International Linen Services P/L v Bartonvale Management Services P/L No. DCCIV-99-155

INTERNATIONAL LINEN SERVICE P/L v BARTONVALE MANAGEMENT SERVICES P/L
[2001] SADC 180
Judge Allan
Civil

This case is about the supply of laundry services.
At all relevant times, the plaintiff was a supplier of laundry services and the defendant carried on the business of a nursing home.
In November 1996, the plaintiff and the defendant entered into a contract whereby the plaintiff would supply laundry services to the defendant’s nursing home and the defendant would pay for such services. The contract was for a period of three years commencing 23 December 1996. Pursuant to the contract, the plaintiff commenced to supply the laundry services on or about 23 December 1996 and continued to do so until the contract was terminated by notice given to it by the defendant on 8 February 1998; the supply of such services continuing until 25 February, 1998.
These matters are not really in dispute. The issues between the parties go to the terms of the contract, whether those terms were breached, whether the defendant was entitled to terminate the contract and, depending on the resolution of those issues, whether the plaintiff is entitled to damages from the defendant and, if so, the measure of those damages.
The plaintiff alleges the defendant wrongfully terminated the contract and claims damages for such termination.
The defendant alleges that it was entitled to terminate the contract, saying that the plaintiff was in breach of it, and denies liability to pay any damages.
In order to decide the issues between the parties, it is necessary to make some findings of fact on contentious matters. Issues of credibility arise as to that process and it is to those issues I first turn. I exclude from them the evidence of Mr Hall and Mr Dewing, both accountants, the former called by the plaintiff and the latter by the defendant: there were clearly witnesses of credit. There are strong conflicts between them on the evidence, but such conflicts will be resolved on grounds other than credibility.
Apart from Mr Hall, the plaintiff called three witnesses: Lyn Currie who, at the relevant time, was employed by the plaintiff and in charge of sales and services, John Kurenda, the Chief Executive Officer of the plaintiff at the time, and Peter James, a Director of the plaintiff.
For it’s part, the defendant called Kathleen Farrow, the Nurse Manager of the defendant at the relevant time, Lee Martin, the Director of Nursing of the defendant at the time, and Peter Martens, the Director and Principal of the defendant.
Broadly put, I prefer the plaintiff’s witnesses to those of the defendant. They were more reliable. There was a candour and directness about them which was lacking with the defendant’s witnesses who struck me as defensive and selective of memory; and who, I thought, tailored their answers to what they perceived to be the issues in the case. Sometimes, during the course of these reasons, I will refer to specific matters of conflict between the various witnesses and indicate whose evidence I prefer on the topic under consideration. Otherwise, it should be understood that, in setting forth a matter of fact, I have relied on the evidence of the plaintiff’s witnesses as opposed to that of the defendant’s witnesses where there is conflict between them on a particular topic.
I deal with one matter of fact at the outset. In the nursing home industry, for obvious reasons, there is widespread use of incontinent bed sheets. There are various brands of such sheets. One such brand is Kylie. As it happens, in the industry, the word kylie has been used generically to describe an incontinent bed sheet; in much the same way as the brand name Hoover found its way into the lexicon to indicate a method of cleaning: “hoovering”. Hence, it is important to make the distinction between a Kylie brand incontinent bed sheet and an incontinent bed sheet simply referred to as a kylie.
Before entering into the contract with the plaintiff, the defendant had been laundering it’s own linen. It had the facilities on it’s premises to do so. It decided to out-source the work. It does not matter, for present purposes, why it took that decision; but it is worth noting that the employees of the defendant were upset about it. Amongst other things, they were concerned that some of them might lose their jobs as a result. It would not be unreasonable to expect that they would have demonstrated some animosity towards the new supplier of laundry services, whoever it might have been. It was also a time of some upheaval in the nursing home industry.
Contact between the plaintiff and the defendant was made and, in the months leading up to the end of November 1996, negotiations were entered into between the parties which led, eventually, to the contract being entered into. During this period, Mr Martin visited the plaintiff’s laundry and was shown the linen and equipment used by the plaintiff. The plaintiff did not use Kylie brand incontinent bed sheets. It used it’s own, manufactured for it. They were green in colour. Kylie brand incontinent bed sheets were blue.
During the period leading up to the parties entering into the contract, the plaintiff prepared for the defendant a document being a survey of the linen requirements of the defendant with a view to demonstrating to the defendant that it was in the defendant’s interests to enter into a contract with the plaintiff; that it would save money by doing so. The plaintiff, in it’s Statement of Claim alleges that this document, which became Exhibit P3 and which was titled “Survey of Linen Requirements for Bartonvale Nursing Home”, formed part of the contract entered into between the parties. The defendant, in it’s Defence denied that allegation. I think the position of the defendant as set out in the Defence on this topic is correct and, Mr Britton, for the plaintiff, conceded as much: it was simply a document produced by the plaintiff for the purpose of inducing the defendant to enter into a contract with it for the supply of laundry services. It was a feasibility study; no more.
The terms of the contract entered into by the parties are substantially contained in a document described as a “Service Agreement” and signed on behalf of the parties on 27 November 1997. A number of copies of that document had been delivered by the plaintiff to the defendant before that day and, on that day, Ms Currie attended at the defendant’s premises to collect the document duly signed. On that day, she signed the document on behalf of the plaintiff and Mr Martens signed it on behalf of the defendant. A copy of that document is annexed hereto and marked “A”. Although nothing turns on it, I think it probable that the words “23^rd December 1999” and “23^rd December 1996” in items 4 and 5 respectively of “The Schedule” were not written in at the time the document was signed. This is the effect of the evidence of Ms Currie and I prefer it on this topic to that of Mr Kurenda, who was not present at the signing, who said those words were written in before the document was signed. I think Mr Kurenda must be mistaken about that. Mr Martens also said that those dates were not on the document when he signed it; and I think he is correct about that.
On the back of page 2 of the document dated 27 November 1996, is a typed page containing headings “Annex 1”, “Annex 2” and “Annex 3”. A copy of that page is annexed hereto and marked “B”. Mr Kurenda said that he wrote the date “21/10/96” where it appears in paragraph 3.2 under the heading “Annex 2”; and he says he would have written in that date before the document was signed. Ms Currie says she does not know if that date had been inserted when the document was signed and Mr Martens said it was not there when the document was signed. I prefer the evidence of Mr Martens on this topic. I think the date had not been inserted when the document was signed. I accept Mr Kurenda’s evidence that the date is a reference to the feasibility study to which I have earlier referred. In it’s Statement of Claim the plaintiff alleges that this page, or document, as it is described in the Statement of Claim, formed part of the contract entered into between the parties. The defendant denies that this is so; and I am not satisfied that it does. This document seems to have been neglected by the parties, through their agents, on the day of the signing of the document dated 27 November, 1996 and, as the Defence correctly alleges, contemplates the attachment of a Schedule and another document; all of which leads me to be less than satisfied that it forms part of the contract between the parties.
There must have been an agreement reached between the parties, as part of the contract between them, as to the fees to be paid by the defendant to the plaintiff for the supply and laundering of linen and the document dated 27 November, 1996 clearly contemplates such an agreement; although it is silent about such fees save for what appears in item 6 in the The Schedule. It is likely that the cost of the various services mentioned in the feasibility study were, or formed the basis of, the fees payable by the defendant. No dispute exists between the parties as to the fees payable by the defendants; but it does illustrate that the document dated 27 November, 1996 might not contain all the terms of the contract between the parties. The defendant says that it was a term of the contract that the incontinent bed sheets to be supplied and laundered by the plaintiff would be Kylie brand sheets. I am not satisfied that was so.
I accept the evidence of Mr Kurenda and Ms Currie that, prior to the parties entering into the contract, during what might be called the negotiating period leading up to it, Mr Martin and Ms Farrow were made aware of the plaintiff’s products; and, as I have mentioned, the plaintiff did not supply Kylie brand incontinent bed sheets. I have already mentioned that Mr Martin had visited the plaintiff’s premises during the negotiation period and was shown the incontinent bed sheets supplied by the plaintiff. I accept Ms Currie’s evidence that there was never any discussion to which she was a party about Kylie brand incontinent bed sheets being supplied by the plaintiff; in particular, I prefer her evidence to that of Mr Martin who said that Ms Currie said that the defendant would be supplied with Kylie brand incontinent bed sheets.
It seems clear that, after the plaintiff commenced to provide it’s services, employees of the defendant showed a preference for the Kylie brand incontinent bed sheets to the sort provided by the plaintiff; but there was never any agreement, after the contract had been entered into, that Kylie brand incontinent bed sheets would be supplied by the plaintiff. Ms Farrow said that, in a conversation with Mr Kurenda and Mr Anthony Nemer, another employee of the plaintiff, early in 1997, it was agreed that the plaintiff would thereafter supply Kylie brand incontinent bed sheets. Mr Kurenda said that Ms Farrow never requested that Kylie brand incontinent bed sheets be supplied. I prefer his evidence to that of Ms Farrow on this topic. I also accept the evidence of Ms Currie that Ms Farrow never complained to her about the quality of the plaintiff’s products. I mention that, in cross-examination, Ms Farrow acknowledged that, at a time after the contract was under way, she was informed by the plaintiff that Kylie brand products would not be supplied by the plaintiff.
The defendant alleges that it was a term of the contract that it could be terminated by the defendant at any time without notice if the defendant was not satisfied with the service being provided by the plaintiff; relying on a conversation between Mr Martens and Ms Currie at the signing of the document on 27 November, 1996 for that purpose.
There seems to be no dispute that, at the signing of the document, Mr Martens exhibited concern about signing it and entering into an agreement with the plaintiff on behalf of the defendant for the supply and laundering of linen. Mr Martens says that, on that occasion, Ms Currie said to him words to the effect that the document was really just a show of good faith and that, if the parties could not get on together, there would be no point in continuing with the arrangement between them; and that he gleaned from what she said that it was open to either party to terminate the contract at any time; in other words, that it was a term of the contract that it could be terminated at any time by either party. He says, in effect, that conversation influenced him in the signing of the document.
For her part, Ms Currie says that she did not use those words or words to that effect. She says that she said to Mr Martens that, if the plaintiff failed in it’s obligations, the defendant could cancel the contract; a quite different proposition to the version put forward by Mr Martens. I prefer the evidence of Ms Currie on this topic. I was more impressed with her reliability; and her version of the conversation, seen against the background of the circumstances as they existed, strikes me as the more likely. I mention that, in relation to another topic, Mr Martens conceded that he might have said a particular situation existed when he knew that it did not. At the time the contract was terminated, both Ms Currie and Mr Kurenda say that Mr Martens said that the defendant would be reverting to doing it’s own laundry. Mr Martens conceded that he might have said that, knowing that not to be the case. I unhesitatingly accept the evidence of Ms Currie and Mr Kurenda on that topic.
I am not satisfied that it was a term of the contract between the parties that it could be terminated at any time simply by either party, in the absence of a breach of it’s terms, giving notice to that effect.
At the time the contract was terminated by the defendant on 8 February 1998, the defendant, by Mr Martens, gave to the plaintiff a letter dated 21 January, 1997. It is agreed that the date should read 21 January 1998. It is a self-serving document expressed in extravagant terms. I set it out hereunder, more for the sake of completeness than anything else:
“We regret that we are advising of our intentions to terminate our contract from 25/02/98.
Our staff are at wits ends as ongoing problems are not resolved, and increased costs result in staff wages having to be cut, which in turn effects residents care.
We have given you every opportunity to resolve problems but nothing changes.
1.Your I.B.S. product has been proven to be ineffective when compared to the Kylie product for which you contracted to supply. You were party to this comparison in April 1997. As a result we have higher costs in:
(a)excessive wet linen which results in higher linen laundering cost and higher staff costs in changing beds.
(b)Wet residents get bed sores and infections resulting in high medical and staff costs.
(c)We do not meet Commonwealth Outcome Standards and recently failed a Resident Care Assessment audit which can lead to cut funding.
2.Trolleys are a disaster. They are not OHS&W approved, they have no buffers and damage the building, and there are no signs to indicate how to operate.
3.Kathy Farrow has asked for more trolleys. Changes are eventually made and then they are cut out.
4.Deliveries are unreliable, even after many promises are made fresh linen constantly arrives late.
5.Loss of residents clothing is a disaster and our public image is severely damaged. To quote a relative “only a fool would be still dealing with the same laundry”. Some staff fear coming to work in anticipation of abuse from relatives.
6.We purchased feeders for residents to launder ourselves. these have gone to International Linen and in a few months have only a few left, none were returned.
7.The quality of I.B.S. is so bad as to not work at all, and towels so thin and rough that they will not dry the resident.
Outsourcing the laundry has cost the Nursing Home in excess of $30,000 over budget and intolerable problems, and we can no longer sustain this. We have done everything possible to overcome these problems with absolutely no change or result.
I note that you implied that International Linen is a Quality Assured company and launders to these standards. Your washing maybe of such a standard but neither the quality of your linen or the method of supply meets such standards.
I also note that our agreement, although signed for 3 years has no validity as agreed with Lyn Currie that it would not be in anyone’s interest to continue the contract if the parties were dissatisfied and in any case the agreement was quite flexible. Lee Martin, who was at the “signing” meeting has confirmed this and said that on subsequent occasions it has again been stated that if the parties were dissatisfied the contract could be revoked. That you quoted to supply Kylies and have not, which as (sic) been the major cause of our problems is of serious concern.
Thank you for being cooperative and we regret that the experiment did not work.
Yours sincerely
Peter Martens
Executive Director
Bartonvale Gardens Retirement Community”
Some of the topics contained in this letter have already being dealt with and I do not propose to enter into a consideration of each of the other matters raised in it, preferring to consider only such of those matters as are raised by the Defence.
Although the Defence does not specifically say so, it seems to be alleging, in the alternative, that the plaintiff was in breach of the contract and, therefore, the defendant was entitled to terminate it. It alleges that the plaintiff was in breach in the following way:
(a) not supplying Kylie brand incontinent bed sheets,
(b)the linen supplied by the plaintiff, including the incontinent bed sheets, was not fit for the purpose for which it was supplied,
(c)the trolleys provided by the plaintiff for the collection and delivery of linen were not adequate for the purpose and did not comply with the standards set out in the Standards and Guidelines for Residential Agent Care Services or Occupational Health and Safety Standards and
(d) failing to make deliveries at times agreed.
I will deal with these matters seriatim.
As I have said, I am not satisfied that the terms of the contract required the plaintiff to supply Kylie brand incontinent bed sheets. As I have said, I think it likely that the staff of the defendant were unhappy with the incontinent bed sheets provided by the plaintiff; but I am not satisfied that the evidence discloses the plaintiff’s product was not fit for the purpose for which it was supplied. It is true that, in February 1997, tests were carried out on two residents of the defendant who were experiencing problems with wet linen and the plaintiff seems to have co-operated in these tests; but, as I have said, I do not accept the evidence of Ms Farrow that, at that time, or any other time, the plaintiff agreed to supply Kylie brand products. I accept the evidence of Ms Currie that, having provided four re-washable pads to be placed between the legs of the two residents concerned to assist in keeping them dry, they were returned unused to the plaintiff two weeks later. I also accept the evidence of Ms Currie that, after that time, the plaintiff received no more complaints about the incontinent bed sheets.
There is no evidence, on which I am prepared to rely, that any of the linen supplied by the plaintiff was “threadbare”, as alleged, and there is no evidence that skin damage was caused to the residents at the defendant’s premises as a result of the use of linen supplied by the plaintiff. It is true that, in examination-in-chief, both Ms Farrow and Mr Martin said that they agreed with the contents of paragraph 7 in the letter of 21 January, 1998, but that is as far as it went. They did not give any other evidence to the effect that the linen supplied by the plaintiff was inadequate apart from the incontinent bed sheets. There was no other evidence that any linen supplied by the plaintiff was “threadbare” and caused skin damage. I am not prepared to rely on the evidence of Ms Farrow and Mr Martin, such as it is, on this topic. I do not have sufficient confidence in it. I am not satisfied that the linen supplied by the plaintiff was inadequate for the purpose for which it was supplied.

There is no evidence to suggest that the trolleys provided by the plaintiff for the collection and delivery of linen did not comply with the standards contained in the Standards and Guidelines for Residential Aged and Care Services or Occupational Health and Safety Standards apart from the comments in paragraph 2 of the letter of 21 January, 1998: and I do not regard that as sufficient material for the purpose of making a finding to that effect. The staff of the defendant experienced some initial difficulty in handling the trolleys, but these difficulties seemed to have been overcome by the placing of a sign on the trolley indicating from which end it should be pushed. Again, it might be that employees of the defendant did not like them and, initially, had trouble adjusting to them; but, on the evidence, any problems with the trolleys went no further than that. I am not satisfied that the trolleys were inadequate for the purpose for which they were supplied.
It was a term of the contract that the plaintiff, on each weekday or other day agreed, would collect from the defendant’s premises dirty linen and replace it with clean linen; and the plaintiff did so. There is no evidence to suggest that, at any time, the defendant was without a supply of clean linen. It is true that, sometimes, deliveries were later than the defendant wished; but that came about as much by late ordering by the defendant’s employees as by the plaintiff’s employees being late with deliveries for other reasons. I am not satisfied that the plaintiff was in breach of the contract by failing to make deliveries in accordance with the terms relating thereto.
For these reasons, I am satisfied that, in terminating the contract as it did, the defendant was in breach of it. The plaintiff is entitled to damages in respect of that breach and it is to that issue I no turn.
The plaintiff claims the sum of $122,600 by way of damages, made up of after-tax loss of profits to 23 December, 1999 of $73,113, a tax liability thereon of $41,126 and $8,361 for loss of use of those monies in the year ending 30 June 2000. The plaintiff bases it’s claim on the opinion of Mr Hall.
In order to give his opinion, Mr Hall was provided with the financial statements of the plaintiff for the five years ending 30/6/95 to 30/6/99. Those statements were tendered in evidence. Save for one matter, which I will mention later, the correctness or accuracy of those financial statements was not challenged. The defendant challenges Mr Hall’s opinion. The challenge goes not to his calculations and the accuracy of his figures, but to the approach adopted by him. The defendant, for it’s part, relies on the opinion of Mr Dewing who considers the approach of Mr Hall to be incorrect; and he puts forward an approach to the calculation of the plaintiff’s loss of profit which, the defendant says, should be preferred to that of Mr Hall. I should mention that Mr Dewing had access to the same financial information as Mr Hall. As will become clear, the two different approaches produce quite different results. I proceed first to a consideration of Mr Hall’s evidence.
In Mr Hall’s opinion, the correct measure of the plaintiff’s loss is the loss of sales from the contract between the plaintiff and the defendant less the costs directly associated with the costs of production; those costs being reasonably represented by the cost of goods sold by the business, as disclosed in the financial statements. For the financial years ended 30/6/95 to 30/6/99, the sales of the plaintiff were between 6.04 million dollars and 8.7 million dollars. Sales to the defendant in the years ended 30/6/97 and 30/6/98 were less than one per cent of the plaintiff’s total sales in those years. The gross profit of the plaintiff before, during and after the contract with the defendant was similar: for the five years that I have mentioned, the plaintiff made a gross profit of between 69 per cent and 73 per cent at an average rate of gross profit of 71.79 per cent; this gross profit being the difference between the sales and the cost of goods sold.
In Mr Hall’s opinion, the plaintiff’s contract with the defendant was such a small percentage of the total sales of the plaintiff that the loss of that contract would have had no effect on the fixed or operating expenses of the plaintiff’s business. In support of that view, he points to the fixed or operating expenses of the business running at approximately 70 per cent of sales for the five years under consideration. In his opinion, the plaintiff’s contract with the defendant was such a small percentage of the total sales of the plaintiff that no changes to the operation to the plaintiff’s business were necessary following the cancellation of the contract. He found support for that in the fact that the plaintiff had shown a similar gross profit percentage for the five years. I mention that there was no evidence of any actual changes to the operation of the plaintiff’s business because of the contract between the plaintiff and the defendant during those five years. I accept the evidence of Mr James, a Director of the plaintiff, that the five-year period was one of growth for the plaintiff.
In Mr Hall’s opinion, the correct measure of the plaintiff’s loss is the loss of gross profit that it would have earned on the estimated sales to the defendant in the period 1/3/98 to 23/12/98. I mention that the plaintiff continued to supply linen services to the defendant to about the end of February 1998. During the course of the contract between the plaintiff and the defendant, the defendant was paying to the plaintiff an average of $1675 per week for the provision of linen. The contract had approximately 95 weeks to run when the defendant terminated it. This equates to sales of $159,129 for those 95 weeks. Assuming the plaintiff would have earned the same rate of gross profit on it’s contract with the defendant as the average rate of gross profit of 71.9 per cent, Mr Hall calculated that the plaintiff would have earned a gross profit of $114,239 on those sales.
Assuming the plaintiff would have paid the surplus funds off it’s overdraft and assuming a borrowing rate of interest on small business overdraft rates equal to those published in the Reserve Bank of Australia Bulletin, Mr Hall calculated the loss suffered by the plaintiff for not having the use of the funds to the year ended 30^th June 2000 at $8,361. He calculated this figure on an after-tax amount of $73,113; saying that the tax payable on the figure of $114,239 would have been at the rate of 36 cents in the dollar.
As I have already said, there is no dispute about Mr Hall’s calculations of the loss he considers the plaintiff has sustained as a result of the defendant’s termination of the contract; the issue between the parties going to the correctness of the method Mr Hall employed.
Mr Dewing described the method of calculation of loss adopted by Mr Hall as the “margin cost method”: revenue less cost of goods sold. As I have indicated, he does not regard this as the correct method. In his view, the appropriate method to adopt is what he describes as the “absorption costing method”: revenue from the contract less the costs of goods sold on that contract, being the direct costs incurred in fulfilling that contract, and reasonably attributable overheads, indirect costs, incurred in relation to servicing the contract. This approach produces what he called a net profit.
Applying his approach to the same financial figures used by Mr Hall, Mr Dewing calculated the plaintiff’s loss at $3,776.78 before tax; producing an after tax loss of $2,417.14. Like Mr Hall, he added to this figure an amount for the plaintiff’s loss of use of the money and, by using the same Reserve Bank Rates as applied by Mr Hall, arrived at a loss of profit of $2,679.34.
I mention that there was no evidence, apart from the opinion expressed by Mr Dewing, that any of the indirect expenses were significantly impacted upon by the contract between the plaintiff and the defendant; for example, there was no evidence that delivery costs increased in any significant way because of the contract; rather, the indications being that, if there was any increase in the delivery costs because of the contract, it was minuscule because deliveries were made to the defendant as part of a delivery route already in place before the contract was entered into. Mr Dewing, in his calculations, applied a proportion of the plaintiff’s total delivery costs to the contract between the plaintiff and the defendant.
I prefer the evidence of Mr Hall: it seems to accord with the commercial reality of the situation. He was prepared to acknowledge that there would be some expenses not included in the costs of goods sold, the indirect expenses, that related to the contract between the plaintiff and the defendant; but he considered that, as the income generated from the contract was about one per cent of the total income of the business, it would be unlikely that those expenses would have changed materially as a result of the contract.
As I said, the correctness of the plaintiff’s financial statements was not challenged, save for a matter raised by Mr Dewing. He said the income tax return of the plaintiff for the year ended 30/6/97 showed that an amount of $464,152 had been written off for stock on hand and that this amount should be added to the figure for the purchases of stock in that financial year; thus reducing the gross profit for that year.
The figure of $464,152 appeared in the reconciliation statement section of the income tax return for the year ended 30/6/97; the amount being the difference between the figure for stock on hand as at 30/6/96 and the figure for stock on hand as at 30/6/97. It is a process which was adopted in the reconciliation statements in the income tax returns in each of the years ended 30/6/95, 30/6/96, 30/6/97 and 30/6/98; although, for the year ended 30/6/97, it was expressed differently to the previous years. Assuming it is correct to say that the stock on hand was being written off to the tune of $464,152 in the year ended 30/6/97, and I do not wish to be understood as saying that was, in fact, what was happening, I accept the evidence of Mr Hall, against the background of the other evidence as to the reliability of the plaintiff’s financial statements, that it does not affect the reliability or accuracy of those statements for the purpose of calculating the plaintiff’s loss.
The plaintiff’s damages are liable to taxation in it’s hands, and, so, it is appropriate that an allowance should be made for taxation as the plaintiff has claimed. Mr Strawbridge, for the defendant, said that the reality is that, the way the taxation position of the plaintiff is handled, it pays little or no tax. Assuming that to be so, I think it does not matter: the money in the plaintiff’s hands is liable to taxation and that is sufficient. There is no dispute that the appropriate tax rate is 36 cents in the dollar.
There will be judgment for the plaintiff in the sum of $122,600.
I will hear counsel as to costs.

[2001] SADC 180

10 December 2001