvement of the J35 had been utilised by Zinwell for the benefit of Sony.  In his witness statement, Mr Kwong expressed these misgivings as follows;

    I have since learnt, on a further review of the Castel discovered material and the TSP discovered material, that the statement from Mr Sato omitted important information which TSP knew about the Zinwell Sony product and apparent sharing of intellectual property that had the consequence that the Sony product benefitted from the Castel J 35 experience resulting in a superior product to the J 35 while Castel continued to struggle with the J 35 problems.  Due to the many faults encountered by Castel with the J-35, two significant improvements had been incorporated into the Sony equivalent unit.  These were the replacement of ribbon cables with wire and the incorporation of an exhaust fan to reduce heat emanating from the J-35, which did not have an exhaust fan.  Zinwell knew about the need for such improvements as a result of the complaints Castel had encountered with the J-35 since its introduction in February 2005.

12. Notwithstanding the optimism expressed on behalf of TSP, mainly by Mr Sato, that the defects which had plagued the J35 had been overcome, faults continued to emerge after the re-launch of the product, to the extent that Castel estimated that each unit which it sold had to be re-worked or returned for rectification on average 2.6 times after the first sale.  Even with the release in October 2005 of the C-26 set-top box, similar defects to those encountered with the J35 continued to manifest themselves.  The C-26 set-top box was intended to have features similar to the J35 but without the latter’s hard disk recording function.  Castel placed orders with TSP for delivery of C-26 units between September 2005 and August 2006.  The first delivery of 1,000 units was made in October 2005. 

13. By mid-2006, Castel had concluded that the continuing deficiencies of the J35 were so profound that the model would never be merchantable in Australia.  That followed a visit to Melbourne by Mr Y C Liu of Zinwell after which Mr Kwong emailed Mr Sato of TSP in these terms;

    Mr Y.C of Zinwell had been here for a approx a week during which I discussed with him several issues re the update of the J35.  Following my visit to Taipeh, the following additional faults were detected.

Defects	Solutions
1.  Hard Disk drive not registering	Software provided to fix issue.  This has been incorporated with the Loader 6.1 discussed in Taipeh.
2.  Cable connection defect	Y.C discussed this during his latest visit.  Such had contributed with various failures on units supposedly “fixed” at Zinwell factory.  Zinwell has forwarded a small quantity of cables for us to swap over.
3.  Minor Intermittent connection problem.	Y.C. also detected some occasional loss transmission problem which he attributed to hardware quality issue.  He has taken 4 units back to Taiwan for further analysis & ascertain cause of defect.

The above are 3 ADDITIONAL faults found following the 6.1 Loader software.  In view of the above I have asked (mentioned to you in my previous memo), Y.C to arrange for 2 technicians, a software & a hardware personnel, to be stationed here for a 3-6 months duration to ensure that any issues surfacing can be quickly analysed and rectified.  The presence of Y.C over the past week has proven that such support is absolutely critical for if it had not been for his presence, we could potentially face another back-lash from retailers/consumers re endless faults with the unit.  Please let me know Zinwell response to this issue.

In view of the above we will need to slightly change our switch to S36 ? and this is because we are unable to deliver replacement units of J35 to customers with faulty units quick enough.  After all the deliveries made to us, the latest being the 200 units received yesterday (which needed to be checked here due to the cable problem mentioned above), Castel has 392 units (pus 4 taken by Y.C) in Zinwell.  This excludes the 1090 units now in transit-at-sea due to be converted to S36.  Initially it was intended that of the 200 units now held in Taipeh and to be modified with the Loader 6.1 and change of cable, would be air freighted to Perth & Brisbane.  We now require these units to be air freighted to MELBOURNE instead on 4/7/06.  Additionally, the 192 units + 4 units should be modified as J35 (instead of S36) to be similarly air freighted to Melbourne as soon as possible (please provide dates when this is ready for shipment).

1. That prompted the laconic email reply from Mr Sato, also dated 27 June 2006 that;

   I would like to ask Zinwell to buy back all J35 from the market again. 

2. In similarly apologetic tone Mr Sato wrote on 5 July 2006 to Castel’s Service Manager, Mr Victor Hew;

   Regarding recent incidents I am sorry for our inadequate action.  I owe you too much about field test and this quality checking.  I will study how to improve and to manage these matters before releasing the goods.

3. On the same date, Mr Sato wrote to River Chiang of Zinwell who was then apparently still in Melbourne conducting field testing of the J35;

   Zinwell just arouse the concern about all related products and if so, I will step down about these matters and leave everything between Castel and Zinwell for all matters.  I have decided to freeze all STB projects and delivery.  Please ask your staff to return to Taiwan.  It is just shame to Toshiba Brand and myself. 

4. Within about two months, Mr Sato left TSP and took up duties at Toshiba’s office in France.  He advised Castel by email of 7 September 2006 of his impending transfer and that his responsibilities within TSP would be taken over by Mr Murakani as Department Manager, Ms Oh as Sales Manager and Mr So as Manager, Product, Planning and Marketing with Mr Yamamoto taking over as General Manager “as concurrent.”

   Mr Hew’s role in developing and modifying the J35 and C26

1. Mr Victor Hew was the service manager for Castel from 1990 and has been its Service Director since December 1996.  From his perspective, the development of the J35 for sale in Australia began in about December 2004 when research and development engineers employed by TSP and engineers employed by Zinwell visited Australia and carried out field testing of the J35 including its recording and playback functions.  As defects were identified, they were notified to Zinwell in Taiwan which immediately made recommendations for rectifying the fault, usually by means of a software upgrade. 

2. After Castel began selling the J35, numerous complaints from retail customers came to Mr Hew’s notice from about April 2005.  He later prepared a schedule of faults which had been discovered in the J35.  That schedule summarised each of the faults and what was done by Castel in response to each complaint about a fault.  Some faults were rectified by the software upgrade prescribed by Zinwell and made available to customers by Castel after approval had been obtained from TSP’s research and development department.

3. Mr Hew calculated that, in the period from July 2005 to June 2006, Castel received 8569 units of the J35 from Zinwell of which 2,520 were production units and 6,049 were units which had been reworked.  As further defects in the units received from Zinwell were identified, a red sticker was attached by Castel to each affected unit.  That served to indicate that the unit in question had been provided with a software upgrade V70-RV1.  Later, red stickers on which the marking “CC” had been made disclosed that the units concerned had been fitted with a more recent software upgrade, R71T10.  As further faults manifested themselves, the rectifying software upgrade was identified in a similar manner.  One fault, which Mr Hew considered to be a serious unresolved defect which was never overcome by any of the software upgrades, was the “lock-up” of the set-top box. 

4. Mr Hew’s definition of an “epidemic failure” was one occurring in more than 3% of a product line.  He characterised the “lock-up” fault as occurring in more than 100% of the J35 units because it recurred, sometimes more than once, even after a unit had been returned to Zinwell to be reworked.

5. On 8 February 2006, TSP advised Mr Hew by email of a major production fault in the circuit boards installed in the J35 units which resulted in a failure rate of approximately 1.5% of 9,000 J35 units tested.  According to Mr Hew, an acceptable failure rate should have been between 2 and 5 for every 10,000 units.  In his opinion, the higher failure rate identified by Zinwell should have resulted in a complete recall of all units fitted with the affected circuit boards.

6. In early March 2005, Castel had received delivery by airfreight of 1,520 J35 units.  It was also given instructions by email from Mr Tsang of TSP on 7 February 2005 for upgrading the software of those units after they had arrived in Australia.  However, it was later discovered, in March 2005, that three capacitors in the main circuit boards of all 1,520 units were defective and all had to be returned to Zinwell for rectification.  At the end of March 2005, Castel agreed to the temporary elimination of certain features of the J35 in order to bring about a saleable product.  At that time, Zinwell’s estimate was that solving the extant faults in the J35 would require four more weeks, i.e. to 27 April 2005.  Three hundred new units which were sent to Castel by Zinwell arrived in Melbourne on 27 April 2005.  Other new units arrived in Brisbane and Perth on 29 April 2005.

7. On 28 April 2005, Mr So of TSP advised Mr Hew that new top covers for the J35 with holes for ventilation would be sent to Castel on 21 April 2005 and that, on 26 April, new software would be released, subject to all critical problems having been fixed, and three Zinwell engineers would visit Castel’s premises to rework 1,500 J35s by downloading new software into them.

8. Mr Huang of TSP arrived in Melbourne on 21 April 2005 but tests which he carried out the next day revealed that each of four test J35s was not performing correctly.  In the last week of April 2005, Castel began distributing to customers J35s which it knew to be defective.  It expected complaints and they came almost immediately.  A new defect in the J35 emerged when it was discovered to be incapable of recording broadcasts from the “WIN” television station.  That was notified immediately to Zinwell. 

9. On 9 May 2005, Mr Hew advised Mr Chey of TSP of a “freezing” problem with the J35.  He acknowledged under cross-examination that some of the defects then remaining in the product would not have been apparent to all end users because of the nature of their television receivers or other equipment.

10. On 2 June 2005 Mr Hew, together with Mr Kwong, met with Mr Y C Liu of Zinwell to discuss further development and reworking of the J35.  Mr Liu undertook to rework 1,557 units and airfreight them to Castel by 13 June 2005.  On 16 June 2005, Mr Hew sent to Mr Liu of Zinwell an email in these terms;

    Thanks very much for visiting us to solve the remaining problems.

    At last, the F.Forward/F.Rewind freezing problem is solved.

    I hope no more problems from now on.

    For your information, Mr Chey called me yesterday wanting to know whether you have completed the rework.

    I told him you have completed approximately 800 units and I will continue what is leftover.  I do not know why he called me to ask about the rework.  He said he would call River.

    Anyway, again I thank you personally for all the assistance you have given to me.  Hope to see you again.  Maybe in Taiwan.

11. The “approximately 800 units” referred to in that email had come from Castel’s warehouse.  They were sold after being fitted with new software. 

12. At the time of Mr Kwong’s letter to Mr Sato of 5 July 2005 quoted at [17] above, all stocks of J35s held by Castel were defective. Further testing of the J35 was carried out by Mr Tsang of TSP in September 2005 and Mr Hew noted some of the test results. Even at the end of that year, Castel was still trying, with Zinwell’s assistance, to remedy defects in the J35 and was continuing to sell those units which it believed did not suffer from major faults.

13. Mr Hew also recounted faults affecting the “Toshiba” C26 set-top box which were similar to those detected in the J35 units.  The C26 was the same as the J35 but without its HDD (hard disk drive) recording capacity.  Some of the same defects may have affected both models.

14. As a result of the many complaints received by Castel from consumers of “Toshiba” products affected by “epidemic” faults, Mr Hew deposed that his service department had to take on 35 additional staff.  As well, the seven existing service staff members were distracted from their normal duties in relation to other products in the Castel range and were overworked in trying to cope with the additional workload. 

15. Several of the “bugs” identified in a list supplied to Castel by TSP on 7 February 2005 were previously unknown to Mr Hew.  Nor was he aware, at the time, of the “bugs” lists which had been created in early 2005 by TSP and Zinwell in relation to the J35 set-top box as described at [154] and [155] below.  He only undertook the installation of software upgrades when specifically instructed to do so by Zinwell or TSP.  Generally, those upgrades were installed by Zinwell or TSP personnel on their visits to Melbourne.  Mr Hew accepted that his service department, from time to time, provided facilities and labour to assist the visitors but disavowed any active participation by Castel in developing or field testing the J35.  Occasionally, Castel, on request from TSP, field-tested software on sample set-top boxes and reported the results to Zinwell and TSP. 

16. The internal classification by TSP of “bugs” as “AAA”, “AA”, “A” etc, was unknown to Mr Hew until TSP gave discovery in these proceedings.  However, he knew that, as at the third week of March 2005, there were significant unsolved problems with the J35 although he was unaware of the details.  That was partly due to difficulties in communicating with the visiting Zinwell engineers who spoke only Mandarin, whereas Mr Hew’s two languages were Cantonese and English.

    Termination of Castel’s Distributorship of “Toshiba” Products

17. By about October 2006, it was apparently seen on both sides that the arrangement between Toshiba and TSP on the one hand, and Castel as their Australian distributor on the other, could not be sustained in light of the distress and dissatisfaction which had been caused by the failure of the J35 and C26 set-top boxes and the recurrent lamp problems with the DLP television receiver.  The termination of the relationship was first discussed at a meeting on 9 November 2006 at Castel’s Melbourne premises.  That meeting was attended by Mr Sato, who, from July 2002 to September 2006 was the Manager, Sales and Marketing for TSP and later became Chief Specialist in Toshiba’s Global Production Department, Mr Yamamoto, who succeeded Mr Sato as TSP’s Manager, Sales and Marketing, and Mr Murakami, who, it will be recalled, had taken over in September 2006 as TSP’s Department Manager.

18. There was a further meeting in Melbourne on 16 November 2006 attended by Mr Osumi, a director of TSP.  Later, Mr Yamamoto and Mr Osumi met two of the directors of Castel, Mr Kwong and Mr Eric Ho in Hong Kong on 2 December 2006.  Mr Yamamoto and Mr Murakami attended a further meeting in Melbourne on 11 December 2006 mainly to discuss Castel’s stock requirements on the assumption that it would continue to distribute Toshiba products until 31 March 2007.  There was also discussion of price reductions which might be allowed to Castel as it ran down its distributorship.

19. On 5 April 2007, at a further meeting in Melbourne, a termination agreement (“the Termination Agreement”) was executed between Castel, TSP and Toshiba.  The Termination Agreement recited that, in it, “Toshiba and TSP shall be jointly or severally called “Toshiba”.”  It contained the following clauses:

    1.Castel Electronics Pty Ltd (“Castel”) has until recently been the Australian Distributor for Toshiba AV products under a distribution agreement dated 8th August 1996 as renewed and sale and purchase transactions (collectively the “Distribution Arrangements”).

    2.Castel and Toshiba agree that the Distribution Arrangements ended on 1st April 2007.  Castel and Toshiba have a number of issues outstanding between them relating to the cessation of the Distribution Arrangement. They have agreed to resolve some of those issues in the manner set out below.

    3.Castel and Toshiba have agreed to resolve all claims which Castel may now or in the future have against Toshiba except for the following matters : -

    a.all claims (including fixture claims) for warranty, quality and consumer issues (including indemnity or claims in respect of liabilities to consumers under Australian Law) for certain of the products namely Toshiba brand television receivers and set top boxes including but not limited to J35, STB, DLP and C26 (together with all other products in which epidemic failure (i.e. failure more than 3 percent of such product purchased from Toshiba) has occurred) purchased by Castel from Toshiba.

    a.ongoing warranty costs and fees to be borne by Toshiba or TAP for Toshiba brand TVs, DVD products and other AV products distributed by Castel on or before March 31, 2007, which would be borne by Castel;

    b.the claims against Toshiba that Castel has in respect of all damages and losses (whosever arising) and expenses to Castel’s business arising from the conduct, representations, actions and/or omissions, if any, of any of Toshiba (including their officers, servants, agents and subsidiaries) affecting Castel for the period commencing 1 January 2007 to 31 March 2007.

    c.interest on the delayed payments being one or more of those matters comprising Solved Disputes.

    (the “Unresolved Disputes”).

    Those claims (except for the unresolved disputes) are called “Solved Disputes”. Toshiba will pay Castel :-

    a.        Outstanding price adjustment of LCD TVs:  US$525,000

    b.Compensation for the termination of the Distribution Arrangements:  US$1,000,000

    c.Reimbursement of advertising costs used in 2006B for DVD products: A$327,768;

    d.Reimbursement of costs and fees incurred by Castel to resolve certain quality issue of DVD products in the past: US$78,409.

    e.Reimbursement of any retrenchments costs (A$900,000), advertisement costs (A$550,000), and various service claims, (A$363,946) - A$1,813,946

    4.        All of the above amounts are to be paid to Castel not later than 11/04/2007.

    5.Castel will cooperate with Toshiba to ensure a smooth transition for the distribution of Toshiba TV, STB and DVD products.

    6.Castel shall provide Toshiba Australia Pty Ltd (“TAP”) with the following information (and in respect of that information that is the intellectual property of Castel, which is clearly identified by Castel, on a non-exclusive basis) to ensure a smooth transition for the distribution of the products at latest in respect of items (a) and (b), 18 April 2007 and for all other matters, 30 April 2007

    (a)customer list, sales price list and sales conditions;

    (b)trade inventory lists;

    (c)       after sale service records;

    (d)       certificates for technical standards;

    (e)any other information held by Castel necessary for the smooth transition, which Toshiba or TAP reasonably request.

    7.Castel shall continue to provide the after sales service of the products until close of business 31 May, 2007 and thereafter Toshiba shall cause TAP to assume all future after sales service for the products. In respect of epidemic failure products Toshiba shall direct Castel as to the manner of providing after sales service.

    8.

    (a)Toshiba and Castel have agreed for the purchase of certain of Castel’s stock which the parties shall separately identify and indicate their costings and date of transfer. The list must be provided by Castel to Toshiba by 10 April 2007. Payment for the stock shall be made to Castel on 11 April 2007. The stock shall be inspected by Toshiba during the week commencing 16 April 2007 at a time and place to be agreed. After Toshiba’s inspection any adjustment, if necessary, shall be made within one week after inspection.

    (b)Castel shall continue to hold stock comprising spare parts for products in order to discharge its after sales service obligations referred to in Paragraph 7 above. Toshiba will purchase all Castel’s remaining stock of spare parts on 31 May 2007 at USD300,000.

    9.On receipt by Castel all of the above amounts, and in consideration of the performance of the covenants by the parties, then

    a.Castel shall release Toshiba, any of its shareholders, directors, employees, agents, subsidiaries including TAP and affiliated companies from any and all manner of action or actions, cause or causes of action, in law or in equity, suits, debts, liens, contracts, agreements, promises, liability, claims, demands, damages, losses, costs, expenses or fees of any nature whatsoever, known or unknown, fixed or contingent, which they now have or may hereafter have in relation to or arising out of only the Solved Disputes.

    b.This letter may be used by Toshiba as conclusive evidence that Castel accepts those payments in full and final settlements of all of the Solved Disputes.

20. It will be noted that cl 3 of the Termination Agreement identified four categories of disputes (“the Unresolved Disputes”) which were not settled by the Termination Agreement.  The Unresolved Disputes were the subject of a further agreement (“the Unsolved Disputes Agreement”) also dated 5 April 2007 which similarly recited that, in it, Toshiba and TSP “shall be jointly or severally called “Toshiba”.”

21. The Unsolved Disputes Agreement repeated cll 1 and 2 from the Termination Agreement and contained the following further provisions:

    3.Castel and Toshiba have agreed to set out the remaining issues between them which are detailed in the following manner:-

    a.all claims (including future claims) for warranty, quality and consumer issues (including indemnity or claims in respect of liabilities to consumers) for certain of the products namely Toshiba brand television receivers and set top boxes including but not limited to J35, STB, DLP and C26 (together with all other products in which epidemic failure (i.e. failure more than 3 percent of such product purchased from Toshiba) has occurred) purchased by Castel from Toshiba;

    b.ongoing warranty costs and fees to be borne by Toshiba or TAP for Toshiba brand TVs, DVD products and other AV products distributed by Castel on or before March 31, 2007, which would be borne by Castel;

    c.the claims against Toshiba that Castel has in respect of all damages and losses (whosever arising) and expenses to Castel’s business arising from the conduct, representations, actions and/or omissions, if any, of any of Toshiba (including their officers, servants, agents and subsidiaries) affecting Castel for the period commencing 1 January 2007 to 31 March 2007.

    d.interest on the delayed payments being one or more of those matters comprising Solved Disputes.

    (the "Unresolved Disputes").

    The above definitions shall not be construed as an admission of any liability caused by each item of the Unresolved Disputes.

    4.Toshiba shall pay USD$2,000,000 (“Interim Payment Amount”) to Castel not later than 11th April 07 as an interim payment for “Unsolved Disputes”.

    5.These arrangements are entered into by the parties for the purpose of accelerating the negotiations about the Unsolved Disputes only, and is not intended to constitute and shall not be construed as an admission that either party is to any extent liable for any breach of contract or violation of law.

    6.The parties agree to negotiate in good faith in order to resolve the “Unsolved Disputes” as expeditiously as possible. If despite such negotiations the Unsolved Disputes are not resolved within 60 days from the date of this letter by a binding agreement in writing, nothing in this letter prevents the parties from taking such action as maybe available to them.

    7.

    (a)If pursuant to Clause 6 the parties reach a binding agreement on the terms of the full and final settlement of the Unsolved Disputes specified in this letter or the Unresolved Disputes are otherwise determined by whatever other steps the parties may take, and if that determination requires payment by Toshiba to Castel, then the Interim Payment Amount shall be appropriated to the said payment. If such determination results in Toshiba having to pay less than the Interim Payment Amount to Castel or Castel having to pay an amount to Toshiba, then Castel shall return to Toshiba the excess or the whole amount of Interim Payment Amount, as appropriate.

    (b)If the parties do not reach a binding agreement in full and final settlement of the Unsolved Disputes as contemplated by this letter Castel may retain and use the Interim Payment Amount received pursuant to this letter until the final resolution of the Unsolved Disputes.

    8.Without limiting the generality of any of the foregoing, the parties acknowledge and agree that upon reaching agreement on the terms of a full and final settlement of the Unsolved Disputes, the parties will document the terms of such a settlement by entering into a comprehensive further settlement agreement embodying all of those terms.

22. As contemplated by cl 6 of the Unsolved Disputes Agreement, the parties continued further negotiations after 5 April 2007 but no further resolution was achieved of the issues outstanding between them and in March 2008 Castel issued the present proceedings.

    CASTEL’S CLAIM AS PLEADED

1. By its amended statement of claim, Castel alleged that, from time to time, it purchased substantially all of its requirements for Toshiba products from TSP on a regular monthly basis from September 1997.  It next alleged, relevantly, that, from September 1996 until April 2007, it promoted Toshiba products in Australia and sold them to retailers and repaired and serviced the Toshiba products.

2. It was then alleged in paragraph 14 of the amended statement of claim:

   On receipt by the Applicant of each pro forma invoice, alternatively on receipt by the Applicant of the commercial and shipping documents for each shipment, a contract for the sale of goods came into existence between the Applicant and the Respondent (hereafter called “a sales contract”).

3. Paragraph 15 of the amended statement of claim invoked, by virtue of the fact that Castel and TSP had their respective places of business in Australia and Singapore, the United Nations Convention on Contracts for the International Sale of Goods (“the CISG”).  The following terms were said to be implied in each sales contract by operation of the CISG:-

   (a)that the Respondent as seller was obliged to deliver goods of the quantity, quality and description required by the sales contract (article 35(1));

   (b)that the goods had to be fit for the purposes for which goods of the same description would ordinarily be used (article 35(2)(a));  and,

   (c)that the goods would have and retain for a reasonable period of normal use by consumers their specified qualities and characteristics.

   Castel then invoked, further or alternatively, the warranties of fitness for purpose and merchantable quality implied by s 19(a) and (b) of the Goods Act 1958 (Vic) (“the Goods Act”).

4. Reference was next made in the amended statement of claim to the introduction in Australia of high definition digital broadcasting and the demand which that created for digital television receivers, set-top boxes capable of receiving digital television broadcast signals and reproducing them on the screens of analogue television receivers, wide screen television receivers able to receive high definition signals and integrated high definition digital television receivers.

5. In paragraphs 23 and 24 of the amended statement of claim Castel alleged that TSP had made to it representations about the J35 to the effect that;

   (a)       it was being developed and would be released in July 2004;

   (b)it would be capable of receiving high definition television digital broadcast signals in all relevant Australian display formats;

   (c)       would be capable of recording and replaying high definition television broadcasts;
   (d)      would be more powerful than the existing S25 set-top box;
   (e)       would most likely be the “most wanted set-top box in the market”;

   (f)would be available by the launch date set by TSP or such later date as would allow Castel sufficient time to exploit the innovative character of the J35 before competitors could introduce competing products into the market.

6. Each of the representations set out above was said to have been repeated by TSP’s entering into each sales contract for the supply of J35s to Castel and causing them to be delivered in Australia to Castel.  As well, it was pleaded that, in reliance upon those representations, Castel made substantial purchases of J35s from TSP.  It was then pleaded in paragraphs 31 and 32 of the amended statement of claim that, in February 2005, serious defects manifested themselves in the J35 as a result of which the proposed launch of the product on the Australian market had to be delayed.  The emergence of further defects after the installation of replacement software in the J35s and numerous complaints by consumers from about May 2005 were alleged in paragraphs 33 and 34.

7. It was next alleged in paragraph 36 of the amended statement of claim that TSP made further representations to Castel that the problems earlier discovered in the J35 had been substantially resolved and it remained superior to competitors’ actual and proposed products.

8. Paragraph 37 of the amended statement of claim alleged that, in reliance on the representations set out at [55] above and the further representations summarised at [57] above, Castel purchased a further 4,040 J35s from TSP. Paragraph 38 then recited a litany of further defects alleged to have appeared between July 2005 and August 2006 in the J35s supplied to Castel by TSP most of which had to be returned for repair or exchange, some more than once.

9. Paragraph 41 of the amended statement of claim alleged that representation (f) set out at [55] above was untrue because:

   In or about September 2005, the Applicant discovered that Zinwell, the manufacturer of J 35 units for the Respondent, was manufacturing and supplying a product with similar characteristics to the J 35 for Sony that was directly competitive with the J 35.

10. It was next alleged that each of the representations and further representations alleged as described at [55] and [57] above was misleading and deceptive and that TSP had no adequate basis for making it.

11. A further set of representations about the Toshiba DLP television receivers (“the DLP representations”) was to be found at paragraph 44 of the amended statement of claim in these terms;

    Between mid 2004 and September 2004 the Respondent represented to the Applicant that it would make available to the Applicant for sale in the Australian market a series of digital light processing television receivers (“DLP’s”) and, that the DLP’s would have the following characteristics:

    (a)they would be large rear projection television receivers utilizing DLP technology developed by Texas Instruments of United States of America and licensed to Toshiba for the manufacture of DLP television sets;

    (b)      they would have a long lamp life;  and,

    (c)       they would be superior prestigious products.

12. As with the J35 representations, the amended statement of claim alleged that, in reliance on the DLP representations, Castel placed orders for DLPs with TSP which sold and delivered 2,250 of them to Castel between December 2004 and October 2006.  It was then alleged in paragraph 51 that from January 2005 serious faults appeared in the DLPs supplied to Castel by TSP as a result of which Castel “was obliged to accept returns of the DLPs from its retailers and refund the purchase prices paid to [Castel]”.

13. It was further alleged in paragraph 53 that the DLP representations were misleading and false in that TSP lacked any adequate basis for making them.

14. Another set of allegations directed to the C26 set-top boxes was introduced by paragraph 54 in these terms:

    Between May 2005 and February 2006 the Respondent represented to the Applicant that it would make available to the Applicant for the Australian market a new product (the HDC 26 set top box) in two versions (“the C 26”), and that the C 26 would have the following characteristics:  (“the C 26 representations”):

    (a)it would be a state of the art set top box with features long awaited by consumers;

    (b)it would have substantially the same capacities as the J 35 was meant to have save for a recording function;

    (c)       the C 26 would be free of defects;  and

    (d)it would be superior to a competitive set top box product marketed by Sony with a Broadcom IC chip incorporated into a set top box.

15. As with the J35 representations and the DLP representations, the amended statement of claim alleged that, in reliance on the C26 representations, Castel made substantial sales contracts with TSP for the purchase of 12,000 C26s.  It was then alleged in paragraph 60 that, after delivery, serious defects appeared in the C26s and in paragraph 61 that the C26 representations were misleading and false in that TSP lacked any adequate foundation for making them.

16. A cause of action for contravention of s 52 of the Trade Practices Act 1974 (Cth) (“the Trade Practices Act”) was next pleaded in paragraph 62 of the amended statement of claim which alleged;

    By making the J 35 representations, the further J 35 representations, the DLP representations and the C 26 representations the Respondent engaged in conduct in trade or commerce which contravened section 52 of the Trade Practices Act 1974 and the Applicant thereby suffered loss and damage in Australia.

17. Products other than the J35s, the DLPs and the C26 which had been purchased by Castel from TSP were alleged in paragraph 64 of the amended statement of claim to be defective at a rate of more than 3% which was said to have been recognised as a matter of customary dealing between Castel and TSP as the maximum tolerable incidence of defective products.  Those other products were called “the other epidemic failure products” and were said to have been unfit for their intended purpose or to have been of unmerchantable quality.  Breaches of the sales contracts in respect of the various goods already described were then alleged in these terms in paragraphs 65, 66 and 67 of the amended statement of claim:

    65.Further or in the alternative, the supply by the Respondent to the Applicant of the J 35 products, the DLP products, the C 26 products and the other epidemic failure products with the hereinbefore pleaded defects was a breach of the terms of the sales contract relating to the particular goods.

    66.The breaches of the sales contracts occurred in Australia by reason of the products being delivered to the Applicant and the defects being found there in purported performance of the applicable sales contracts.

    67.Further or in the alternative, the supply of the J 35 products, the DLP’s the C 26 and the epidemic failure products with the aforesaid defects was a breach of each of the hereinbefore pleaded implied terms of the applicable sales contracts under the CISG and/or the law of Victoria.

18. The allegation of loss and damage suffered by Castel was to be found in paragraph 68 of the amended statement of claim which recited;

    In dealing with the defects in the goods the subject of the J 35 representations, the further J 35 representations, the DLP representations and the C 26 representations and the epidemic failure occurrences on other products the Applicant incurred substantial costs and expenses it would not otherwise have incurred but for the said misleading and deceptive conduct, and breaches of contract.

19. Paragraphs 69 to 74 of the further amended statement of claim then advanced an additional claim for damages sustained by Castel as a result of not having consummated the Harman Option discussed at [70] to [95] of these reasons.  The essence of that claim was encapsulated in the last two paragraphs of the amended statement of claim which alleged:

    73.In or about June 2004 the Applicant determined not to take up its opportunity to acquire the Harman International distributorship for Australia by reason that the Applicant was satisfied in consequence of the J 35 representations and DLP representations as to its ability to achieve its profit projections for the 2005 financial year and subsequently.

    74.The Applicant lost the opportunity to acquire and profit from the Australian Harman International distributorship and any other supplementary business by reason of relying upon the said misleading and deceptive conduct constituted by the J 35 representations and DLP representations and the consequences thereof, and thereby suffered further loss and damage.

    THE HARMAN OPTION

20. In 2003 Mr Kwong conceived an ambition, as he put it in his witness statement, “to extend Castel’s business to audio products.”  That stemmed partly from Castel’s involvement in the formation of a group of specialist Hi-Fi retailers known first as “Australian Consumer Electronics Specialists” and later as “AV Specialists.”  Almost all of the retailers who became members of that group were strong supporters of the “Toshiba” products distributed by Castel and Mr Kwong estimated that at least 75% of the members of AV Specialists would have supported “Harman” brand products had Castel become the Australian distributor of those products.  To further Castel’s ambitions to expand its product range, Castel appointed James Chay as General Manager of a new air conditioning division and Paul Clarke as General Manager of a new audio division.

21. In September 2003, Mr Kwong, accompanied by Paul Clarke, visited the offices of Harman International (“Harman”) in Paris where they met Phillipe Rinckenberger, Harman’s Sales Director – Distributor Market and Cyril Vincienne, Harman’s Area Sales Manager for the Middle East, Africa and Oceania.  Mr Kwong and Mr Clarke then made a “presentation” to the Harman representatives on 24 September 2003.  That gave details of Australia’s population distribution, the market conditions for selling various types of television receivers, DVD, CD and Mini Disk players and digital still cameras.

22. As well, the Castel presentation identified key categories of the major brands of audio and video products in Australia and the market share enjoyed in various categories by the major brands.  Part of the power point presentation recited “Castel is interested in distributing the Harman Kardon brand in the Australian market.  JBL and Infinity are also of interest.”

23. As a result of the meeting in Paris in September 2003, Mr Cyril Vincienne of Harman visited Castel’s premises at Preston in Victoria to appraise its resources and operations in Australia.  A further meeting occurred at Harman’s European headquarters in France on 13 and 14 April 2004 when Mr Kwong and Mr Clarke made a further presentation to Mr Rinckenberger, Mr Vincienne and several other Harman executives.  That presentation drew attention to the strength of the Australian economy and its prospects for growth.  It also emphasised that Castel was “ready for expansion” and expressed its interest in “Harman Kardon, JBL home and car and Infinity home and car products” saying;

    We are prepared to openly discuss any opportunity to secure these brands either by direct negotiation with Harman International or by way of acquisition of the current distributor, Convoy International.

    The presentation also indicated the resources which Castel would dedicate exclusively to selling and servicing the Harman brands in Australia.  As well, it outlined Castel’s general marketing programs for 2004 and what Castel would offer Harman International by way of improved sales promotion, a leading parts and service network and increased volumes of sales. That presentation acknowledged the existing presence in Australia of Convoy International (“Convoy”) as a distributor of certain Harman brands, and outlined the expected impact on the Australian market if Castel were to become the distributor in place of Convoy.

24. However, after the meeting in April 2004, Harman offered to appoint Castel to be its Australian distributor of “Infinity” brand speakers and car audio products and indicated its willingness to extend the distributorship to further brands after Castel had demonstrated a period of successful trading in the “Infinity” products.

25. Nevertheless, Harman was not prepared to displace Convoy as the distributor of Harman’s brands, which it was then distributing (Harman, Kardon and JBL).  That had been made clear to Castel as early as 2003 when Mr Vincienne wrote to Mr Paul Clarke as follows:

    Dear Paul,

    How are you?

    Have you received and reviewed the samples of Infinity car audio products?  If so, I would be interested to know the outcomes of your investigations.

    A proposal was submitted to you on October 22^nd which was explaining the type and amount of support Harman was prepared to grant Castel.  I have not heard from you on this specific topic and would be interested to study your detailed business proposal.

    Harman already does a significant business on JBL car products in Australia and that we will not jeopardize.  The decision which consists of changing our distributorship will be taken if the performances of the current distributor are not satisfactory while considering all existing options.  However, Castel is not active on this market yet and I am convinced that you have an opportunity to penetrate it very successfully with Infinity.

    Wouldn’t it be an exciting challenge for both of us to position Castel as one of the leading distribution company in this field in Australia?

    I look forward to reading your advices.

26. Mr Clarke responded to Mr Vincienne’s email of 6 November 2003 by an email of his own on 7 November 2003 in these terms:

    By now, you would have received my email response to your proposal sent on 28^th October.

    With respect to your decision to make only Infinity available to us, we decline your kind offer at this time until we are able to secure another brand of car audio from which we can plan a more effective launch strategy.  As presented in our plan, we would be committed to invest significant money and resources to launch car audio to appeal to a larger audience rather than start in a niche manner.

    We respect the business your current distributor provides Harman, and as mentioned at our meeting, our interest in carrying the complete Harman range and providing you with an established distribution network, we propose to you, is another option.

    Regarding the samples, I understand they are still in your system in the Netherlands.  Could you kindly arrange to retrieve these as we would not be requiring them at this time.

    Michael and I thank you for your time to date and we hope we may be able to continue our discussions in the not too distant future.

27. Harman would only install Castel as distributor of the Harman and JBL products if a totally satisfactory arrangement could be reached between Castel and Convoy.

28. Mr Kwong thought that, if Castel were limited to distributing only some Harman brands, there would be insufficient income to justify acquisition of the new line of business.  In Mr Kwong’s opinion, an additional $20 million in annual turnover would be needed to justify the acquisition.

29. In light of the intimation by Harman that Castel would need to reach an accommodation with Convoy, Castel, on 22 April 2004, entered into negotiations with Mr McInnes, the Chairman and Managing Director, and Mr Matthews the Technical Marketing Director, of Convoy.  At that time, Convoy’s business consisted of the distribution of Harman and JBL products, principally in New South Wales with limited activity in other States of Australia.  Convoy was also a distributor of “Monster” brand cables in which Castel had no interest.  Castel believed that Convoy’s sales of Harman and JBL products amounted to about $3 million per annum.

30. At a meeting on 22 April 2004, Mr McInnes of Convoy indicated that he regarded the value of Convoy’s goodwill attached to the Australian distributorship of the Harman and JBL products as in the order of $6 million.  He also stipulated that, in the event of acquiring that part of Convoy’s business, Castel would have to take over Convoy’s liability to support warranties to purchasers of Harman products which had been distributed by Convoy.

31. Mr Kwong regarded Mr McInnes’ indication as only an “opening gambit” and suggested that Convoy’s goodwill attaching to the Australian distributorship should be valued independently by one of the “Big Four” accounting firms.  Mr McInnes rejected that proposal and suggested that an alternative should be formulated by his mergers and acquisitions advisers.  Mr McInnes then left Australia for Europe where he had consultations with representatives of Harman.  On his return, he advised Mr Kwong that Convoy would then agree to a valuation of the goodwill of Harman’s business being conducted by KPMG (one of the “Big Four” accounting firms) but would not necessarily be bound by the figure arrived at by that valuation.

32. Mr Kwong has deposed that, in or after May 2004, he had estimated that sales of the Toshiba J35s and DLPs could generate revenue of up to $20 million per annum for Castel, but to achieve that result Castel would have to deploy its sales staff to servicing the new Toshiba products as well as the existing lines distributed by Castel.  That would leave Castel with no capacity to support a new line of Harman audio products.  As well, he considered that the $5.7 million which he had budgeted for supporting the new Harman products would have to be used for the promotion and support of the J35s and DLPs.

1. Evaluating the evidence to which I have just referred in conjunction with Mr Acton’s concession under cross-examination that he had no particular knowledge of, and had carried out no investigation into, the electronic brown goods market in Australia, I find that his estimate of the repercussive effect of the “epidemic” Toshiba products is unduly high.  In my view, a more realistic estimate is that, but for the presence of the “epidemic” products, Castel’s margins on its other Toshiba products would have averaged 20% in each of the years 2004-2005, 2005-2006 and 2006-2007 instead of the 25% “hypothetical gross margin” imputed by Mr Acton.  Accordingly, on the hypothesis which I prefer, there would have been no loss of margin attributable to the “epidemic” products in 2004-2005 when the actual margin was 20.5% and a correspondingly small loss of margin in 2006-2007 when the actual loss, according to Mr Acton’s calculation was 19.4%.  I therefore consider that the damages recoverable by Castel under this head should be confined to restoring the actual margin calculated by Mr Acton for 2005-2006 as 16.4% to the hypothetical margin of 20% which I regard as more consistent with the evidence than Mr Action’s 25%.  That requires an increase above the actual margin for that year on non-epidemic products of $2,195,720 (rounded up).

   (iii)      Loss of margins on defective products

2. Mr Acton assumed that by contrast with margins on the other products described at [197] above, the new J35, C26 and various DLP models, having been presented as innovative “should have faced less competition for the first few months,” enabling them to be sold at significantly higher margins. However, he detected a rapid erosion in margins on the problem products as their defects became known. That erosion, he said, was illustrated by the following table;

   Product Gross Margins by period (%)

PRODUCT	Months 1-3	Months 4-6	Months 7+	Average
DLP – 52JM	38.3	34.7	22.8	30.0
DLP – 62CM	37.9	33.0	34.3	34.7
DLP – 62JM	33.3	33.0	18.5	24.9
DLP – 72CM	39.0	33.0	29.7	33.9
C26 H	10.7	20.1	22.7	19.7
C26HB	10.7	-84.4	10.6	-6.5
J35	34.9	33.6	6.8	24.3

1. By comparison with the decline in margins which had occurred with other Toshiba television products over a similar period, Mr Acton inferred that margins on the problem products should not have declined by more than 1% after the first three months in which they had been introduced to the market.  By taking into account the actual gross margins in fact derived from sales of the problem products and setting them against the gross margins which could have been expected to have been achieved had the products been problem-free, Mr Acton arrived at this estimate (to which I have made some arithmetical corrections) of the loss sustained by Castel as a result of diminution in gross margins:

PRODUCT	Actual Gross Margin ($)	Expected Gross Margin ($)	Margin Loss ($)
DLP – 52JM	553,204	740,101	186,897
DLP – 62CM	355,474	378,222	22,748
DLP – 62JM	818,445	1,133,901	315,456
DLP – 72CM	615,924	714,597	98,673
C26H	828,930	877,153	48,223
C26HB	117,038	276,427	159,389
J35	1,162,617	2,507,822	1,345,205
TOTAL	4,451,632	6,628,284	2,176,591

1. Counsel for TSP contended that Mr Acton’s analysis of the loss claimed under this head was flawed because it assumed that the actual margin or profit which Castel expected to make on each category of the epidemic goods remained constant from the date of the first relevant sales contract until the last of the goods in that category had been sold.  Instead, Counsel argued Castel’s expectation of the profit to be derived by it from sales of each consignment of goods should have been ascertained objectively at the time of the “conclusion” of the sales contract related to that consignment.

2. Had that been done, so it was contended, the analysis would have imputed to Castel an expectation of a lower margin of profit at each point when a defect or collection of defects became apparent in the relevant product.  However, as I have pointed out at [182] of these reasons, the sales contracts for the epidemic goods were concluded within a relatively short space of time so that it is reasonable to group them together, particularly when assessing a loss of profit, which seems to be the primary head of damage contemplated by Article 74 of the CISG.  It follows that I reject the contention advanced in this context on behalf of TSP that:

   Castel’s profit expectations and achievable profit margins in respect of the goods which were the subject of an individual sales contract must be looked at objectively in the terms of the CISG, at the time of “conclusion of the contract.”  If the costs incurred, and the gross profits achieved, by Castel upon its resale of goods supplied to Castel by TSP pursuant to a previous contract had not met Castel’s expectations, for whatever reasons, then Castel’s expectations relating to costs and achievable gross profits, upon its resale of similar goods in the future would or should have been different.

3. The fallacy in that argument is that Castel’s expectations were not met because the goods did not conform with Article 35 of the CISG.  At no stage in the course of the dealings between Castel and TSP in respect of the “epidemic” products can an expectation be imputed to Castel that it would receive, or offer for resale, non-conforming goods from which it would derive a lower margin of profit.

4. TSP relied in resisting this part of Castel’s claim for damages on a report by Mr Jeffrey Hall dated 12 May 2009.  Mr Hall has graduate qualifications in accounting and post-graduate qualifications in finance as well as extensive experience in the valuation of businesses and corporate advice particularly in relation to mergers and acquisitions.  Mr Hall criticised Mr Acton’s assumption that the J35, the DLP and the C26 “were presented as innovative and should have faced less competition for the first few months, thus enabling significant higher price realisation”.  According to Mr Hall, that assumption was not borne out by the evidence.  However, my impression of the evidence is to the contrary.  Precursors in the Australian market of the J35 and C26 set-top boxes did not have a recording and playback function and the innovative features of the former enabled Mr So to announce to the World Tour in July 2004 that the J35 “will be likely the most wanted set-top box in the market”;  see [132] and [139] above.  Similarly, the DLP television receivers used innovative technology developed in the United States of America which enabled the use of much larger screens than had previously been available in Australia and were therefore well suited to take advantage of the new demand in this country for a “home theatre experience”.

5. Mr Hall also attacked Mr Acton’s quantification of this component of TSP’s expectation claim as depending on the adoption of a “simple average” decline in margins which may be unreliable.  However, consistently with the views expressed above about the circumstances in which a global approach to the assessment of damages can be legitimate, I do not regard this part of Mr Acton’s approach as producing an entirely arbitrary or exorbitant result.  Of course, any process of reasoning by inference from a relatively small sample involves an element of speculation.  However, as Thomas J observed in Hardware Services Pty Ltd v Primac Association Limited [1988] 1 Qd R 393, at 401;

   … whilst in some cases a plaintiff will show a certain series of events to be probable, and there may be no basis for assessing other than the maximum damages that would have flowed on that footing, in other cases it would be wrong to overlook the possibility that some other course may have eventuated in which the plaintiff would not have suffered such damage.  In that event it becomes the court’s duty to do the best it can, and if necessary temper the award by making an appropriate reduction for such possibilities.

   I therefore consider it appropriate to uphold in its entirety this part of Mr Acton’s quantification of Castel’s expectation claim.

   Mr Acton’s conclusion on Castel’s Expectation Claim

6. At the end of the relevant part of his principal expert report, Mr Acton encapsulated his estimate of Castel’s total Expectation Claim in this way:

   My estimate of the total cost to Castel of receiving product that did not meet expectations is therefore $19,292,819, consisting of:

   Total Costs of Product Not Meeting Castel’s Expectation:

ITEM	$
Repairs to J35	5,352,163
Repairs to DLPs	931,641
Repairs to C26	1,148,049
Repairs to other epidemic products	1,280,097
Lost Margin on other Toshiba products	8,404,217
Lost Margin on J35	1,345,265
Lost Margin on DLPs	623,775
Lost Margin on C26	207,612
TOTAL	$19,292,819

As these costs were incurred largely during the financial year 2005-06, they should be brought to present value by inflating them at Castel’s marginal borrowing cost, which was around 7% at this time, from 1 January 2006 onwards (sales took place approximately evenly over calendar 2005 and 2006).  This gives a cost as at 31 December 2008 of $23,634,533 (Attachment Twenty-Nine).

I observe that Castel might quite reasonably claim that, had the products been suitable, it would have imported many more of them and been able to sell them at high margins for a longer period.  As this cannot be established with certainty, this opportunity cost is not included in this claim.

1. By contrast, I have estimated at the following amounts the components identified by Mr Acton as comprising Castel’s expectation claim:

(i)        Cost of dealing with defective products	$1,725,232
(ii)       Impact of “epidemic” products on Castel’s sales of other products	$2,195.720
(iii)      Loss of margin of profit on “epidemic” products	$2,176,591
$6,097,543 ========

1. I do not accept Mr Acton’s contention that the total amount allowed for the three elements which comprise Castel’s expectation claim should be “brought to present value by inflating them at Castel’s marginal borrowing cost” of around 7%. There is no evidence of the rate at which Castel was borrowing funds in 2006 or of the amount which it borrowed in that year. In my opinion, any claim by Castel for interest on the amount to which it has established it is entitled should be recognised in accordance with s 51A of the Federal Court Act.  Sub-section (1) of that section provides;

   In any proceedings for the recovery of any money (including any debt or damages or the value of any goods) in respect of a cause of action that arises after the commencement of this section, the Court or a Judge shall, upon application, unless good cause is shown to the contrary, either:

   (a)order that there be included in the sum for which judgment is given interest at such rate as the Court or the Judge, as the case may be, thinks fit on the whole or any part of the money for the whole or any part of the period between the date when the cause of action arose and the date as of which judgment is entered;  or

   (b)without proceeding to calculate interest in accordance with paragraph (a), order that there be included in the sum for which judgment is given a lump sum in lieu of any such interest.

   The remaining sub-sections of s 51A have no application to the circumstances of the present case.

2. In my view, s 51A empowers the Court to add to the judgment sum for recovery of damages an amount representing interest from the date when the cause of action arose to the date when judgment is entered. The availability of that power obviates any need for including in the amount of damages recovered any allowance for interest incurred or foregone such as that for 7% per annum made by Mr Acton as described at [208] above.

   B.       The Reliance Claim

3. This alternative formulation of Castel’s alleged loss proceeded from the assumption that, if it had not carried the J35, the C26 and the DLP television sets, Castel would have acquired the rights to distribute, in Australia, the Harman products identified in the description of the “Harman Option” which is to be found at [70] to [93] above.

4. Mr Acton explained in these terms the methodology which he adopted in calculating the profit which Castel would have made in the years from 2004/05 to 2006/07 and the first six months of the year 2007/08, had it implemented the Harman Option:

   In order to establish a profit and loss statement reflecting the distribution of the Harman products in place of the discontinued Toshiba products, three adjustments must be made to revenues and gross margins:

   i.All revenues and gross margins relating to the Toshiba products in question must be deducted.

   ii.Estimates must be made of likely sales, Gross Margins and incremental costs of Harman products for each year.

   iii.The adequacy of the Castel infrastructure to deal with the Harman products in place of the epidemic ones must be established and additional resources added if necessary

   iv.Margins on the remaining Toshiba products must be adjusted to reflect the removal of the negative impact on them of the products that would not have been carried.

5. Mr Acton regarded as reasonable Mr Kwong’s estimate that, if Castel had acquired the Harman distributorship including the rights to sell additional lines, namely the Infinity home speakers and car audio range, Becker car radios and JBL professional speakers, it could have achieved sales of those products growing from $13 million in the first year, to a steady $30 million in the third and subsequent years.  Mr Acton then imputed a realised gross margin on those projected sales of 32.5%.  He regarded that imputation as conservative and as making full allowance “for any discounts required to secure the support of current resellers and secure rapid acceptance in new ones.”

6. Mr Acton accepted that it was likely that Castel would have had to pay a capital sum to Convoy in order to secure the Harman distributorship, but conceded his inability “to assist the Court in attempting to quantify this cost.”  However, he did make allowances for Harman-specific costs including legal fees, the purchase or lease of demonstration vehicles, the conduct of “roadshows” and advertising expenses.  As well, provision was made in Mr Acton’s calculations for modifications to Castel’s warehouses, new service equipment, demonstration stock and materials for training staff and retailers.  (One of his assumptions in this context was that four additional staff members specialising in car audio technology would have to be added to the Castel workforce.  After allowing for inflation at the rate of 5% pa of recurrent costs of the kinds just indicated, in the financial years 2007 and 2008, Mr Acton calculated the annual differences in Castel’s actual profit and the profit which would have been derived by his model of Castel’s business expanded to sell the Harman brands.

7. However, Mr Acton, for the purposes of the Reliance Claim, assumed that Castel had not distributed the J35, the C26 or the DLP television sets at all, so that costs incurred in testing, handling, transporting and reworking those products would never have been incurred. A concomitant of that assumption was that some of Castel’s staffing, warehousing and other resources which would have been devoted to those “discontinued” products, were free to be applied to selling and servicing the Harman lines. On that basis, Mr Acton assumed that the four car audio specialists noted at [214] above would replace other staff who would leave Castel as a result of its reduced offering of Toshiba products. These assumptions led him to allow for warehouse staffing to be increased by half a person and service staff to be increased by two persons in 2006-07 to accommodate the required volume of sales and servicing of the new Harman lines, the continuing Toshiba lines and other existing lines in the Castel product range.

8. Mr Acton’s modelling for the Reliance Claim allowed for some costs such as superannuation and motor vehicle expenses to be adjusted in accordance with the model’s allowance for increased staff.  Other fixed costs such as legal fees and information technology expenses were assumed to remain at the level at which they actually prevailed in the relevant years.  Other costs assessed as likely to have been partly fixed and partly variable were modelled accordingly.

9. This analysis led Mr Acton to assert, at p 25 of his principal report;

   The resulting total cost structure in the hypothesised scenario is, in my judgement, that necessary to run the business including sales of all Toshiba products except the J35, DLPs and the C26, current TCL products and the new Harman products, and to service other defective Toshiba products.

10. Mr Acton also found it necessary to adjust margins on the continuing Toshiba products which he hypothesised would remain in the Castel range.  He assumed that, unaffected by the discontinued products, those continuing products would have been sold at a gross margin of 25%.  He justified this aspect of the modelling by observing, again at p 25 of his principal report:

    As we have shown in relation to the Expectation Claim, actual results for the years in question show these products as having had Gross Margins in the range of 16-20%, which is consistent with a need to discount Toshiba products in order to counter marketplace discontent with the brand. The analysis assumes that had the discontinued products not been carried, these discounts would have been unnecessary, so in the model the remaining products have been ascribed a Gross Margin of 25%. (It is quite possible that excluding these products would not have prevented all of the margin decline, given other Toshiba products that had failed. In this case the model would not incorporate all this margin restoration, but the remainder of the lost margin would appear in the model as an additional net cost of the other epidemic products making no difference to the resulting total cost to Castel).

11. A further adjustment was made in modelling the Reliance Claim to allow for financing working capital (stock plus debtors net of creditors) for the Harman products after taking account of the eliminated need to provide working capital for the presumptively discontinued Toshiba products.  In this respect sales were assumed to be achieved on ratios of a stock holding of 4 months sales, 3.4 months of debtors and 45 days of creditors.  After assuming that, after tax, cash profits from the model in excess of actual profits in the relevant years would be available to finance working capital, and allowing for borrowing costs of 7% per annum, Mr Acton deducted the cost of working capital attributable to the discontinued Toshiba products in order to arrive at “the incremental amount of working capital” that would have had to be financed had the Harman Option been exercised.

12. These calculations and assumptions led Mr Acton to conclude, at p 27 of his principal report:

    The difference in cumulative before tax profits to Castel between, on the one hand, carrying the range that was carried, including all the epidemic products, and, on the other, discontinuing the J35, DLPs and the C26 and carrying Harman products, is represented by the sum of the annual differences in profit between actual results and those derived in the model of the reconfigured business. This amounts to $29,916,038, … .

    Differences between the Reliance Claim and the Expectation Claim

13. In the concluding part of his principal report, Mr Acton identified the reasons why the Reliance Claim, on his calculations, differed from the Expectation Claim.  In the first place, he noted that the variable and direct staffing costs (sales, service and warehouse personnel of the J35, the C26 and the DLP television receivers were not part of the Expectation Claim which assumed the elimination of those expenses.  However, the assumption that the Harman Option had been exercised, gave rise to the consequential assumption that those overhead expenses would be redeployed on sales and service of the Harman products.

1. On the other hand, the cost of continuing to deal with the other epidemic products, (not being the J35, the C26 and the DLP televisions) would have been incurred even if the Harman Option had been exercised.  Accordingly, those expenses quantified at $1,094,894 are a component of Mr Acton’s calculation of both the Expectation Claim and the Reliance Claim.

2. Costs incurred on epidemic products before 1 July 2004 were not covered by the modelling for the Harman Option which could not have been exercised before that date.  However, they were incurred in an estimated amount of $185,203 which has been included in both the Expectation Claim and the Reliance Claim.

3. The estimated loss of gross margin on the Toshiba products other than the J35, the C26 and the DLP was restored for the purpose of modelling the Harman Option and as explained by Mr Acton “is not an additional cost to Castel under this claim.”

4. For the avoidance of doubt, Mr Acton set out in tabular form the points of difference between the Expectation Claim which was calculated to amount in all to $23,634,533 and the Reliance Claim calculated in an amount of $33,657,361 from which should be deducted “whatever sum if any the court determines Castel would have had to pay to secure the [Harman] distributorship from Convoy”.  In respect of compensation paid or allowed by TSP to Castel, Mr Acton made these observations at pp 29-30 of his principal report;

   I understand Castel acknowledges the receipt of $3,415,406 from Toshiba between February 2005 and April 2007 in part payment of some of these costs. This represents cash payments, and does not include the value to Castel of Toshiba supplying replacement parts for the DLP to a value of $116,325. That value was reflected in a reduction in Castel’s Cost of Goods Sold thus reducing the claim under the Harman model;  had it not been paid, or been treated separately, the Harman model profits would have been larger than actual results by exactly the same amount. Thus it should not be treated as an offset to the Harman claim.

   I also note that other sums paid to Castel by Toshiba during this period in respect of other matters, such as the termination of Castel’s distributorship and a contribution to resulting redundancy costs, advertising subsidies or repurchase of stock, are not relevant to the Expectations Claim as they offset other costs than those claimed. Nor are they relevant to the Reliance Claim as they do not differ between the model and actual results. Certain other payments amounting to US$825,000 and compensating for reduced price realisation on LCD television sets have been included in actual results for the year as an offset to the cost of goods sold. As Gross Margin loss in both the Expectations Claim and the Reliance Claim were calculated by restoring brown goods margins to 25%, these payments have already reduced the gap between the models and actual results by raising the latter and so should not be taken into account as an offset to Castel’s costs. These figures are shown in Attachment Three.

   This sum of $3,415,406 should be offset against the total claimed. To make it comparable with Castel’s claims by bringing it to current value as at 31 December 2008,1 have applied a rate of 7% inflation from March 2006, that being the approximate midpoint of the period in which payments were received. This takes the value of compensation acknowledged to $3,910,298.

5. Numerous detailed criticisms of the assumptions and methodology on which Mr Acton’s calculation of the Reliance Claim have been made both by Counsel for TSP and by Mr Jeffrey Hall whose expert evidence was adduced on its behalf.  However, it is unnecessary to consider those criticisms or to reach a conclusion as to the validity of Mr Acton’s Harman model.  That is because the fundamental hypothesis on which the model rests cannot be sustained.  That hypothesis was that Castel would have acquired the Harman and JBL brands in or about 2004 with or without paying a premium or compensation to Convoy for goodwill.  However, the hypothesis could not be sustained because of the finding explained at [94] and [95] above that by 4 June 2004 the Harman Option ceased to be available to Castel quite independently of its reliance on any representation by TSP or the “epidemic” goods conforming in 2004-2005 and subsequent years with the implied warranties of merchantability and fitness for purpose.

   CONCLUSION

6. As noted at [208] of these reasons, I have assessed the loss and damage sustained by Castel as a result of TSP’s breaches of the sales contracts as $6,097,543.  In particulars of loss and damage furnished on 7 March 2008, Castel made allowances by way of crediting TSP for “the following payments received … by way of partial compensation for its losses”:

Date	Amount
(i)        18 February 2005	84,976
(ii)       8 November 2005	195,272
(iii)      5 May 2006	69,000
(iv)      11 April 2007	104,545
(v)       11 April 2007	363,946
(vi)      11 April 2007	2,666,667
Total	$3,484,406 ========

1. By paragraph 68 of its defence to Castel’s amended statement of claim, TSP alleged the making of the payments of compensation numbered (i), (ii) and (iii) in the last preceding paragraph and asserted that those amounts had been accepted by Castel wholly or in part as compensation in respect of various models of Toshiba products.  Moreover, it is alleged in sub-paragraphs 68(m) and (n) of the same defence that, in addition to the amount of $69,000 or US$50,000 acknowledged by Castel to have been received by way of compensation on 5 May 2005, a further payment was made on the same date and in the same amount and accepted by Castel “in part satisfaction of Castel’s claim for compensation in respect of Toshiba model no. HDD-J35 set top boxes.”  As well, it is alleged in sub-paragraphs (o) and (p) of the same paragraph that, on or about 16 February 2007, TSP paid to Castel a further amount of US$200,000 which was accepted by Castel in part satisfaction of its “claim for compensation in respect of Toshiba model no HDD-J35 set top boxes.”

2. There is next pleaded also in paragraph 68 of the defence the making of the Termination Agreement and the Unsolved Disputes Agreement noted at [47] and [48] above, and the payment thereunder of the three amounts numbered (iv), (v) and (vi) in [227] above.

3. I am not satisfied on the whole of the relevant evidence that TSP made to Castel on 5 May 2006 a second payment by way of compensation of $69,000 or US$50,000 as claimed in paragraph 68(m) of the defence.  Not only is the making of two separate payments each of the same amount on the same date inherently unlikely but it is contradicted by the evidence of Mr Kwong who relies on an email of 1 April 2006 from Ms Violet Oh of TSP directing that a total payment of US$504,080.99 was to be applied as sales rebates, advertising and promotional assistance and sundries.

4. The same evidence of Mr Kwong and lack of supporting evidence for the claim of Ms Violet Oh that TSP paid a further US$200,000 to Castel on 16 February 2007 as part compensation for defects in J35 units have led me to reject that claim which, in any event, has not been pleaded in TSP’s defence.

5. I have therefore concluded that the only deduction which should be made from the damages which I have found Castel has suffered as a result of TSP’s breaches of contract is the amount of $3,484,406 which Castel acknowledges having received in part compensation.  When that deduction is made from the sum of $6,097,543 arrived at in [208] above, it follows that there must be judgment for Castel in the sum of $2,613,137.

6. By its cross-claim appended to its defence, TSP sought to recover from Castel an alleged overpayment of $616,673 in respect of stock which TSP had agreed, pursuant to the Termination Agreement, to purchase from Castel as at 11 April 2007. A further element of TSP’s cross-claim was a claim for the costs incurred by TSP in taking over Castel’s obligations to honour five-year warranty obligations which Castel had assumed to purchasers of Toshiba products sold by it. As well, it was alleged in paragraphs 82 and 83 of the cross-claim that Castel has no entitlement to retain, and is obliged to repay to TSP, the sum of $2,666,667 numbered (vi) in [227] above which Castel has allowed should be set off against its claim for damages. That amount, it will be recalled, was payable by TSP as interim or provisional compensation pursuant to cl 4 of the Unsolved Disputes Agreement set out at [49] above.

7. The evidence does not support TSP’s contention that it overpaid by $616,673 or any other amount for the stock which it took over from Castel pursuant to the Termination Agreement.  Indeed, a reconciliation adduced into evidence on behalf of Castel suggests that it was underpaid by $75,973 on that account.  The sum of $2,666,667 paid by TSP pursuant to the Termination Agreement has been allowed by Castel and will be set off against the damages recoverable by it.  The claim to be indemnified for taking over Castel’s five-year warranty obligations was abandoned by Senior Counsel for TSP in the course of his opening address.  Accordingly, TSP’s cross-claim must be dismissed.

8. I shall receive submissions on a date to be fixed in consultation with the parties in respect of costs and interest.  The time for filing and service of a notice of appeal by either party will be extended until the expiration of 21 days after the making of final orders as to those matters.

9. To preserve the confidentiality of any commercially sensitive information which these reasons may disclose, they are made available for the time being only to the parties and their legal advisers.  Each party should submit, within seven days of this day, its suggestions as to how these reasons should be redacted or otherwise edited to prevent that confidential information from being disclosed when the reasons are published generally.  In the absence of any such suggestions from either party, that party will be taken to have no objection to the unrestricted publication of the reasons.

I certify that the preceding two hundred and thirty-six (236) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Ryan.

Associate:

Dated:       28 September 2010