Chippendale Printing Co. Pty Ltd v Spunaline Pty Ltd t/as Ronald W. Mealing & Co.

[1985] FCA 482

Re: CHIPPENDALE PRINTING CO. PTY. LIMITED
And: SPUNALINE PTY. LIMITED T/AS RONALD W. MEALING & CO. and RONALD W.
MEALING
No. G388 of 1983
Trade Practices

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Burchett J.

CATCHWORDS

Trade Practices - Misleading conduct - Representations as to capabilities of computer programme - Involvement of director - Measure of damages - Duty to mitigate.

Trade Practices Act 1974, sections 52, 53, 75B, 82.

Gates v. The City Mutual Life Assurance Society Ltd. (1983) 68 FLR 101 at 104

Sanrod Pty. Ltd. v. Dainford Ltd. (1984) 54 ALR 179 at 191.

HEARING

SYDNEY
#DATE 20:9:1985

ORDER

(1) The respondents pay to the applicant damages in the sum of $26,000.

(2) The respondents pay the applicant's costs, to be taxed.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

Mr. E.M. Gardiner, the Managing Director of the applicant, Chippendale Printing Co. Pty. Limited, was concerned about the time taken, in connection with the business of his Company, in the mundane but wholly necessary task of estimating the cost of jobs for which he was quoting. The Company is described by him as a commercial printer, the business of which was concerned with the production of brochures, folders, leaflets, forms and similar work, almost all of which was done upon quotations. Often a customer would change his mind concerning some detail, necessitating re-calculation of a quotation previously furnished.

1. The solution which presented itself to Mr. Gardiner was the purchase of a small computer or computers with appropriate programmes. As he explained, he was not interested in some kind of aid to calculation, but rather in a fully integrated system which would be capable, when once installed and working, of producing electronically the ultimate invoice and account as well as the initial quotation.

2. Mr. R.W. Mealing is a director, together with his wife, of Spunaline Pty. Limited. Mr. Mealing was known to Mr. Gardiner as an expert in costing in the printing trade, and he represented himself to Mr. Gardiner as having expertise also in the area of computers. In about March 1983 there was a meeting between Mr. Mealing and Mr. Gardiner in Mr. Gardiner's office, at which Mr. Gardiner explained that he wanted a computerised system which would estimate the cost of a job, produce a typed quotation, also a work ticket if the quotation were acccepted, and would subsequently raise an invoice. The methodology of estimation which had been employed by Mr. Gardiner was explained, and Mr. Mealing asserted that there would be no problem producing an estimation on the same basis by computer. Mr. Gardiner made it clear that he was relying entirely on Mr. Mealing to advise him as to the capacity and suitability of the proposed computer system, since Mr. Gardiner's relevant knowledge was limited to the printing factors, and was altogether negligible as regards computers.

3. There followed a demonstration of a particular system, referred to in evidence as the Printers Software Inc. or PSI Estimate/80 software package. The demonstration was in conjunction with a Tandy computer. Mr. Gardiner gave the following evidence:
   
   

"Ron (i.e. Mr. Mealing) assured me that once the master file was built for our particular situation" (this would simply involve inserting into the system the particular details requisite for Mr. Gardiner's operations) "that it would all come clear to me, and computers were not such a scary thing, they would really do the job that I wanted, and on a couple of occasions I pointed out to Ron that, once again, my knowledge of computers was absolutely negligible, and that I was relying upon him telling me that the computer would do it, and knowing that he knew what I needed it to do."

1. Mr. Gardiner also swore:
   
   

"He (i.e. Mr. Mealing) assured me that the computer would do exactly what we were presently doing but in a fraction of the time. I once again pointed out to him that ...I would be totally reliant upon him to assist me in every way possible to get it up and running, and that it would do what he said it would do. He said to me, not only would he do that, but also, because we were buying the system and he was the agent or licensee for the system from America, that we would have the back-up of the American corporation, so that if there were any problems or, as up-dates became available, we would be able to get those through the American parent company."

1. The system which Mr. Mealing recommended to Mr. Gardiner included two Tandy microcomputers, one with floppy disk and one with hard disk. The idea was that the floppy disk would have a capacity large enough to store thirty quotations, which would be an average day's quoting work for Mr. Gardiner, and when the floppy disk was full the information recorded on it could be transferred once a day to the hard disk, which was capable of storing a very much greater volume of quotations.

2. Mr. Gardiner agreed to accept the proposal as outlined by Mr. Mealing, and to acquire the hardware, that is the computers, hard disk and printers, from Tandy, and the software from Mr. Mealing's company, Spunaline Pty. Limited. It was arranged that the acquisition should be effected by hire purchase through Commercial & General Acceptance Limited. In about April 1983, the equipment was duly delivered.

3. Unfortunately, as soon as Mr. Gardiner attempted to utilise the computer system, it became apparent that it was throwing up anomalous and incorrect answers. These occurred in respect of one particular item, the estimated cost of press running time, but the quantification of the error appeared to Mr. Gardiner to be random, and Mr. Mealing was unable to find, or at least demonstrate to Mr. Gardiner, any explanation of what was happening. A further source of error and confusion arose when the computer was asked to store the elements of a calculation which involved some variations from standard details, and then an attempt was made to re-calculate the same quotation for a different quantity, for example, or according to some other varied factor. In such a case all the alterations from standard figures involved in the original calculation were automatically lost in the re-calculation. A further problem was that the floppy disk, instead of having the stated capacity to hold thirty quotations, became over-charged after about five, or sometimes ten, quotations and simply failed to retain further information, whilst also failing to alert the user that this was happening. There were also other problems.

4. Mr. Mealing endeavoured to solve the difficulties, and arranged for a computer expert, a Mr. Upex, to examine the system. Following discussion with Mr. Upex, Mr. Mealing indicated he would contact the originators of the system in the U.S., and subsequently Mr. Mealing handed to Mr. Upex two telexes which dealt with queries Mr. Upex had raised. The first is dated May 17 1983 and includes the following:
   
   

"BELIEVE YOUR DEMO DISK CONTAINS MORE THAN JUST E/80 PROGRAMME THEREFORE JUST FIVE ESTIMATES. E/80 ALONE CAN STORE 30 TO 40...LOOKING FORWARD TO ORDER SOME CHIPPENDALE AND..."

The reference to "E/80" is clearly a reference to the system, which was referred to as "Estimate 80". The telex furnishes a reason, of which I shall say more later, but for present purposes the matter to note about it is the fact for which that reason is given, namely that the disk would contain "just five estimates". The second telex is dated May 19 1983 and simply negatives a suggestion which Mr. Upex had raised to try to overcome the limited storage problem in respect of the floppy disk.

1. In this situation the applicant sues the respondent, relying upon sections 52 and 53 of the Trade Practices Act 1974. It is claimed, inter alia, that Spunaline Pty. Limited, by its director Mr. Mealing, represented to the applicant that the software was capable of accurately and efficiently estimating the cost of performing the applicant's printing work, and that Spunaline Pty. Limited and Mr. Mealing had the capacity to provide such assistance as would allow the system to be effectively used in the applicant's business. It is claimed that these representations were false, and that Spunaline Pty. Limited was in breach of s.52 of the Trade Practices Act in that in making the representations it engaged, in trade or commerce, in conduct that was misleading or deceptive, and was also in breach of s.53 in that, in trade or commerce, in connexion with the supply of goods and services, it falsely represented that the goods and services were of a particular standard, quality and grade and that they had performance characteristics, uses and benefits that they did not have. There is a further claim under s.73 of the Trade Practices Act and a claim in contract, but neither of these was pressed before me. What was additionally pressed was a claim that Mr. Mealing was liable as a person involved in the contraventions alleged of ss.52 and 53.

2. The hearing took a somewhat unusual course. The respondents were originally represented by counsel, who subsequently withdrew on the basis that his instructing solicitor was no longer instructed in the matter. I gave leave to Mr. Mealing, as a director of the company, pursuant to Order 9 Rule 3, to appear on behalf of the respondent company as well as on his own behalf. However, on the last day of the hearing Mr. Mealing did not attend Court. He advised the solicitor for the applicant that he had a problem with his heel and was unable to attend, but he did not supply any medical certificate or evidence. He was informed, on the day before the resumed hearing, that the applicant intended to proceed, and when spoken to again by telephone after the matter had been called on, and being told that the proceedings were continuing, he said he presumed that would be the case. I had previously adjourned the hearing at Mr. Mealing's request, and there had been an earlier adjournment prior to my commencing the hearing. In all the circumstances, I did not think it appropriate to adjourn the hearing yet again, in the absence of any medical evidence, or indeed any evidence, that Mr. Mealing's absence was really unavoidable.

3. Although Mr. Mealing was not present on the final day, and was represented by counsel only during the earlier part of the hearing, Mr. Gardiner was cross-examined by counsel who was then appearing for the respondents. I formed a clear impression that Mr. Gardiner was a reliable and honest witness and I accept his evidence. I am satisfied that the system did not have the capacity which Mr. Mealing represented it as having. In particular it was not capable of estimating in accordance with the parameters which Mr. Gardiner's practical experience had evolved and which he had explained to Mr. Mealing. It was also completely inadequate by reason of the inability of the floppy disk to deal with more than a miniscule number of estimates at a time, and the inability of the system to utilise altered details when re-calculating estimates. Each of these matters was fundamental to the usefulness of the system. Furthermore, it seems to me that Mr. Mealing's inability to solve the problem of the anomalous calculations in respect of press running time is strong evidence of a lack of that expert capacity, in respect of the system, which I find Mr. Mealing represented himself as having. For the problem has now been found to have arisen quite directly out of the failure of the system to allow for press running time in respect of wasted sheets. Mr. Gardiner, as a person not expert in computers, could not be expected to observe the inevitable correlations between the apparently random errors in respect of the press running time figures, but I am satisfied that anyone expert both in computers and in the printing industry, who applied his mind to what was happening, could not have failed to appreciate the nature of the particular error. I reach this conclusion having, I hope, made full allowance for the blinding clarity which hindsight must now provide.

4. There is a further and serious aspect of the situation disclosed by the evidence. The equipment came with a manual which was necessary to enable it to be used. The manual is obviously not an original document but a photocopy of a printed manual. The particular copy which has been photocopied bears on the first page the following notes:
   
   

"PROPRIETARY NOTICE

This manual is specially prepared for:

(here the name "Paul Grieco" has been inserted in ink, crossed out, and replaced by an ink insertion "Chippendale Printing Co. Pty. Ltd.")

to be used in conjunction with license______ Dated: _______ which grants rights to use the PSI Estimate/80 Software Package. The contents of this manual are proprietary to PSI, are copyrighted, and are not to be disclosed to any third party."

Mr. Gardiner gave evidence that he was never handed any documentation by Mr. Mealing, in the form of a license agreement or other agreement with Printers Software Inc., and that he himself had never had any contact with that corporation. He said that the photocopied manual was one of three such photocopied manuals which he received from Mr. Mealing, being told at the time that the original ones would be following. There was no suggestion that any original manual ever did follow. The name "Paul Grieco" is identical with the name of the President of Printers Software Inc. The software delivered involved a floppy disk which bears the following endorsement:

"DISKETTE NAME: METRIC DEMO ESTIMATE/80" and also bears the following:

"LICENSE : 010

LICENSEE : PRINTERS SOFTWARE INC. 1/17/83"

1. In the light of the evidence that Mr. Mealing represented the floppy disk would have a capacity to take thirty quotations, but in fact the disk delivered would hold as few as five, the word "demo" accquires a quite striking possible significance. Mr. Proctor, a computer consultant who is, I accept, well qualified and very experienced, gave evidence that there is a distinction in respect of computer software packages between what might be called "demo disks" and other types of disks. He said that a "demo disk" is used as a demonstration article for selling, but commonly has an in-built trap in it in order to prevent a person given access to it from simply copying the diskette, using the copy, and not buying the rights of a licensee. Mr. Proctor explained that it is necessary for marketers of software to protect themselves in this way, since a demonstration diskette would be extremely simple to duplicate, and a person obtaining one upon the pretext of an interest in considering purchase of software upon license, might just take a copy and find some excuse not to buy. Mr. Upex, the expert originally brought in by Mr. Mealing himself, was called during the applicant's case. He was asked what he understood by the reference to "metric demo" and replied: "I would expect I would understand "metric"; I would expect "demo" to be short for demonstration software." He explained that imposing a file limit of five files would be a technique that could be undertaken in constructing a demonstration diskette, which would be made to perform all the functions of the normal software, but restricted in the number of entries that could be made on it, so that it would be unsuitable for someone to make a copy of it to use unbeknownst to the supplier. Mr. Gardiner gave evidence that the disk marked "metric demo" was the only disk delivered with information on it, and other floppy disks were copies of that disk. I have already referred to the telex produced by Mr. Mealing to Mr. Upex which also used the word "demo", and the photocopied manual.

2. When all these matters are put together, it seems to me that they raise a strong inference that the disk delivered to the applicant was not ever a part of a suable software package, but was a demonstration disk deliberately designed not to be usable in commercial operations, which was supplied without a license agreement or an original manual. This would be consistent with the telex of 17 May 1983 from the U.S. corporation quoted above, referring to the "demo disk", which included the words: "Looking forward to order some Chippendale", suggesting no order for Chippendale Printing Co. Pty. Limited had at that date, two months after the contract, been received in the United States. I am mindful that this is a very serious inference to draw, and that it should not be drawn lightly. Nevertheless, I have come to the conclusion that, in all the circumstances, it is an inference which I am compelled to draw. On this basis alone, and even apart from matters elsewhere referred to in this judgment, the plaintiff's case is made out against the respondent company, and also against Mr. Mealing, since his position in that company and in the transaction is such that I conclude he was knowingly involved in misrepresenting to the applicant the demonstration disk and photocopied manual as havng in the respects the subject of the claim properties which the genuine software should have had.

3. As regards the incapacity of the system in respect of the press running time calculation, miniscule storage of quotations, and inability to retain altered parameters when re-calculating, even if these were not due to the use of a demonstration disk, I think the misrepresentations, evaluated purely on that basis, still fall within ss.52 and 53, and that Mr. Mealing was ainvolved in the breaches of those sections. The defective performance of the software is so basic that I conclude on the probabilities Mr. Mealing must have known of it or, it he did not, that must have been because he had not checked the software, or because he was not competent to assess it. Each of these possibilities involves his knowledge that the positive representations made about the software were misleading, and indeed false. It would be as much a false statement for him, in ignorance of the capacities of the software, to represent positively that it had certain particular capacities, as to make the same representation having ascertained its actual capacities to be different. For in either case, the representation would falsely convey that the person making it was aware of facts which justified it. I find that Mr. Mealing did, as the mouthpiece of the company, make the representations alleged, and thereby knowingly participated in breaches of ss.52 and 53 so as to be a person involved in those breaches.

4. It remains to assess the damages. The measure is "how much worse off (the applicant) is by reason of having taken the steps which he did in reliance on the statements" (Gates v. The City Mutual Life Assurance Society Ltd. (1983) 68 FLR 101 at evidence that I accept, is worthless, since it would be uneconomic to incur the consts of rectifying it. It also acquired two computers (and associated equipment) being goods intrinsically liable to early obsolescence because of the revolutionary advances constantly occurring in computer technology. Both software and hardware were acquired (as the respondents intended, since a special invoice was prepared for this purpose) through a hire purchase agreement having a term of four years. The cash price of the software was $10,000, less an agreed discount of $1,000, and the cash price of the hardware was $18.946.50. The terms charges (at 20.572% p.a.) set out in the hire purchase agreement were $11,737.50. The terms charges are relevant to the calculation of damages upon the basis that the loss includes, in a case where money in invested as a result of misleading conduct, the loss of the interes it would have earned, and correspondingly, where money is borrowed to invest it, the cost of the borrowing: Sanrod Pty. Ltd. v. Dainford Ltd. (1984) 54 ALR 179 at 191.

5. But I do not think the applicant was entitled to retain the hardward, which was not valueless, up to the present time, ant then claim the full depreciation it inevitably suffered. Although the applicant had entered into a hire purchase agreement, it would have been able to terminate the agreement in order to sell the goods: Hire Purchase Act, 1960, of N.S.W., s.11. On the other hand, it was certainly appropriate for the applicant to retain the equipment for a reasonable period whilst exploring the possibilities in regard to its utilisation. Time was taken in attempts to rectify it, and further time awaiting clarification of the attitude towards its rectification of the U.S. supplier of the software, Printers Software Inc. That corporation was still, on the evidence, keeping the matter open till some time into the next year, that is 1984. It is now some two and one half years since the equipment was supplied, and the hardware has depreciated very greatly. This was to be expected, since Mr. Proctor's evidence shows that microcomputers become superseded within three years or less. Having regard both to the estimates of Mr. Upex and to Mr. Proctor's views, I conclude that the present value of the hardware does not exceed $4,000. On this basis, the applicant's case is that I should allow something of the order of $39,000 less $4,000, i.e. $35,000, less some allowance for the future interest component in the terms charges included in that figure.

1. I have already given reasons for not acceding to that submission. But I think it is proper to allow about one third of the depreciation in the value of the hardware plus a proportion of the terms charges provided in the hire purchase agreement. If I were to calculate the precise proportion of the terms charges which would have been the subject of a statutory rebate, had the applicant exercised its right to bring the hire purchase agreement to an end as at a date in early 1984, I should then have to allow an amount in the nature of interest upon the lump sum which would have required to be paid upon termination of the agreement. The respondents cannot have the damages reduced on the basis that the applicant should have mitigated its lossI without accepting the costs of mitigation. Also, I accept the applicant's submission that some allowance should be made for the disruption and loss of Mr. Gardiner's productive time which must have been involved in attempting to utilise or rectify the equipment and in disposing of ti. I respectfully agree with the dictum of Wilcox J. in Steiner v. Magic Carpet Tours Pty. Ltd. (1984) 6 ATPR 45,639 at 45,642 suggesting that s.82 of the Trade Practices Act is not restricted so as to exclude compensation for inconcenence. There is also authority justifying assessment of damages under the section upon a broad basis and not a precise calculation: see Brown v. Jam Factory Pty. Ltd. (1981) 53 FLR 340 at 354.

2. Therefore, I think justice would be done if I allow, to cover the depreciation of hardware, proportion of terms charges, interes, and value to the applicant of Mr. Gardiner's time thrown away, a round sum of $17,000. To that fiure I add the amount of the cash price of the software previously referred to, namely $9,000, to arrive at a final figure at which I assess the damages, of $26,000. I award that sum to the applicant against the respondents, Spunaline Pty. Limited and Ronald Mealing. I order the respondents to pay the applicant's costs.